National Bankshares
1999
Annual Report
1999 Annual Report
Financial Highlights
$ In thousands, except per share data 1999 1998 1997
---- ---- ----
Net income $ 7,088 6,798 6,560
Basic net income per share 1.96 1.79 1.73
Cash dividends declared per share 0.80 0.74 0.68
Book value per share 14.99 16.00 14.73
Loans, net $291,562 236,578 214,552
Total securities 137,492 166,754 149,974
Total assets 472,134 445,166 402,907
Total deposits 407,187 382,696 344,867
Stockholders' equity 52,723 58,503 54,029
Contents
To Our Stockholders 2
Selected Consolidated
Financial Data 4
Management's Discussion and
Analysis 5
Independent Auditors' Report 12
Consolidated Financial
Statements 13
Notes to Consolidated
Financial Statements 17
Selected Quarterly Data 36
Board of Directors 38
Corporate Information 40
To Our Stockholders
We are pleased to report
another year of higher earnings and
solid asset growth. National
Bankshares, Inc. achieved net income
in 1999 of nearly $7.09 million, an
increase of 4.3% over 1998. Based National Bankshares
upon a weighted average of shares
outstanding during 1999 and also
reflecting the effects of the common
stock repurchase plan that was
completed in the second quarter of
the year, basic net income per share
rose to $1.96 from $1.79 in 1998.
The total assets of National
Bankshares increased to $472.13
million at December 31, 1999, as
compared to $445.17 million for the
same period in 1998. A major factor
contributing to asset growth during Picture of
the year was a 23.2% increase in net "New Hubbard Street Office"
loans, to $291.56 million at year-
end. Adding sound loans to our
subsidiary banks' portfolios serves
our communities, our customers and
our stockholders. Funds on deposit
at The National Bank and at Bank of
Tazewell County are used to make
loans in our local region. The
loans in turn support business
expansion and the construction of
new homes. They also allow our
customers to purchase new cars, to
pay for medical expenses and to
educate their children. National Picture of
Bankshares' stockholders benefit "Newly renovated BTC Bluefield
from loan growth because making good Branch Lobby"
loans is the most profitable use of
the banks' capital and assets.
As I mentioned above, when you
review this year's Annual Report you
will see that net income for 1999
totaled nearly $7.09 million, a 4.3%
increase over last year. You will
also see an item listed as
"comprehensive income", which is
less than the net income figure.
Since this difference can be
confusing, I want to explain about
comprehensive income, an accounting
presentation that in our case is Picture of
used to reflect the annual "NBB Customer Service Representative
fluctuations in the market value of demonstrating Online Banking"
our "available for sale" investment
portfolio.
2
In 1999, because of increases Picture of
in interest rates in the bond market "James G. Rakes"
and the structure of our available
for sale investment portfolio,
National Bankshares experienced an
unrealized net loss in the work by employees, neither The
portfolio. This year's National Bank nor Bank of Tazewell
comprehensive income resulted from Country experienced any disruption
subtracting the unrealized net loss in work flow. On the first business
figure from our net income total. day of 2000, it was business as
This unrealized net loss is usual for bank customers and
significant only if we actually sell employees.
the investments and recognize the We believe that the future of
loss into net income. When our progressive community banks
investments are fundamentally sound, depends upon offering a full
as we believe ours are, there is no spectrum of financial service
need to recognize any loss into net options, from high touch to high
income unless the investments are tech. As the world becomes more
sold before maturity. We do not impersonal, trusted relationships
plan to liquidate any significant become more valuable. Because of
portion of our available for sale our historic community ties, The
investment portfolio before National Bank and Bank of Tazewell
maturity, and we do not foresee any County are important present and
events in the near future that would future sources of quality financial
cause us to change these plans. services with a personal touch. It
This past year was a busy and would be impossible for us to move
productive one for The National Bank forward and carry out our corporate
and for Bank of Tazewell County. On mission without the support of our
February 1, NBB introduced an stockholders, directors and
Internet Banking product that has employees. I thank you for your
proven to be quite popular. With contributions to the continued
Internet Banking, our customers can success of National Bankshares.
access account balances, apply for
loans, open new accounts and pay
bills when it is most convenient for James G. Rakes
them. In August, The National Bank Chairman of the Board
opened the new Hubbard Street Office President and
Building in Blacksburg. In addition Chief Executive Officer
to housing the bank's tenth branch
location, Hubbard Street serves as
the corporate headquarters and as
the home to NBB's Trust, Bank Card,
Marketing, Human Resources, Audit,
Compliance and Loan Review
departments. Also during 1999, Bank
of Tazewell County completed needed
renovations at the Bluefield,
Virginia office. BTC highlighted
the importance of tradition by
incorporating several items of
antique furniture from its 110-year
past into the office renovation
plan. The year ended with the
publicized millennium celebration
and the associated Y2K computer
century date change. Fortunately,
because of years of advance
preparation and a great deal of hard
3
National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data
$ In thousands, except per share data. Years ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Selected Interest income $ 33,603 31,828 29,797 28,647 28,094
Income Interest expense 14,203 13,928 13,106 13,036 12,703
Statement Net interest income 19,400 17,900 16,691 15,611 15,391
Data: Provision for loan
losses 1,400 624 435 331 282
Noninterest income 3,512 3,174 2,834 2,693 2,382
Noninterest expense 11,868 11,061 10,031 9,515 10,033
Income taxes 2,556 2,591 2,499 2,341 1,933
Net income 7,088 6,798 6,560 6,117 5,525
Per Share Basic net income $ 1.96 1.79 1.73 1.61 1.46
Data: Cash dividends
declared 0.80 0.74 0.68 0.62 0.57
Book value per
share(1) 14.99 16.00 14.73 13.56 12.70
Selected Loans, net $291,562 236,578 214,552 193,598 163,193
Balance Total securities 137,492 166,754 149,974 171,244 187,635
Sheet Total assets 472,134 445,166 402,907 388,850 380,915
Data at Total deposits 407,187 382,696 344,867 334,584 330,313
End Stockholders'
of Year: equity 52,723 58,503 54,029 49,801 48,154
Selected Loans, net $266,431 225,613 204,540 177,419 160,643
Balance Total securities 151,424 152,432 157,179 177,403 183,994
Sheet Total assets 454,189 420,988 395,932 388,045 378,406
Daily Total deposits 391,583 359,970 339,439 335,938 330,261
Averages: Stockholders'
equity(1) 56,196 58,282 53,712 49,459 45,726
Selected Return on average
Ratios: assets 1.56 1.61 1.66 1.58 1.46
Return on average
equity(1) 12.61 11.66 12.21 12.37 12.08
Dividend payout
ratio 39.70 41.29 39.31 37.55 37.32
Average equity to
average assets(1) 12.37 13.84 13.57 12.75 12.08
(1) Includes amount related to common stock subject to ESOP put option
excluded from stockholders' equity on the Consolidated Balance Sheets
in 1998, 1997 and 1996.
"Cash Dividends Per Share" Graph
(In Dollars)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
.80 .74 .68 .62 .57
4
Management's Discussion and Analysis
($ In thousands, except per share data.)
PERFORMANCE SUMMARY
Net income in 1999 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 $7,088, an increase of $290 or 4.27%
over the previous year. This produced a return on average assets and a return
on average equity of 1.56% and 12.61%, respectively.
Net income for the Company for 1998 was $6,798, an increase of $238 or
3.63% over 1997. The return on average assets and return on average equity for
1998 were 1.61% and 11.66%, respectively.
The Company's net income for 1997 was $6,560 which produced a return on
average assets of 1.66% and a return on average equity of 12.21%.
Basic net income per share increased steadily over the three-year period
rising from $1.73 per share in 1997 to $1.79 in 1998 and $1.96 in 1999.
Net income for 1999 increased 4.27% as previously stated; however, total
asset growth increased at a rate of approximately 6%, resulting in a slight
decline in the return on average assets. The increase in the return on average
equity for 1999 was the result of increased earnings and a decline in
stockholders' equity. This decline in stockholders' equity was due to a
combination of a stock repurchase that occurred in the second quarter of 1999,
cash dividends and a substantial decline in accumulated other comprehensive
income. The dividend payout ratio for 1999 was 39.70%, which compares to
41.29% in 1998 and 39.31% in 1997.
"Net Income" Graph
(In Millions)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
7.1 6.8 6.6 6.1 5.5
NET INTEREST INCOME
Net interest income for 1999 was $19,400, an increase of $1,500 or 8.38%
over 1998. In 1998, net interest income was $17,900, up $1,209 or 7.24% from
1997 net interest income of $16,691.
The net yield on earning assets for 1999 was 4.82%. In 1998 and 1997, the
net yield on earning assets was 4.77% and 4.75%, respectively.
During 1999, the Company continued to experience substantial loan growth,
which in turn contributed significantly to the increase in net interest income.
The improvement in the net interest margin of 5 basis points was the result of
a 14 basis point decline in the yield on earning assets combined with a 19
basis point decline in the cost to fund earning assets. In the fourth quarter
of 1999, the Company changed its method of accounting for loan late fees from
cash to accrual basis. As a result of this change, net interest income
increased by $266. This change was not deemed to be material.
The Company experienced a higher level of deposit growth in 1998 relative
to the preceding year. This allowed loan growth to be funded by deposits. The
investment portfolio grew as well.
In 1997, management's strategy was to fund increases in the loan portfolio
through liquidity generated principally from the securities portfolio. In
1997, overall loan growth was strong, particularly in commercial loans and
loans to individuals.
