National Bankshares
2000 Annual Report
Financial Highlights
$ In thousands, except per share data
2000 1999 1998
- --------------------------------------------------------------------------------
Net income $ 7,309 7,088 6,798
Basic and diluted net income per share 2.08 1.96 1.79
Cash dividends per share 0.85 0.80 0.74
Book value per share 17.04 14.99 16.00
Loans, net $ 355,795 291,562 236,578
Total securities 156,344 137,492 166,754
Total assets 593,497 472,134 445,166
Total deposits 530,648 407,187 382,696
Stockholders' equity 59,834 52,723 58,503
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
Boards of Directors...........................................................38
Corporate Information.........................................................40
1
To Our Stockholders
Photograph of
"Radford Branch Office"
When I look back on the year 2000 at National Bankshares, Inc., I will
remember it as a year in which your company was presented with an opportunity
that was too promising to be ignored. In mid-Summer of 2000 we learned that
AmSouth Bank of Birmingham, Alabama was interested in selling six of its
Virginia branch offices. These offices are located along the Interstate 81
corridor, from Radford to Abingdon. Although the simultaneous acquisition of six
new offices is logistically challenging for a company of our size, our Board of
Directors and employees unanimously agreed that this was a challenge that we
definitely should accept. In late August we formally agreed to purchase the
loans and deposits and take over the office locations of the six AmSouth
offices. We decided that the offices in Radford, Dublin and Pulaski should be
operated by The National Bank and that the Wytheville, Marion and Abingdon
offices would be managed by Bank of Tazewell County.
Photograph of
"Ribbon Cutting at new Radford branch location"
There are many factors that made the AmSouth transaction attractive to
National Bankshares. Among these is the fact that the experienced bankers who
had been with AmSouth would join our banks and become our employees. Also, most
of the AmSouth offices are in localities that are expansion targets in our
long-range plans. When the transaction closed on November 8, the execution of
those long-range plans advanced considerably. On Friday November 9, NBB and BTC
opened for business in six new communities. We now have 23 total office
locations throughout Southwest Virginia. The hard work of employees and the
goodwill of our new customers allowed us to meet the logistical challenges of
the acquisition. The greater challenge still remains of maximizing the potential
of the purchase over the long term. We are confident that our style of community
banking and our friendly, knowledgeable employees will help us meet that
challenge as well.
Photograph of
"Lobby of new BTC Wytheville Office"
2
Photograph of
"Ribbon cutting of new BTC Wytheville Office"
The past year's emphasis on the AmSouth acquisition did not keep us from
completing several other important projects. The National Bank added a useful
software enhancement to the host computer that serves both subsidiary banks. In
August, Bank of Tazewell County opened a new office in Richlands, Virginia,
thereby expanding market coverage in its home county. Finally, in September, BTC
entered into an agreement to purchase the deposits and consumer loans of the
Bluefield, Virginia office of First Union National Bank. This purchase is
scheduled to close in the first quarter of 2001.
Quote
"At National Bankshares, Inc. we respect our heritage
while focusing intently on the future"
When I think back on 2000, I am also likely to remember the unsettled
financial environment. Even with economic uncertainty, we are pleased to report
that National Bankshares enjoyed yet another record year for profits. Net income
for 2000 was nearly $7.31 million, up by 3.12% when compared with 1999. Basic
net income per share ended the year at $2.08, versus $1.96 for 1999. We
recognized the importance of our stockholders' investment by increasing cash
dividends per share from $0.80 per share last year to $0.85 in 2000. Partly
reflecting the effects of the AmSouth acquisition, National Bankshares ended
2000 with over $593 million in total assets and nearly $356 in net loans.
If the year just past offered National Bankshares future opportunities, the
years ahead are sure to offer many challenges. Your company, through The
National Bank and Bank of Tazewell County, will continue to focus on providing
exceptional customer service, while being alert to advances in technology. We
understand that we must be large enough to meet our customers' changing
financial needs, without losing the personal service advantages of real
community banking. At National Bankshares, Inc. we respect our heritage while
focusing intently on the future. I want to thank our stockholders, directors and
employees for their many contributions to the success of our company.
Picture of /s/James G. Rakes
"James G. Rakes"
James G. Rakes
Chairman of the Board
President and Chief Executive Officer
3
National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data
$ In thousands, except per share data. Years ended December 31,
2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------
Selected Interest income $ 38,358 33,603 31,828 29,797 28,647
Income Interest expense 18,163 14,203 13,928 13,106 13,036
Statement Net interest income 20,195 19,400 17,900 16,691 15,611
Data: Provision for loan losses 1,329 1,400 624 435 331
Noninterest income 4,082 3,512 3,174 2,834 2,693
Noninterest expense 12,876 11,868 11,061 10,031 9,515
Income taxes 2,763 2,556 2,591 2,499 2,341
Net income 7,309 7,088 6,798 6,560 6,117
Per Share Basic and diluted net income $ 2.08 1.96 1.79 1.73 1.61
Data: Cash dividends declared 0.85 0.80 0.74 0.68 0.62
Book value per share (1) 17.04 14.99 16.00 14.73 13.56
Selected Loans, net $ 355,795 291,562 236,578 214,552 193,598
Balance Sheet Total securities 156,344 137,492 166,754 149,974 171,244
Data at End Total assets 593,497 472,134 445,166 402,907 388,850
of Year: Total deposits 530,648 407,187 382,696 344,867 334,584
Stockholders' equity 59,834 52,723 58,503 54,029 49,801
Selected Loans, net $ 310,624 266,431 225,613 204,540 177,419
Balance Sheet Total securities 142,686 151,424 152,432 157,179 177,403
Daily Total assets 500,381 454,189 420,988 395,932 388,045
Averages: Total deposits 433,673 391,583 359,970 339,439 335,938
Stockholders' equity (1) 55,682 56,196 58,282 53,712 49,459
Selected Return on average assets 1.46 1.56 1.61 1.66 1.58
Ratios Return on average equity (1) 13.13 12.61 11.66 12.21 12.37
Dividend payout ratio 40.87 39.70 41.29 39.31 37.55
Average equity to
average assets(1) 11.13 12.37 13.84 13.57 12.75
(1) Includes the amount related to common stock subject to ESOP put option
excluded from stockholders' equity on the Consolidated Balance Sheets in 1998,
1997 and 1996.
Graph of
"Cash Dividends Per Share"
2000 1999 1998 1997 1996
- ---------------- --------------- --------------- --------------- ---------------
.85 .80 .74 .68 .62
4
Management's Discussion and Analysis
($ In Thousands, except per share data)
Performance Summary
Net income in 2000 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 $7,309, an increase of $221 or 3.12%
over the previous year. This produced a return on average assets and a return on
average equity of 1.46% and 13.13%, respectively.
Net income for the Company for 1999 was $7,088, an increase of $290 or 4.27%
over 1998. The return on average assets and return on average equity for 1999
were 1.56% and 12.61%, respectively.
The Company's net income for 1998 was $6,798 which produced a return on
average assets of 1.61% and a return on average equity of 11.66%.
Net income per share increased steadily over the three-year period rising
from $1.79 per share in 1998 to $1.96 in 1999 and $2.08 in 2000.
While net income increased by $221 in 2000, the return on average assets
declined by 10 basis points. This decrease was primarily due to a substantial
increase in assets. Asset growth was the result of aggressive marketing efforts
for deposits combined with the purchase of six branches from AmSouth Bank of
Birmingham, Alabama (AmSouth). The return on equity, however, rose in part due
to the increased level of earnings and in part due to a decline in average
equity that had its origins in a 1999 stock repurchase.
Graph of
"Net Income"
(In Millions)
2000 1999 1998 1997 1996
- ---------------- ------------- ------------- ------------- --------------
$7.3 7.1 6.8 6.6 6.1
Net income for 2000 increased 3.12% over 1999; however, total asset growth
increased at a rate of approximately 26%, resulting in a 6.41% 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 in 1999 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 2000 was 40.87%, which compares to 39.70% in 1999 and 41.29% in
1998.
Net Interest Income
Net interest income for 2000 was $20,195, an increase of $795 or 4.10% over
1999. In 1999, net interest income was $19,400, up $1,500 or 8.38% from 1998 net
interest income of $17,900.
The net yield on earning assets for 2000 was 4.53%. In 1999 and 1998, the
net yield on earning assets was 4.82% and 4.77%, respectively.
The yield on earning assets for 2000 was 8.36%, down 18 basis points from
the previous year. At the same time the cost to fund earning assets, which was
3.83%, increased 50 basis points. This produced a net decrease in the net
interest margin of 32 basis points. This decrease was due primarily to the
rising interest rate environment that occured in 2000.
