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, 1997 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 18, 1998 was $96,689,655. 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 18, 1998
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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, 1997, 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 14, 1998 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.)
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(The Index of Exhibits are on pages 39-40.)<PAGE>
NATIONAL BANKSHARES, INCORPORATED
ANNUAL REPORT FOR 1997 ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 3-29
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of
Security Holders 29
Executive Officers of the Registrant 30
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters 31
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 31
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 31-33
Item 8. Financial Statements and
Supplementary Data 34
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 35
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 as the Bank of
Blacksburg in 1891. Its state charter was converted to a national charter in
1922 and it became The National Bank of Blacksburg. NBB operates a full-service
banking business from its headquarters in Blacksburg, Virginia, and its eight
area branch offices. NBB offers general retail and commercial banking services
to individuals, businesses, local government units and institutional customers.
These products and services include accepting deposits in the form of checking
accounts, money market deposit accounts, interest-bearing demand deposit
accounts, savings accounts and time deposits; making real estate, commercial,
revolving, consumer and agricultural loans; offering letters of credit;
providing other consumer financial services, such as automatic funds transfer,
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
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Tazewell County resulted from the 1964 merger of Bank of Graham, Bluefield,
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 both secured and unsecured loans to businesses and to
individuals for business purposes. 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 a substantial percentage of the residential real estate
loans it originates in the secondary market on a servicing released basis.
There are occasions when a borrower or the real estate do not qualify under
secondary market criteria, but the loan request represents a reasonable credit
risk. Also, an otherwise qualified borrower may 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.
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 more limited than NBB's 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 at any point in time be 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 made as 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.
The following table sets forth, for the three fiscal years ended December 31,
1997, 1996 and 1995 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.
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Percentage of
Period Class of Service Total Revenues
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December 31, 1997 Interest and Fees on Loans 59.92%
Interest on Investments 29.31%
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%
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,
Pembroke and Rich Creek, in Giles County. The local economy is diverse and is
oriented toward higher education, retail and service, light manufacturing and
agriculture. For the years 1997, 1996 and 1995 the unemployment rate in
Montgomery County was 2.6%, 3.3% and 3.0%, respectively, and the rate in Giles
County during those years was 6.7% in 1997 and 8.4% in 1996 and 1995.
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 the Celco plant, that manufactures the
material from which cigarette filters are made. In 1995 and 1996 employment at
that plant was stable, however, in late 1997 temporary employee furloughs were
announced, and it is anticipated that some percentage of these temporary layoffs
will become permanent. 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 have 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 is likely to be 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
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census. Total fair market value of real estate, measured in real dollars,
increased in Giles County by 54% between 1980 and 1992, but declined by 9% over
that twelve-year period, as measured in constant dollars. The continued slow
decline of Giles County's population is predicted to continue through the year
2000. However, since the total population of the County reported in the 1990
census was only 16,366, and the population projected by the Virginia Employment
Commission for Giles in the year 2000 is 16,121, the predicted decline of 245
individuals is not expected to materially impact 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, West 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 1997, 1996 and 1995 the unemployment rate for Tazewell County was 9.5%,
9.5% and 10.2%, respectively. In the same years, Mercer County, West Virginia's
unemployment rate was 5.3%, 5.2% and 5.7%, 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
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compensation paid to officers and employees is paid by NBB, except for fees paid
by Bankshares to President and Chief Executive Officer James G. Rakes for his
service as a director of the Company.
At December 31, 1997, NBB employed 107 full time equivalent employees at its
main office, operations center and branch offices. BTC at December 31, 1997
employed 69 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. 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). 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
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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. Under the
implementing CRA 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 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 regulations
place substantial importance on a bank's product delivery system, particularly
branch localities. The new regulations require banks, other than small banks,
to comply with significant 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 ongoing government scrutiny and that costs associated with
compliance will continue to increase.
NBB has received a CRA rating of "Outstanding" in its last examination by
federal bank regulators. BTC was rated as "Satisfactory".
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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, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the Interstate Act) became law. 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 could 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, requires a state's specific approval. An
acquisition or merger is not permitted under the Interstate Act if the bank,
including its insured depository affiliates, will control more than 10% of the
total amount of deposits of insured depository institutions in the United
States, or will 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 will 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 has the
authority to examine and supervise out-of-state state banks to ensure that the
branch is operating in a safe and sound manner and in compliance with the laws
of Virginia. The Virginia statute authorizes the Bureau of Financial
Institutions to enter into cooperative agreements with other state and federal
regulators for the examination and supervision of out-of-state state banks with
Virginia operations, or Virginia domiciled banks with operations in other
states. Likewise, national banks, with the approval of the OCC, may branch into
and out of the state of Virginia. Any Virginia branch of an out-of-state
national bank is subject to Virginia law (enforced by the OCC) with respect to
intrastate branching, consumer protection, fair lending and community
reinvestment as if it were a branch of a Virginia bank, unless preempted by
federal law.
-12-<PAGE>
The Interstate Act permits banks and bank holding companies from throughout
the United States to enter Virginia markets through the acquisition of Virginia
institutions and makes 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, were subject to a higher FDIC assessment which funds
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
composition of that account.
-13-<PAGE>
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
NBB. These guidelines provide for a minimum ratio of 4.0% for banks that meet
certain specified criteria, including that they have the highest regulatory
-14-<PAGE>
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 depository institution's principal federal regulator determines that an
otherwise adequately capitalized institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, it may require the
institution to submit a corrective action plan, restrict its asset growth and
prohibit branching, new acquisitions and new lines of business. An
institution's principal federal regulator may deem the institution to be
engaging in an unsafe or unsound practice if it receives a less than
satisfactory rating for asset quality, management, earnings or liquidity in its
most recent examination.
Among other possible sanctions, an undercapitalized depository institution
may not pay dividends and is required to submit a capital restoration plan to
its principal federal regulator. In addition, its holding company may be
required to guarantee compliance with the capital restoration plan under certain
circumstances. If an undercapitalized depository institution fails to submit or
implement an acceptable capital restoration plan, it can be subject to more
severe sanctions, including an order to sell sufficient voting stock to become
adequately capitalized. More severe sanctions and remedial actions can be
mandated by the regulators if an institution is considered significantly or
critically undercapitalized.
-15-<PAGE>
In addition, FDICIA requires regulators to draft a new set of non-capital
measures of bank safety, such as loan underwriting standards and minimum
earnings levels. The legislation also requires regulators to perform annual on-
site bank examinations, places limits on real estate lending by banks and
tightens auditing requirements. In April 1995, the regulators adopted safety
and soundness standards as required by FDICIA in the following areas: (i)
operational and managerial; (ii) asset quality earnings and stock valuation; and
(iii) employee compensation.
Deposit Insurance. FDICIA reduces the scope of federal deposit insurance.
The most significant change ended the "too big to fail" doctrine, under which
the government protects all deposits in most banks, including those exceeding
the $100,000 insurance limit. The FDIC's ability to reimburse uninsured
deposits--those over $100,000 and foreign deposits--has been sharply limited.
Since December 1993, the Federal Reserve Board's ability to finance
undercapitalized banks with extended loans from its discount window has been
restricted. In addition, only the best capitalized banks will be able to offer
insured brokered deposits without FDIC permission or to insure accounts
established under employee pension plans.
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 were subject to increased assessments that are designed to finally
resolve problems associated with the savings and loan industry.
Other Legislative and Regulatory Concerns
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 SUBSIDIARIES (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 1997 1996 1995
------ ---- ---- ----
Cash and due from banks $ 9,954 9,842 10,189
Interest bearing deposits 4,165 1,651 ---
Federal funds sold 8,181 8,903 12,105
Securities available for sale:
Taxable 54,213 65,992 41,695
Nontaxable 6,312 6,679 930
Securities held to maturity:
Taxable 67,046 79,599 105,701
Nontaxable 29,608 25,133 35,668
Mortgage loans held for sale 413 850 723
Loans, net 204,540 177,419 159,920
Other assets 11,500 11,977 11,475
-------- ------- -------
Total assets $395,932 388,045 378,406
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Noninterest-bearing demand
deposits $ 44,193 41,997 38,833
Interest-bearing demand deposits 75,519 76,017 77,545
Savings deposits 47,781 49,783 54,698
Time deposits 171,946 168,141 159,185
-------- ------- -------
Total deposits 339,439 335,938 330,261
Short-term borrowings 319 433 593
Other liabilities 2,462 2,215 1,826
-------- ------- -------
Total liabilities 342,220 338,586 332,680
Stockholders' equity 53,712 49,459 45,726
-------- ------- -------
Total liabilities and
stockholders' equity $395,932 388,045 378,406
======== ======= =======
-17-<PAGE>
<TABLE>
B. ANALYSIS OF NET INTEREST EARNINGS
The following table shows the major categories of interest-earning assets and interest-bearing liabilities,
the interest earned or paid, the average yield or rate on the daily average balance outstanding, net
interest income and net yield on average interest-earning assets for the years indicated.
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
------------------------- -------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
($ 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) $204,953 19,667 9.60% 178,269 17,339 9.73% 160,643 15,897 9.90%
Taxable securities 121,259 7,776 6.41% 145,591 8,877 6.10% 147,396 9,723 6.60%
Nontaxable
securities (1) 35,920 2,708 7.54% 31,812 2,971 9.34% 36,598 2,856 7.80%
Federal funds sold 8,181 470 5.75% 8,903 567 6.37% 12,105 704 5.82%
Interest bearing
deposits 4,165 230 5.52% 1,651 91 5.51% --- --- ---
-------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-
earning assets $374,478 30,851 8.24% 366,226 29,845 8.15% 356,742 29,180 8.18%
======== ====== ==== ======= ====== ==== ======= ====== ====
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 75,519 3,073 4.07% 76,017 2,182 2.87% 77,545 2,353 3.03%
Savings deposits 47,781 1,571 3.29% 49,783 1,646 3.31% 54,698 1,798 3.29%
Time deposits 171,946 8,445 4.91% 168,141 9,181 5.46% 159,185 8,517 5.35%
Short-term borrowings 319 17 5.33% 433 27 6.24% 593 35 5.90%
Long-term debt --- --- --- --- --- --- --- --- ---
-------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-
bearing liabilities $295,565 13,106 4.43% 294,374 13,036 4.43% 292,021 12,703 4.35%
======== ====== ==== ======= ====== ==== ======= ====== ====
Net interest income
and interest rate
spread 17,745 3.81% 16,809 3.72% 16,477 3.83%
====== ==== ====== ==== ====== ====
Net yield on average
interest-earning
assets 4.74% 4.59% 4.62%
==== ==== ====
(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 $339 in 1997, $374 in 1996 and $305 in 1995 are included in total interest income.
(3) Nonaccrual loans are included in average balances for yield computations.
</TABLE>
-18-<PAGE>
<TABLE>
C. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The Company's primary source of revenue is net interest income, which is the difference between the
interest and fees earned on loans and investments and the interest paid on deposits and other funds.
The Company's net interest income is affected by changes in the amount and mix of interest-earning
assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets and
rates paid on interest-bearing liabilities. The following table sets forth, for the years indicated,
a summary of the changes in interest income and interest expense resulting from changes in average
asset and liability balances (volume) and changes in average interest rates (rate).
<CAPTION>
1997 Over 1996 1996 Over 1995
------------------------------- -------------------------------
Changes Due To Changes Due To
------------------- -------------------
Net Dollar Net Dollar
($ in thousands) Rates(2) Volume(2) Change Rates(2) Volume(2) Change
-------- --------- ---------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest income:(1)
Loans $ (200) 2,528 2,328 (276) 1,718 1,442
Taxable securities 441 (1,542) (1,101) (728) (118) (846)
Nontaxable securities (617) 354 (263) 518 (403) 115
Federal funds sold (53) (44) (97) 62 (199) (137)
Interest bearing deposits --- 139 139 --- 91 91
------ ------ ------ ----- ------ ------
Increase(decrease) in
income on interest-
earning assets $ (429) 1,435 1,006 (424) 1,089 665
------ ------ ------ ----- ------ ------
Interest expense:
Interest-bearing demand
deposits $ 905 (14) 891 (125) (46) (171)
Savings deposits (9) (66) (75) 10 (162) (152)
Time deposits (940) 204 (736) 178 486 664
Short-term borrowings (4) (6) (10) 2 (10) (8)
------ ------ ------ ----- ------ ------
Increase(decrease) in
expense of interest-
bearing liabilities $ (48) 118 70 65 268 333
------ ------ ------ ----- ------ ------
Increase (decrease) in net
interest income $ (381) 1,317 936 (489) 821 332
====== ====== ====== ===== ====== ======
(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>
<TABLE>
II. INVESTMENT PORTFOLIO
A. BOOK VALUE OF INVESTMENTS
The amortized costs and fair values of securities available for sale as of December 31, 1997, 1996
and 1995 were as follows:
<CAPTION>
December 31,
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
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 $ 6,742 6,862 8,740 8,790 14,991 15,322
U.S. Government agencies and corporations 36,252 36,276 33,840 33,640 42,586 42,809
States and political subdivisions 9,540 9,639 8,688 8,619 7,613 7,567
Mortgage-backed securities (1) 4,172 4,119 4,568 4,452 4,748 4,645
Other securities 8,582 8,686 7,074 7,033 5,505 5,527
------- ------ ------ ------ ------ ------
Total securities available for sale $65,288 65,582 62,910 62,534 75,443 75,870
======= ====== ====== ====== ====== ======
<CAPTION>
The amortized costs of securities held to maturity as of December 31, 1997, 1996 and 1995 were as
follows:
December 31,
------------------------------
($ in thousands) 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Securities held to maturity:
U.S. Treasury $ 7,527 11,547 19,330
U.S. Government agencies and corporations 36,853 54,804 49,938
States and political subdivisions 32,949 34,144 36,428
Mortgage-backed securities (1) 630 767 961
Other securities 6,433 7,448 5,108
------- ------- -------
Total securities held to maturity $84,392 108,710 111,765
======= ======= =======
(1) The majority of Mortgage-backed Securities and Collateralized Mortgage Obligations held at
December 31, 1997 were backed by U.S. agencies. Certain holdings are required to be periodically
subjected to the Financial Institution Examination Council's (FFIEC) high risk mortgage security
test. These tests address possible fluctuations in the average life and price sensitivity which
are the primary risks associated with this type of security. Such tests are usually subject to
regulatory review.