5
Management's Discussion and Analysis
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. In prior years, the Company has used its securities available for
sale as a primary means to counter movements in interest rates. At December
31, 1999, this portfolio contained a substantial amount of longer term
securities with call features. Due to an overall increase in interest rate
levels these securities have not been called as originally anticipated. The
rising interest rate levels also resulted in a substantial increase in net
unrealized losses making the sale of these securities impractical. At present
and for an indeterminate amount of time in the future, the Company will not be
able to use the securities available for sale portfolio to respond to interest
rate movements to the extent possible in recent years. This risk can be
mitigated, however, by funds management, specifically through use of credit
instruments offered by the Federal Home Loan Bank. Accordingly, the Company's
vulnerability to upward movements of interest rates has increased.
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.
6
National Bankshares, Inc. and Subsidiaries
Loan Loss Data
($ In thousands) 1999 1998 1997
---- ---- ----
Provision for loan losses $ 1,400 624 435
Net charge-offs to average
net loans 0.31% 0.17% 0.28%
Allowance for loan losses to
loans, net of unearned
income and deferred fees 1.10% 1.12% 1.12%
Allowance for loan losses to
nonperforming loans 1,691.62% 9,567.86% 2,802.30%
Allowance for loan losses to
nonperforming assets 506.43% 408.38% 479.92%
Nonperforming assets to loans,
net of unearned income
and deferred fees, plus
other real estate owned 0.22% 0.27% 0.23%
Nonaccrual loans $ 151 28 87
Restructured loans 40 --- ---
Other real estate owned, net 447 628 421
--------- --------- ---------
Total nonperforming assets $ 638 656 508
========= ========= =========
Accruing loans past due 90 days or more $ 1,077 550 672
========= ========= =========
Nonperforming loans include nonaccrual loans and restructured loans, but
do not include accruing loans past due 90 days or more. Nonperforming assets
for 1999 have decreased $18 or 2.74% from 1998. Nonperforming assets for 1998
increased by $148 or 29.13% from the 1997 total of $508.
Net charge-offs to average net loans for 1999 were 0.31%, up from 0.17% in
1998. In 1999, overall asset quality continued to be satisfactory and general
economic conditions favorable. The provision for loan loss increased by $776
or 124.36%. This increased level of bad debt expense was primarily in response
to the growth in the loan portfolio, but also provided for additional losses.
Charge-offs in the commercial loan category increased by $153, while charge-
offs on loans to individuals increased by $234. A majority of the charge-offs
in the commercial loan area was due to a single credit, while charge-offs on
loans to individuals consisted of numerous smaller credits.
Net charge-offs to average net loans for 1998 were 0.17%, down from 1997
when that ratio was 0.28%. The provision for loan losses, which increased $189
in 1998 or 43.45% over 1997's provision of $435, was increased to cover 1998's
net charge-offs and loan growth. 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.
While past efforts directed at improving asset quality have been largely
successful, management is unable to estimate when and under what exact terms
problem assets will be resolved. 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.
In addition, precise loss predictions may be difficult to determine
because of the complex circumstances that surround troubled debts.
NONINTEREST INCOME
Noninterest income for 1999 was $3,512, an increase of $338 or 10.65%
over 1998. Noninterest income for 1998 was $3,174, up $340 or 12.00% from
1997.
7
Management's Discussion and Analysis
Service charges on deposits for 1999 totaled $1,395, an increase of $230
or 19.74% from 1998. This increase was due in part to volume and improved
collection efforts. Service charges on deposit accounts in 1998 were up $34 or
3.01% 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 increase for 1998 was largely attributable to the overall increase
in demand deposit volume. The decrease for 1997 was 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
1999, these charges were $279, an increase of $48 or 20.78% from 1998. For
1998, these charges totaled $231, a decrease of $19 or 7.60% from 1997.
Trust income for 1999 was $927 which represents an increase of $153 or
19.77% over 1998. In 1998, trust income was $774, an increase of $36 or 4.88%
over 1997. 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 1999, credit card income totaled $802, an increase of $149 or
22.82% over 1998. The increase in 1999 was attributable to increases in
merchant income and debit card processing fees. Credit card income for 1998
was $653, up $47 or 7.76% over 1997. Credit card income increased in 1998
largely because of a higher volume of interchange transactions, created in part
by the Company's debit card product. The Company's debit card product was
introduced late in the first quarter of 1997. Accordingly, 1998 reflects the
first full year of income derived from this product. Given the highly
competitive market which limits the amount of set charges, 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 realized securities gains were $24 in 1999, down $164 or 87.23% from
1998. In 1998, net securities gains were $188, up 408.11% from 1997. Gains
and losses can occur as a result of portfolio restructuring, securities called
before maturity and certain market adjustments.
NONINTEREST EXPENSE
Noninterest expense in 1999 totaled $11,868, up $807 or 7.30% from 1998.
In 1998, noninterest expense was $11,061, an increase of $1,030 or 10.27% from
1997.
Salaries and benefits in 1999 increased $224 or 3.85% from 1998.
In 1998, salaries and benefits expense totaled $5,824, up $426 or 7.89%
from 1997. The increase in salaries was due in part to the acquisition of the
Galax office by NBB at the beginning of the second quarter, salary adjustments
and from increases in other normal compensation related items.
In early 2000, the Company's NBB subsidiary purchased a tract of land with
the intent to establish a new branch facility. The exact timing of the branch
application and construction processes has not been precisely determined. When
completed, it is expected that this planned addition will increase salaries
expense as well as certain other noninterest expenses.
Occupancy and furniture and fixtures expense increased $154 or 15.43% for
1999 when compared to 1998. This increase was due to higher costs associated
with the Galax office acquired by NBB in the second quarter of 1998 and also to
regular planned maintenance of facilities. Management anticipates occupancy
8
National Bankshares, Inc. and Subsidiaries
and furniture and fixtures expense will continue to increase due to the
addition of its Hubbard Street office placed in service in the third quarter of
1999 and the previously mentioned planned new facility. The expected increase
in occupancy and furniture and fixtures expense will be somewhat offset by a
future reduction in expenses for leased premises. Occupancy and furniture and
fixtures expense experienced an increase in 1998 of 4.18% over 1997.
Data processing and ATM expense was $889 for 1999, an increase over 1998
of $118 or 15.30%. This increase was due to costs associated with the upgrade
of information system hardware and software and costs related to an expanded
microcomputer network. In 1998, data processing and ATM expense was $771, an
increase of $193 or 33.39% over 1997.
The cost of Federal Deposit Insurance was $47 in 1999, an increase of $10
from 1998. 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 1998, the Company's affiliates paid a premium of $37, a
decrease of $6 over 1997.
Credit card processing expense for 1999 was $712, an increase of $113 or
18.86% over 1998. In 1998, credit card processing expense was $599, an
increase of 8.71%. 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.
Net costs of other real estate owned for 1999 were $26, a decrease of $11
or 29.73% from 1998. In 1998, net costs of other real estate owned were $37,
increasing $29 from 1997.
Other operating expenses were $2,956 in 1999, up $197 or 7.14% from 1998,
which was primarily the result of increases in stationery and supplies,
telephone and state franchise tax expense at BTC. The other operating expense
category in 1998 was $2,759, increasing 11.93% from 1997.
INCOME TAXES
Despite higher pre-tax income in 1999, a $35 decrease in income tax
expense resulted when compared to 1998. Tax exempt interest income continues
to be the primary difference between the "expected" and reported income tax
expense. The Company's effective tax rates for 1999, 1998 and 1997 were
26.50%, 27.60% and 27.59%, respectively.
See note 10 of Notes to Consolidated Financial Statements for additional
information relating to income taxes.
EFFECTS OF INFLATION
The Company's consolidated statements of income and comprehensive income
generally reflect the effects of inflation. Since interest rates, loan demand
and deposit levels are related to inflation, the resulting changes are included
in net income. The most significant item which does not reflect the effects of
inflation is depreciation expense, because historical dollar values used to
determine this expense do not reflect the effect of inflation on the market
value of depreciable assets after their acquisition.
"Total Assets" Graph
($ In Millions)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
$472.1 445.2 402.9 388.9 380.9
9
Management's Discussion and Analysis
"Net Loans" Graph
($ In Millions)
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
$291.6 236.6 214.6 193.6 163.2
BALANCE SHEET
Total assets at year-end 1999 were $472,134 which represents an increase
of $26,968 or 6.06% over the previous year. The Company's primary methods of
achieving growth are to seek increases in deposits at its bank subsidiaries and
to grow through corporate acquisitions and mergers.
While deposit growth was strong in 1999, it was not sufficient to fund all
of the Company's investing and financing activities. Deposit growth was
supplemented in the fourth quarter by borrowing approximately $10,000 from the
Federal Home Loan Bank. See the Liquidity section for further comments.
In 1998, deposit growth was sufficient to fund loan growth as well as some
expansion of the securities portfolio. Profitable growth continues to be a
management objective. In 1999 and 1998, total average deposits grew by $31,613
and $20,531, respectively, which represents growth rates of 8.78% and 6.05%,
respectively.
LOANS
Loans, net of unearned income and deferred fees, grew by $55,536 or
23.21% in 1999. Commercial loans grew by $38,877 or 35.18% with loans to
individuals increasing by $4,332 or 6.23%. Loan growth for the year 2000 is
not expected to reach 1999 levels.
In 1998, loans, net of unearned income and deferred fees, grew by $22,267
or 10.26%. Commercial loans, which grew by $9,130 or 9.01%, accounted for the
largest portion of the increase.
The Company engages in the origination and sale of mortgage loans in the
secondary market. In 1999 and 1998, the Company originated $31,538 and
$41,472, respectively, and sold $33,489 and $39,697 in 1999 and 1998,
respectively, of mortgage loans.
SECURITIES
In 1999, total bank-owned securities decreased by $29,262 or 17.55%
compared to 1998. Securities available for sale declined by $22,233 or 16.34%,
while securities held to maturity declined by $7,029 or 22.91%. (See comments
in the Interest Rate Sensitivity section.)
In 1998, total bank-owned securities increased by $16,780 or 11.19% from
1997.