In January 2001, the Federal Reserve Bank announced a 100 basis point cut in
the discount rate. Given national economic conditions, management anticipates
further interest rate reductions, which will eventually translate into reduced
funding costs for the Company. Hence, management expects a gradual improvement
in the net yield on earning assets to begin in 2001.
In 1999, the Company for the year experienced substantial loan growth, which
in turn contributed significantly to the increase in net interest income for the
year. 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.
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.
5
At December 31, 2000, the Company's investment portfolio contained a
substantial amount of longer term securities with call features. Due to the
higher interest rate level that existed in 1999 and 2000 the securities were not
called as anticipated. At the time, the net unrealized losses made the sale of
the securities impractical. This problem has to a large extent abated as there
has been substantial improvement in market values. With the lower interest rate
environment that management anticipates, the market value should continue to
improve, allowing more flexibility to manage the Company's asset and liability
position through use of the available for sale portfolio.
Another advantage for the Company can be found in its overall liability
sensitive position. Providing that the expected period of declining rates in
2001 occurs, the Company's interest bearing liabilities will reprice downward at
a faster rate than earning assets, producing additional net interest income.
The Company uses simulation analysis to forecast its balance sheet and
monitor interest rate sensitivity. One test is a shock analysis that measures
the effect of a hypothetical, immediate and parallel shift in interest rates.
The following table shows the results of a rate shock of 100, 200, and 300 basis
points and the effects on net income and return on average assets and return on
average equity at December 31, 2000.
Simulation analysis allows the Company to test asset and liability
management strategies under rising and falling rate conditions. As a part of the
simulation process, certain estimates and assumptions must be made. These
include, but are not limited to, asset growth, the mix of assets and
liabilities, rate environment, local and national economic conditions. Asset
growth and the mix of assets can to a degree be influenced by management. Other
areas such as the rate environment and economic factors cannot be controlled.
For this reason actual results may vary materially from any particular forecast
or shock analysis.
This shortcoming is offset to a degree by the periodic re-forecasting of the
balance sheet to reflect current trends and economic conditions. Shock analysis
must also be updated periodically as a part of the asset and liability
management process.
($ in thousands, except for percent data)
Rate Net Return on Return on
Shift Income Average Equity Average Assets
- ------------------------------------------------------------------------------
300 $ 6,541 10.38% 1.10%
200 7,248 11.44% 1.21%
100 7,951 12.48% 1.33%
(-) 100 9,347 14.52% 1.56%
(-) 200 10,039 15.52% 1.68%
(-) 300 10,359 15.97% 1.73%
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 (following page).
Nonperforming loans include nonaccrual loans and restructured loans, but do
not include accruing loans past due 90 days or more. Nonperforming assets for
2000 have decreased $10 from 1999. Nonperforming assets for 1999 decreased by
$18 or 2.74% from the 1998 total of $656.
Net charge-offs to average net loans for the year 2000 were 0.21%, down from
0.31% 1999. Overall asset quality continued to be satisfactory. The provision
for loan losses for 2000 declined by $71 or 5.07% from 1999. Overall
nonperforming assets remained approximately at 1999 levels.
Net charge-offs to average net loans for 1999 were 0.31%, up from 0.17% in
1998. The provision for loan loss for 1999 increased by $776 or 124.36% from
1998. 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 $234. A majority of the charge-offs in the
commercial loan area was due to a single credit, while charge-offs on loans to
individuals consisted of numerous smaller credits.
While past efforts directed at improving asset quality have been largely
successful, management is unable to estimate when and under what exact terms
problem assets will be resolved. Changing economic conditions, the timing and
extent of changes and the ultimate impact on the Company's asset quality is not
within management's ability to predict with any degree of precision.
In addition, precise loss predictions may be difficult to determine because
of the complex circumstances that surround troubled debts.
6
Loan Loss Data Table
($ In thousands)
2000 1999 1998
------------- -------------- --------------
Provision for loan losses $ 1,329 1,400 624
Net charge-offs to average
net loans 0.21% 0.31% 0.17%
Allowance for loan losses
to loans, net of unearned
income and deferred fees 1.08% 1.10% 1.12%
Allowance for loan losses
to nonperforming loans 4,415.91% 1,691.62% 9,567.86%
Allowance for loan losses to
nonperforming assets 618.79% 506.43% 408.38%
Nonperforming assets to
loans, net of unearned
income and deferred fees,
plus other real estate owned 0.17% 0.22% 0.27%
Nonaccrual loans $ 88 151 28
Restructured loans --- 40 ---
Other real estate owned, net 540 447 628
------------- -------------- --------------
Total nonperforming assets $ 628 638 656
============= ============== ==============
Accruing loans past due 90
days or more $ 1,321 1,077 550
============= ============== ==============
Noninterest Income
Noninterest income for 2000 was $4,082, an increase of $570 or 16.23% over
1999. Noninterest income for 1999 was $3,512, up $338 or 10.65% from 1998.
Service charges on deposits for 2000 totaled $1,683, an increase of $288 or
20.65% from 1999. This increase was due primarily to volume, a portion of which
was due to the purchase of six AmSouth Bank branches. Service charges on deposit
accounts in 1999 were up $230 or 19.74% 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. Other service charges and fees are
composed of safe deposit box rent, charges associated with letters of credit and
other miscellaneous items. In 2000, these charges were $348, an increase of $69
or 24.73% from 1999. For 1999, these charges totaled $279, an increase of $48 or
20.78% from 1998.
Trust income for 2000 was $885 which represents a decrease of $42 or 4.53%
over 1999. In 1999, trust income was $927, an increase of $153 or 19.77% over
1998. Factors affecting trust income include the number of accounts managed, the
average value of the accounts managed, and the types of trust accounts. Trust
income declined in 2000 because fewer estates were settled than in the prior
year. 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 2000, credit card income totaled $1,012, an increase of $210 or
26.18% over 1999. The increase in this category was attributable to an increase
in debit card activity. Credit card income for 1999 was $802, up $149 or 22.82%
over 1998. The increase in 1999 was attributable to increases in merchant income
and debit card processing fees. 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. These increases result in higher transaction volume.
Net realized securities gains were $9 in 2000, down $15 from 1999. In 1999,
net securities gains were $24, down $164 or 87.23% from 1998. Gains and losses
can occur as a result of portfolio restructuring, securities called before
maturity and certain market adjustments.
Noninterest Expense
Noninterest expense in 2000 totaled $12,876, an increase of $1,008 or 8.49%
from 1999. In 1999, noninterest expense was $11,868, an increase of $807 or
7.30% from 1998. In November of 2000 the Company acquired six AmSouth Bank
branches. This acquisition affected salaries and benefits, occupancy and data
processing expenses in 2000. These categories are expected to increase
significantly in 2001 as the AmSouth transaction was only in effect for two
months of 2000.
Salaries and benefits in 2000 increased $312 or 5.16% from 1999. In 1999,
salaries and benefits expense totaled $6,048, up $224 or 3.85% from 1998.
As stated above, largely because of the addition of the six AmSouth Bank
branches late in 2000, occupancy and furniture and fixtures expense increased
$163 or 14.15% for 2000 when compared to 1999.
7
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. The increase was also due to the
addition of the Company's new Hubbard Street corporate office building placed
into service in the third quarter of 1999.
"Total Assets" Graph
(In Millions)
2000 1999 1998 1997 1996
- ---------------- ------------- ------------ -------------- ---------------
$593.5 472.1 445.2 402.9 388.9
Data processing and ATM expense was $931 for 2000, an increase over 1999 of
$42 or 4.72%. This increase is mostly attributable to a host computer software
upgrade and to the costs associated with the AmSouth acquisition.
Data processing and ATM expense was $889 for 1999, an increase 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.
The cost of Federal Deposit Insurance was $86 in 2000, an increase of $39
from 1999. 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 1999, the Company's affiliates paid a premium of $47, an increase
of $10 over 1998.
Credit card processing expense for 2000 was $1,025, an increase of $313 or
43.96% over 1999. Included in credit card expenses is approximately $192 in
losses incurred by the Company's NBB affiliate. The loss was the result of
charged-back items from a single merchant. The remainder of the increase was
attributable to volume. In 1999, credit card processing expense was $712, an
increase of $113 or 18.86% over 1998. 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 2000 were $83, an increase of $57
from 1999. In 1999, net costs of other real estate owned were $26, decreasing
$11 or 29.73% from 1998.
Other operating expenses were $3,038 in 2000, up $82 or 2.77% from 1999,
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 1999 was $2,956, increasing $197 or 7.14% from 1998.