Except for U.S. Government securities, the Company has no securities with any issuer that exceeds 10%
of stockholders' equity.
</TABLE>
-20-<PAGE>
<TABLE>
B. MATURITIES AND ASSOCIATED YIELDS
The following table presents the maturities for those securities available for sale and held to matrity
as of December 31, 1997 and weighted average yield for each range of maturities.
<CAPTION>
Maturities and Yields
December 31, 1997
---------------------------------------------------------
($ 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 $ 995 3,867 2,000 --- --- $ 6,862
5.12% 7.10% 5.92% ---% ---% 6.47%
U.S. Agencies 6,476 17,395 11,403 1,001 --- 36,275
5.60% 6.19% 7.16% 7.35% ---% 6.42%
Mortgage-backed securities --- --- 622 3,501 --- 4,123
---% ---% 5.82% 6.03% ---% 6.00%
Taxable Securities --- 1,099 1,337 769 --- 3,205
---% 6.64% 7.09% 7.63% ---% 7.07%
Nontaxable Securities --- 2,263 3,696 473 --- 6,432
---% 6.68% 7.06% 7.38% ---% 6.95%
Corporate 1,204 1,521 3,041 2,057 --- 7,823
5.98% 6.72% 6.76% 7.07% ---% 6.71%
Other securities --- --- --- --- 862 862
---% ---% ---% ---% 13.51% 13.51%
------------------------------------------------------------
Total 8,675 26,145 22,099 7,801 862 65,582
5.60% 6.42% 6.93% 6.71% 13.51% 6.59%
============================================================
Held To Maturity
----------------
U.S. Treasury 3,000 6,035 --- --- --- 9,035
4.89% 6.04% ---% ---% ---% 5.66%
U.S. Agencies 10,249 16,614 8,480 --- --- 35,343
5.24% 5.99% 6.80% ---% ---% 5.97%
Mortgage-backed securities --- 42 192 395 --- 629
---% 6.65% 7.67% 8.08% ---% 7.86%
Taxable Securities 411 1,274 1,267 1,659 --- 4,611
6.72% 6.99% 7.50% 7.40% ---% 7.25%
Nontaxable Securities 2,990 17,954 6,664 1,697 --- 29,305
8.59% 7.47% 8.24% 7.90% ---% 7.79%
Corporate 1,500 3,005 471 493 --- 5,469
5.80% 6.98% 7.50% 8.00% ---% 6.79%
Other securities --- --- --- --- --- ---
---% ---% ---% ---% ---% ---%
------------------------------------------------------------
Total 18,150 44,924 17,074 4,244 --- 84,392
5.81% 6.68% 7.44% 7.73% ---% 6.70%
============================================================
(1) Rates shown represent weighted average yield on a fully taxable basis.
</TABLE>
-21-<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, 1997.
A. TYPES OF LOANS
December 31,
----------------------------------------
($ in thousands) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Commercial and industrial
loans $101,379 87,519 59,609 59,213 67,359
Real estate mortgage
loans 42,969 43,917 45,589 44,447 40,236
Real estate construction
loans 8,510 6,295 6,007 5,643 3,967
Loans to individuals 66,635 60,991 56,920 52,031 43,084
-------- ------- ------- ------- -------
Total loans 219,493 198,722 168,125 161,334 154,646
Less unearned income and
deferred fees (2,503) (2,549) (2,307) (2,494) (1,907)
-------- ------- ------- ------- -------
Total loans, net of
unearned income 216,990 196,173 165,818 158,840 152,739
Less allowance for loans
losses (2,438) (2,575) (2,625) (2,551) (2,583)
-------- ------- ------- ------- -------
Total loans, net $214,552 193,598 163,193 156,289 150,156
======== ======= ======= ======= =======
B. MATURITIES AND INTEREST RATE SENSITIVITIES
December 31, 1997
--------------------------------------
After
($ in thousands) <1 Year 1-5 Years 5 Years Total
------- --------- ------- -----
Commercial and
industrial $49,984 36,935 14,460 101,379
Real estate
construction 8,510 --- --- 8,510
Less loans with
predetermined interest
rates (9,718) (13,447) (13,262) (36,427)
------- ------- ------- -------
Loans with adjustable
rates $48,776 23,488 1,198 73,462
======= ======= ======= =======
-22-<PAGE>
C. RISK ELEMENTS
1. Nonaccrual, Past Due and Restructured Loans
The following table presents aggregate amounts for nonaccrual loans,
restructured loans, other real estate owned, net and accruing loans
which are contractually past due ninety days or more as to interest
or principal payments.
December 31,
----------------------------------
($ in thousands) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Nonaccrual loans:
Commercial and industrial $ 55 121 270 --- 710
Real estate mortgage 32 495 418 390 1,123
Real estate construction --- --- --- --- ---
Loans to individuals --- --- 30 30 31
------ ----- ----- ----- -----
$ 87 616 718 420 1,864
Restructured loans:
Commercial and industrial --- --- --- 229 598
------ ----- ----- ----- -----
Total nonperforming loans $ 87 616 718 649 2,462
Other real estate owned, net 421 474 762 1,150 225
------ ----- ----- ----- -----
Total nonperforming assets $ 508 1,090 1,480 1,799 2,687
====== ===== ===== ===== =====
Accruing loans past due 90
days or more:
Commercial and industrial $ 82 14 11 4 45
Real estate mortgage 358 252 250 219 198
Real estate construction --- --- --- 87 243
Loans to individuals 232 192 313 180 128
------ ----- ----- ----- -----
$ 672 458 574 490 614
====== ===== ===== ===== =====
The effect of nonaccrual and restructured loans on interest income
is presented below:
($ in thousands) 1997 1996 1995
---- ---- ----
Scheduled interest:
Nonaccrual loans $ 8 68 59
Restructured loans --- --- ---
----- ----- ----
Total scheduled interest $ 8 68 59
----- ----- ----
Recorded interest:
Nonaccrual loans $ 1 24 5
Restructured loans --- --- ---
----- ----- ----
Total recorded interest $ 1 24 5
===== ===== ====
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.
-23-<PAGE>
2. Potential Problem Loans
At December 31, 1997, the recorded investment in loans which have
been identified as impaired loans totaled $177,000. Of this amount,
$124,000 related to loans with no valuation allowance and $53,000
related to loans with a corresponding valuation allowance of
$53,000. For the year-ended December 31, 1997, the average recorded
investment in impaired loans was approximately $458,000 and the
total interest income recognized on impaired loans was $23,000 of
which $12,000 was recognized on a cash basis.
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.
3. Foreign Outstandings
At December 31, 1997, 1996 and 1995, 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 Celco. 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, 1997 and 1996, approximately $80 million and $71
million, respectively, of the loan portfolio were concentrated in
commercial real estate. This represents approximately 37% and 36%
of the loan portfolio at December 31, 1997 and 1996, respectively.
Included in commercial real estate at December 31, 1997 and 1996 was
approximately $50 million and $49 million, respectively, in loans
for college housing and professional office buildings. Loans
secured by residential real estate were approximately $65 million
and $60 million at December 31, 1997 and 1996, respectively. This
-24-<PAGE>
represents approximately 30% and 31% of the loan portfolio at
December 31, 1997 and 1996, respectively. Loans secured by
automobiles were approximately $34 million and $29 million at
December 31, 1997 and 1996, respectively. This represents
approximately 16% of the loan portfolio at December 31, 1997 and 15%
at December 31, 1996.
The Company has established operating policies relating to the
credit process and collateral in loan originations. Loans to
purchase real and personal property are generally collateralized by
the related property and with loan amounts established based on
certain percentage limitations of the property's total stated or
appraised value. Credit approval is primarily a function of
collateral and the evaluation of the creditworthiness of the
individual borrower or project based on available financial
information.
-25-<PAGE>
<TABLE>
IV. SUMMARY OF LOAN LOSS EXPERIENCE
-------------------------------
A. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The following tabulation shows average loan balances at the end of each period; changes in the
allowance for loan losses arising from loans charged off and recoveries on loans previously
charged off by loan category; and additions to the allowance which have been charged to
operating expense:
<CAPTION>
December 31,
----------------------------------------------
($ in thousands) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Average loans outstanding $204,540 177,419 159,920 152,976 149,027
======== ======= ======= ======= =======
Balance at beginning of year 2,575 2,625 2,551 2,583 2,327
Charge-offs:
Commercial and industrial loans 257 95 23 72 231
Real estate mortgage loans --- 11 9 192 285
Real estate construction loans --- --- --- 53 ---
Loans to individuals 422 400 259 322 246
-------- ------- ------- ------- -------
Total loans charged off 679 506 291 639 762
-------- ------- ------- ------- -------
Recoveries:
Commercial and industrial loans 70 4 10 7 10
Real estate mortgage loans --- 64 16 4 5
Real estate construction loans --- --- --- --- ---
Loans to individuals 37 57 57 43 50
-------- ------- ------- ------- -------
Total recoveries 107 125 83 54 65
-------- ------- ------- ------- -------
Net loans charged off 572 381 208 585 697
-------- ------- ------- ------- -------
Additions charged to operations 435 331 282 553 953
-------- ------- ------- ------- -------
Balance at end of year $ 2,438 2,575 2,625 2,551 2,583
======== ======= ======= ======= =======
Net charge-offs to average net loans
outstanding 0.28% 0.21% 0.13% 0.38% 0.47%
======== ======= ======= ======= =======
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>
-26-<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,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------
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 $ 213 46.18% 403 44.04% 411 35.46% 679 36.70% 860 43.56%
Real estate
mortgage
loans 67 19.58% 305 22.10% 363 27.12% 364 27.55% 373 26.02%
Real estate
construction
loans --- 3.88% 51 3.17% 100 3.57% 37 3.50% 54 2.56%
Loans to
individuals 416 30.36% 504 30.69% 271 33.85% 569 32.25% 685 27.86%
Unallocated 1,742 1,312 1,480 902 611
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$2,438 100.00% 2,575 100.00% 2,625 100.00% 2,551 100.00% 2,583 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
-27-<PAGE>
V. DEPOSITS
A. AVERAGE AMOUNTS OF DEPOSITS AND AVERAGE RATES PAID
Average amounts and average rates paid on deposit categories in
excess of 10% of average total deposits are presented below:
December 31,
--------------------------------------------------
1997 1996 1995
---------------- ---------------- ---------------
Average Average Average
Average Rates Average Rates Average Rates
($ in thousands) Amounts Paid Amounts Paid Amounts Paid
------- ------- ------- ------- ------- -------
Noninterest-bearing
demand deposits $ 44,193 --- 41,997 --- 38,833 ---
Interest-bearing
demand deposits 75,519 4.07% 76,017 2.87% 77,545 3.03%
Savings deposits 47,781 3.29% 49,783 3.31% 54,698 3.29%
Time deposits 171,946 4.91% 168,141 5.46% 159,185 5.35%
-------- ----- ------- ----- ------- -----
Average total
deposits $339,439 4.43% 335,938 4.43% 330,261 4.35%
======== ===== ======= ===== ======= =====
B. TIME DEPOSITS OF $100,000 OR MORE
The following table sets forth time certificates of deposit and
other time deposits of $100,000 or more:
DECEMBER 31, 1997
-----------------------------------------------
Over 3 Over 6
3 Months Months
Months Through 6 Through 12 Over 12
($ in thousands) or Less Months Months Months Total
------- --------- ---------- ------- -----
Certificates of
deposit $13,098 7,055 12,685 6,399 39,237
Other time deposits 232 --- 172 2,906 3,310
------- ------ ------ ------ ------
Total time
deposits of
$100,000 or more $13,330 7,055 12,857 9,305 42,547
======= ====== ====== ====== ======
-28-<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,
------------------------
1997 1996 1995
---- ---- ----
Return on average assets 1.66% 1.58% 1.46%
Return on average equity(1) 12.21% 12.37% 12.08%
Dividend payout ratio 39.31% 37.55% 37.32%
Average equity to average assets(1) 13.57% 12.75% 12.08%
(1) Includes amount related to common stock subject to ESOP put
option excluded from stockholders' equity on the Consolidated
Balance Sheets.