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.
At December 31, 1999 and 1998, the Company had no investment
concentrations in any single issues (excluding U.S. Government) that exceeded
ten percent of capital.
DEPOSITS
At year-end 1999, total deposits were $407,187 which represents a $24,491
or 6.4% increase over 1998. At December 31, 1998, total deposits were
$382,696, an increase of 10.97% over 1997. In the third quarter of 1999, the
10
National Bankshares, Inc. and Subsidiaries
Office of the Comptroller of Currency announced the closure of a banking
institution in Keystone, West Virginia. As a result of the closure, depositors
in that area were forced to seek banking relationships with other institutions
in the general area. The Company's BTC affiliate benefitted from the event,
acquiring new deposits in excess of $20,000. This event accounted for the
majority of the Company's deposit growth for 1999.
Average noninterest-bearing deposits were $55,700 in 1999, an increase of
$6,148 or 12.41% over 1998. In 1998, average noninterest- bearing deposits
increased by $5,359 or 12.13% over 1997.
Average interest-bearing deposits were $335,883 in 1999, an increase of
$25,465 over 1998. In 1998, average interest-bearing deposits of $310,418
increased $15,172 from 1997.
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 14 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,
principally GNMA's, with a fair value of approximately $13,547, which includes
$2,142 of structured notes. In addition, the Company has investments in
nonmortgage-backed structured notes with a fair value of approximately $4,297.
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 15 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 changes in the overall rate environment. The Company's profitability in the
near term may be temporarily affected either positively by a falling interest
rate scenario or negatively by a period of rising rates. See note 16 of Notes
to Consolidated Financial Statements for information relating to fair value of
financial instruments and comments concerning interest rate sensitivity.
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 1999 and
1998. In 1999, the Company's liquidity was materially affected by several
events. As previously discussed, the Company's available for sale securities
11
Management's Discussion and Analysis
portfolio experienced a significant level of net unrealized losses through much
of 1999 and at December 31, 1999, which limited, in the near term, its use as a
source of liquidity. Deposit growth, however, during 1999 was strong, reducing
the effect of the lack of liquidity found in the securities portfolio. (See
comments in the deposit section related to the Keystone matter.) Loan growth
and other cash needs did however remain strong and resulted in the Company
borrowing $10,000 from the Federal Home Loan Bank on a short term basis at its
NBB subsidiary. Liquidity was also affected by a stock repurchase that used
cash totaling $7,762 and the building of a new corporate headquarters.
Management does not anticipate that 1999 loan growth levels will be repeated in
2000 and accordingly, believes that liquidity needs can be met by extensions of
credit by the Federal Home Loan Bank, as well as federal funds purchased.
Other needs for cash include the planned building of a new branch by the
Company's NBB subsidiary. The Company had approximately $43,000 in available
credit at the Federal Home Loan Bank at December 31, 1999. Overall, based on
available information, management does not expect demands for cash in 2000 to
reach 1999 levels.
Management is not aware of any other commitments or events that will
result in or are reasonably likely to result in a material and adverse decrease
in liquidity.
Net cash from operating activities of $11,448 in 1999 increased by $6,201
from 1998 primarily due to the increase in the provision for loan losses and
the decrease in mortgage loans held for sale. Net cash flows provided by
operating activities and financing activities for 1999 of $11,448 and $24,161,
respectively, were used primarily to fund loan growth.
Net cash from operating activities of $5,247 in 1998 decreased $2,326 from
1997 due primarily to the increase in mortgage loans held for sale offset by
the increase in net income. Net cash flows provided by operating activities
and financing activities for 1998 of $5,247 and $34,751, respectively, were
used to fund the net increases in federal funds sold, securities, loans made to
customers and purchases of loan participations of $790, $15,429, $18,675 and
$4,635, respectively.
CAPITAL RESOURCES
Total stockholders' equity decreased $7,986 from 1998 to 1999 and
increased $4,474 from 1997 to 1998. Cash dividends on common stock of $2,814
and the repurchase of common stock of $7,762, offset by net income, contributed
to the decrease in 1999. In addition, net unrealized gains (losses) on
securities available for sale, net of deferred income taxes, were ($3,453) at
December 31, 1999, $1,019 at December 31, 1998 and $194 at December 31, 1997.
These unrealized net gains and losses are recorded as accumulated other
comprehensive income (loss), 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.
In the second quarter of 1999, the Company repurchased 275,856 of its
common shares at $28.00 per share. This reduced stockholders' equity by
$7,762.
The Company has operated from a consistently strong capital position. The
ratio of total stockholders' equity to total assets was 11.17% at year end 1999
compared to 13.14% at year end 1998 and 13.41% at year end 1997. 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 banks' risk-based capital ratios.
No regulatory authorities have advised National Bankshares, Inc., The National
Bank of Blacksburg or Bank of Tazewell County of any specific leverage ratios
applicable to them. National Bankshares, Inc., The National Bank of Blacksburg
12
National Bankshares, Inc. and Subsidiaries
and Bank of Tazewell County's capital adequacy ratios exceed regulatory
requirements and provide added flexibility to take advantage of business
opportunities as they arise. See note 11 of Notes to Consolidated Financial
Statements for additional information.
RECENT ACCOUNTING PRONOUNCEMENTS
See notes 1 and 19 of Notes to Consolidated Financial Statements for
information relating to recent accounting pronouncements.
BUSINESS COMBINATIONS
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.
Settlement of this purchase agreement occurred on April 3, 1998 and did not
have a material impact on the Company's results of operations or liquidity.
YEAR 2000
The Company was cognizant of the risks posed by the Year 2000 issue for
Bank operations and borrowers. Subsequent to December 31, 1999, the Company
was not aware of any information that indicates a significant vendor or service
provider may be unable to sell goods or provide services to the Company because
of Year 2000 issues. Further, the Company has not received any notifications
from borrowers or regulatory agencies to which it is subject, nor is it aware
of any such information which indicates that (1) a borrower has experienced
significant issues which may impact its ability to service its loan or which
may impact its borrowing agreement terms or covenants or (2) significant
regulatory action is being or may be taken against the Company, as a result of
Year 2000 issues.
The Company has not experienced any significant disruptions to financial
or operating activities caused by failure in computerized systems resulting
from Year 2000 issues. Management does not expect Year 2000 issues to have a
material adverse effect on the Company's operations or financial results in
2000.
The Company was prepared for the millennium change and continues to
successfully operate and handle the transactions of customers subsequent to
December 31, 1999.
COMMON STOCK INFORMATION AND DIVIDENDS
Effective December 1, 1999, National Bankshares, Inc.'s common stock began
trading on the Nasdaq SmallCap Market under the symbol "NKSH". Prior to
December 1, 1999, National Bankshares, Inc.'s common stock was traded on a
limited basis in the over-the-counter market and was not listed on any exchange
or quoted on Nasdaq. As of December 31, 1999, there were 1,109 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 1999 and 1998. Prices prior to December 1, 1999 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.
13
Common Stock Market Prices
Dividends
1999 1998 Per Share
High Low High Low 1999 1998
---- --- ---- --- ---- ----
First Quarter $26.00 22.00 $27.75 24.75 --- ---
Second Quarter 27.50 24.00 28.00 26.50 0.39 0.36
Third Quarter 25.00 22.00 27.50 23.25 --- ---
Fourth Quarter 23.50 19.75 24.25 21.25 0.41 0.38
Bankshares' primary source of funds for dividend payments is dividends
from its subsidiaries, The National Bank of Blacksburg and Bank of Tazewell
County. Bank regulatory agencies restrict dividend payments of the
subsidiaries as more fully disclosed in note 11 of Notes to Consolidated
Financial Statements.
14
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, 1999 and 1998, and the
related consolidated statements of income and comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1999. 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 conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National
Bankshares, Inc. and subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999 in conformity with generally accepted
accounting principles.
As discussed in note 1(S) to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as of October
1, 1998.
/S/KPMG LLP
Roanoke, Virginia
February 11, 2000
15
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
$ In thousands, except share and per share data.
December 31, 1999 and 1998 1999 1998
---- ----
Assets Cash and due from banks (notes 2 and 16) $ 13,311 14,421
Interest-bearing deposits (note 16) 9,219 7,027
Federal funds sold (note 16) 2,800 5,090
Securities available for sale (notes 3 and 16) 113,845 136,078
Securities held to maturity (fair value $23,496
in 1999 and $31,151 in 1998) (notes 3 and 16) 23,647 30,676
Mortgage loans held for sale (notes 14, 15 and 16) 229 2,180
Loans (notes 4, 5, 15 and 16):
Real estate construction loans 14,669 12,827
Real estate mortgage loans 58,829 48,724
Commercial and industrial loans 149,386 110,509
Loans to individuals 73,825 69,493
-------- -------
Total loans 296,709 241,553
Less unearned income and deferred fees (1,916) (2,296)
-------- -------
Loans, net of unearned income and
deferred fees 294,793 239,257
Less allowance for loan losses (note 5) (3,231) (2,679)
-------- -------
Loans, net 291,562 236,578
-------- -------
Bank premises and equipment, net (note 6) 8,506 6,657
Accrued interest receivable 4,014 3,777
Other real estate owned, net (note 5) 447 628
Other assets (note 10) 4,554 2,054
-------- -------
Total assets $472,134 445,166
======== =======
Liabilities Noninterest-bearing demand deposits $ 54,748 55,479
and Interest-bearing demand deposits 88,385 84,319
Stockholders'Savings deposits 44,834 46,387
Equity Time deposits (note 7) 219,220 196,511
-------- -------
Total deposits (note 16) 407,187 382,696
-------- -------
Other borrowed funds (notes 3 and 16) 10,460 214
Accrued interest payable 651 647
Other liabilities (note 8) 1,113 926
-------- -------
Total liabilities 419,411 384,483
-------- -------
16
Common stock subject to ESOP put option (note 8) --- 2,180
-------- -------
Stockholders' equity (notes 9, 10, 11 and 17):
Preferred stock of no par value. Authorized
5,000,000 shares; none issued and outstanding --- ---
Common stock of $2.50 par value. Authorized
5,000,000 shares; issued and outstanding
3,516,977 shares in 1999 and 3,792,833 in
1998 8,792 9,482
Retained earnings 47,384 50,182
Accumulated other comprehensive income (loss) (3,453) 1,019
Common stock subject to ESOP put option
(77,301 shares at $28.20 per share in
1998)(note 8) --- (2,180)
-------- -------
Total stockholders' equity 52,723 58,503
Commitments and contingent liabilities (notes 6, 8,
and 14)
-------- -------
Total liabilities and stockholders'
equity $472,134 445,166
======== =======
See accompanying notes to consolidated financial statements.