Income Taxes
With higher pre-tax income in 2000, a $207 increase in income tax expense
resulted when compared to 1999. 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 2000, 1999 and 1998 were 27.43%, 26.50% and
27.60%, 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.
Balance Sheet
Total assets at year-end 2000 were $593,497 which represents an increase of
$121,363 or 25.71% 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.
In late 2000 the Company acquired six AmSouth Bank branches. The transaction
resulted in an increase of approximately $94,000 in deposits and $42,000 in
loans. The additional liquidity provided by the acquisition allowed the Company
to repay $10,000 in funds borrowed from the Federal Home Loan Bank referred to
in the 1999 discussion. At year-end 2000 the Company had a total of $42,669 in
federal funds sold and deposits in the Federal Home Loan Bank.
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 of 1999 by borrowing approximately $10,000
from the Federal Home Loan Bank.
Loans
Loans, net of unearned income and deferred fees, grew by $64,888 or 22.01%
in 2000. Commercial loans grew by $14,543 or 9.74%, with loans to individuals
increasing by $36,351 or 49.24%. Real estate mortgage loans grew by $12,334, an
increase of 20.97%. Real estate construction loans grew by 14.02%. This growth
was largely attributable to the AmSouth Bank acquisition, which added
approximately $42,000 to the loan portfolio.
8
"Net Loans" Graph
2000 1999 1998 1997 1996
- ---------------- ------------- ------------- -------------- ---------------
$355.8 291.6 236.6 214.6 193.6
In another transaction planned for the first quarter of 2001, the Company
will acquire approximately $11,000 in loans in connection with the purchase of a
branch office in Bluefield, Virginia from First Union National Bank.
In 1999, loans, net of unearned income and deferred fees, grew by $55,536 or
23.21%. Commercial loans, which grew by $38,877 or 35.18%, accounted for the
largest portion of the increase.
The Company engages in the origination and sale of mortgage loans in the
secondary market. In 2000 and 1999, the Company originated $20,129 and $31,538,
respectively, and sold $20,358 and $33,489 in 2000 and 1999, respectively, of
mortgage loans.
Securities
With the completion of the AmSouth transaction and because of aggressive
deposit procurement efforts, the Company generated excess liquidity in 2000. A
portion of these excess funds was invested in the available for sale portfolio,
which increased by $9,940 or 8.73%, and a portion was invested in the held to
maturity category, which increased by $8,912 or 37.69%.
As previously mentioned the net unrealized loss in the available for sale
portfolio decreased significantly in 2000. At December 31, 2000, net securities
loss, net of deferred tax benefit, was approximately ($575) compared to ($3,453)
at December 31, 1999. Further improvement is expected due to the declining rate
environment anticipated by management in 2001.
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.)
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, 2000 and 1999, the Company had no investment concentrations
in any single issues (excluding U.S. Government) that exceeded ten percent of
capital.
Deposits
As a result of aggressive marketing efforts and the acquisition of six
AmSouth Bank branches, total deposits grew by $123,461 or 30.32% in 2000. The
AmSouth purchase accounted for approximately $94,000 of the increase.
The planned first quarter of 2001 acquisition of the First Union National
Bank branch in Bluefield, Virginia will add approximately $39,000 to deposits.
(See Business Combination for more information).
At year-end 1999, total deposits were $407,187, which represented a $24,491
or 6.40% increase over 1998. In the third quarter of 1999, the 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 benefited from the event, acquiring new
deposits in excess of $20,000. This event accounted for the majority of the
Company's deposit growth in 1999.
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 $12,068, which includes $2,156 of
structured notes. In addition, the Company has investments in nonmortgage-backed
structured notes with fair value of approximately $1,808. 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
credit risk when a loan is granted and monitors 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 the 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.
9
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 2000 and 1999.
In 2000, the Company's liquidity greatly improved. In the first half of 2000
the Company aggressively marketed its deposit products. In the fourth quarter it
acquired six AmSouth Bank branches. The result of these efforts allowed the
Company to repay a $10,000 advance from the Federal Home Loan Bank and to end
2000 with $42,669 in federal funds sold and deposits in the Federal Home Loan
Bank. Continued improvement in the level of net unrealized gains/losses in the
available for sale securities portfolio due to the previously discussed falling
interest rate environment will provide additional liquidity, though the exact
timing is not known.
In 1999, the Company's liquidity was materially affected by several events.
As previously discussed, the Company's available for sale securities 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 by the building of a new corporate headquarters. Other needs
for cash include the planned building of a new branch by the Company's NBB
subsidiary late in 2001.
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 $9,691 in 2000, decreased by $1,757
from 1999 primarily due to the decrease in accrued interest receivable and the
decrease in mortgage loans held for sale. Net cash flows provided by operating
activities and financing activities for 2000 of $9,691 and $101,902
respectively, were used primarily to fund loan growth.
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.
Capital Resources
Total stockholders' equity increased by $7,111 or 13.49% in the year 2000.
Growth was the result of net income of $7,309, offset by dividends to
shareholders of $2,987. Accumulated comprehensive income increased by $2,878.
Stock in the amount of $89 was repurchased.
Total stockholders' equity decreased $7,986 from 1998 to 1999. 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 and $1,019 at December 31,
1998. 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.
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 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 note 1 of Notes to Consolidated Financial Statements for information
relating to recent accounting pronouncements.
Branch Acquisitions
On November 8, 2000 the Company acquired six branches of AmSouth Bank of
Birmingham, Alabama (AmSouth). Approximately $42,000 in loans and $94,000 in
deposits were acquired. Three of the six branches, located in Radford, Pulaski,
and Dublin, Virginia, are being operated by the Company's NBB affiliate. The
remaining three, located at Wytheville, Abingdon, and Marion, Virginia, are
being operated by the Company's BTC affiliate.
In another move to improve the Company's competitive position, BTC announced
on September 15, 2000 that it will acquire a branch in Bluefield, Virginia from
First Union National Bank. The acquisition will involve the purchase of
approximately $39,000 in deposits and $11,000 in loans. Plans call for the
acquisition to be completed in the first quarter of 2001.
10
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, 2000, there were 1,076 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 2000 and
1999.
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.
Common Stock Market Prices
2000 1999 Dividends per share
---------- --------- ------------ --------- -------- ----------
High Low High Low 2000 1999
---------- --------- ------------ --------- -------- ----------
First Quarter $ 20.50 18.75 $ 26.00 22.00 --- ---
Second Quarter 19.00 15.50 27.50 34.00 0.42 .039
Third Quarter 17.50 16.06 25.00 22.00 --- ---
Fourth Quarter 18.75 15.125 23.50 19.75 0.43 0.41
11
Independent Auditors' Report
The Board of Directors and Stockholders
National Bankshares, Inc.
Blacksburg, Virginia
We have audited the accompanying consolidated balance sheet of National
Bankshares, Inc. and subsidiaries as of December 31, 2000, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of National Bankshares, Inc. for the years
ended December 31, 1999 and 1998 were audited by other auditors whose report,
dated February 11, 2000, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2000 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, 2000, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/Yount, Hyde & Barbour, P.C.
Winchester, Virginia
February 2, 2001
12
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
$ In thousands, except per share data. December 31, 2000 and 1999.
2000 1999
-------------- -------------
Assets Cash and due from banks $ 11,130 13,311
Interest-bearing deposits 13,579 9,219
Federal funds sold 29,090 2,800
Securities available for sale 123,785 113,845
Securities held to maturity (fair value $32,602
in 2000 and $23,496 in 1999) 32,559 23,647
Mortgage loans held for sale --- 229
Loans:
Real estate construction loans 16,726 14,669
Real estate mortgage loans 71,163 58,829
Commercial and industrial loans 163,929 149,386
Loans to individuals 110,176 73,825
--------- ---------
Total loans 361,994 296,709
Less unearned income and deferred fees (2,313) (1,916)
--------- ---------
Loans, net of unearned income and
deferred fees 359,681 294,793
Less allowance for loan losses (3,886) (3,231)
--------- ---------
Loans, net 355,795 291,562
--------- ---------
Bank premises and equipment, net 10,324 8,506
Accrued interest receivable 5,049 4,014
Other real estate owned, net 540 447
Other assets 11,646 4,554
--------- ---------
Total Assets $593,497 472,134
========= =========
Liabilities and Noninterest-bearing demand deposits $ 60,165 54,748
Stockholders' Interest-bearing demand deposits 101,257 88,385
Equity Savings deposits 42,560 44,834
Time deposits 326,666 219,220
--------- ---------
Total deposits 530,648 407,187
--------- ---------
Other borrowed funds 270 10,460
Accrued interest payable 1,538 651
Other liabilities 1,207 1,113
--------- ---------
Total liabilities 533,663 419,411
--------- ---------
Stockholders' equity:
Preferred stock of no par value. Authorized
5,000,000 shares; none issued and outstanding --- ---
Common stock of $2.50 par value. Authorized
5,000,000 shares; issued and outstanding
3,511,877 in 2000 and 3,516,977 shares in 1999 8,780 8,792
Retained earnings 51,629 47,384
Accumulated other comprehensive loss (575) (3,453)
--------- ---------
Total stockholders' equity 59,834 52,723
Commitments and contingent liabilities
--------- ---------
Total liabilities and stockholders'equity $593,497 472,134
========= =========
See accompanying notes to consolidated financial statements.