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 seven branch offices: two in the Town of Blacksburg; one
in the Town of Christiansburg; one in Montgomery County; and three in the
County of Giles. 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. Construction of an office building on this site is
expected to begin in 1998, reducing the future 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 at present owns all of its computer and data
processing hardware and is a licensee of the software it utilizes. During
1997, the Company implemented a major hardware and software upgrade at NBB.
It is management's plan in 1998 to consolidate BTC's data processing using
NBB's recently upgraded system.
Item 3. Legal Proceedings
- --------------------------
Bankshares, NBB nor BTC are not 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, 1997.
-29-<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 14, 1998.
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 53 President and Chief 1986
Executive Officer, National
Bankshares, Inc.; and
President and Chief
Executive Officer of The
National Bank of Blacksburg
since 1983.
J. Robert Buchanan 46 Treasurer, National 1998
Bankshares, Inc.; Senior
Vice President/Chief
Financial Officer of The
National Bank of Blacksburg,
since January 1, 1998; and
Senior Vice President,
Treasurer and Chief
Financial Officer, Premier
Bankshares Corporate since
1991.
Marilyn B. Buhyoff 49 Secretary & Counsel, 1989
National Bankshares, Inc.;
and Senior Vice President/
Administration since 1992,
of The National Bank of
Blacksburg.
F. Brad Denardo 45 Corporate Officer, National 1989
Bankshares, Inc.; and
Executive Vice President/
Loans since 1989 of The
National Bank of Blacksburg.
Joan C. Nelson 47 Corporate Officer, National 1993
Bankshares, Inc.; Treasurer,
National Bankshares Inc.,
from 1993 to 1998; Cashier
since 1993 and Senior Vice
President/Operations since
1989 of The National Bank of
Blacksburg.
Except for J. Robert Buchanan and Joan C. Nelson, each of the executive
officers listed above have served Bankshares and/or its subsidiaries in the
aforementioned executive capacity for the past five years.
-30-<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 18, 1998, the total number of holders of the
Registrant's common stock was 1,151.
Information concerning Market Price and Dividend Data is set forth under
"Common Stock Information and Dividends" on page 14 of Bankshares' 1997
Annual Report to Stockholders and is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The table entitled "Selected Consolidated Financial Data" on page 5 of
Bankshares' 1997 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 6 through 14 of Bankshares' 1997 Annual Report to Stockholders is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
See "Analysis of Interest Rate Sensitivity" set forth below. Additional
information is set forth under the section "Interest Rate Senstitity" on page
6 and the section "Derivatives and Market Risk Exposure" on pages 11 and 12
of Bankshares' 1997 Annual Report to Stockholders and is incorporated herein
by reference.
ANALYSIS OF INTEREST RATE SENSITIVITY
The table below sets forth, as of December 31, 1997, 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.
-31-<PAGE>
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 the Company 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 or
falling and the length of time rates remained stable at the level ultimately
reached.
-32-<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, 1997
------------------------------------------------------
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 $ 27,324 5,399 17,207 36,936 14,460 101,326
Real estate mortgage loans 1,514 4,100 10,045 14,843 12,239 42,741
Real estate construction loans 5,773 1,833 885 --- --- 8,491
Loans to individuals 22,545 2,949 5,967 29,983 2,901 64,345
-------- ------- ------- ------ ------ -------
Total loans, net of unearned income (2) $ 57,156 14,281 34,104 81,762 29,600 216,903
Federal funds sold 4,300 --- --- --- --- 4,300
Interest bearing deposits 9,728 --- --- --- --- 9,728
Securities available for sale 10,168 3,661 10,097 29,164 12,492 65,582
Securities held to maturity 15,758 10,056 9,334 28,593 20,651 84,392
Mortgage loans held for sale 405 --- --- --- --- 405
-------- ------- ------- ------ ------ -------
Total interest-earning assets $ 97,515 27,998 53,535 139,519 62,743 381,310
======== ======= ======= ======= ====== =======
Interest-bearing liabilities:
Interest-bearing demand deposits $ 77,863 --- --- --- --- 77,863
Savings deposits 46,773 --- --- --- --- 46,773
Time deposits 45,021 30,768 53,531 45,320 498 175,138
Other borrowings 485 --- --- --- --- 485
-------- ------- ------- ------ ------ -------
Total interest-bearing liabilities $170,142 30,768 53,531 45,320 498 300,259
======== ======= ======= ====== ====== =======
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities .57 .62 .70 1.06 1.27 1.27
======== ======= ======= ====== ====== =======
Cumulative interest-sensitivity gap $(72,627) (75,397) (75,393) 18,806 81,051 81,051
======== ======= ======= ====== ====== =======
(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, 1997, 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>
-33-<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The following consolidated financial statements of the Registrant and the
Independent Auditors' Report set forth on pages 15 through 41 of Bankshares'
1997 Annual Report to Stockholders are incorporated herein by reference:
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 1997 and 1996
3. Consolidated Statements of Income - Years Ended December 31, 1997, 1996
and 1995
4. Consolidated Statements of Changes in Stockholders' Equity - Years Ended
December 31, 1997, 1996 and 1995
5. Consolidated Statements of Cash Flows - Years Ended December 31, 1997,
1996 and 1995
6. Notes to Consolidated Financial Statements - December 31, 1997, 1996 and
1995
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, 1997 are listed on page 30
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 18, 1998, 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 18, 1998 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 18, 1998 is incorporated herein by reference.
-34-<PAGE>
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under "Certain Transactions With Officers and
Directors" on page 11 of Bankshares' Proxy Statement dated March 18, 1998 is
incorporated herein by reference.
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:
1997 Annual Report
To Stockholders Page(s)*
------------------------
1. Financial Statements:
--------------------
Independent Auditors' Report 15
Consolidated Balance Sheets -
December 31, 1997 and 1996 16
Consolidated Statements of
Income - Years ended December
31, 1997, 1996 and 1995 17
Consolidated Statements of Changes
in Stockholders' Equity - Years
ended December 31, 1997, 1996 and
1995 18
Consolidated Statements of Cash
Flows - Years ended December 31,
1997, 1996 and 1995 19
Notes to Consolidated
Financial Statements - December
31, 1997, 1996 and 1995 20-41
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 1997 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
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) 1997 Annual Report to
Stockholders (such Report,
except to the extent
incorporated herein by
reference, is being furnished
for the information of the
Commission only and is not
deemed to be filed as part of
this Report on Form 10-K)
21(i) Subsidiaries of National
Bankshares, Inc.
27 Financial Data Schedule
99 Independent Auditor's Report of
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 20, 1998
------------------------------
BY: /s/J. Robert Buchanan
------------------------------
J. Robert Buchanan
Treasurer
DATE: March 27, 1998
------------------------------
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 23, 1998 Director and Vice
------------------------- -------------- Chairman of the Board
C. L. BOATWRIGHT
/s/T. C. Bowen, Jr. March 20, 1998 Director
------------------------- --------------
T. C. BOWEN, JR.
/s/A. A. Crouse March 20, 1998 Director
------------------------- --------------
A. A. CROUSE
/s/R. E. Christopher, Jr. March 23, 1998 Director and Chairman of
------------------------- -------------- the Board
R. E. CHRISTOPHER, JR.
Director
------------------------- --------------
R. E. DODSON
Director
------------------------- --------------
P. A. DUNCAN
/s/W. T. Peery March 20, 1998 Director
------------------------- --------------
W. T. PEERY
/s/J. G. Rakes March 20, 1998 President and Chief
------------------------- -------------- Executive Officer -
J. G. RAKES National Bankshares, Inc.
/s/J. R. Stewart March 23, 1998 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
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)
*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)
-39-<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) 1997 Annual Report to
Stockholders (such Report,
except to the extent
incorporated herein by
reference, is being furnished
for the information of the
Commission only and is not
deemed to be filed as part of
this Report on Form 10-K)
21(i) Subsidiaries of National
Bankshares, Inc.
27 Financial Data Schedule
99 Independent Auditor's Report of
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>
National Bankshares
1997 Annual Report<PAGE>
$ In thousands, except per share data.
Financial Highlights 1997 1996 1995
------ ------ ------
Net income per share $ 1.73 1.61 1.46
Cash dividends declared per share 0.68 0.62 0.57
Book value per share 14.73 13.56 12.70
Loans, net $214,552 193,598 163,193
Total securities 149,974 171,244 187,635
Total assets 402,907 388,850 380,915
Total deposits 344,867 334,584 330,313
Stockholders' equity 54,029 49,801 48,154
Contents
Community Caring 2
--------------------------------
To Our Stockholders 4
--------------------------------
Selected Consolidated
Financial Data 5
--------------------------------
Management's Discussion and
Analysis 6
--------------------------------
Independent Auditors' Report 15
--------------------------------
Consolidated Financial
Statements 16
--------------------------------
Notes to Consolidated
Financial Statements 20
--------------------------------
Corporate Information 44
--------------------------------<PAGE>
Community
Caring
National Bankshares, Inc. "Picture of Community Breakfast"
strives to be an exceptional (Lara Ramsey - Community
community bank holding Oranizations and Businesses)
company dedicated to
providing shareholder value "Picture of Main Street Moments"
by offering financial services (Carl Gillespie - Board Member and
to customers through Sandra Viney - Head Teller)
subsidiary financial
institutions and affiliated "Picture of Boo Party"
companies in an efficient, (Halloween Party hosted by BTC
friendly, personalized and for the area pre-school and
cost-effective manner. We head start students)
recognize that to do this, our
financial institutions must
retain the ability to make
decisions locally and must "Picture of Primeline Social"
actively participate in the (Customers with Primeline Account)
communities they serve. We
are committed to offering
competitive and fair
employment opportunities
and to maintaining the highest
standards in all aspects of
our business.
NBB
The National Bank
BTC Bank of Tazewell County
2<PAGE>
"Picture of Crystal Artis"
(COE Student - Cooperative
Office Education)
"Picture of Wilderness Trail Festival"
(Phyllis Duncan - North Main Branch Manager)
"Picture of Main Street Moments"
(Anthony Dawson, T. C. Bowen and
Connie Stallard)
"Picture of Rich Creek Branch Opening"
(Betty Johnson - Branch Manager)
3<PAGE>
National Bankshares
"Picture of James G. Rakes"
To Our Stockholders: technology and employee computer
training. Late in the year, the
It is always pleasant to report Board of Directors of Bank of
positive financial results to you, Tazewell County determined that
and there are a number of highlights during 1998 BTC will combine its
in National Bankshares' performance data processing with that of NBB.
for 1997. Net income reached a Consolidation will allow the
record $6.56 million, up from the Tazewell bank to take advantage of
$6.12 million earned in 1996, which NBB's updated equipment, and it will
was itself a record total. permit both banks to realize some
Stockholders shared in this success, economies of scale.
with annual dividends in 1997 that
were 9.68% higher than in 1996. In April 1997, The National Bank
During the past year, the asset size opened its eighth branch office in
of Bankshares and its bank Rich Creek, Virginia, the third
subsidiaries topped the $400 million office in Giles County. At the end
mark for the first time, and the of the year, NBB agreed to purchase
Company ended 1997 with nearly $403 the Galax, Virginia office of First
million in total assets. American Federal Savings Bank. We
hope to complete that transaction
Several areas that contributed to very soon, and to begin offering our
1997's final results deserve special style of personalized banking in a
mention. A positive 10.82% increase new, but nearby, market area.
in net loans accomplished two
important things. First, funds were The year just past proved to be
shifted from the securities profitable for our banks and our
portfolio into higher yielding customers. We worked to attain our
loans. Second, thousands of loans goal of being an exceptional
were made to individuals and community bank holding company
businesses throughout Southwest dedicated to providing value to our
Virginia, keeping the deposits stockholders. We are firmly
generated in our region at work in committed to the belief that there
our localities. Reflecting the is a bright future for community
strong economy, the quality of the banks, and therefore a great
loan portfolio remained high and the opportunity for a progressive and
level of total nonperforming assets competitive company like ours. I
dropped significantly, from $1.1 would be remiss if I did not thank
million in 1996 to $0.5 million in our directors, officers and
1997. The Company's already good employees for their contributions to
capital level increased during the our success in 1997, and I also
year, and at year end Bankshares and thank you for your continued
subsidiaries had over $54 million in investment and confidence in
stockholders' equity. A healthy National Bankshares.
capital base is a positive indicator
of the strength of our subsidiary
banks, and, in addition, it allows
us to actively consider new business James G. Rakes
opportunities. President and
Chief Executive Officer
While enjoying the prosperity of
1997, we planned for the future.