17
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
$ In thousands, except per share data. Years ended
December 31, 1999, 1998 and 1997 1999 1998 1997
---- ---- ----
Interest Interest and fees on loans $ 24,105 21,691 19,553
Income Interest on federal funds sold 170 345 451
Interest on interest-bearing deposits 269 696 230
Interest on securities - taxable 6,820 7,201 7,776
Interest on securities - nontaxable 2,239 1,895 1,787
-------- -------- -------
Total interest income 33,603 31,828 29,797
-------- -------- -------
Interest Interest on time deposits of $100,000 or
Expense more 2,487 2,457 2,335
Interest on other deposits 11,484 11,460 10,754
Interest on borrowed funds 232 11 17
-------- -------- -------
Total interest expense 14,203 13,928 13,106
-------- -------- -------
Net interest income 19,400 17,900 16,691
Provision for loan losses (note 5) 1,400 624 435
-------- -------- -------
Net interest income after
provision for loan losses 18,000 17,276 16,256
-------- -------- -------
Noninterest Service charges on deposit accounts 1,395 1,165 1,131
Income Other service charges and fees 279 231 250
Credit card fees 802 653 606
Trust income 927 774 738
Other income 85 163 72
Realized securities gains, net (note 3) 24 188 37
-------- -------- -------
Total noninterest income 3,512 3,174 2,834
-------- -------- -------
Noninterest Salaries and employee benefits (note 8) 6,048 5,824 5,398
Expense Occupancy and furniture and fixtures 1,152 998 958
Data processing and ATM 889 771 578
FDIC assessment 47 37 43
Credit card processing 712 599 551
Goodwill amortization 38 36 30
Net costs of other real estate owned 26 37 8
Other operating expenses 2,956 2,759 2,465
-------- -------- -------
Total noninterest expense 11,868 11,061 10,031
-------- -------- -------
18
Income before income tax expense 9,644 9,389 9,059
Income tax expense (note 10) 2,556 2,591 2,499
-------- -------- -------
Net income 7,088 6,798 6,560
-------- -------- -------
Other comprehensive income (loss), net of
income taxes:
Net unrealized gains (losses) on
securities available for sale (notes
1(R), 1(S) and 18):
Arising during the year (4,472) 356 442
Cumulative accounting change --- 469 ---
-------- -------- -------
Total other comprehensive income
(loss) (4,472) 825 442
-------- -------- -------
Comprehensive income $ 2,616 7,623 7,002
======== ======== =======
Basic net income per share (note
1(N)) $ 1.96 1.79 1.73
======== ======== =======
See accompanying notes to consolidated financial statements.
19
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Common
Stock
Accumulated Subject
$ In thousands, except per share Other to ESOP
data. Years ended December 31, 1999, Common Retained Comprehensive Put
1998 and 1997. Stock Earnings Income (Loss) Option Total
------ -------- ------------- ------- -----
Balances, December 31, 1996 $ 9,482 42,210 (248) (1,643) 49,801
Net income --- 6,560 --- --- 6,560
Cash dividends ($0.68 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
Net income --- 6,798 --- --- 6,798
Cash dividends ($0.74 per share) --- (2,807) --- --- (2,807)
Change in net unrealized gains
(losses) on securities available
for sale, net of income tax expense
of $425:
Arising during the year, net of
income tax expense of $183 --- --- 356 --- 356
Cumulative accounting change, net
of income tax expense of $242
(note 1(S)) --- --- 469 --- 469
------- ------ ------ ------ ------
Total --- --- 825 --- 825
------- ------ ------ ------ ------
Change in common stock subject to
ESOP put option --- --- --- (342) (342)
------- ------ ------ ------ ------
Balances December 31, 1998 9,482 50,182 1,019 (2,180) 58,503
Net income --- 7,088 --- --- 7,088
Cash dividends ($0.80 per share) --- (2,814) --- --- (2,814)
Change in net unrealized gains
(losses) on securities available
for sale, net of income tax benefit
of $2,304 --- --- (4,472) --- (4,472)
Common stock repurchase (690) (7,072) --- --- (7,762)
Change in common stock subject to
ESOP put option (note 8) --- --- --- 2,180 2,180
------- ------ ------ ------ ------
Balances, December 31, 1999 $ 8,792 47,384 (3,453) --- 52,723
======= ====== ====== ====== ======
See accompanying notes to consolidated financial statements.
20
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
$ In thousands. Years ended December 31, 1999, 1998 and
1997 1999 1998 1997
---- ---- ----
Cash Flows Net income $ 7,088 6,798 6,560
from Adjustments to reconcile net income to net cash
Operating provided by operating activities:
Activities Provision for loan losses 1,400 624 435
(Note 13) Recovery of bond losses --- --- (10)
Provision for deferred income taxes (214) (135) 300
Depreciation of bank premises and
equipment 903 811 586
Amortization of intangibles 152 144 121
Amortization of premiums and accretion of
discounts, net 350 87 11
Gains on sales and calls of
securities available for sale, net (20) (145) (5)
Gains on calls of securities held to
maturity, net (4) --- ---
Other 22 (135) (18)
(Increase) decrease in:
Mortgage loans held for sale 1,951 (1,775) 111
Accrued interest receivable (237) (332) 65
Other assets (134) (580) (76)
Increase (decrease) in:
Accrued interest payable 4 (75) 22
Other liabilities 187 (40) (529)
-------- -------- -------
Net cash provided by operating
activities 11,448 5,247 7,573
-------- -------- -------
Cash Flows Net (increase) decrease in federal funds sold 2,290 (790) (2,390)
from Net (increase) decrease in interest-bearing
Investing deposits (2,192) 2,701 (9,637)
Activities Proceeds from repayments of mortgage-backed
(Note 13) securities available for sale 4,558 1,065 396
Proceeds from sales of other securities
available for sale 1,300 2,999 ---
Proceeds from calls and maturities of other
securities available for sale 21,495 35,180 9,443
Proceeds from calls and maturities of
securities held to maturity 6,997 34,187 35,673
Purchases of mortgage-backed securities
available for sale --- (14,175) ---
Purchases of other securities available for
sale (12,190) (73,685) (12,201)
Purchases of securities held to maturity --- (1,000) (11,345)
Purchases of loan participations (5,643) (4,635) (6,189)
Collections of loan participations 3,408 4,074 1,934
Loans purchased, including premium --- (4,051) ---
Net increase in loans made to customers (54,456) (18,675) (17,400)
Proceeds from disposal of other real estate
owned 336 194 216
21
Recoveries on loans charged off 130 255 107
Bank premises and equipment expenditures (2,757) (1,770) (1,304)
Proceeds from sale of bank premises and
equipment 5 114 8
-------- -------- -------
Net cash used in investing
activities (36,719) (38,012) (12,689)
-------- -------- -------
Cash Flows Deposits acquired, net of premium --- 7,016 ---
from Net increase in time deposits 22,709 14,357 6,618
Financing Net increase in other deposits 1,782 16,456 3,665
Activities Net increase (decrease) in other borrowed funds 10,246 (271) (142)
(Note 13) Cash dividends paid (2,814) (2,807) (2,579)
Common stock repurchase (7,762) --- ---
-------- -------- -------
Net cash provided by
financing activities 24,161 34,751 7,562
-------- -------- -------
Net increase (decrease) in cash and due from
banks (1,110) 1,986 2,446
Cash and due from banks at beginning of year 14,421 12,435 9,989
-------- -------- -------
Cash and due from banks at end of year $ 13,311 14,421 12,435
======== ======== =======
See accompanying notes to consolidated financial statements.
22
National Bankshares, Inc. and Subsidiaries
$ In thousands, except share and per share data.
December 31, 1999, 1998 and 1997
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.
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.
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. All
interest accrued but not collected for loans that are placed on nonaccrual
status or charged-off is reversed against interest income. The interest
on these loans is accounted for on the cash basis until qualifying for
return to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Impaired loans are presented in the consolidated 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. This requirement
23
Notes to Consolidated Financial Statements
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.
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.
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. Subsequent decreases
in the net realizable value of such properties are 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 $592 and $706 at
December 31, 1999 and 1998, respectively, and goodwill of $382 and $420 at
December 31, 1999 and 1998, respectively. Deposit intangibles are being
amortized on a straight-line basis over a ten-year period and goodwill is
being amortized on a straight-line basis over a fifteen-year period.
(I) Stock Option Plan
Effective March 10, 1999, the Company adopted the National
Bankshares, Inc. 1999 Stock Option Plan. The Company applies the
intrinsic value-based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, in accounting for its fixed plan
stock options. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock
exceeded the exercise price. Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation," established accounting
and disclosure requirements using a fair value-based method of accounting
for stock-based employee compensation plans. As allowed by Statement 123,
24
National Bankshares, Inc. and Subsidiaries
the Company has elected to continue to apply the intrinsic value-based
method of accounting described above, and has adopted the disclosure
requirements of Statement 123.