13
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
$ In thousands, except per share data. Years ended December 31, 2000, 1999 and
1998.
2000 1999 1998
-------------- ------------- -------------
Interest Interest and fees on loans $ 28,326 24,105 21,691
Income Interest on federal funds sold 338 170 345
Interest on interest-bearing deposits 689 269 696
Interest on securities - taxable 6,760 6,820 7,201
Interest on securities - nontaxable 2,245 2,239 1,895
------------ ----------- ------------
Total interest income 38,358 33,603 31,828
------------ ----------- ------------
Interest Interest on time deposits of $100,000 or more 3,455 2,487 2,457
Expense Interest on other deposits 14,080 11,484 11,460
Interest on borrowed funds 628 232 11
------------ ----------- ------------
Total interest expense 18,163 14,203 13,928
------------ ----------- ------------
Net interest income 20,195 19,400 17,900
Provision for loan losses 1,329 1,400 624
------------ ----------- ------------
Net interest income after provision for
loan losses 18,866 18,000 17,276
------------ ----------- ------------
Noninterest Service charges on deposit accounts 1,683 1,395 1,165
Income Other service charges and fees 348 279 231
Credit card fees 1,012 802 653
Trust income 885 927 774
Other income 145 85 163
Realized securities gains, net 9 24 188
------------ ----------- ------------
Total noninterest income 4,082 3,512 3,174
------------ ----------- ------------
Noninterest Salaries and employee benefits 6,360 6,048 5,824
Expense Occupancy and furniture and fixtures 1,315 1,152 998
Data processing and ATM 931 889 771
FDIC assessment 86 47 37
Credit card processing 1,025 712 599
Goodwill amortization 38 38 36
Net costs of other real estate owned 83 26 37
Other operating expenses 3,038 2,956 2,759
------------ ----------- ------------
Total noninterest expense 12,876 11,868 11,061
------------ ----------- ------------
Income before income tax expense 10,072 9,644 9,389
Income tax expense 2,763 2,556 2,591
------------ ----------- ------------
Net income 7,309 7,088 6,798
------------ ----------- ------------
Other comprehensive income (loss), net of
income taxes:
Net unrealized gains (losses) on securities
available for sale:
Arising during the year 2,878 (4,472) 356
Cumulative accounting change --- --- 469
------------ ----------- ------------
Total other comprehensive income
(loss) 2,878 (4,472) 825
------------ ----------- ------------
Comprehensive income $ 10,187 2,616 7,623
============ =========== ============
Basic and diluted net income per
share $ 2.08 1.96 1.79
============ =========== ============
See accompanying notes to consolidated financial statements.
14
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
$ In thousands, except per share data. Years ended December 31, 2000, 1999 and
1998.
Accumulated Common
Other Stock
Comprehensive Subject to
Common Retained Income ESOP Put
Stock Earnings (Loss) Option Total
------------- ------------- ------------ ------------- -------------
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 --- --- 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 --- --- --- 2,180 2,180
------------- ------------- ------------ ------------- -------------
Balances, December 31, 1999 8,792 47,384 (3,453) --- 52,723
Net income --- 7,309 --- --- 7,309
Cash dividends ($0.85 per share) --- (2,987) --- --- (2,987)
Change in net unrealized gains
(losses) on securities available
for sale, net of income tax
expense of $1,483 --- --- 2,878 --- 2,878
Common stock repurchase (12) (77) --- --- (89)
------------- ------------- ------------ ------------- -------------
Balances, December 31, 2000 $ 8,780 51,629 (575) --- 59,834
============= ============= ============ ============= =============
See accompanying notes to consolidated financial statements.
15
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
$ In thousands. Years ended December 31, 2000, 1999 and 1998.
2000 1999 1998
------------- ------------- ------------
Cash Flows Net income $ 7,309 7,088 6,798
from Adjustments to reconcile net income to net cash
Operating provided by operating activities:
Activities Provision for loan losses 1,329 1,400 624
Provision for deferred income taxes (253) (214) (135)
Depreciation of bank premises and equipment 1,015 903 811
Amortization of intangibles 229 152 144
Amortization of premiums and accretion of
discounts, net 132 350 87
(Gains) losses on sales and calls of securities
available for sale, net 4 (20) (145)
Gains on calls of securities held to maturity, net (13) (4) ---
Losses and writedowns on other real estate owned 26 --- ---
Other (4) 22 (135)
(Increase) decrease in:
Mortgage loans held for sale 229 1,951 (1,775)
Accrued interest receivable (1,035) (237) (332)
Other assets (258) (134) (580)
Increase (decrease) in:
Accrued interest payable 887 4 (75)
Other liabilities 94 187 (40)
------------- ------------- ------------
Net cash provided by operating
activities 9,691 11,448 5,247
------------- ------------- ------------
Cash Flows Net (increase) decrease in federal funds sold (26,290) 2,290 (790)
from Net (increase) decrease in interest-bearing deposits (4,360) (2,192) 2,701
Investing Proceeds from repayments of mortgage-backed
Activities securities available for sale 1,558 4,558 1,065
Proceeds from sales of other securities available for sale 935 1,300 2,999
Proceeds from calls and maturities of other securities
available for sale 7,732 21,495 35,180
Proceeds from calls and maturities of securities held
to maturity 3,192 6,997 34,187
Purchases of mortgage-backed securities available for sale --- --- (14,175)
Purchases of other securities available for sale (15,914) (12,190) (73,685)
Purchases of securities held to maturity (12,117) --- (1,000)
Purchases of loan participations (2,759) (5,643) (4,635)
Collections of loan participations 3,768 3,408 4,074
Loans purchased, including premium (42,187) --- (4,051)
Net increase in loans made to customers (24,869) (54,456) (18,675)
Proceeds from disposal of other real estate owned 271 336 194
Recoveries on loans charged off 95 130 255
Bank premises and equipment expenditures (2,839) (2,757) (1,770)
Proceeds from sale of bank premises and equipment 10 5 114
------------- ------------- ------------
Net cash used in investing activities (113,774) (36,719) (38,012)
Cash Flows Deposits acquired, net of premium 85,944 --- 7,016
from Net increase in time deposits 40,031 22,709 14,357
Financing Net increase (decrease) in other deposits (10,807) 1,782 16,456
Activities Net increase (decrease) in other borrowed funds (10,190) 10,246 (271)
Cash dividends paid (2,987) (2,814) (2,807)
Common stock repurchase (89) (7,762) ---
------------- ------------- ------------
Net cash provided by financing
activities 101,902 24,161 34,751
------------- ------------- ------------
Net increase (decrease) in cash and due from banks (2,181) (1,110) 1,986
Cash and due from banks at beginning of year 13,311 14,421 12,435
------------- ------------- ------------
Cash and due from banks at end of year $ 11,130 13,311 14,421
============= ============= ============
See accompanying notes to consolidated financial statements.
16
Notes to Consolidated Financial Statements
$ In thousands, except share data and per share data. December 31, 2000, 1999
and 1998.
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 Debt securities that management
has the positive intent and ability to hold to maturity are classified as
"held to maturity" and recorded at amortized cost. Securities not classified
as held to maturity or trading, including equity securities with readily
determinable fair values, are classified as "available for sale" and
recorded at fair value, with unrealized gains and losses excluded from
earnings and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using
the interest method over the terms of the securities. Declines in the fair
value of held to maturity and available for sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as
realized losses. Gains and losses on the sale of securities are recorded on
the trade date and are determined using the specific identification method.
(D) Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried
at the lower of cost or estimated fair value on an individual loan basis.
Net unrealized losses, if any, are recognized through a valuation allowance
by charges to income.
(E) Loans
The Company grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans.