During the year, The National Bank
made a significant investment in
upgraded information processing
4<PAGE>
National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data
$ In thousands, except per share data. Years ended December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
Selected Interest income $ 29,797 28,647 28,094 26,062 25,827
Income Interest expense 13,106 13,036 12,703 10,684 10,752
Statement Net interest income 16,691 15,611 15,391 15,378 15,075
Data: Provision for loan
losses 435 331 282 553 953
Noninterest income 2,834 2,693 2,382 2,047 2,399
Noninterest expense 10,031 9,515 10,033 9,725 9,002
Income taxes 2,499 2,341 1,933 1,844 1,903
Net income 6,560 6,117 5,525 5,303 5,644
Per Share Net income $ 1.73 1.61 1.46 1.40 1.49
Data: Cash dividends
declared 0.68 0.62 0.57 0.52 0.45
Book value per
share(1) 14.73 13.56 12.70 11.25 10.81
Selected Loans, net $214,552 193,598 163,193 156,289 150,156
Balance Total securities 149,974 171,244 187,635 184,231 174,964
Sheet Total assets 402,907 388,850 380,915 373,132 357,773
Data at Total deposits 344,867 334,584 330,313 327,686 314,001
End Stockholders'
of Year: equity 54,029 49,801 48,154 42,658 40,951
Selected Loans, net $204,540 177,419 160,643 152,976 149,027
Balance Total securities 157,179 177,403 183,994 185,365 154,740
Sheet Total assets 395,932 388,045 378,406 369,962 349,747
Daily Total deposits 339,439 335,938 330,261 325,167 307,645
Averages: Stockholders'
equity(1) 53,712 49,459 45,726 42,402 39,435
Selected Return on average
Ratios: assets 1.66 1.58 1.46 1.43 1.61
Return on average
equity(1) 12.21 12.37 12.08 12.51 14.31
Dividend payout
ratio 39.31 37.55 37.32 37.13 32.18
Average equity to
average assets(1) 13.57 12.75 12.08 11.46 11.28
(1) Includes amount related to common stock subject to ESOP put
option excluded from stockholders' equity on the Consolidated
Balance Sheets.
(Dollars) (Dollars)
Book Value Per Share Graph Cash Dividends Per Share Graph
1993 1994 1995 1996 1997 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
$10.81 11.25 12.70 13.56 14.73 $0.45 0.52 0.57 0.62 0.68
5<PAGE>
Management's Discussion and Analysis
($ In thousands, except per share data.)
Net Income Graph
($ In millions)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
$5.6 5.3 5.5 6.1 6.6
Average Equity to Average Assets Graph
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
11.28% 11.46% 12.08% 12.75% 13.57%
PERFORMANCE SUMMARY
Net income in 1997 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 $6,560, an increase of $443 or
7.24%. This produced a return on average assets and a return on average
equity of 1.66% and 12.21%, respectively.
Net income for the Company for 1996 was $6,117, an increase of $592 or
10.71% over 1995. The return on average assets and return on average equity
for 1996 were 1.58% and 12.37%, respectively.
The Company's net income for 1995 was $5,525 which produced a return on
average assets of 1.46% and a return on average equity of 12.08%.
Earnings per share increased steadily over the three year period rising
from $1.46 per share in 1995, to $1.61 in 1996 and $1.73 in 1997.
The Company continues to enjoy good profitability as indicated by the
return on average assets and steadily increasing earnings per share. The
decline in the return on average equity in 1997 was due to a net increase in
the Company's capital resulting from continued good earnings offset by
dividends paid to the Company's stockholders. The dividend payout ratio for
1997 was 39.31%, which compares to 37.55% in 1996 and 37.32% in 1995.
NET INTEREST INCOME
Net interest income for 1997 was $16,691, an increase of $1,080 or 6.92%
over 1996. In 1996, net interest income was $15,611, up $220 or 1.43% from
1995 net interest income of $15,391.
The net yield on earnings assets for 1997 was 4.75%. In 1996 and 1995,
the net yields on earning assets were 4.59% and 4.63%, respectively.
Throughout the three year period, management's strategy was to fund
increases in the loan portfolio through liquidity generated principally from
the securities portfolio. In 1997, overall loan growth remained strong,
particularly in commercial loans and loans to individuals.
In 1996, a substantial amount of loan growth took place in the highly
rate-competitive commercial loan area. This limited the effect of the loan
growth on net interest income.
6<PAGE>
INTEREST RATE SENSITIVITY
The Company considers interest rate risk to be a significant market risk
and has systems in place to measure the exposure of net interest income and
fair market values to adverse movement in interest rates. Interest rate
sensitivity analyses indicate repricing opportunities, and interest rate
shock simulations indicate potential economic loss due to future interest
rate changes. Management realizes certain risks are inherent and minimizes
these by adjusting asset/liability management responses to changing economic
conditions.
The Company reduces the volatility of its net interest income by
managing the relationship of interest-rate sensitive assets to interest-rate
sensitive liabilities. The Company would be impacted by rising interest rate
changes, as it is liability sensitive for the time period up to one year.
Beyond one year, the cumulative interest rate position is asset sensitive,
indicating that the effect of rising rates would dissipate in the one to five
year time period.
The impact of rate fluctuations 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. Based on the information and
assumptions in effect at December 31, 1997, management believes that an
immediate 200 basis point rate shock, up or down, over a twelve month period
could significantly affect the Company's annualized net interest income or
net economic value if not countered by management's pricing strategies.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The adequacy of the allowance for loan losses is based on management's
judgement and analysis of current and historical loss experience, risk
characteristics of the loan portfolio, concentrations of credit and asset
quality, as well as other internal and external factors such as general
economic conditions.
An internal credit review department performs pre-credit analyses of
large credits and also conducts credit review activities that provide
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 Loan Loss Data table.
7<PAGE>
Management's Discussion and Analysis
Loan Loss Data
($ In thousands) 1997 1996 1995
------ ------ ------
Provision for loan losses $ 435 331 282
Net charge-offs to average
net loans 0.28% 0.21% 0.13%
Allowance for loan losses to
loans, net of unearned
interest and deferred fees 1.12% 1.31% 1.58%
Allowance for loan losses to
nonperforming loans 2,802.30% 418.02% 365.60%
Allowance for loan losses to
nonperforming assets 479.92% 236.24% 177.37%
Nonperforming assets to loans,
net of unearned income
and deferred fees, plus
other real estate owned 0.23% 0.55% 0.89%
Nonaccrual loans $ 87 616 718
Other real estate owned, net 421 474 762
--------- ------ ------
Total nonperforming assets $ 508 1,090 1,480
========= ====== ======
Accruing loans past due 90 days
or more $ 672 458 574
Nonperforming loans include nonaccrual loans and do not include accruing
loans past due 90 days or more. Nonperforming assets for 1997 have decreased
$582 or 53.39% from 1996 and represent the continuation of a declining trend.
Nonperforming assets for 1996 decreased by $390 or 26.35% from the 1995 total
of $1,480.
Net charge-offs to average net loans for 1997 were .28%, up .07% when
compared to 1996. Allocations for these net charge-offs were made in
previous periods. In 1997, overall asset quality continued to improve and
general economic conditions were favorable. While the provision for loan
loss increased by $104 or 31.42%, the previously mentioned loan charge-offs
and the level of loan growth resulted in a lower ratio of the allowance to
loans.
Net charge-offs to average net loans for 1996 were .21%, up from 1995
when that ratio was .13%. While the Company did experience an increase in
net charge-offs, there was an overall trend of improving asset quality. The
provision for loan losses, which was up $49 in 1996 or 17.38% over 1995's
provision of $282, was increased to cover 1996's net charge-offs. See note 5
of Notes to Consolidated Financial Statements for additional information
relating to nonperforming assets, past due loans, impaired loans and
allowance for loan losses.
8<PAGE>
National Bankshares, Inc. and Subsidiaries
While past efforts directed at improving asset quality have been largely
successful, management is unable to estimate when and under what exact terms
problem credits will be resolved. With the information available, management
does not anticipate any significant deterioration in asset quality. However,
changing economic conditions, the timing and extent of changes and the
ultimate impact on the Company's asset quality is not within management's
ability to predict with any degree of precision.
NONINTEREST INCOME
Noninterest income for 1997 was $2,834, an increase of $141 or 5.24%
over 1996. Noninterest income for 1996 was $2,693, up $311 or 13.06% from
1995.
Service charges on deposits for 1997 totalled $1,131, a decrease of $52
or 4.40% from 1996. Service charges on deposit accounts in 1996 were up $190
or 19.13% from the previous year. The level of these charges is driven by
demand deposit volume, types of accounts opened, service charge rates in
effect, the level of charges such as overdraft fees and the waiver policy
concerning these fees. The decrease for 1997 and the increase for 1996 were
largely attributable to fluctuations in overdraft volumes.
Other service charges and fees are composed of safe deposit box rent,
charges associated with letters of credit and other miscellaneous items. In
1997, these charges were $250, a decrease of $19 or 7.06% from 1996. For
1996, these charges totalled $269, an increase of $41 or 17.98% over 1995.
Trust income for 1997 was $738 which represents an increase of $135 or
22.39% over 1996. In 1996, trust income was $603, an increase of $123 or
25.63% over 1995. Factors affecting the growth in trust income include an
increase in the number of accounts managed, an increase in the average value
of the accounts managed and an increase in both the number and value of
estates settled. Due to its nature, estate business volume and the related
income is not within management's ability to predict.
Credit card income is composed of several types of fees and charges,
including transaction or interchange fees, merchant discount fees and
overlimit charges. In 1997, credit card income totalled $606, an increase of
$95 or 18.59% over 1996. Credit card income for 1996 was $511, up $61 or
13.56% over 1995. Credit card income increased in 1997 largely because of a
higher volume of interchange transactions, created in part by the
introduction of a debit card product. The increase in credit card income was
offset somewhat by the discontinuation early in 1997 of annual membership
fees charged to customers. Given the highly competitive market which limits
the amount of charges set, revenue increases result from growth in the number
of merchant accounts processed and increases in the number of customer credit
and debit card accounts that result in higher transaction volume.
Net securities gains were $37 in 1997, down $60 or 61.86% from 1996. In
1996, net securities gains were $97, down 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. These bonds were disposed of in 1997 and a gain
of approximately $10 was recognized.
NONINTEREST EXPENSE
Noninterest expense in 1997 totalled $10,031, up $516 or 5.42% from
1996. In 1996, noninterest expense was $9,515, a decrease of $518 or 5.16%
from 1995.
9<PAGE>
Management's Discussion and Analysis
Salaries and benefits increased $120 or 2.27% from 1996. The increase
resulted from the addition of staff in connection with NBB's opening of a new
branch office early in 1997 and from salary adjustments, promotions and other
normal compensation related items, offset by a $119 decrease in net pension
cost.
In 1996, salaries and benefits expense totalled $5,278, up $244 or 4.85%
from 1995. This was largely due to a $177 increase in net pension cost and
other normal compensation related items.
Occupancy and furniture and fixtures expense increased $74 or 8.37% for
1997 when compared to 1996. This increase was due to higher costs associated
with the new branch office constructed and opened by NBB and also to regular
planned maintenance of facilities. Management anticipates occupancy and
furniture and fixtures expense to continue to increase. NBB expects to
purchase a branch office in Galax, Virginia in early 1998 and will also start
construction of a new office building during the year. The expected increase
in occupancy and furniture and fixtures expense will be somewhat moderated by
a future reduction in expenses for leased premises. Occupancy and furniture
and fixtures expense experienced a slight decrease in 1996 of 3.91% over
1995.
Data processing and ATM expense was $578 for 1997, an increase over 1996
of $81 or 16.30%. This increase was due to costs associated with the upgrade
of information system hardware and software and costs related to an expanded
microcomputer network. Data processing and ATM expense is also likely to
increase in 1998, as BTC completes a planned upgrade of its information
system hardware and software and an expansion of its microcomputer network.
In 1996, data processing and ATM expense was $497, an increase of $35 or
7.58% over 1995. The expansion of a microcomputer network and increased
costs of maintenance on older equipment were the primary causes of the
increase.
The cost of Federal Deposit Insurance increased in 1997 by $39 over
1996. While the banks' base premiums remain at the minimum required by law,
legislation enacted in late 1996 levied an assessment on banks for the
purpose of financing certain costs associated with the resolution of the
savings and loan crisis. This additional levy is expected to remain in
effect until 2018-2019. In 1996, the Company's affiliates paid the base
premium of $4, the minimum payment required by law, which was a 98.94%
decrease from 1995's assessment.
Credit card processing expense for 1997 was $551, an increase of $85 or
18.24% over 1996. This increase reflects additional expense due to the
introduction of a debit card product, higher merchant processing costs and an
overall increase in business activity. In 1996, credit card processing
expense increased by $55 or 13.38%, which was primarily the result of
increased business activity.
Net costs of other real estate owned for 1997 were $8, a decrease of $3
or 60.00% from 1996. Other real estate owned net of valuation allowance
decreased in 1997 by $53. Efforts to market existing properties continue,
however, the exact timing, terms and conditions of the sale of the properties
remain unknown. In 1996, net costs of other real estate owned decreased by
$190 or 97.44% from 1995, primarily due to a $119 reduction in the valuation
allowance for other real estate in 1996.
Other operating expenses were $2,465 in 1997, up $114 or 4.85% from
1996. The other operating expense category in 1996 decreased by $251 or
9.65% from 1995 and was due primarily to a $111 reduction in merger expenses,
from $268 in 1995 to $157 in 1996. Other operating expenses in 1995 included
a contribution to a community development corporation which was not incurred
in 1996.