(J) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
Long-lived assets and certain identifiable intangibles are 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 undiscounted 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.
(K) Pension Plans
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosure about Pension and
Other Post-retirement Benefits." Statement 132 revises the Company's
disclosure about pension and other post-retirement benefit plans.
Statement 132 does not change the method of accounting for such 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.
(L) 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.
(M) 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.
(N) Net Income Per Share
Basic net income per share is based upon the weighted average number
of common shares outstanding (3,607,669 shares in 1999, and 3,792,833 in
1998 and 1997). Stock options that could potentially dilute basic net
income per share in the future that were not included in the computation
of diluted net income per share because to do so would have been
antidilutive totaled 5,500 at December 31, 1999 (see note 9).
25
Notes to Consolidated Financial Statements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share."
Statement 128 established new standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly-held common
stock or potential common stock.
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.
(O) 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.
(P) 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.
26
National Bankshares, Inc. and Subsidiaries
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.
(5) Other Borrowed Funds
Other borrowed funds represents treasury tax and loan deposits,
and short-term borrowings from the Federal Home Loan Bank. 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, 1999
and 1998, and as such, the related fair values have not been
estimated.
(Q) 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, 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.
27
Notes to Consolidated Financial Statements
(R) Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." Statement
130 establishes standards for reporting and presentation of comprehensive
income and its components 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.
The Company is required to classify items of "Other Comprehensive
Income" [such as net unrealized gains (losses) on securities available for
sale] by their nature in a financial statement and present 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.
In accordance with the provisions of the Statement, the Company has
included Consolidated Statements of Income and Comprehensive Income in the
accompanying consolidated financial statements. Comprehensive income
consists of net income and net unrealized gains (losses) on securities
available for sale. Also, accumulated other comprehensive income (loss)
is included as a separate disclosure within the Consolidated Statements of
Changes in Stockholders' Equity in the accompanying consolidated financial
statements. The adoption of Statement 130 did not have any effect on the
Company's consolidated financial position, results of operation or
liquidity.
(S) Derivatives
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Company adopted
Statement 133 as of October 1, 1998. In connection with the adoption of
Statement 133, the Company transferred securities with a carrying value of
approximately $20,516 from held to maturity to available for sale. This
transfer of securities resulted in an increase in unrealized gains on
securities available for sale, comprehensive income, accumulated other
comprehensive income and stockholders' equity of approximately $469, net
of income taxes of $242, as of October 1, 1998, which is reported as a
cumulative effect of an accounting change. Except as discussed above, the
adoption of Statement 133 did not have a material effect on the
consolidated financial position, results of operations or liquidity of the
Company.
(T) 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.
28
National Bankshares, Inc. and Subsidiaries
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 $5,285 and $4,813 for the weeks including December 31, 1999
and 1998, respectively.
Note 3: Securities
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities available for sale by major security type as of
December 31, 1999 and 1998 are as follows:
December 31, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Available for sale:
U.S. Treasury $ 6,244 7 87 6,164
U.S. Government agencies
and corporations 50,373 7 2,882 47,498
States and political
subdivisions 32,903 112 1,398 31,617
Mortgage-backed securities 13,464 8 296 13,176
Corporate debt securities 14,349 --- 703 13,646
Federal Home Loan Bank
stock 1,329 --- --- 1,329
Federal Reserve Bank stock 247 --- --- 247
Other securities 168 --- --- 168
-------- ------ ----- -------
Total securities
available for sale $119,077 134 5,366 113,845
======== ====== ===== =======
December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Available for sale:
U.S. Treasury $ 9,253 418 --- 9,671
U.S. Government agencies
and corporations 59,365 369 (139) 59,595
States and political
subdivisions 32,183 786 (104) 32,865
Mortgage-backed securities 17,282 12 (94) 17,200
Corporate debt securities 14,528 331 (35) 14,824
Federal Home Loan Bank
stock 1,214 --- --- 1,214
Federal Reserve Bank stock 247 --- --- 247
Other securities 462 --- --- 462
-------- ------ ----- -------
Total securities
available for sale $134,534 1,916 (372) 136,078
======== ====== ===== =======
29
Notes to Consolidated Financial Statements
The amortized costs and fair values of single maturity securities
available for sale at December 31, 1999, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. Mortgage-backed securities included in these totals
are allocated based upon estimated cash flows at December 31, 1999.
December 31, 1999
Amortized Fair
($ In thousands) Costs Values
--------- ------
Due in one year or less $ 4,170 4,168
Due after one year through five years 21,629 21,423
Due after five years through ten years 40,667 38,984
Due after ten years 51,037 47,695
No maturity 1,574 1,575
-------- -------
$119,077 113,845
======== =======
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities held to maturity by major security type as of
December 31, 1999 and 1998 are as follows:
December 31, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Held to maturity:
U.S. Treasury $ 500 --- --- 500
U.S. Government agencies
and corporations 5,500 --- 230 5,270
States and political
subdivisions 17,283 117 45 17,355
Mortgage-backed securities 364 7 --- 371
------- ------- ----- -------
Total securities held
to maturity $23,647 124 275 23,496
======= ======= ===== =======
30
National Bankshares, Inc. and Subsidiaries
December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Held to maturity:
U.S. Treasury $ 1,006 3 --- 1,009
U.S. Government agencies
and corporations 7,497 55 (121) 7,431
States and political
subdivisions 21,160 537 (18) 21,679
Mortgage-backed securities 513 17 --- 530
Corporate debt securities 500 2 --- 502
------- ------- ----- -------
Total securities held
to maturity $30,676 614 (139) 31,151
======= ======= ===== =======
The amortized costs and fair values of single maturity securities held to
maturity at December 31, 1999, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities included in these totals are
allocated based upon estimated cash flows at December 31, 1999.
December 31, 1999
Amortized Fair
($ In thousands) Costs Values
--------- ------
Due in one year or less $ 2,602 2,606
Due after one year through five years 15,868 15,817
Due after five years through ten years 3,877 3,779
Due after ten years 1,300 1,294
------- -------
$23,647 23,496
======= =======
There were no sales of securities held to maturity during 1999, 1998 or
1997.
The carrying value of securities pledged to secure public and trust
deposits, and for other purposes as required or permitted by law, was $46,937
at December 31, 1999 and $21,629 at December 31, 1998.
As members of the Federal Reserve and the Federal Home Loan Bank (FHLB) of
Atlanta, NBB and BTC are required to maintain certain minimum investments in
the common stock of those entities. Required levels of investment are based
upon NBB and BTC's capital and a percentage of qualifying assets. In addition,
NBB and BTC are eligible to borrow from the FHLB with borrowings collateralized
by qualifying assets, primarily residential mortgage loans, and NBB and BTC's
capital stock investment in the FHLB. At December 31, 1999, the available
borrowing limit was approximately $53,000, of which NBB had $10,000 in
borrowings outstanding at December 31, 1999. The note is due in February 2000
and bears interest at a fixed rate of 5.93 percent.
31
Notes to Consolidated Financial Statements
Note 4: Loans to Officers and Directors
In the normal course of business, loans have been made to executive
officers and directors of Bankshares and its subsidiaries. As of December 31,
1999 and 1998, there were direct loans to executive officers and directors of
$1,566 and $1,782, respectively. In addition, there were loans of $357 and
$1,844 at December 31, 1999 and 1998, respectively, which were endorsed by
directors and/or executive officers or had been made to companies in which
directors and/or executive officers had an equity interest.
The following schedule summarizes amounts receivable from executive
officers and directors of Bankshares and its subsidiaries, and their immediate
families or associates:
Year ended
December 31,
($ In thousands) 1999
------------
Aggregate balance, beginning of year $ 3,626
Additions 2,601
Collections (4,304)
-------
Aggregate balance, end of year $ 1,923
=======
Note 5: Nonperforming Assets, Past Due Loans, Impaired Loans and Allowance for
Loan Losses
Nonperforming assets consist of the following:
December 31,
($ In thousands) 1999 1998 1997
---- ---- ----
Nonaccrual loans $ 151 28 87
Restructured loans 40 --- ---
Other real estate owned, net 447 628 421
------- ------- ------
Total nonperforming assets $ 638 656 508
======= ======= ======
Accruing loans past due 90 days or
more $ 1,077 550 672
======= ======= ======
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at December 31, 1999.
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:
32
National Bankshares, Inc. and Subsidiaries
Years ended December 31,
($ In thousands) 1999 1998 1997
---- ---- ----
Scheduled interest:
Nonaccrual loans $ 13 4 8
======= ====== ======
Recorded interest:
Nonaccrual loans $ --- --- 1
======= ====== ======
Changes in the valuation allowance for other real estate owned are as
follows:
Years ended December 31,
($ In thousands) 1999 1998 1997
---- ---- ----
Balances, beginning of year $ 93 68 96
Provision for other real estate owned 8 25 ---
Write-offs --- --- (28
------- ------- -----
Balances, end of year $ 101 93 68
======= ======= =====
At December 31, 1999, the recorded investment in loans which have been
identified as impaired loans, totaled $317. Of this amount, $95 related to
loans with no valuation allowance and $222 related to loans with a
corresponding valuation allowance of $154. At December 31, 1998, the recorded
investment in loans which have been identified as impaired loans totaled $373.
Of this amount, $228 related to loans with no valuation allowance and $145
related to loans with a corresponding valuation allowance of $145.
For the year ended December 31, 1999, the average recorded investment in
impaired loans was approximately $292, and the total interest income recognized
on impaired loans was $13 of which $0 was recognized on a cash basis. For the
year ended December 31, 1998, the average recorded investment in impaired loans
was approximately $387, and the total interest income recognized on impaired
loans was $32 of which $0 was recognized on a cash basis. 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 $12 was recognized on a cash basis.