The ability of the Company's debtors to honor their contracts is dependent
upon the real estate and general economic conditions in the Company's market
area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at
their outstanding unpaid principal balances less the allowance for loan
losses, and any deferred fees or costs on originated loans. Interest income
is accrued on the unpaid principal balance. Loan origination fees, net of
certain direct origination costs, are deferred and recognized as an
adjustment of the related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is discontinued
at the time the loan is 90 days delinquent unless the credit is well-secured
and in process of collection. Credit card loans and other personal loans are
typically charged off no later than 180 days past due. In all cases, loans
are placed on nonaccrual or charged-off at an earlier date if collection of
principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The interest
on these loans is accounted for on the cash-basis or cost-recovery method,
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.
(F) Allowance for Loan Losses
The allowance for loan losses is established based upon various estimates of
losses through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the nature
and volume of the loan portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral
and prevailing economic conditions. This evaluation is inherently subjective
as it requires estimates that are susceptible to significant revision as
more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record, and the amount of the
shortfall in
17
Notes to Consolidated Financial Statements
National Bankshares, Inc. and Subsidiaries
relation to the principal and interest owed. Impairment is measured on a
loan by loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair
value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Company does not separately
identify individual consumer and residential loans for impairment
disclosures.
(G) 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. (H) Other Real Estate Real
estate acquired through, or in lieu of, foreclosure is held for sale and is
initially recorded at fair value at the date of foreclosure, establishing a
new cost basis. Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of carrying
amount or fair value less cost to sell. Revenues and expenses from
operations and changes in the valuation are included in other operating
expenses.
(I) Intangible Assets
Included in other assets are deposit intangibles of $8,693 and $592 at
December 31, 2000 and 1999, respectively, and goodwill of $345 and $382 at
December 31, 2000 and 1999, 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.
(J) 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, 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.
(K) 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 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 of fair value less costs to
sell.
(L) Pension Plans
The Company sponsors two separate defined benefit pension plans which cover
substantially all full-time officers and employees. The benefits are based
upon length of service and a percentage of the employee's compensation
during the final years of employment. Pension costs are computed based upon
the provisions of Statement 87. The Company contributes to the pension plans
amounts deductible for federal income tax purposes.
(M) Income Taxes
Deferred income tax assets and liabilities are determined using the balance
sheet method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the temporary differences between the
book and tax bases of the various balance sheet assets and liabilities and
gives current recognition to changes in tax rates and laws.
(N) 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.
(O) Net Income Per Share
Basic earnings per share (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.
Basic net income per share is based upon the weighted average number of
common shares outstanding (3,514,586 shares in 2000, 3,607,669 in 1999 and
3,792,833 in 1998). Stock options totaled 18,000 and 5,500 shares at
December 31, 2000 and 1999, respectively (see note 9). Options that could
potentially dilute basic net income per share in the future were not
included in the computation of diluted net income per share because to do so
would have been antidilutive .
18
(P) 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.
(Q) Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating
disclosure for financial instruments:
(1)Cash and Due from Banks, Interest-Bearing Deposits and Federal Funds
Sold
The carrying amounts approximate 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 Held for Sale
Fair values of loans held for sale are based on commitments on hand from
investors or prevailing market prices.
(4)Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as mortgage loans
held for sale, commercial, real estate - commercial, real estate -
construction, real estate - mortgage, credit card and other consumer
loans. Each loan category is further segmented into fixed and adjustable
rate interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk
inherent in the loan, as well as estimates for prepayments. The estimate
of maturity is based on the Company's historical experience with
repayments for loan classification, modified, as required, by an
estimate of the effect of economic conditions on lending.
Fair value for significant nonperforming loans is based on estimated
cash flows which are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit
risk, cash flows and discount rates are judgmentally determined using
available market information and specific borrower information.
(5)Deposits
The fair value of demand and savings deposits is the amount payable on
demand. The fair value of fixed maturity term deposits and certificates
of deposit is estimated using the rates currently offered for deposits
with similar remaining maturities.
(6)Accrued Interest
The carrying amounts of accrued interest approximate fair value.
(7)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.
(8)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, 2000 and 1999, and as such, the
related fair values have not been estimated.
(R) Advertising
The Company practices the policy of charging advertising costs to expenses
as incurred.
(S) 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 operations or
liquidity.
19
(T) 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. (U) Use of Estimates In
preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of the
allowance for loan losses, valuation of foreclosed real estate and deferred
tax assets.
Changing economic conditions, adverse economic prospects for borrowers,
as well as regulatory agency action as a result of 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.
Note 2: Restriction on Cash
To comply with Federal Reserve regulations, the Company is required to
maintain certain average reserve balances. The daily average reserve
requirements were $1,523 and $5,285 for the weeks including December 31, 2000
and 1999, respectively.
Note 3: Securities
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities available for sale by major security type as of
December 31, 2000 and 1999 are as follows (tables next page):
December 31, 2000
($ In thousands) Gross Gross
Amortized Unrealized Unrealized
Available for sale: Costs Gains Losses Fair Value
----------- ----------- ------------ ------------
U.S. Treasury $ 6,246 85 --- 6,331
U.S. Government agencies and corporations 54,815 87 868 54,034
States and political subdivisions 35,456 395 245 35,606
Mortgage-backed securities 11,818 18 60 11,776
Corporate debt securities 14,341 63 346 14,058
Federal Home Loan Bank stock 1,329 --- --- 1,329
Federal Reserve Bank stock 209 --- --- 209
Other securities 442 --- --- 442
--------- ---------- ------------ -----------
Total securities available for sale $ 124,656 648 1,519 123,785
========= ========== ============ ===========
December 31, 1999
($ In thousands) Gross Gross
Amortized Unrealized Unrealized
Available for sale: Costs Gains Losses Fair Value
----------- ----------- ------------ ------------
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 $119,077 134 5,366 113,845
========== =========== ============ ============
20
The amortized costs and fair values of single maturity securities available for
sale at December 31, 2000, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities included in these totals are categorized
by final maturity at December 31, 2000.
December 31, 2000
Amortized
($ In thousands) Costs Fair Values
--------------- -------------
Due in one year or less $ 1,217 1,201
Due after one year through five years 31,434 31,632
Due after five years through ten years 43,231 43,067
Due after ten years 46,797 45,908
No maturity 1,977 1,977
--------------- -------------
$ 124,656 123,785
=============== =============
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,
2000 and 1999 are as follows:
December 31, 2000
($ In thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity: Costs Gains Losses Value
----------- ----------- ----------- ----------
U.S. Government agencies and corporations $ 8,500 8 195 8,313
States and political subdivisions 17,288 207 4 17,491
Mortgage-backed securities 288 5 --- 293
Corporate debt securities 6,483 29 7 6,505
---------- ---------- ---------- ----------
Total securities held to maturity $ 32,559 249 206 32,602
========== ========== ========== ==========
December 31, 1999
($ In thousands) Gross Gross
Amortized Unrealized Unrealized Fair
Held to maturity: Costs Gains Losses Value
----------- ----------- ----------- ----------
U.S. Government agencies and corporations $ 500 --- --- 500
States and political subdivisions 5,500 --- 230 5,270
Mortgage-backed securities 17,283 117 45 17,355
Corporate debt securities 364 7 --- 371
----------- ----------- ----------- ----------
Total securities held to maturity $ 23,647 124 275 23,496
=========== =========== =========== ==========
21
The amortized costs and fair values of single maturity securities held to
maturity at December 31, 2000, 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 categorized
by final maturity at December 31, 2000.
December 31, 2000
Amortized
($ In thousands) Costs Fair Values
--------------- -------------
Due in one year or less $ 6,715 6,721
Due after one year through five years 20,479 20,431
Due after five years through ten years 3,254 3,314
Due after ten years 2,111 2,136
--------------- ------------
$ 32,559 32,602
============== ============
There were no sales of securities held to maturity during 2000, 1999 or
1998.
The carrying value of securities pledged to secure public and trust
deposits, and for other purposes as required or permitted by law, was $48,810 at
December 31, 2000 and $46,937 at December 31, 1999.
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, 2000, the available
borrowing limit was approximately $65,000.
Note 4: Loans to Officers and Directors
In the normal course of business loans have been granted to executive
officers and directors of Bankshares and its subsidiaries amounting to $2,084 at
December 31, 2000 and $1,923 at December 31, 1999. During the year ended
December 31, 2000, total principal additions were $1,620 and principal payments
were $1,459.