10<PAGE>
National Bankshares, Inc. and Subsidiaries
INCOME TAXES
Higher pre-tax income in 1997 resulted in a $158 increase in income tax
expense when compared to 1996. Tax exempt interest income continues to be
the primary difference between the "expected" and reported income tax
expense. The Company's effective tax rates for 1997, 1996 and 1995 were
27.59%, 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.
See note 9 of Notes to Consolidated Financial Statements for additional
information relating to income taxes.
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 1997 were $402,907 which represents an increase
of $14,057 or 3.62% over the previous year. The Company's primary methods of
achieving growth are to seek to increase deposits at its bank subsidiaries
and to grow through corporate acquisitions and mergers. In both 1997 and
1996, the Company experienced excess liquidity, and because management
stressed profitability over growth, management's strategy was to utilize
those funds before aggressively pursuing new deposits. In 1997 and 1996,
total average deposits grew by $3,501 and $5,677, respectively, which
represents growth rates of 1.04% and 1.72%, respectively.
Total Assets Graph
(Millions)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
$357.8 373.1 380.9 388.9 402.9
LOANS
Loans, net of unearned income and deferred fees, grew by $20,817 or
10.61% in 1997. Commercial loans grew by $13,860 or 15.84% with loans to
individuals increasing by $5,644 or 9.25%.
In 1996, loans, net of unearned income and deferred fees, grew by
$30,355 or 18.31%. Commercial loans, which grew by $27,910 or 46.82%,
accounted for the largest portion of the increase.
The Company engages in the origination and sale of mortgage loans in the
secondary market. In 1997 and 1996, the Company originated $19,120 and
$17,907, respectively, and sold $19,231 and $18,271 in 1997 and 1996,
respectively, of mortgage loans.
SECURITIES
In 1997, bank-owned securities declined by $21,270 or 12.42% compared to
1996. The decrease took place in the held to maturity portfolio which
declined by $24,318 or 22.37%. Securities available for sale increased
$3,048 or 4.87% offsetting a portion of that decline. In 1996, total bank-
11<PAGE>
Management's Discussion and Analysis
owned securities were $171,244, a decrease of $16,391 or 8.74% from 1995. In
1997 and 1996, cash flows resulting from the reduction in the securities
portfolio were 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, 1997 and 1996, the Company had no investment
concentrations in any single issues (excluding U.S. Government) that exceeded
ten percent of capital.
DEPOSITS
At year end 1997, total deposits were $344,867 which represent a $10,283
or a 3.07% increase over 1996. At December 31 1996, total deposits were
$334,584, an increase of 1.29% over 1995.
Average noninterest-bearing deposits of $44,193 grew by $2,196 or 5.23%
in 1997, $3,164 or 8.15% in 1996 and $2,109 or 5.74% in 1995. Average
interest-bearing deposits were $295,246 in 1997, an increase of $1,305 over
1996. In 1996, average interest-bearing deposits of $293,941 increased
$2,513 from the 1995 total of $291,428.
DERIVATIVES AND MARKET RISK EXPOSURES
The Company is not a party to derivative financial instruments with off-
balance sheet risks such as futures, forwards, swaps and options. The
Company is a party to financial instruments with off-balance sheet risks such
as commitments to extend credit, standby letters of credit, and recourse
obligations in the normal course of business to meet the financing needs of
its customers. See note 13 of Notes to Consolidated Financial Statements for
additional information relating to financial instruments with off-balance
sheet risk. Management does not plan any future involvement in high risk
derivative products. The Company has investments in mortgage-backed
securities, collateralized mortgage obligations, structured notes and other
similar instruments which are included in securities available for sale and
securities held to maturity. The fair value of these investments at December
31, 1997 approximated $11,144. See note 3 of Notes to Consolidated Financial
Statements for additional information relating to securities.
The Company's securities and loans are subject to credit and interest
rate risk and its deposits are subject to interest rate risk. Management
considers its credit risk when a loan is granted and monitors its credit risk
after the loan is granted. The Company maintains an allowance for loan
losses to absorb losses in the collection of its loans. See note 5 of Notes
to Consolidated Financial Statements for information relating to
nonperforming assets, past due loans, impaired loans and allowance for loan
losses. See note 14 of Notes to Consolidated Financial Statements for
information relating to concentrations of credit risk. The Company has an
asset/liability program to manage its interest rate risk. This program
provides management with information related to the rate sensitivity of
certain assets and liabilities and the effect of changing rates on
profitability and capital accounts. While this planning process is designed
to protect the Company over the long term, it does not provide near term
protection from interest rate shocks, as interest rate sensitive assets and
liabilities do not, by their nature, move up or down in tandem in response to
12<PAGE>
National Bankshares, Inc. and Subsidiaries
changes in the overall rate environment. The Company's profitability in the
near term may temporarily be affected, either positively by a falling
interest rate scenario or negatively by a period of rising rates. See note
15 of Notes to Consolidated Financial Statements for information relating to
fair value of financial instruments.
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 1997
and 1996. 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 $7,573 in 1997 decreased $395 from
1996 due primarily to the increase in net income offset by the change in
other liabilities. Net cash flows provided by operating activities,
securities and financing activities for 1997 of $7,573, $21,966 and $7,562,
respectively, were used to fund the net increases in federal funds sold,
interest-bearing deposits, loans made to customers and purchases of loan
participations of $2,390, $9,637, $17,400 and $6,189, respectively.
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 in 1996 continued to reflect the
shifting of securities to the loan portfolio and from 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, $15,542 and $1,930, respectively, were used principally to
fund the net increase in loans of $31,633.
A pending acquisition by NBB of the Galax branch of First American
Federal Savings Bank, which is expected to close in early 1998, is not
anticipated to have a material impact on the Company's liquidity. See
"Future Management Considerations."
CAPITAL RESOURCES
Total stockholders' equity increased $4,228 from 1996 to 1997 and $1,647
from 1995 to 1996. Net income, less cash dividends on common stock of $2,579
in 1997 and $2,297 in 1996, accounted primarily for the increase. Net
unrealized gains (losses) on securities available for sale, net of deferred
income taxes, were $194 at December 31, 1997, $(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.
The Company has operated from a consistently strong capital position.
The ratio of total stockholders' equity to total assets was 13.41% at year
end 1997 compared to 12.81% at year end 1996 and 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
13<PAGE>
Management's Discussion and Analysis
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 10 of
Notes to Consolidated Financial Statements for additional information.
Stockholders' Equity Graph
(Millions)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
$41.0 42.7 48.2 49.8 54.0
RECENT ACCOUNTING PRONOUNCEMENTS
See notes 1 and 17 of Notes to Consolidated Financial Statements for
information relating to recent accounting pronouncements.
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.
Bank of Tazewell County is well capitalized with excess liquidity, and
provides the Company with an expanded market place.
FUTURE MANAGEMENT CONSIDERATIONS
Year 2000
The Company is cognizant of the risks and challenges presented by the
impact of the century date change on information processing and other
computer controlled systems. The Year 2000 presents two related but distinct
issues for financial institutions. The Company's internal information
processing and computer controlled systems must be Year 2000 compliant, and
the subsidiary banks' compliance efforts are subject to regulatory review.
In addition, banks face credit risk should their commercial loan customers
suffer significant business disruptions as a result of the impact of computer
failures in their own operations or in those of their suppliers or customers.
As a normal part of business operations, the Company's subsidiaries are
currently in the process of upgrading information processing systems which
will include the acquisition of new information processing hardware and
software. The primary goal of this project is to provide a shared
information processing system for affiliates, additional capacity and the
ability to use the most advanced software available from vendors.
14<PAGE>
National Bankshares, Inc. and Subsidiaries
While the overall costs associated with the upgrade are substantial, it
is not anticipated that the Year 2000 component of this upgrade will have a
material effect on the Company's consolidated financial statements.
Pending Acquisition
On December 26, 1997, NBB entered into an agreement to purchase the
assets, including real estate and improvements, and assume the liabilities of
the Galax, Virginia, branch office of First American Federal Savings Bank.
The transaction, which is subject to regulatory approval, is expected to
close in early 1998.
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. Some trades in the Company's stock are reported on the OTC Bulletin
Board under the trading symbol NKSH. Local brokerage firms are familiar with
and active in trading in the common stock of National Bankshares, Inc. As of
December 31, 1997, there were 1,163 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 1997 and 1996.
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
Dividends
1997 1996 Per Share
----------- ---------- -----------
High Low High Low 1997 1996
---- --- ---- --- ---- ----
First Quarter $26.25 25.00 $26.50 24.00 --- ---
Second Quarter 25.87 23.50 26.25 24.50 .33 .30
Third Quarter 25.75 23.81 27.00 24.50 --- ---
Fourth Quarter 26.50 23.50 26.50 25.00 .35 .32
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 10 of Notes to Consolidated
Financial Statements.
15<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
National Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of National
Bankshares, Inc. and subsidiaries as of December 31, 1997 and 1996, 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, 1997. 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 1995 financial statements of Bank of Tazewell County, a wholly-
owned subsidiary, which statements reflect total assets constituting 47
percent and total interest income constituting 43 percent of the related 1995
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, 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Roanoke, Virginia
February 6, 1998
16<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
$ In thousands except share and per share data.
December 31, 1997 and 1996 1997 1996
------ ------
Assets Cash and due from banks (notes 2 and 15) $ 12,435 9,989
Interest-bearing deposits (note 15) 9,728 91
Federal funds sold (note 15) 4,300 1,910
Securities available for sale (notes 3 and 15) 65,582 62,534
Securities held to maturity (fair value
$85,005 in 1997 and $108,755 in 1996) 84,392 108,710
Mortgage loans held for sale (notes 13, 14 and 15) 405 516
Loans (notes 4, 5, 14 and 15):
Real estate construction loans 8,510 6,295
Real estate mortgage loans 42,969 43,917
Commercial and industrial loans 101,379 87,519
Loans to individuals 66,635 60,991
-------- -------
Total loans 219,493 198,722
Less unearned income and deferred fees (2,503) (2,549)
-------- -------
Loans, net of unearned income and
deferred fees 216,990 196,173
Less allowance for loan losses (note 5) (2,438) (2,575)
-------- -------
Loans, net 214,552 193,598
-------- -------
Bank premises and equipment, net (note 6) 5,739 5,037
Accrued interest receivable 3,445 3,510
Other real estate owned, net (note 5) 421 474
Other assets (note 9) 1,908 2,481
-------- -------
Total assets $402,907 388,850
======== =======
Liabilities Noninterest-bearing demand deposits $ 45,093 44,096
and Interest-bearing demand deposits 77,863 73,804
Stockholders'Savings deposits 46,773 48,164
Equity Time deposits (note 7) 175,138 168,520
-------- -------
Total deposits (note 15) 344,867 334,584
-------- -------
17<PAGE>
Other borrowed funds (note 15) 485 627
Accrued interest payable 722 700
Other liabilities (note 8) 966 1,495
-------- -------
Total liabilities 347,040 337,406
-------- -------
Common stock subject to ESOP put option (note 8) 1,838 1,643
-------- -------
Stockholders' equity (notes 9, 10 and 16):
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 46,191 42,210
Net unrealized gains (losses) on securities
available for sale 194 (248)
Common stock subject to ESOP put option
(72,783 shares at $25.25 per share in 1997
and 64,796 shares at $25.35 per share in
1996) (note 8) (1,838) (1,643)
-------- -------
Total stockholders' equity 54,029 49,801
Commitments and contingent liabilities (notes 6,
8, 13 and 16)
-------- -------
Total liabilities and stockholders'
equity $402,907 388,850
======== =======
See accompanying notes to consolidated financial statements.
18<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
$ In thousands, except per share data. Years ended
December 31, 1997, 1996 and 1995 1997 1996 1995
------ ------ ------
Interest Interest and fees on loans $19,553 17,232 15,761
Income Interest on federal funds sold 451 476 704
Interest on interest-bearing deposits 230 91 ---
Interest on securities - taxable 7,776 8,877 9,723
Interest on securities - nontaxable 1,787 1,971 1,906
------- ------- -------
Total interest income 29,797 28,647 28,094
------- ------- -------
Interest Interest on time deposits of $100,000
Expense or more 2,335 2,070 1,898
Interest on other deposits 10,754 10,939 10,770
Interest on borrowed funds 17 27 35
------- ------- -------
Total interest expense 13,106 13,036 12,703
------- ------- -------
Net interest income 16,691 15,611 15,391
Provision for loan losses (note 5) 435 331 282
------- ------- -------
Net interest income after
provision for loan losses 16,256 15,280 15,109
------- ------- -------
Noninterest Service charges on deposit accounts 1,131 1,183 993
Income Other service charges and fees 250 269 228
Credit card fees 606 511 450
Trust income 738 603 480
Other income 72 30 49
Realized securities gains, net
(note 3) 37 97 182
------- ------- -------
Total noninterest income 2,834 2,693 2,382
------- ------- -------
Noninterest Salaries and employee benefits (note 8) 5,398 5,278 5,034
Expense Occupancy and furniture and fixtures 958 884 920
Data processing and ATM 578 497 462
FDIC assessment 43 4 379
Credit card processing 551 466 411
Goodwill amortization 30 30 30
Net costs of other real estate owned 8 5 195
Other operating expense 2,465 2,351 2,602
------- ------- -------
Total noninterest expense 10,031 9,515 10,033
------- ------- -------
19<PAGE>
Income before income tax expense 9,059 8,458 7,458
Income tax expense (note 9) 2,499 2,341 1,933
------- ------- -------
Net income $ 6,560 6,117 5,525
======= ======= =======
Net income per share (note 1) $ 1.73 1.61 1.46
======= ======= =======
See accompanying notes to consolidated financial statements.