Changes in the allowance for loan losses are as follows:
Years ended December 31,
($ In thousands) 1999 1998 1997
---- ---- ----
Balances, beginning of year $ 2,679 2,438 2,575
Provision for loan losses 1,400 624 435
Recoveries 130 255 107
Loans charged off (978) (638) (679)
------- ------- ------
Balances, end of year $ 3,231 2,679 2,438
======= ======= ======
33
Notes to Consolidated Financial Statements
Note 6: Bank Premises and Equipment
Bank premises and equipment stated at cost, less accumulated depreciation,
are as follows:
December 31,
($ In thousands) 1999 1998
---- ----
Premises $ 8,818 6,321
Furniture and equipment 6,140 5,343
Construction-in-progress 21 632
-------- --------
14,979 12,296
Less accumulated depreciation (6,473) (5,639)
-------- --------
Bank premises and equipment, net $ 8,506 6,657
======== ========
The Company leases a branch facility as well as certain other office space
under noncancellable operating leases that expire over the next five years.
The future minimum lease payments under these leases (with initial or remaining
lease terms in excess of one year) as of December 31, 1999 are as follows: $51
in 2000, $50 in 2001, $43 in 2002 and $33 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 $46,172 at December 31,
1999 and $46,257 at December 31, 1998. At December 31, 1999, the scheduled
maturities of time deposits are as follows: $152,147 in 2000, $43,490 in 2001,
$9,692 in 2002, $8,297 in 2003 and $5,594 in 2004.
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, 1999, 1998 and 1997,
NBB contributed $102, $91 and $87, 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 $162, $0 and $219 for the years ended December 31, 1999, 1998 and
1997, respectively. Dividends on ESOP shares are charged to retained earnings.
As of December 31, 1999, the number of allocated shares held by the ESOP was
76,680 and the number of unallocated shares was 1,951. All shares held by the
ESOP are treated as outstanding in computing the Company's basic 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
34
National Bankshares, Inc. and Subsidiaries
not readily tradeable on an established market at the time of its distribution.
Since the shares were not readily tradeable at December 31, 1998, 77,301 shares
of stock held by the ESOP, at their estimated fair value, which was based on
the most recent available independent valuation, is recorded outside of
stockholders' equity as of December 31, 1998. Effective December 1, 1999,
Bankshares' common stock began trading on the Nasdaq SmallCap Market. As a
result of being listed on an established national exchange, presentation of the
fair value of the shares of common stock held by the ESOP outside of
stockholders' equity is no longer required at December 31, 1999.
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 (30%), mutual funds (32%),
corporate bonds (5%) and equity securities (33%). BTC's pension plan's assets
are invested principally in BTC certificates of deposit (4%), U.S. Government
agency obligations (81%) and equity securities (15%).
Pension Benefits
----------------
December 31,
------------
($ In thousands) 1999 1998
---- ----
Change in benefit obligation
Benefit obligation at beginning of year $ 5,995 4,967
Service cost 398 331
Interest cost 415 367
Actuarial gain (749) 491
Benefits paid (365) (161)
-------- --------
Benefit obligation at end of year 5,694 5,995
-------- --------
Change in plan assets
Fair value of plan assets at beginning of year 4,971 4,337
Actual return on plan assets 85 430
Employer contribution 186 365
Benefits paid (365) (161)
-------- --------
Fair value of plan assets at end of year 4,877 4,971
-------- --------
Funded status (817) (1,024)
Unrecognized net actuarial loss 522 917
Unrecognized prior service cost 201 216
Unrecognized transition asset (160) (183)
-------- --------
Net accrued pension cost (includes accrued
pension cost of $414 in 1999 and $363 in
1998 included in other liabilities, and
prepaid pension cost of $160 in 1999 and
$289 in 1998 included in other assets) $ (254) (74)
======== ========
35
Notes to Consolidated Financial Statements
Pension Benefits
------------------------------------------------
NBB BTC
($ In thousands) 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
Weighted average
assumptions as of
December 31
Weighted average
discount rate 7.50% 7.00% 7.50% 7.50% 7.00% 7.50%
Expected return on
plan assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Rate of compensation
increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Pension Benefits
----------------
Years Ended December 31,
($ In thousands) 1999 1998 1997
---- ---- ----
Components of net periodic
benefit cost
Service cost $ 398 331 281
Interest cost 415 367 367
Expected return on plan assets (457) (400) (364)
Amortization of prior service
cost 15 15 15
Recognized net actuarial loss 18 3 8
Amortization of transition
asset (23) (22) (23)
------ ----- -----
Net periodic benefit cost $ 366 294 284
====== ===== =====
Note 9: Stock Option Plan
Effective March 10, 1999, the Company adopted the National Bankshares,
Inc. 1999 Stock Option Plan to give key employees of Bankshares and its
subsidiaries an opportunity to acquire shares of National Bankshares, Inc.
common stock. The purpose of the 1999 Stock Option Plan is to promote the
success of Bankshares and its subsidiaries by providing an incentive to key
employees that enhances the identification of their personal interest with the
long term financial success of the Company and with growth in stockholder
value. Under the 1999 Stock Option Plan, up to 250,000 shares of Bankshares
common stock may be granted. The 1999 Stock Option Plan is administered by the
Stock Option Committee, which is made up of all of the non-employee, outside
directors of National Bankshares, Inc. The Stock Option Committee may
determine whether options are incentive stock options or nonqualified stock
options and may determine the other terms of grants, such as number of shares,
term, a vesting schedule and the exercise price. The 1999 Stock Option Plan
limits the maximum term of any option granted to ten years, states that options
may be granted at not less than fair market value on the date of the grant and
contains certain other limitations on the exercisability of incentive stock
options. The options vest 25% after one year, 50% after two years, 75% after
36
National Bankshares, Inc. and Subsidiaries
three years and 100% after four years. At the discretion of the Stock Option
Committee, options may be awarded with the provision that they may be
accelerated upon a change of control, merger, consolidation, sale or
dissolution of National Bankshares, Inc.
At December 31, 1999, there were 244,500 additional shares available for
grant under the Plan. The per share weighted-average estimated fair value of
stock options granted during 1999 was $2.38 on the date of grant using the
Black Scholes option-pricing model with the following weighted-average
assumptions: 1999 - expected cash dividend yield of 3.41% percent, risk-free
interest rate of 6.38% percent, expected volatility of 18.60% percent and an
expected life of ten years.
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Proforma compensation cost determined
in accordance with Statement 123 was not material and had no impact on net
income per share presented.
Stock option activity during the periods indicated is as follows:
Weighted
Number of Average
Shares Exercise Price
--------- --------------
Granted in 1999 5,500 $22.00
Exercised --- ---
Forfeited --- ---
Expired --- ---
------ ------
Balance at December 31, 1999 5,500 $22.00
====== ======
At December 31, 1999, the exercise price and remaining contractual life of
outstanding options was $22.00 and 9.83 years.
Note 10: Income Taxes
Total income taxes were allocated as follows:
Years ended December 31,
($ In thousands) 1999 1998 1997
---- ---- ----
Income $ 2,556 2,591 2,499
Stockholders' equity, for net
unrealized gains (losses) on
securities available for sale
recognized for financial reporting
purposes (2,304) 425 228
------- ------- ------
Total income taxes $ 252 3,016 2,727
======= ======= ======
37
Notes to Consolidated Financial Statements
The components of federal income tax expense attributable to income before
income tax expense are as follows:
Years ended December 31,
($ In thousands) 1999 1998 1997
---- ---- ----
Current $ 2,770 2,726 2,199
Deferred (214) (135) 300
------- ------- ------
Total income tax expense $ 2,556 2,591 2,499
======= ======= ======
Taxes resulting from securities transactions amounted to a tax expense of
$8 for the year ended December 31, 1999, $64 for the year ended December 31,
1998 and $13 for the year ended December 31, 1997.
The following is a reconciliation of the "expected" income tax expense,
computed by applying the U.S. Federal income tax rate of 34% to
income before income tax expense, with the reported income tax expense:
Years ended December 31,
($ In thousands) 1999 1998 1997
---- ---- ----
Expected income tax expense (34%) $ 3,279 3,192 3,080
Tax-exempt interest income (866) (742) (700)
Nondeductible interest expense 109 97 90
Other, net 34 44 29
------- ------- ------
Reported income tax expense $ 2,556 2,591 2,499
======= ======= ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1999 and 1998 are presented below:
38
National Bankshares, Inc. and Subsidiaries
December 31,
($ In thousands) 1999 1998
---- ----
Deferred tax assets:
Loans, principally due to allowance for loan
losses and unearned fee income $ 786 545
Other real estate owned, principally due to
valuation allowance 32 32
Deferred compensation and other liabilities,
due to accrual for financial reporting
purposes 124 96
Deposit intangibles and goodwill 59 51
Community development corporation related tax
credit 19 22
Other 36 ---
Net unrealized losses on securities available
for sale 1,779 ---
------- -------
Total gross deferred tax assets 2,835 746
Less valuation allowance --- ---
------- -------
Net deferred tax assets 2,835 746
Deferred tax liabilities:
Bank premises and equipment, principally due
to differences in depreciation (121) (102)
Securities, due to differences in discount
accretion (58) (52)
Accrued late fee income (72) ---
Other assets (62) (63)
Net unrealized gains on securities available
for sale --- (525)
------- -------
Total gross deferred tax liabilities (313) (742)
------- -------
Net deferred tax asset included in other
assets $ 2,522 4
======= =======
The Company has determined that a valuation allowance for the gross
deferred tax assets is not necessary at December 31, 1999 and 1998 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.
39
Notes to Consolidated Financial Statements
Note 11: Restrictions on Payments of Dividends and Capital Requirements
Bankshares' principal source of funds for dividend payments is dividends
received from its subsidiary banks. For the years ended December 31, 1999,
1998 and 1997, dividends received from subsidiary banks were $10,538, $5,341
and $2,712, respectively. Additional funds dividended to the parent in 1999
were used primarily for a common stock repurchase.