The following schedule summarizes amounts receivable from executive officers and
directors of Bankshares and its subsidiaries, and their immediate families or
associates:
Year ended
($ In thousands) December 31, 2000
------------------
Aggregate balance, beginning of year $ 1,923
Additions 1,620
Collections (1,459)
------------------
Aggregate balance, end of year $ 2,084
==================
Note 5: Allowance for Loan Losses
An analysis of the allowance for loan losses follows:
Years ended December 31,
($ In thousands) 2000 1999 1998
------------ ------------ -------------
Balance at beginning of year $ 3,231 2,679 2,438
Provision for loan losses 1,329 1,400 624
Loans charged off (770) (978) (638)
Recoveries of loans previously
charged off 96 130 255
------------ ------------ -------------
Balance at end of year $ 3,886 3,231 2,679
============ ============ =============
22
The following is a summary of information pertaining to impaired loans:
December 31,
($ In thousands) 2000 1999
---------- ----------
Impaired loans without a valuation allowance $ 321 95
Impaired loans with a valuation allowance 135 222
---------- ----------
Total impaired loans $ 456 317
========== ==========
Valuation allowance related to impaired loans $ 135 154
========== ==========
December 31,
($ In thousands) 2000 1999 1998
--------- ---------- ----------
Average investment in impaired loans $ 657 292 387
Interest income recognized on impaired loans 43 13 32
Interest income recognized on a cash basis on
impaired loans --- --- ---
--------- ---------- ----------
No additional funds are committed to be advanced in connection with impaired
loans.
No nonaccrual loans were excluded from impaired loan disclosure under FASB 114
at December 31, 2000 and 1999.
Note 6: Bank Premises and Equipment
Bank premises and equipment stated at cost, less accumulated depreciation,
are as follows:
December 31,
($ In thousands) 2000 1999
-------------- --------------
Premises $ 10,413 8,818
Furniture and equipment 7,040 6,140
Construction-in-progress 141 21
-------------- --------------
17,594 14,979
Less accumulated depreciation (7,270) (6,473)
-------------- --------------
Bank premises and equipment, net $ 10,324 8,506
============== ==============
The Company leases three branch facilities under noncancellable operating
leases. The future minimum lease payments under these leases (with initial or
remaining lease terms in excess of one year) as of December 31, 2000 are as
follows: $135 in 2001, $133 in 2002, $131 in 2003, $123 in 2004 and $125 in
2005.
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 $72,307 at December 31,
2000 and $46,172 at December 31, 1999. At December 31, 2000, the scheduled
maturities of time deposits are as follows: $214,925 in 2001, $60,591 in 2002,
$33,109 in 2003, $7,378 in 2004 and $10,663 in 2005.
Note 8: Employee Benefit Plans
The Company has a Retirement Accumulation Plan qualifying under IRS Code
Section 401(k), in which NBB and BTC are participating employers. Eligible
participants in the plan can contribute up to 10% of their total annual
compensation to the plan. Employee contributions are matched by NBB and BTC
based on a percentage of an employee's total annual compensation contributed to
the plan. Prior to 2000, NBB was the only participating employer in the plan.
For the year ended December 31, 2000, NBB and BTC contributed $156 to the plan.
For the years ended December 31, 1999 and 1998, NBB contributed $102 and $91,
respectively.
23
Bankshares has a nonleveraged Employee Stock Ownership Plan (ESOP) which
enables employees 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, $162 and $0 for the years
ended December 31, 2000, 1999 and 1998, respectively. Dividends on ESOP shares
are charged to retained earnings. As of December 31, 2000, the number of
allocated shares held by the ESOP was 76,489 and the number of unallocated
shares was 6,180. All shares held by the ESOP are treated as outstanding in
computing the Company's basic net income per share. 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
contained a put option which allows a withdrawing participant to require
Bankshares or the ESOP, if the plan administrator agrees, to purchase his or her
allocated shares if the shares are not readily tradeable on an established
market at the time of its distribution. Since the shares 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 (33%), mutual funds (31%), corporate bonds (4%),
equity securities (29%) and cash (3%). BTC's pension plan's assets are invested
principally in corporate bonds (3%), U.S. Government agency obligations (81%)
and equity securities (16%).
Pension Benefits
December 31,
($ In thousands) 2000 1999 1998
----------- ----------- ---------
Change in benefit obligation
Benefit obligation at beginning of year $ 5,694 5,995 4,967
Service cost 354 398 331
Interest cost 425 415 367
Actuarial gain (142) (749) 491
Benefits paid (633) (365) (161)
----------- ----------- ---------
Benefit obligation at end of year 5,668 5,694 5,995
----------- ----------- ---------
Change in plan assets
Fair value of plan assets at beginning of year 4,877 4,971 4,337
Actual return on plan assets 202 85 430
Employer contribution 276 186 365
Benefits paid (663) (365) (161)
----------- ----------- ---------
Fair value of plan assets at end of year 4,692 4,877 4,971
----------- ----------- ---------
Funded status (976) (817) (1,024)
Unrecognized net actuarial loss 610 522 917
Unrecognized prior service cost 186 201 216
Unrecognized transition asset (137) (160) (183)
----------- ----------- ---------
Net accrued pension cost (includes
accrued pension cost of $500, $414
and $363 in 2000, 1999 and 1998,
respectively, included in other
liabilities, and prepaid pension
cost of $141, $160 and $289 in 2000,
1999 and 1998, respectively, included
in other assets). $ (317) (254) (74)
=========== =========== =========
24
Pension Benefits
NBB BTC
($ In thousands) 2000 1999 1998 2000 1999 1998
------- ------- -------- ------- ------- ------
Weighted average assumptions as
of December 31
Weighted average discount rate 7.50% 7.50% 7.00% 7.50% 7.50% 7.00%
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) 2000 1999 1998
---------- ------------ -----------
Components of net periodic benefit cost
Service cost $ 354 398 331
Interest cost 424 415 367
Expected return on plan assets (441) (457) (400)
Amortization of prior service cost 15 15 15
Recognized net actuarial loss 8 18 3
Amortization of transition asset (23) (23) (22)
---------- ------------ -----------
Net periodic benefit cost $ 337 366 294
========== ============ ===========
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 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, 2000, there were 232,000 additional shares available for
grant under the Plan. The per share weighted-average estimated fair value of
stock options granted during 2000 was $0.72 and $2.38 during 1999, based on the
date of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 2000 - expected cash dividend yield of 4.85%,
risk-free interest rate of 5.12%, expected volatility of 19.52% and an expected
life of ten years. 1999 assumptions were: expected cash dividend yield of 3.41%,
risk-free interest rate of 6.38%, expected volatility of 18.60% 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.
25
Stock option activity during the periods indicated is as follows:
2000 1999
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
--------------- ------------- ------------- ----------
Outstanding, beginning
of year 5,500 $ 22.00 --- $ ---
Granted 12,500 18.50 5,500 22.00
Exercised --- --- --- ---
Forfeited --- --- --- ---
Expired --- --- --- ---
--------------- ------------- ------------- ----------
Balance, end of year 18,000 $ 19.57 5,500 $ 22.00
=============== ============= ============= ==========
At December 31, 2000, the remaining contractual life of outstanding options was
9.52 years. The exercise price of options issued in 2000 was $18.50, and for
options issued in 1999 the exercise price was $22.00. Exercisable options
totaled 1,387 at December 31, 2000.
Note 10: Income Taxes
Total income taxes were allocated as follows:
Years ended December 31,
($ In thousands) 2000 1999 1998
---------- ---------- -----------
Income $ 2,763 2,556 2,591
Stockholders' equity, for net unrealized
gains (losses) on securities available
for sale recognized for financial
reporting purposes 1,483 (2,304) 425
---------- ---------- -----------
Total income taxes $ 4,246 252 3,016
========== ========== ===========
Allocations of income tax expense between current and deferred portions is as
follows:
Years ended December 31,
($ In thousands) 2000 1999 1998
----------- ----------- -----------
Current $ 3,016 2,770 2,726
Deferred (253) (214) (135)
----------- ----------- -----------
Total income tax expense $ 2,763 2,556 2,591
=========== =========== ===========
Taxes resulting from securities transactions amounted to a tax expense of $3
for the year ended December 31, 2000, $8 for the year ended December 31, 1999
and $64 for the year ended December 31, 1998.