20<PAGE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Net
Unrealized Common
Gains Stock
(Losses) on Subject
$ In thousands, except per share Securities to ESOP
data. Years ended December 31, Common Retained Available Put
1997, 1996 and 1995. Stock Earnings For Sale Option Total
------- -------- ----------- ------- -------
Balances, December 31, 1994 $ 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 tax
expense of $1,047 --- --- 2,033 --- 2,033
------- ------ ------ ------ ------
Balances, December 31, 1995 9,482 38,390 282 --- 48,154
Net income --- 6,117 --- --- 6,117
Cash dividends ($.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 $273 --- --- (530) --- (530)
Common stock subject to ESOP put
option --- --- --- (1,643) (1,643)
------- ------ ------ ------ ------
Balances, December 31, 1996 9,482 42,210 (248) (1,643) 49,801
Net income --- 6,560 --- --- 6,560
Cash dividends ($.68 per share) --- (2,579) --- --- (2,579)
Change in net unrealized gains
(losses) on securities available
for sale, net of income tax
expense of $228 --- --- 442 --- 442
Change in common stock subject to
ESOP put option --- --- --- (195) (195)
------- ------ ------ ------ ------
Balances, December 31, 1997 $ 9,482 46,191 194 (1,838) 54,029
======= ====== ====== ====== ======
See accompanying notes to consolidated financial statements.
21<PAGE>
<TABLE>
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
<CAPTION>
$ In thousands. Years ended December 31, 1997, 1996 and 1995 1997 1996 1995
------ ------ ------
<S> <C> <C> <C> <C>
Cash Flows Net income $ 6,560 6,117 5,525
from Adjustments to reconcile net income to net cash
Operating provided by operating activities:
Activities Provision for loan losses 435 331 282
(Note 12) Recovery of bond losses (10) (89) ---
Provision for deferred income taxes 300 (4) (120)
Depreciation of bank premises and equipment 586 517 535
Amortization of intangibles 121 121 145
Amortization of premiums and accretion of
discounts, net 11 52 (32)
(Gains) losses on bank premises and
equipment disposals 8 7 (9)
Gains on sales and calls of
securities available for sale, net (5) (3) (2)
Gains on calls of securities held to
maturity, net (22) (5) (180)
(Gains) losses and write-downs on other
real estate owned (4) (9) 168
(Increase) decrease in:
Mortgage loans held for sale 111 364 (488)
Accrued interest receivable 65 111 88
Other assets (76) 40 129
Increase (decrease) in:
Accrued interest payable 22 (44) 170
Other liabilities (529) 462 153
------- ------- -------
Net cash provided by operating
activities 7,573 7,968 6,364
------- ------- -------
Cash Flows Net (increase) decrease in federal funds sold (2,390) 5,815 (100)
from Net increase in interest-bearing deposits (9,637) (91) ---
Investing Proceeds from sales of securities available for
Activities sale --- 1,000 1,867
(Note 12)
22<PAGE>
Proceeds from calls and maturities of
securities available for sale 9,839 21,938 8,134
Proceeds from calls and maturities of
securities held to maturity 35,673 35,569 28,592
Purchases of securities available for sale (12,201) (10,397) (16,432)
Purchases of securities held to maturity (11,345) (32,477) (22,271)
Purchases of loan participations (6,189) (1,704) ---
Collection of loan participations 1,934 2,448 1,928
Net increase in loans made to customers (17,400) (31,633) (9,197)
Proceeds from disposal of other real estate owned 216 325 220
Recoveries on loans charged off 107 125 83
Bank premises and equipment expenditures (1,304) (882) (492)
Proceeds from sale of bank premises and equipment 8 --- 9
------- ------- -------
Net cash used in investing
activities (12,689) (9,964) (7,659)
------- ------- -------
Cash Flows Net increase in time deposits 6,618 1,672 18,179
from Net increase (decrease) in other deposits 3,665 2,599 (15,552)
Financing Net increase (decrease) in other borrowed funds (142) 466 (630)
Activities Cash dividends paid (2,579) (2,807) (2,056)
(Note 12) ------- ------- -------
Net cash provided by (used in)
financing activities 7,562 1,930 (59)
------- ------- -------
Net increase (decrease) in cash and due from banks 2,446 (66) (1,354)
Cash and due from banks at beginning of year 9,989 10,055 11,409
------- ------- -------
Cash and due from banks at end of year $12,435 9,989 10,055
======= ======= =======
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
23<PAGE>
Notes to Consolidated Financial Statements
$ In thousands, except share and per share data.
December 31, 1997, 1996 and 1995
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 16 for merger with BTC).
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
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 income and deferred fees 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.
Effective January 1, 1995, the Company adopted the provisions of
Statement of Financial Accounting Standards (Statement) No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by
Statement 118, "Accounting by Creditors for Impairment of a Loan - Income
24<PAGE>
National Bankshares, Inc. and Subsidiaries
Recognition and Disclosures." Statement 114, as amended by Statement
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. Statement 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. Statement 118 allows a creditor
to use existing methods for recognizing interest income on an impaired
loan. Adoption of this Statement did not have a material impact on the
Company's financial position, result of operations or liquidity.
Mortgage loans held for sale are carried at the lower of cost or
fair value on an individual loan basis.
(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, 3-10 years for furniture and equipment,
and 5 years for computer software. 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 $575 and $666
at December 31, 1997 and 1996, respectively, and goodwill of $337 and
$367 at December 31, 1997 and 1996, 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.
25<PAGE>
Notes to Consolidated Financial Statements
(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 Statement 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
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 1997, 1996 and 1995).
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share." Statement 128 establishes new standards for computing and
presenting earnings per share (EPS) and applies to entities with publicly
held common stock or potential common stock. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the
entity.
Statement 128 was adopted by the Company at December 31, 1997. The
Statement requires restatement of prior years EPS data previously
presented. Adoption of this Statement did not have any effect on current
or prior years' EPS data presented due to the Company's simple capital
structure.
26<PAGE>
National Bankshares, Inc. and Subsidiaries
(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, Interest-Bearing Deposits and Federal
Funds Sold
The carrying amounts are a reasonable estimate of fair
value.
(2) 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.
(3) 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 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.
(4) 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.
27<PAGE>
Notes to Consolidated Financial Statements
(5) 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.
(6) Commitments to Extend Credit and Standby Letters of Credit
The only amounts recorded for commitments to extend
credit, standby letters of credit and financial guarantees
written are the deferred fees arising from these unrecognized
financial instruments. These deferred fees are not deemed
significant at December 31, 1997 and 1996, 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 Statement 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) Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
The Company adopted the provisions of Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," on January 1, 1997. 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. Under that approach, after a transfer of financial assets, an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes financial assets when control
has been surrendered, and derecognizes liabilities when extinguished.
This Statement provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured
borrowings. This Statement also provides implementation guidance for
assessing isolation of transferred assets and for accounting for
transfers of partial interests, servicing of financial assets,
securitizations, transfers of sales-type and direct financing lease
receivables, securities lending transactions, repurchase agreements
including "dollar rolls," "wash sales," loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse, and extinguishments
of liabilities. Statement No. 127, "Deferral of the Effective Date of
Certain Provisions of Statement 125," issued in December 1996, deferred
until January 1, 1998 the effective date (a) of paragraph 15 of Statement
125 and (b) for repurchase agreement, dollar-roll, securities lending,
28<PAGE>
National Bankshares, Inc. and Subsidiaries
and similar transactions, of paragraphs 9-12 and 237(b) of Statement 125.
Statement 125 was required to be adopted on a prospective basis and its
adoption did not have a material impact on the Company's financial
position, results of operations or liquidity.
(Q) Use of Estimates
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.
(R) Reclassifications
Certain reclassifications have been made to prior years'
consolidated financial statements to place them on a basis comparable
with the 1997 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 $3,699 and $2,914 for the weeks including December 31, 1997
and 1996, respectively.
Note 3: Securities
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities available for sale by major security type as of
December 31, 1997 and 1996 are as follows:
December 31, 1997
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- --------
Available for sale:
U.S. Treasury $ 6,742 131 (11) 6,862
U.S. Government agencies
and corporations 36,252 141 (117) 36,276
States and political
subdivisions 9,540 101 (2) 9,639
Mortgage-backed securities 4,172 34 (87) 4,119
Other securities 8,582 121 (17) 8,686
-------- ----- ------ ------
Total securities
available for sale $ 65,288 528 (234) 65,582
======== ===== ====== ======
29<PAGE>
Notes to Consolidated Financial Statements
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
======== ==== ===== ======
The amortized costs and fair values of single maturity securities
available for sale at December 31, 1997, 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, 1997.
December 31, 1997
------------------
Amortized Fair
($ In thousands) Costs Values
--------- --------
Due in one year or less $ 8,952 8,926
Due after one year through five years 25,758 25,894
Due after five years through ten years 21,950 22,099
Due after ten years 7,826 7,801
No maturity 802 862
-------- ------
$ 65,288 65,582
======== ======
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, 1997 and 1996 are as follows:
December 31, 1997
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- --------
Held to maturity:
U.S. Treasury $ 7,527 27 (41) 7,513
U.S. Government agencies
and corporations 36,853 167 (362) 36,658
States and political
subdivisions 32,949 696 (32) 33,613
Mortgage-backed securities 630 28 --- 658
Other securities 6,433 131 (1) 6,563
------- ----- ---- ------
Total securities held
to maturity $84,392 1,049 (436) 85,005
======= ===== ==== ======
30<PAGE>
National Bankshares, Inc. and Subsidiaries
December 31, 1996
----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
($ 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 $108,710 913 (868) 108,755
======== ===== ===== =======
The amortized costs and fair values of single maturity securities held to
maturity at December 31, 1997, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities included in these totals
are allocated based upon estimated cash flows at December 31, 1997.
December 31, 1997
-------------------
Amortized Fair
($ In thousands) Costs Values
--------- --------
Due in one year or less $ 18,150 18,128
Due after one year through five years 44,924 45,225
Due after five years through ten years 17,074 17,308
Due after ten years 4,244 4,344
-------- ------
$ 84,392 85,005
======== ======
There were no sales of securities held to maturity during 1997, 1996 or
1995.
The carrying value of securities pledged to secure public and trust
deposits, and for other purposes as required or permitted by law, was $21,257
at December 31, 1997 and $18,446 at December 31, 1996.
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, 1997 and 1996, there were direct loans to executive officers and
directors of $1,351 and $2,567, respectively. In addition, there were loans
of $3,566 and $2,145 at December 31, 1997 and 1996, respectively, which were
endorsed by directors and/or executive officers or had been made to companies
in which directors and/or executive officers had an equity interest.
The following schedule summarizes amounts receivable from executive
officers and directors of Bankshares and its subsidiaries, and their
immediate families or associates:
31<PAGE>
Notes to Consolidated Financial Statements
Year ended
December 31,
($ In thousands) 1997
------
Aggregate balance, beginning of year $ 4,712
Additions 4,852
Collections (4,647)
-------
Aggregate balance, end of year $ 4,917
=======
Note 5: Nonperforming Assets, Past Due Loans, Impaired Loans and Allowance
for Loan Losses
Nonperforming assets consist of the following:
December 31,
----------------------------
($ In thousands) 1997 1996 1995
------ ------ ------
Nonaccrual loans $ 87 616 718
Other real estate owned, net 421 474 762
-------- ------ ------
Total nonperforming assets $ 508 1,090 1,480
======== ====== ======
Accruing loans past due 90 days or
more $ 672 458 574
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at December 31, 1997.
The following table shows the interest that would have been earned on
nonaccrual 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) 1997 1996 1995
------ ------ ------
Scheduled interest:
Nonaccrual loans $ 8 68 59
======== ======= ======
Recorded interest:
Nonaccrual loans $ 1 24 5
======== ======= ======
Changes in the valuation allowance for other real estate owned are as
follows:
32<PAGE>
National Bankshares, Inc. and Subsidiaries
Years ended December 31,
---------------------------
($ In thousands) 1997 1996 1995
------ ------ ------
Balances, beginning of year $ 96 91 49
Provision for other real estate owned --- 5 124
Write-offs (28) --- (82)
-------- ----- ----
Balances, end of year $ 68 96 91
======== ===== ====
At December 31, 1997, the recorded investment in loans which have been
identified as impaired loans, in accordance with Statement 114, totaled $177.
Of this amount, $124 related to loans with no valuation allowance and $53
related to loans with a corresponding valuation allowance of $53. At
December 31, 1996, the recorded investment in loans which have been
identified as impaired loans 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, 1997, the average recorded investment in
impaired loans was approximately $458, and the total interest income
recognized on impaired loans was $23 of which $12 was recognized on a cash
basis. 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 $23 was recognized on a cash
basis.