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,
1999, retained net income which was free of such restriction at NBB amounted to
approximately $198. There was no retained income free of this restriction at
BTC at December 31, 1999.
Bankshares and its subsidiaries are subject to various regulatory capital
requirements administered by the bank regulatory agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Bankshares and its subsidiaries must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Bankshares' and its subsidiaries' capital amounts and
classification are also subject to qualitative judgments by regulators about
components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bankshares and its subsidiaries to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1999, that Bankshares and its subsidiaries meet all capital adequacy
requirements to which they are subject.
Bankshares' and its subsidiaries' actual regulatory capital amounts and
ratios are also presented in the following tables.
40
National Bankshares, Inc. and Subsidiaries
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
------ ----------- ------------
($ In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1999
Total capital (to risk
weighted assets)
Bankshares consolidated $58,433 18.3% 25,552 8.0% N/A N/A
NBB 29,320 14.1% 16,682 8.0% 20,853 10.0%
BTC 26,630 23.7% 8,998 8.0% 11,247 10.0%
Tier I capital (to risk
weighted assets)
Bankshares consolidated $55,202 17.3% 12,776 4.0% N/A N/A
NBB 27,222 13.1% 8,341 4.0% 12,512 6.0%
BTC 25,497 22.7% 4,499 4.0% 6,748 6.0%
Tier I capital (to
average assets)
Bankshares consolidated $55,202 11.7% 18,957 4.0% N/A N/A
NBB 27,222 9.8% 11,135 4.0% 13,919 5.0%
BTC 25,497 12.7% 8,019 4.0% 10,023 5.0%
To Be Well
Capitalized
Under Prompt
Corrective
For Capital Action
Adequacy Provisions
Actual Purposes ------------
------ -----------
($ In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1998
Total capital (to risk
weighted assets)
Bankshares consolidated $61,216 22.4% 21,819 8.0% N/A N/A
NBB 30,411 16.5% 14,747 8.0% 18,433 10.0%
BTC 28,284 31.8% 7,112 8.0% 8,890 10.0%
Tier I capital (to risk
weighted assets)
Bankshares consolidated $58,537 21.5% 10,910 4.0% N/A N/A
NBB 28,511 15.5% 7,373 4.0% 11,060 6.0%
BTC 27,505 30.9% 3,536 4.0% 5,334 6.0%
Tier I capital (to
average assets)
Bankshares consolidated $58,537 13.4% 17,457 4.0% N/A N/A
NBB 28,511 11.1% 10,292 4.0% 12,865 5.0%
BTC 27,505 15.6% 7,068 4.0% 8,835 5.0%
41
Notes to Consolidated Financial Statements
As of December 31, 1999, the most recent notifications from the
appropriate regulatory authorities categorized Bankshares and its subsidiaries
as adequately capitalized under the regulatory framework for prompt corrective
action. To be categorized as adequately capitalized, Bankshares and its
subsidiaries must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table. There are no conditions or
events since those notifications that management believes have changed
Bankshares' and its subsidiaries' category.
42
National Bankshares, Inc. and Subsidiaries
Note 12: Parent Company Financial Information
Condensed financial information of Bankshares (Parent) is presented below:
Condensed Balance Sheets
December 31,
($ In thousands, except share and
per share data.) 1999 1998
---- ----
Assets Cash due from subsidiaries $ 5 28
Securities available for sale
(note 3) 2,292 2,521
Investment in subsidiaries, at
equity 50,302 58,139
Refundable income taxes due
from subsidiaries 59 30
Other assets 85 30
-------- --------
Total assets $ 52,743 60,748
======== ========
Liabilities Other liabilities $ 20 65
and -------- --------
Stockholders' Common stock subject to ESOP
Equity put option (note 8) --- 2,180
-------- --------
Stockholders' equity (notes 9,
10, 11 and 17):
Preferred stock of no par
value. Authorized
5,000,000 shares; none
issued and outstanding --- ---
Common stock of $2.50 par
value. Authorized
5,000,000 shares; issued
and outstanding 3,516,977
shares in 1999 and 3,792,833
in 1998 8,792 9,482
Retained earnings 47,384 50,182
Accumulated other
comprehensive income (loss) (3,453) 1,019
Common stock subject to ESOP
put option (77,301 shares at
$28.20 per share in 1998)
(note 8) --- (2,180)
------- --------
Total stockholders' equity 52,723 58,503
Commitments and contingent
liabilities (notes 6, 8, and 14)
------- --------
Total liabilities and
stockholders' equity $52,743 60,748
======= ========
43
Notes to Consolidated Financial Statements
Condensed Statements of Income and Comprehensive Income
Years ended December 31,
($ In thousands) 1999 1998 1997
---- ---- ----
Income Dividends from subsidiaries
(note 11) $10,538 5,341 2,712
Interest on securities - taxable 17 29 ---
Interest on securities -
nontaxable 118 24 ---
------- ------ ------
10,673 5,394 2,712
Expenses Other expenses 194 173 125
------- ------ ------
Income before income tax benefit
and equity in undistributed net
income (distributions in excess
of equity in net income) of
subsidiaries 10,479 5,221 2,587
Applicable income tax benefit 59 47 42
------- ------ ------
Income before equity in
undistributed net income
(distributions in excess of
equity in net income) of
subsidiaries 10,538 5,268 2,629
Equity in undistributed net
income (distributions in
excess of equity in net
income) of subsidiaries (3,450) 1,530 3,931
------- ------ ------
Net income 7,088 6,798 6,560
------- ------ ------
Other comprehensive income
(loss), net of income taxes:
Net unrealized gains
(losses) on securities
available for sale
(notes 1(R), 1(S) and 18):
Arising during the year (4,472) 356 442
Cumulative accounting change --- 469 ---
------- ------ ------
Total other comprehensive
income (loss) (4,472) 825 442
======= ------ ------
Comprehensive income $ 2,616 7,623 7,002
======= ====== ======
44
National Bankshares, Inc. and Subsidiaries
Condensed Statements of Cash Flows
Years ended December 31,
($ In thousands) 1999 1998 1997
---- ---- ----
Cash Flows Net income $ 7,088 6,798 6,560
from Adjustments to reconcile net
Operating income to net cash provided
Activities by operating activities:
(Equity in undistributed
net income) distributions
in excess of equity in
net income of subsidiaries 3,450 (1,530) (3,931)
Amortization of premiums
and accretion of
discounts, net 7 4 ---
(Increase) decrease in
refundable income taxes
due from subsidiaries (29) (8) 3
Increase in other assets (10) (30) ---
Increase (decrease) in
other liabilities (45) 22 (4)
------- ------- ------
Net cash provided by
operating activities 10,461 5,256 2,628
------- ------- ------
Cash Flows Purchases of securities
from available for sale (207) (4,534) ---
Investing Maturities of securities
Activities available for sale 299 2,044 ---
------- ------- ------
Net cash provided by
(used in) investing
activities 92 (2,490) ---
------- ------- ------
Cash Flows Cash dividends paid (2,814) (2,807) (2,579)
from Common stock repurchase (7,762) --- ---
Financing ------- ------- ------
Activities
Net cash used in
financing activities (10,576) (2,807) (2,579)
------- ------- ------
Net increase (decrease) in
cash (23) (41) 49
Cash due from subsidiary
at beginning of year 28 69 20
------- ------- ------
Cash due from subsidiary
at end of year $ 5 28 69
======= ======= ======
45
Notes to Consolidated Financial Statements
Note 13: Supplemental Cash Flow Information
The Company paid $14,199, $14,003 and $13,084 for interest and $2,941,
$2,631 and $2,719 for income taxes, net of refunds, in 1999, 1998 and 1997,
respectively. Noncash investing activities consisted of $978, $638 and $679 of
loans charged against the allowance for loan losses in 1999, 1998 and 1997,
respectively. Noncash investing activities also included $177 in 1999, $382 in
1998 and $159 in 1997 of loans transferred to other real estate owned. In
addition, for the years ended December 31, 1999, 1998 and 1997, noncash
investing activities included changes in net unrealized gains (losses) on
securities available for sale of ($6,776), $1,250 and $670, respectively,
changes in deferred tax assets included in other assets of $2,304, ($425) and
($228), respectively, and changes in net unrealized gains (losses) on
securities available for sale included in stockholders' equity of ($4,472),
$825 and $442, respectively. Securities, classified as held to maturity,
totaling approximately $20,516, were transferred to securities available for
sale in 1998. This was in accordance with the reassessment of the
classification of securities allowed by Statement No. 133 "Accounting for
Derivative Instruments and Hedging Activities," which was adopted by the
Company on October 1, 1998.
Note 14: Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated
balance sheets. The contract amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss, in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit, is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The Company may require collateral or other security to support the
following financial instruments with credit risk:
December 31,
($ In thousands) 1999 1998
---- ----
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $52,932 53,498
======= =======
Standby letters of credit $ 5,109 3,320
======= =======
Mortgage loans sold with potential
recourse $33,489 39,697
======= =======
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
46
National Bankshares, Inc. and Subsidiaries
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 approximately equally divided between fixed and variable
rate in nature, except for 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 1999, the Company originated $31,538 and sold $33,489 to investors, compared
to $41,472 originated and $39,697 sold in 1998. 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 15: Concentrations of Credit Risk
The Company does a general banking business, serving the commercial,
agricultural and personal banking needs of its customers. NBB's trade
territory, commonly referred to as the New River Valley, consists of Montgomery
and Giles Counties and the City of Galax, 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, 1999 and 1998, approximately $130,000 and $94,000,
respectively, of the loan portfolio was concentrated in commercial real estate.