26
The following is a reconciliation of the "expected" income tax expense,
computed by applying the U.S. Federal income tax rate of 34% to income before
income tax expense, with the reported income tax expense:
Years ended December 31,
($ In thousands) 2000 1999 1998
------------ ---------- ----------
Expected income tax expense (34%) $3,424 3,279 3,192
Tax-exempt interest income (862) (866) (742)
Nondeductible interest expense 168 109 97
Other, net 33 34 44
------------ ---------- ----------
Reported income tax expense $2,763 2,556 2,591
============ ========== ==========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2000 and
1999 are presented below:
December 31,
($ In thousands) 2000 1999
-------------- --------------
Deferred tax assets:
Loans, principally due to allowance for loan losses and unearned
fee income $ 995 786
Other real estate owned, principally due to valuation allowance 21 32
Deferred compensation and other liabilities, due to accrual for
financial reporting purposes 143 124
Deposit intangibles and goodwill 68 59
Community development corporation related tax credit 15 19
Other 36 36
Net unrealized losses on securities available for sale 296 1,779
-------------- --------------
Total gross deferred tax assets 1,574 2,835
Deferred tax liabilities:
Bank premises and equipment, principally due to differences in
depreciation (93) (121)
Securities, due to differences in discount accretion (74) (58)
Accrued late fee income (48) (72)
Other assets (67) (62)
-------------- --------------
Total gross deferred tax liabilities (282) (313)
-------------- --------------
Net deferred tax asset included in other assets $ 1,292 2,522
============== ==============
The Company has determined that a valuation allowance for the gross deferred tax
assets is not necessary at December 31, 2000 and 1999 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.
27
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, 2000, 1999
and 1998, dividends received from subsidiary banks were $2,987, $10,538 and
$5,341, respectively. Additional funds paid to the parents as dividends 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,
2000, retained net income which was free of such restriction at NBB amounted to
approximately $1,360. There was no retained income free of this restriction at
BTC at December 31, 2000.
Bankshares and its subsidiaries are subject to various regulatory capital
requirements administered by the bank regulatory agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, Bankshares and its subsidiaries must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
regulators about components, risk weightings and other factors. Prompt
corrective provisions are not applicable to Bank holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require Bankshares and its subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2000, that Bankshares and its subsidiaries meet all capital adequacy
requirements to which they are subject.
Bankshares' and its subsidiaries' actual regulatory capital amounts and ratios
are also presented in the following tables.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------- ---------- ---------- ---------- ----------- ----------
($ In thousands) Amount Ratio Amount Ratio Amount Ratio
----------- ---------- ---------- ---------- ----------- ----------
December 31, 2000
Total capital (to risk weighted
assets)
Bankshares consolidated $55,256 14.2% 31,073 8.0% N/A N/A
NBB 28,234 11.6% 19,531 8.0% 24,414 10.0%
BTC 24,601 17.3% 11,383 8.0% 14,228 10.0%
Tier I capital (to risk weighted
assets)
Bankshares consolidated $51,371 13.2% 15,536 4.0% N/A N/A
NBB 25,834 10.6% 9,765 4.0% 14,648 6.0%
BTC 23,116 16.3% 5,691 4.0% 8,537 6.0%
Tier I capital (to average assets)
Bankshares consolidated $51,371 9.5% 21,721 4.0% N/A N/A
NBB 25,834 8.2% 12,648 4.0% 15,810 5.0%
BTC 23,116 10.2% 9,072 4.0% 11,340 5.0%
28
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------- ---------- ---------- ---------- ----------- ----------
($ 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 $55,202 11.7% 18,957 4.0% N/A N/A
NBB 27,222 9.8% 11,135 4.0% 13,919 5.0%
BTC 25,497 12.7% 8,019 4.0% 10,023 5.0%
29
As of December 31, 2000, the most recent notifications from the appropriate
regulatory authorities categorized Bankshares and its subsidiaries as adequately
capitalized under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized, an institution must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since those notifications that
management believes have changed Bankshares' and its subsidiaries' category.
Note 12: Parent Company Financial Information
Condensed financial information of Bankshares (Parent) is presented
below:
Consolidated Balance Sheets
December 31,
($ In thousands, except share and per share data) 2000 1999
------------------ -------------
Assets Cash due from subsidiaries $ 38 5
Securities available for sale 2,365 2,292
Investment in subsidiaries, at equity 57,405 50,302
Refundable income taxes due from subsidiaries 11 59
Other assets 46
------------------ -------------
Total assets $ 59,865 52,743
================== =============
Liabilities Other liabilities $ 31 20
and ------------------ -------------
Stockholders' Stockholders' equity:
Equity Preferred stock of no par value. Authorized 5,000,000
shares; none issued and outstanding --- ---
Common stock of $2.50 par value. Authorized 5,000,000
shares; issued and outstanding 3,511,877 shares in 2000
and 3,516,977 in 1999 8,780 8,792
Retained earnings 51,629 47,384
Accumulated other comprehensive income (loss) (575) (3,453)
------------------ -------------
Total stockholders' equity 59,834 52,723
Commitments and contingent liabilities
------------------ -------------
Total liabilities and stockholders' equity $ 59,865 52,743
================== =============
30
Condensed Statements of Income and Comprehensive Income
Years Ended December 31,
($ In thousands) 2000 1999 1998
------------- ----------- ------------
Income Dividends from subsidiaries $ 2,987 10,538 5,341
Interest on securities - taxable 11 17 29
Interest on securities - nontaxable 99 118 24
Other income 40 --- ---
Realized securities losses (3) --- ---
------------- ----------- ------------
3,134 10,673 5,394
Expenses Other expenses 157 194 173
------------- ----------- ------------
Income before income tax benefit and equity in
undistributed net income (distributions in
excess of equity in net income) of subsidiaries 2,977 10,479 5,221
Applicable income tax benefit 36 59 47
------------- ----------- ------------
Income before equity in undistributed net income
(distributions in excess of equity in net
income) of subsidiaries 3,013 10,538 5,268
Equity in undistributed net income (distributions
in excess of equity in net income) of subsidiaries 4,296 (3,450) 1,530
------------- ----------- ------------
Net income 7,309 7,088 6,798
------------- ----------- ------------
Other comprehensive income (loss), net of income
taxes:
Net unrealized gains (losses) on securities
available for sale:
Arising during the year 2,878 (4,472) 356
Cumulative accounting change --- --- 469
------------- ----------- ------------
Total other comprehensive income (loss) 2,878 (4,472) 825
------------- ----------- ------------
Comprehensive income $ 10,187 2,616 7,623
============= =========== ============
31
Condensed Statements of Cash Flows
Years ended December 31,
($ In thousands) 2000 1999 1998
--------------- ------------- --------------
Cash Flows Net income $ 7,309 7,088 6,798
from Operating Adjustments to reconcile net income to net cash
Activities provided by operating activities:
(Equity in undistributed net income)
distributions in excess of equity in
net income of subsidiaries (4,296) 3,450 (1,530)
Amortization of premiums and accretion of
discounts, net 6 7 4
(Increase) decrease in refundable income
taxes due from subsidiaries 48 (29) (8)
Increase in other assets (31) (10) (30)
Increase (decrease) in other liabilities 10 (45) 22
--------------- ------------- --------------
Net cash provided by operating activities 3,046 10,461 5,256
--------------- ------------- --------------
Cash Flows Purchases of securities available for sale (529) (207) (4,534)
from Maturities of securities available for sale 30 299 2,044
Investing Sales of securities available for sale 562 --- ---
Activities --------------- ------------- --------------
Net cash provided by (used in)
investing activities 63 92 (2,490)
--------------- ------------- --------------
Cash Flows Cash dividends paid (2,987) (2,814) (2,807)
from Common stock repurchase (89) (7,762) ---
Financing --------------- ------------- --------------
Net cash used in financing activities (3,076) (10,576) (2,807)
--------------- ------------- --------------
Net increase (decrease) in cash 33 (23) (41)
Cash due from subsidiary at beginning of year 5 28 69
--------------- ------------- --------------
Cash due from subsidiary at end of year $ 38 5 28
=============== ============= ==============
Note 13: Supplemental Cash Flow Information
The Company paid $17,276, $14,199 and $14,003 for interest and $2,958,
$2,941 and $2,631 for income taxes, net of refunds, in 2000, 1999 and 1998,
respectively. Noncash investing activities consisted of $770, $978 and $638 of
loans charged against the allowance for loan losses in 2000, 1999 and 1998,
respectively. Noncash investing activities also included $390 in 2000, $177 in
1999 and $382 in 1998 of loans transferred to other real estate owned. In
addition, for the years ended December 31, 2000, 1999 and 1998, noncash
investing activities included changes in net unrealized gains (losses) on
securities available for sale of $4,361, ($6,776) and $1,250, respectively,
changes in deferred tax assets included in other assets of ($1,483), $2,304 and
($425), respectively, and changes in net unrealized gains (losses) on securities
available for sale included in stockholders' equity of $2,878, ($4,472) and
$825, respectively.
Securities, classified as held to maturity, totaling approximately $20,516,
were transferred to securities available for sale in 1998. This was in
accordance with the reassessment of the classification of securities allowed by
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which was adopted by the Company on October 1, 1998.