Changes in the allowance for loan losses are as follows:
Years ended December 31,
----------------------------
($ In thousands) 1997 1996 1995
------ ------ ------
Balances, beginning of year $ 2,575 2,625 2,551
Provision for loan losses 435 331 282
Recoveries 107 125 83
Loans charged off (679) (506) (291)
------- ------ ------
Balances, end of year $ 2,438 2,575 2,625
======= ====== ======
Note 6: Bank Premises and Equipment
Bank premises and equipment stated at cost, less accumulated
depreciation, are as follows:
December 31,
--------------------
($ In thousands) 1997 1996
------ ------
Premises $ 6,148 5,787
Furniture and equipment 4,458 3,936
Construction-in-progress 33 249
-------- ------
10,639 9,972
Less accumulated depreciation (4,900) (4,935)
-------- ------
Total bank premises and equipment $ 5,739 5,037
======== ======
33<PAGE>
Notes to Consolidated Financial Statements
The Company leases a branch facility as well as certain other office
space under noncancellable operating leases that expire over the next six
years. The future minimum lease payments under these leases (with initial or
remaining lease terms in excess of one year) as of December 31, 1997 are as
follows: $78 in 1998, $38 in 1999, $13 in years 2000, 2001 and 2002 and $10
in 2003.
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 $42,547 at December 31,
1997 and $37,414 at December 31, 1996. At December 31, 1997, the scheduled
maturities of time deposits are as follows: $128,929 in 1998, $19,451 in
1999, $19,338 in 2000, $3,419 in 2001 and $4,001 in 2002.
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, 1997, 1996 and
1995, NBB contributed $87, $83 and $78, respectively, to the plan.
Bankshares has a nonleveraged Employee Stock Ownership Plan (ESOP) which
enables employees of the sole participating employer, NBB, who have one year
of service and 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 $219, $200 and $163 for the years ended December 31,
1997, 1996 and 1995, respectively. Dividends on ESOP shares are charged to
retained earnings. As of December 31, 1997, the number of allocated shares
held by the ESOP was 50,615 and the number of unallocated shares was 22,168.
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. Since the shares are not
readily tradeable, at December 31, 1997, 72,783 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 purchase of shares held by the ESOP
participants.
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 (47%), mutual funds (25%)
and equity securities (28%). BTC's pension plan's assets are invested
principally in BTC certificates of deposit (22%), U.S. Government agency
obligations (36%), U.S. Treasury securities (11%), money market funds (24%)
and equity securities (7%).
34<PAGE>
National Bankshares, Inc. and Subsidiaries
The plans' funded status at December 31, 1997 and 1996 is as follows:
December 31,
----------------
($ In thousands) 1997 1996
------ ------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of $3,027 in 1997 and $3,148
in 1996 $ 3,150 3,252
======= =======
Projected benefit obligation for service
rendered to date (4,967) (5,160)
Plan assets at fair value 4,337 3,950
------- -------
Projected benefit obligation in excess of
plan assets (630) (1,210)
Unrecognized net transition asset (205) (228)
Unrecognized net loss from past experience
different from that assumed 459 989
Prior service cost not yet recognized in net
pension cost 231 246
------- -------
Net accrued pension cost (includes accrued
pension cost of $352 in 1997 and $346 in
1996 included in other liabilities, and
prepaid pension cost of $207 in 1997 and
$143 in 1996 included in other assets) $ (145) (203)
======= =======
Net pension cost includes the following (income) expense components:
Years ended December 31,
--------------------------
($ In thousands) 1997 1996 1995
------ ------ ------
Service cost-benefits earned during
the year $ 281 327 223
Interest cost on projected benefit
obligation 367 353 288
Actual return on plan assets (327) (185) (304)
Net amortization and deferral (37) (92) 19
------ ------ -----
Net pension cost $ 284 403 226
====== ====== =====
35<PAGE>
Notes to Consolidated Financial Statements
Assumptions used in accounting for the pension plans as of December 31,
1997, 1996 and 1995 are as follows:
NBB BTC
----------------------- ----------------------
1997 1996 1995 1997 1996 1995
------ ------ ------ ------ ------ ------
Weighted average
discount rate 7.50% 7.75% 7.00% 7.50% 7.00% 7.00%
Expected long-term
rate of return 9.00% 9.00% 9.00% 9.00% 9.00% 7.50%
Rate of increase in
future compensation 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Note 9: Income Taxes
Total income taxes were allocated as follows:
Years ended December 31,
--------------------------
($ In thousands) 1997 1996 1995
------ ------ ------
Income $ 2,499 2,341 1,933
Stockholders' equity, for net
unrealized gains (losses) on
securities available for sale
recognized for financial reporting
purposes 228 (273) 1,047
------- ------ -----
Total income taxes $ 2,727 2,068 2,980
======= ====== =====
The components of federal income tax expense attributable to income
before income tax expense are as follows:
Years ended December 31,
--------------------------
($ In thousands) 1997 1996 1995
------ ------ ------
Current $ 2,199 2,345 2,053
Deferred 300 (4) (120)
------- ------ ------
Total income tax expense $ 2,499 2,341 1,933
======= ====== ======
Taxes resulting from securities transactions amounted to a tax expense of
$13 for the year ended December 31, 1997, $33 for the year ended December 31,
1996 and $62 for the year ended December 31, 1995.
The following is a reconciliation of the "expected" income tax expense,
computed by applying the U.S. Federal income tax rate of 34% to income before
income tax expense, with the reported income tax expense:
36<PAGE>
National Bankshares, Inc. and Subsidiaries
Years ended December 31,
--------------------------
($ In thousands) 1997 1996 1995
------ ------ ------
Expected income tax expense (34%) $ 3,080 2,876 2,536
Tax-exempt interest income (700) (756) (744)
Nondeductible interest expense 90 99 88
Other, net 29 122 53
------- ------ ------
Reported income tax expense $ 2,499 2,341 1,933
======= ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below:
December 31,
---------------
($ In thousands) 1997 1996
------ ------
Deferred tax assets:
Loans, principally due to allowance for loan
losses and unearned fee income $ 344 545
Other real estate owned, principally due to
valuation allowance 23 33
Deferred compensation and other liabilities,
due to accrual for financial reporting
purpose 114 138
Deposit intangibles and goodwill 42 35
Nonaccrual interest on loans --- 23
Community development corporation related tax
credit 26 30
Net unrealized losses on securities available
for sale --- 128
------- -------
Total gross deferred tax assets 549 932
Less valuation allowance --- ---
------- -------
Net deferred tax assets 549 932
------- -------
Deferred tax liabilities:
Bank premises and equipment, principally due
to differences in depreciation (16) (12)
Securities, due to differences in discount
accretion (77) (43)
Other assets (62) (55)
Net unrealized gains on securities available
for sale (100) ---
------- -------
Total gross deferred liabilities (255) (110)
------- -------
Net deferred tax asset included in
other assets $ 294 822
======= =======
37<PAGE>
Notes to Consolidated Financial Statements
The Company has determined that a valuation allowance for the gross
deferred tax assets is not necessary at December 31, 1997 and 1996 due to the
fact that the realization of the entire gross deferred tax assets can be
supported by the amount of taxes paid during the carryback period available
under current tax laws.
Note 10: 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, 1997,
1996 and 1995, dividends received from subsidiary banks were $2,712, $1,901
and $1,055, respectively.
Substantially all of Bankshares' retained earnings are undistributed
earnings of its banking subsidiaries, which are restricted by various
regulations administered by federal and state bank regulatory agencies. 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,
1997, retained net income which was free of such restriction amounted to
approximately $7,828.
Bankshares and its subsidiaries are subject to various regulatory capital
requirements administered by the bank regulatory agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Bankshares and its subsidiaries must meet
specific capital guidelines that involve quantitative measures of their
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. Bankshares' and its subsidiaries' capital
amounts and classification are also subject to qualitative judgments by
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Bankshares and its subsidiaries to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk weighted assets (as defined), and of Tier
I capital (as defined) to average assets (as defined). Management believes,
as of December 31, 1997, that Bankshares and its subsidiaries meet all
capital adequacy requirements to which they are subject.
Bankshares' and its subsidiaries' actual regulatory capital amounts and
ratios are also presented in the following tables.
38<PAGE>
National Bankshares, Inc. and Subsidiaries
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------- ------------- -------------
($ In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1997
Total capital (to risk
weighted assets)
Bankshares consolidated $57,198 23.3% 19,652 8.0% N/A N/A
NBB 28,825 17.4% 13,232 8.0% 16,540 10.0%
BTC 28,313 34.7% 6,527 8.0% 8,159 10.0%
Tier I capital (to risk
weighted assets)
Bankshares consolidated $54,760 22.3% 9,826 4.0% N/A N/A
NBB 27,084 16.4% 6,616 4.0% 9,924 6.0%
BTC 27,616 33.9% 3,264 4.0% 4,895 6.0%
Tier I capital (to
average assets)
Bankshares consolidated $54,760 13.7% 15,988 4.0% N/A N/A
NBB 27,084 12.1% 8,985 4.0% 11,231 5.0%
BTC 27,616 15.8% 7,003 4.0% 8,754 5.0%
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------------- ------------- -------------
($ In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1996
Total capital (to risk
weighted assets)
Bankshares consolidated $53,193 23.0% 18,497 8.0% N/A N/A
NBB 26,175 16.3% 12,855 8.0% 16,069 10.0%
BTC 27,007 38.3% 5,642 8.0% 7,052 10.0%
Tier I capital (to risk
weighted assets)
Bankshares consolidated $50,618 21.9% 9,249 4.0% N/A N/A
NBB 24,171 15.0% 6,428 4.0% 9,641 6.0%
BTC 26,436 37.5% 2,821 4.0% 4,231 6.0%
Tier I capital (to
average assets)
Bankshares consolidated $50,618 13.0% 15,620 4.0% N/A N/A
NBB 24,171 11.2% 8,636 4.0% 10,795 5.0%
BTC 26,436 15.1% 6,984 4.0% 8,730 5.0%
As of December 31, 1997, the most recent notifications from the
appropriate regulatory authorities categorized Bankshares and its
subsidiaries as adequately capitalized under the regulatory framework for
prompt corrective action. To be categorized as adequately capitalized,
Bankshares and its subsidiaries must maintain minimum total risk-based, Tier
39<PAGE>
Notes to Consolidated Financial Statements
I risk-based, and Tier I leverage ratios as set forth in the table. There
are no conditions or events since those notifications that management
believes have changed Bankshares' and its subsidiaries' category.
Note 11: Parent Company Financial Information
Condensed financial information of National Bankshares, Inc. (Parent) is
presented below:
Condensed Balance Sheets
December 31,
-----------------
($ In thousands, except share and
per share data) 1997 1996
------ ------
Assets Cash due from subsidiaries $ 69 20
Investment in subsidiaries, at
equity 55,807 51,434
Refundable income taxes due
from subsidiaries 22 25
-------- -------
Total assets $ 55,898 51,479
======== =======
Liabilities Other liabilities $ 31 35
and -------- -------
Stockholders' Common stock subject to ESOP
Equity put option (note 8) 1,838 1,643
-------- -------
Stockholders' equity (notes 9,
10 and 16):
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 46,191 42,210
Net unrealized gains
(losses) on securities
available for sale 194 (248)
Common stock subject to ESOP
put option (72,783 shares at
$25.25 per share in 1997 and
64,796 shares at $25.35 per
share in 1996) (note 8) (1,838) (1,643)
-------- -------
Total stockholders' equity 54,029 49,801
Commitments and contingent
liabilities (notes 6, 8,
13 and 16)
-------- -------
Total liabilities and
stockholders' equity $ 55,898 51,479
======== =======
40<PAGE>
National Bankshares, Inc. and Subsidiaries
Condensed Statements of Income
Years ended December 31,
----------------------------
($ In thousands) 1997 1996 1995
------ ------ ------
Income Dividends from subsidiaries
(note 10) $2,712 1,901 1,055
Expenses Other expenses 125 232 285
------ ------ ------
Income before income tax
benefit and equity in
undistributed net income
of subsidiaries 2,587 1,669 770
Applicable income tax
benefit 42 41 97
------ ------ ------
Income before equity in
undistributed net income
of subsidiaries 2,629 1,710 867
Equity in undistributed net
income of subsidiaries 3,931 4,407 4,658
------ ------ ------
Net income $6,560 6,117 5,525
====== ====== ======
41<PAGE>
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
Years ended December 31,
----------------------------
($ In thousands) 1997 1996 1995
------ ------ ------
Cash Flows Net income $ 6,560 6,117 5,525
from Adjustments to reconcile
Operating net income to net cash
Activities provided by operating
activities:
Equity in undistributed
net income of
subsidiaries (3,931) (4,407) (4,658)
Decrease in other assets --- --- 3
Decrease in refundable
income taxes due from
subsidiaries 3 88 162
Decrease in other
liabilities (4) (5) (9)
------- ------ ------
Net cash provided by
operating activities 2,628 1,793 1,023
------- ------ ------
Cash Flows Cash dividends paid (2,579) (1,787) (1,080)
from ------- ------ ------
Financing
Activities Net cash used in
financing activities (2,579) (1,787) (1,080)
------- ------ ------
Net increase (decrease) in
cash 49 6 (57)
Cash due from subsidiary
at beginning of year 20 14 71
------- ------ ------
Cash due from subsidiary
at end of year $ 69 20 14
======= ====== ======
Note 12: Supplemental Cash Flow Information
The Company paid $13,084, $13,080 and $12,533 for interest and $2,719,
$1,839 and $1,942 for income taxes, net of refunds, in 1997, 1996 and 1995,
respectively. Noncash investing activities consisted of $679, $506 and $291
of loans charged against the allowance for loan losses in 1997, 1996 and
1995, respectively. Noncash investing activities also included $159 in 1997
and $28 in 1996 of loans transferred to other real estate owned. In
addition, for the years ended December 31, 1997, 1996 and 1995, noncash
investing activities included changes in net unrealized gains (losses) on
securities available for sale of $670, ($803) and $3,080, respectively,
changes in deferred tax assets included in other assets of ($228), $273 and
($1,047), respectively, and changes in net unrealized gains (losses) on
securities available for sale included in stockholders' equity of $442,
($530) and $2,033, respectively. Securities, classified as held to maturity,
totaling approximately $30,200, were transferred to securities available for
sale in 1995. This was in accordance with the one-time reassessment of the
classification of securities allowed by the Financial Accounting Standards
Board.