This represents approximately 44% and 39% of the loan portfolio at December 31,
1999 and 1998, respectively. Included in commercial real estate at December
31, 1999 and 1998 was approximately $85,000 and $64,000, respectively, in loans
47
Notes to Consolidated Financial Statements
for college housing and professional office buildings. Loans secured by
residential real estate were approximately $74,000 and $67,000 at December 31,
1999 and 1998, respectively. This represents approximately 25% and 28% of the
loan portfolio at December 31, 1999 and 1998, respectively. Loans secured by
automobiles were approximately $33,000 and $32,000 at December 31, 1999 and
1998, respectively. This represents approximately 11% of the loan portfolio at
December 31, 1999 and 13% at December 31, 1998
The Company has established operating policies relating to the credit
process and collateral in loan originations. Loans to purchase real and
personal property are generally collateralized by the related property and with
loan amounts established based on certain percentage limitations of the
property's total stated or appraised value. Credit approval is primarily a
function of collateral and the evaluation of the creditworthiness of the
individual borrower or project based on available financial information.
Interest-bearing deposits with banks represent deposits with the Federal Home
Loan Bank of Atlanta. Management considers the concentration of credit risk to
be minimal.
Note 16: Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments at
December 31, 1999 and 1998 are as follows:
December 31,
1999 1998
---- ----
Carrying Estimated Carrying Estimated
($ In thousands) Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial assets:
Cash and due from banks $ 13,311 13,311 14,421 14,421
Interest-bearing
deposits 9,219 9,219 7,027 7,027
Federal funds sold 2,800 2,800 5,090 5,090
Securities 137,492 137,341 166,754 167,229
Mortgage loans held for
sale 229 229 2,180 2,180
Loans, net 291,562 287,504 236,578 241,064
-------- -------- ------- --------
Total financial assets $454,613 450,404 432,050 437,011
======== ======== ======= ========
Financial liabilities:
Deposits $407,187 407,328 382,696 384,080
Other borrowed funds 10,460 10,460 214 214
-------- -------- ------- --------
Total financial
liabilities $417,647 417,788 382,910 384,294
======== ======== ======= ========
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
48
National Bankshares, Inc. and Subsidiaries
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 17: Business Combinations
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 was subject to regulatory approval, closed in the second
quarter of 1998. It did not have a material impact on the Company's results of
operations or liquidity.
Note 18: Other Comprehensive Income (Loss)
Other comprehensive income (loss) net of income taxes and net of
reclassification adjustments between net income and other comprehensive income
(loss) relating to securities available for sale are reported in the
Consolidated Statements of Income and Comprehensive Income. The information
that follows discloses the reclassification adjustments and the income taxes
related to securities available for sale that are included in other
comprehensive income, net of income taxes.
($ In thousands)
1999 1998
---- ----
Net unrealized gains (losses) on
securities available for sale:
Net unrealized holding gains
(losses) during the year $(6,756) 1,282
Less reclassification
adjustments for gains
included in net income (20) (32)
Income tax (expense) benefit 2,304 (425)
------- ------
Total other comprehensive
income (loss) $(4,472) 825
======= ======
Note 19: Future Accounting Considerations
There have been no recent accounting pronouncements issued that would have a
material effect on the consolidated financial position, results of operations
or liquidity of the Company or require additional disclosures.
49
Selected Quarterly Data (Unaudited)
The following is a summary of the unaudited quarterly results of
operations for the years ended December 31, 1999 and 1998:
1999
($ In thousands, except First Second Third Fourth
per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Income Statement Data:
Interest income $ 8,089 8,170 8,416 8,928
Interest expense 3,436 3,392 3,506 3,869
------- ------ ------ ------
Net interest income 4,653 4,778 4,910 5,059
Provision for loan losses 232 237 371 560
Noninterest income 766 856 956 934
Noninterest expense 2,926 2,946 3,025 2,971
Income taxes 582 651 666 657
------- ------ ------ ------
Net income $ 1,679 1,800 1,804 1,805
======= ====== ====== ======
Per Share Data:
Basic net income per share $ 0.44 0.50 0.51 0.51
Cash dividends per share --- 0.39 --- 0.41
Book value per share $ 16.21 14.80 15.16 14.99
Selected Ratios:
Return on average assets 1.54% 1.61% 1.60% 1.53%
Return on average equity 11.12% 12.55% 13.64% 13.50%
Average equity to average
assets 13.82% 12.81% 11.70% 11.37%
50
1998
($ In thousands, except First Second Third Fourth
per share data) Quarter Quarter Quarter Quarter
------- ------- ------- -------
Income Statement Data:
Interest income $ 7,571 7,923 8,150 8,184
Interest expense 3,296 3,458 3,590 3,584
------- ------ ------ ------
Net interest income 4,275 4,465 4,560 4,600
Provision for loan losses 21 73 225 305
Noninterest income 666 826 754 928
Noninterest expense 2,696 2,850 2,780 2,735
Income taxes 616 666 638 671
------- ------ ------ ------
Net income $ 1,608 1,702 1,671 1,817
======= ====== ====== ======
Per Share Data:
Basic net income per share $ 0.42 0.45 0.44 0.48
Cash dividends per share --- 0.36 --- 0.38
Book value per share $ 15.18 15.26 15.88 16.00
Selected Ratios:
Return on average assets 1.63% 1.63% 1.56% 1.65%
Return on average equity 11.49% 11.92% 11.37% 11.80%
Average equity to average
assets 14.16% 13.71% 13.74% 14.02%
51
National Bankshares
Mission Statement
National Bankshares, Inc. strives to be an exceptional community bank
holding company dedicated to providing shareholder value by offering
financial services to customers through subsidiary financial
instituions and affiliated companies in an efficient, friendly,
personalized and cost-effective manner. We recognize that to do
this, our financial institutions must retain the ability to make
decisions locally and must actively participate in the 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.
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 County Advisory Board Paul B. Collins, John H. Givens, Jr., Ross E.
Martin, Kenneth L. Rakes, Scarlet B. Ratcliffe, H. M. Scanland, Jr., Buford
Steele
Galax Advisory Board Charles L. Cox, Willie T. Greene, Sr., Jerry R. Mink,
Judy C. Wherry, James A. Williams, Jr.
52
National Bankshares
Board of Directors
Picture of Picture of
"William T. Peery, Charles L. "Cameron L. Forrester, James A.
Boatwright and James G. Rakes" Deskins, Sr. and L. Allen Bowman"
William T. Peery Cameron L. Forrester
Cargo Oil Co., Inc. President Bank of Tazewell County, President
Charles L. Boatwright and Chief Executive Officer
Vice Chairman of the Board, James A. Deskins, Sr.
Physician Deskins Super Market, Inc., Retired
James G. Rakes President
Chairman of the Board, National L. Allen Bowman
Bankshares, Inc., President and Litton Poly-Scientific, Retired
Chief Executive Officer, The President
National Bank, President and
Chief Executive Officer
Picture of Alonzo A. Crouse
"Alonzo A. Crouse, Paul A. Bank of Tazewell County, Executive
Duncan and Jeffrey R. Stewart" Vice President, Secretary and
Cashier
Paul A. Duncan
Holiday Motor Corp., President
Jeffrey R. Stewart
Educational Consultant
53
NBB
The National Bank Board of Directors
Picture of
"NBB Board of Directors"
Seated, from left: J. Lewis Webb, Jr., Dentist; Jeffrey R. Stewart, Chairman of
the Board, Educational Consultant; Paul A. Duncan, Holiday Motor Corp.,
President. Standing, from left: Charles L. Boatwright, Physician; James G.
Rakes, National Bankshares, Inc., Chairman, The National Bank, President and
Chief Executive Officer; L. Allen Bowman, Vice Chairman of the Board, Litton
Poly-Scientific, Retired President; James M. Shuler, Virginia House of
Delegates, Delegate; Paul P. Wisman, Grundy National Bank, Vice President of
Investments, Nicewonder Investments, Manager of Assets.
BTC
Bank of Tazewell County Board of Directors
Picture of
"BTC Board of Directors"
Charles E. Green, III, Registered Representative, The Equitqble Life Assurance
Society of the United States; E.P. Greever, Retired; William T. Peery, Chairman
of the Board, Cargo Oil Co., Inc. President; William H. VanDyke, Candlewax
Smokeless Fuel Co., Vice President; Alonzo A. Crouse, Bank of Tazewell County,
Executive Vice President, Secretary and Cashier; James S. Gillespie, Jr., Jim
Sam Gillespie Farm, President; Carl C. Gillespie, Honorary Chairman of the
Board, Attorney; James A. Deskins, Sr., Deskins Super Market, Inc., Retired
President; Jack Harry, Harry's Enterprises, Inc., President; J. M. Pope,
Retired; Cameron L. Forrester, Bank of Tazewell County, President and Chief
Executive Officer; James G. Rakes, National Bankshares, Inc., Chairman, The
National Bank, President and Chief Executive Officer.
54
Corporate Information
National Bankshares, Inc. Officers
James G. Rakes, Chairman F. Brad Denardo
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
Annual Meeting
The Annual Meeting of Stockholders will be held on Tuesday, April 11, 2000 at
3:00 p.m. at the Best Western Red Lion Inn, 900 Plantation Road, Blacksburg,
Virginia.
Corporate Stock
National Bankshares, Inc. common stock trades on the Nasdaq Stock Market under
the symbol "NKSH".
Financial Information
Investors and analysts seeking financial information about National Bankshares,
Inc. should contact:
James G. Rakes, Chairman or J. Robert Buchanan
President and Chief Executive Officer Treasurer
(540)951-6300 or (800)552-4123 (540)951-6300 or (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)951-6300 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.
101 Hubbard Street
Blacksburg, VA 24060
P.O. Box 90002
Blacksburg, VA 24062-9002
55