42<PAGE>
National Bankshares, Inc. and Subsidiaries
Note 13: Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
consolidated balance sheets. The contract amounts of those instruments
reflect the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss, in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit, is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The Company may require collateral or other security to support the
following financial instruments with credit risk:
December 31,
--------------------
($ In thousands) 1997 1996
------ ------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $37,700 32,087
======= ======
Standby letters of credit $ 1,949 1,380
======= ======
Mortgage loans sold with potential
recourse $19,231 18,271
======= ======
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.
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 1997, the Company originated $19,120 and sold $19,231 to investors,
43<PAGE>
Notes to Consolidated Financial Statements
compared to $17,907 originated and $18,271 sold in 1996. 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.
Note 14: 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 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, 1997 and 1996, approximately $80,000 and $71,000,
respectively, of the loan portfolio were concentrated in commercial real
estate. This represents approximately 37% and 36% of the loan portfolio at
December 31, 1997 and 1996, respectively. Included in commercial real estate
at December 31, 1997 and 1996 was approximately $50,000 and $49,000,
respectively, in loans for college housing and professional office buildings.
Loans secured by residential real estate were approximately $65,000 and
$60,000 at December 31, 1997 and 1996, respectively. This represents
approximately 30% and 31% of the loan portfolio at December 31, 1997 and
1996, respectively. Loans secured by automobiles were approximately $34,000
and $29,000 at December 31, 1997 and 1996, respectively. This represents
approximately 16% of the loan portfolio at December 31, 1997 and 15% at
December 31, 1996.
The Company has established operating policies relating to the credit
process and collateral in loan originations. Loans to purchase real and
personal property are generally collateralized by the related property and
with loan amounts established based on certain percentage limitations of the
property's total stated or appraised value. Credit approval is primarily a
function of collateral and the evaluation of the creditworthiness of the
individual borrower or project based on available financial information.
Interest-bearing deposits with banks represent deposits with the Federal Home
Loan Bank of Atlanta. Management considers the concentration of credit risk
to be minimal.
44<PAGE>
National Bankshares, Inc. and Subsidiaries
Note 15: Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments at
December 31, 1997 and 1996 are as follows:
December 31,
------------------------------------------
1997 1996
-------------------- --------------------
($ In thousands) Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial assets:
Cash and due from banks $ 12,435 12,435 9,989 9,989
Interest-bearing
deposits 9,728 9,728 91 91
Federal funds sold 4,300 4,300 1,910 1,910
Securities 149,974 150,587 171,244 171,289
Mortgage loans held for
sale 405 405 516 516
Loans, net 214,552 215,285 193,598 192,201
-------- ------- ------- -------
Total financial assets $391,394 392,740 377,348 375,996
======== ======= ======= =======
Financial liabilities:
Deposits 344,867 344,589 334,584 331,758
Other borrowed funds 485 485 627 627
-------- ------- ------- -------
Total financial
liabilities $345,352 345,074 335,211 332,385
======== ======= ======= =======
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 the bank premises and
equipment. In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
Note 16: Business Combination and Pending Acquisition
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
45<PAGE>
Notes to Consolidated Financial Statements
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 Year ended
ended June 30, December 31,
($ In thousands) 1996 1995
------ ------
Revenues:
National Bankshares, Inc. $ 9,286 17,848
Bank of Tazewell County 6,166 12,628
------- -------
Combined $15,452 30,476
======= =======
Net Income:
National Bankshares, Inc. $ 1,883 3,256
Bank of Tazewell County 1,106 2,269
------- -------
Combined $ 2,989 5,525
======= =======
On December 26, 1997, NBB entered into an agreement to purchase the
assets, including real estate and improvements, and assume the liabilities of
the Galax, Virginia, branch office of First American Federal Savings Bank.
The transaction, which is subject to regulatory approval, is expected to
close in early 1998 and is not expected to have a material impact on the
Company's results of operations or liquidity.
Note 17: Future Accounting Considerations
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." Statement 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. Statement 130
was issued to address concerns over the practice of reporting elements of
comprehensive income directly in equity.
This Statement requires all items that are required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the other
financial statements. It does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. Enterprises are required to classify items of "other
46<PAGE>
National Bankshares, Inc. and Subsidiaries
comprehensive income" by their nature in the financial statement and display
the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of a
statement of financial position. It does not require per share amounts of
comprehensive income to be disclosed.
Statement 130 is effective for fiscal years beginning after December 15,
1997. Earlier application is permitted. Comparative financial statements
provided for earlier periods are required to be reclassified to reflect the
provisions of this statement. Publicly traded enterprises that issue
condensed financial statements for interim periods are required to report a
total for comprehensive income in those financial statements.
Adoption of Statement 130 on January 1, 1998 will not have any effect on
the Company's consolidated financial position, results of operation or
liquidity. However, Statement 130 will have an effect on future financial
statement displays presented by the Company since the Company has net
unrealized gains (losses) on securities available for sale, an item of other
comprehensive income, which is included in the consolidated statements of
changes in stockholders' equity.
In June 1997, the FASB issued Statement No. 131, "Disclosures about
Segments of an Enterprise and Related Information." Statement 131
establishes standards for the way public business enterprises are to report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Statement 131 is effective for
financial statements for periods beginning after December 15, 1997. It is
not anticipated that Statement 131 will have any material effect on current
or prior period disclosures presented by the Company.
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." This
Statement standardizes the disclosure requirements for pensions and other
postretirement benefits, requires additional information on changes in the
benefit obligations and fair values of assets and eliminates certain existing
disclosure requirements. Statement 132 is effective for fiscal years
beginning after December 15, 1997 and will impact future disclosures of the
Company's defined benefit pension plans.
47<PAGE>
National Bankshares, Inc. Board of Directors
(Picture of National Bankshares, Inc. Board of Directors)
Paul A. Duncan, Holiday Motor Corp., President;
Alonzo A. Crouse, Bank of Tazewell County, Executive
Vice President, Secretary and Cashier; R.E. Dodson,
Bank of Tazewell County, President and Chief
Executive Officer; Charles L. Boatwright, Vice
Chairman of the Board, Physician; James G. Rakes,
National Bankshares, Inc., The National Bank,
President and Chief Executive Officer; William T.
Peery, Cargo Oil Co., Inc., President; Robert E.
Christopher, Jr., Chairman of the Board, Retired;
Jeffrey R. Stewart, Educational Consultant; T.C.
Bowen, Jr., Attorney
48<PAGE>
The National Bank and Bank of Tazewell County Boards of Directors
(Picture of The James G. Rakes, National Bankshares, Inc., The National
National Bank Bank, President and Chief Executive Officer; Charles
Board of Directors) L. Boatwright, Vice Chairman of the Board, Physician;
Robert E. Christopher, Jr., Chairman of the Board,
Retired; L. Allen Bowman, Litton Poly-Scientific, Retired
President; Jeffrey R. Stewart, Educational Consultant;
Paul A. Duncan, Holiday Motor Corp., President; James
M. Shuler, Companion Animal Clinic, Inc., President,
Virginia House of Delegates, Delegate; Paul P. Wisman,
Grundy National Bank, Vice President of Investments,
Nicewonder Investments, Manager of Assets; J. Lewis
Webb, Jr., Dentist
(Picture of Bank Alonzo A. Crouse, Bank of Tazewell County, Executive Vice
of Tazewell County President, Secretary and Cashier; James G. Rakes,
Board of Directors) National Bankshares, Inc., The National Bank, President
and Chief Executive Officer; William T. Peery, Cargo Oil
Co., Inc. President; R. E. Dodson, Bank of Tazewell
County, President and Chief Executive Officer; James S.
Gillespie, Jr., Jim Sam Gillespie Farm, President; T.C.
Bowen, Jr., Chairman of the Board, Attorney; James A.
Deskins, Deskins Super Market, Inc., President; Carl C.
Gillespie, Honorary Chairman of the Board, Attorney;
Jack H. Harry, Harry's Enterprises, Inc., President; J.M.
Pope, Retired, Charles E. Green, III, Registered
Representative, The Equitable Life Assurance Society of
the United States; E.P.Greever, Retired; William H.
VanDyke, Candlewax Smokeless Fuel Co., Vice President
The National Bank Advisory Boards
Montgomery County Advisory Board Dan A. Dodson, 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
49<PAGE>
Corporate Information
National Bankshares, Inc. Officers
James G. Rakes Joan C. Nelson
President and Chief Executive Officer Corporate Officer
J. Robert Buchanan Shelby M. Evans
Treasurer Corporate Compliance Officer
Marilyn B. Buhyoff David K. Skeens
Secretary and Counsel Corporate Auditor
F. Brad Denardo
Corporate Officer
Annual Meeting
The Annual Meeting of Stockholders will be held on Tuesday, April 14, 1998 at
3:00 p.m. at the Best Western Red Lion Inn, 900 Plantation Road, Blacksburg,
Virginia.
Corporate Stock
The common stock of National Bankshares, Inc. is traded over the counter, and
certain trades are reported on the OTC Bulletin Board under the symbol
"NKSH."
Financial Information
Investors and analysts seeking financial information about National
Bankshares, Inc. should contact:
James G. Rakes or J. Robert Buchanan
President and Chief Executive Officer Treasurer
(540)552-2011 or (540)552-2011 or
(800)552-4123 (800)552-4123
Written requests may be directed to: National Bankshares, Inc., P.O. Box
90002, Blacksburg, VA 24062-9002.
Stockholder Services and Stock Transfer Agent
Stockholders seeking information about National Bankshares, Inc. stock
accounts should contact:
Marilyn B. Buhyoff
Secretary and Counsel
(540)552-2011 or (800)552-4123
The National Bank of Blacksburg serves as transfer agent for National
Bankshares, Inc. stock.
Written requests and requests for stock transfers may be directed to:
National Bankshares, Inc., P.O. Box 90002, Blacksburg, VA 24062-9002.
A copy of National Bankshares, Inc.'s annual report to the Securities and
Exchange Commission on Form 10-K will be furnished without charge to any
stockholder upon written request.
Corporate Office National Bankshares, Inc.
100 South Main Street
Blacksburg, VA 24060
P.O. Box 90002
Blacksburg, VA 24062-9002
50<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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,435
<INT-BEARING-DEPOSITS> 9,728
<FED-FUNDS-SOLD> 4,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 65,582
<INVESTMENTS-CARRYING> 84,392
<INVESTMENTS-MARKET> 85,005
<LOANS> 216,990
<ALLOWANCE> 2,438
<TOTAL-ASSETS> 402,907
<DEPOSITS> 344,867
<SHORT-TERM> 485
<LIABILITIES-OTHER> 3,526
<LONG-TERM> 0
0
0
<COMMON> 9,482
<OTHER-SE> 44,547
<TOTAL-LIABILITIES-AND-EQUITY> 402,907
<INTEREST-LOAN> 19,553
<INTEREST-INVEST> 9,563
<INTEREST-OTHER> 681
<INTEREST-TOTAL> 29,797
<INTEREST-DEPOSIT> 13,089
<INTEREST-EXPENSE> 13,106
<INTEREST-INCOME-NET> 16,691
<LOAN-LOSSES> 435
<SECURITIES-GAINS> 37
<EXPENSE-OTHER> 10,031
<INCOME-PRETAX> 9,059
<INCOME-PRE-EXTRAORDINARY> 9,059
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,560
<EPS-PRIMARY> 1.73
<EPS-DILUTED> 1.73
<YIELD-ACTUAL> 4.75
<LOANS-NON> 87
<LOANS-PAST> 672
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 177
<ALLOWANCE-OPEN> 2,575
<CHARGE-OFFS> 679
<RECOVERIES> 107
<ALLOWANCE-CLOSE> 2,438
<ALLOWANCE-DOMESTIC> 2,438
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,742
</TABLE>
COOK ASSOCIATES, LLP
CERTIFIED PUBLIC ACCOUNTANTS
MEMBERS: DIVISION FOR CPA FIRMS AICPA
AND THE VIRGINIA SOCIETY
OF CERTIFIED PUBLIC ACCOUNTANTS
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 accepted
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.
Cook Associates, LLP
February 27, 1996<PAGE>