Note 14: Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets. The contract amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.
32
The Company may require collateral or other security to support the following
financial instruments with credit risk:
December 31,
($ In thousands) 2000 1999
------------- -------------
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 60,614 52,932
======== ======
Standby letters of credit $ 4,269 5,109
======== ======
Mortgage loans sold with potential recourse $ 20,358 33,489
======== ======
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. The commitments for equity lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Company, is based on management's
credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit
lines and overdraft protection are commitments for possible future extensions of
credit. Some of these commitments are uncollateralized and do not contain a
specified maturity date and may not be drawn upon to the total extent to which
the Company is committed.
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 2000, the
Company originated $20,129 and sold $20,358 to investors, compared to $31,538
originated and $33,489 sold in 1999. 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.
The Company maintains cash accounts in other commercial banks. The amount on
deposit with correspondent institutions at December 31, 2000, exceeded the
insurance limits of the Federal Deposit Insurance Corporation by $929.
Note 15: Concentrations of Credit Risk
The Company does a general banking business, serving the commercial and
personal banking needs of its customers. NBB's market area, commonly referred to
as Virginia's New River Valley and Mountain Empire, consists of Montgomery,
Giles and Pulaski Counties and the cities of Radford and Galax, together with
portions of adjacent counties. BTC's market area adjoins NBB's and includes the
counties of Tazewell, Wythe, Smyth and Washington in Virginia, as well as
contiguous portions of McDowell and Mercer Counties in West Virginia.
Substantially all of NBB's and BTC's loans are made within their market area.
The ultimate collectibility of the banks' loan portfolios and the ability to
realize the value of any underlying collateral, if needed, are influenced by the
economic conditions of the market area. The Company's operating results are
therefore closely correlated with the economic trends within this area.
At December 31, 2000 and 1999, approximately $151,000 and $130,000,
respectively, of the loan portfolio was concentrated in commercial real estate.
This represents approximately 42% and 44% of the loan portfolio at December 31,
2000 and 1999, respectively. Included in commercial real estate at December 31,
2000 and 1999 was approximately $84,000 and $85,000, respectively, in loans for
college housing and professional office buildings. Loans secured by residential
real estate were approximately $110,000 and $74,000 at December 31, 2000 and
1999, respectively. This represents approximately 31% and 25% of the loan
portfolio at December 31, 2000 and 1999 respectively. Loans secured by
automobiles were approximately $36,000 and $33,000 at December 31, 2000 and
1999, respectively. This represents approximately 10% of the loan portfolio at
December 31, 2000 and 11% at December 31, 1999.
The Company has established operating policies relating to the credit
process and collateral in loan originations. Loans to purchase real and personal
property are generally collateralized by the related property and with loan
amounts established based on certain percentage limitations of the property's
total stated or appraised value. Credit approval is primarily a function of
collateral and the evaluation of the creditworthiness of the individual borrower
or project based on available financial information. Management considers the
concentration of credit risk to be minimal.
33
Note 16: Fair Value of Financial Instruments and Interest Rate Risk
The estimated fair values of the Company's financial instruments at December
31, 2000 and 1999 are as follows:
December 31,
2000 1999
------------------------------ ----------------------------
($ In thousands) Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------------- --------------- ------------- --------------
Financial assets:
Cash and due from banks $ 11,130 11,130 13,311 13,311
Interest-bearing deposits 13,579 13,579 9,219 9,219
Federal funds sold 29,090 29,090 2,800 2,800
Securities 156,344 156,387 137,492 137,341
Mortgage loans held for sale --- --- 229 229
Loans, net 355,795 348,753 291,562 287,504
Accrued interest receivable 5,049 5,049 4,014 4,014
-------------- --------------- ------------- --------------
Total financial assets $570,987 563,988 458,627 454,418
============== =============== ============= ==============
Financial liabilities:
Deposits $530,648 531,829 407,187 407,328
Other borrowed funds 270 270 10,460 10,460
Accrued interest payable 1,538 1,538 651 651
-------------- --------------- ------------- --------------
Total financial
Liabilities $532,456 533,637 418,298 418,439
============== =============== ============= ==============
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company's various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
fair discount rate and estimates of future cash flows. Accordingly, the fair
value estimates may not be realized in an immediate settlement of the
instrument. SFAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented may not necessarily represent the underlying fair value
of the Company.
Loan commitments on which the committed interest rate is less than the
current market rate are insignificant at December 31, 2000 and 1999.
The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate
environment. Conversely, depositors who are receiving fixed rates are more
likely to withdraw funds before maturity in a rising rate environment and less
likely to do so in a falling rate environment. Management monitors rates and
maturities of assets and liabilities and attempts to minimize interest rate risk
by adjusting terms of new loans and deposits and by investing in securities with
terms that mitigate the Company's overall interest rate risk.
Note 17: Branch Acquisitions
On August 17, 2000, the Company entered into an agreement to purchase six
branches from AmSouth Bank of Birmingham, Alabama. The acquisitions involved
approximately $94,000 in deposits and $42,000 in loans. Three of the branches,
Radford, Dublin and Pulaski, Virginia were acquired by the Company's NBB
affiliate, with the remaining offices located in Wytheville, Abingdon and
Marion, Virginia acquired by the Company's BTC affiliate. The acquisition was
completed in November of 2000.
In another move to improve the Company's competitive position, BTC announced
on September 15, 2000 that it will acquire a branch in Bluefield, Virginia from
First Union National Bank. The acquisition will involve the purchase of
approximately $39,000 in deposits and $11,000 in loans. Plans call for the
acquisition to be completed in the first quarter of 2001.
34
Note 18: Other Comprehensive Income (Loss)
Other comprehensive income (loss) net of income taxes and net of
reclassification adjustments between net income and other comprehensive income
(loss) relating to securities available for sale are reported in the
Consolidated Statements of Income and Comprehensive Income. The information that
follows discloses the reclassification adjustments and the income taxes related
to securities available for sale that are included in other comprehensive
income, net of income taxes.
2000 1999 1998
($ In thousands) ------------- ----------- -----------
Net unrealized gains (losses) on securities
available for sale:
Net unrealized holding gains (losses)
during the year $ 4,359 (6,756) 1,282
Less reclassification adjustments for
gains included in net income 2 (20) (32)
Income tax (expense) benefit (1,483) 2,304 (425)
------------- ----------- -----------
Total other comprehensive income (loss) $ 2,878 (4,472) 825
============= =========== ===========
35
Selected Quarterly Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 2000 and 1999:
($ In thousands, except per share 2000
data)
First Third Fourth
Quarter Second Quarter Quarter Quarter
--------------- --------------- -------------- -------------
Income Statement Data:
- ---------------------
Interest income $ 8,844 9,286 9,586 10,642
Interest expense 3,886 4,274 4,550 5,453
--------------- --------------- -------------- -------------
Net interest income 4,958 5,012 5,036 5,189
Provision for loan losses 353 313 331 332
Noninterest income 925 962 976 1,219
Noninterest expense 2,991 3,094 3,291 3,500
Income taxes 687 698 639 739
--------------- --------------- -------------- -------------
Net income $ 1,852 1,869 1,751 1,837
=============== =============== ============== =============
Per Share Data:
- --------------
Basic net income per share $ 0.53 0.53 0.50 0.52
Cash dividends per share --- 0.42 --- 0.43
Book value per share $ 15.54 15.64 16.39 17.04
Selected Ratios:
- ---------------
Return on average assets 1.58% 1.54% 1.42% 1.33%
Return on average equity 13.98% 13.94% 12.42% 12.52%
Average equity to average assets 11.30% 11.05% 11.46% 10.62%
($ In thousands, except per share 1999
data)
First Third Fourth
Quarter Second 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%
36
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 institutions 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, Morris D. Reece, H. M. Scanland,
Jr., Buford Steele
Galax Advisory Board Charles L. Cox, Willie T. Greene, Sr., Jerry R. Mink, James
A. Williams, Jr.
Radford/Pulaski County Advisory Board Jack M. Lewis, Jack Nunley
37
National Bankshares, Inc.
Board of Directors
Photograph of
"NBI Board Members"
Foreground, from left: William T. Peery, President, Cargo Oil Inc; James G.
Rakes, Chairman of the Board, President, Chief Executive Officer, National
Bankshares, Inc., President and Chief Executive Officer, The National Bank; L.
Allen Bowman, Retired; Charles L. Boatwright, Vice Chairman of the Board,
Physician; Jeffrey R. Stewart, Educational Consultant. Stairs, from left: Alonzo
A. Crouse, Executive Vice President, Secretary, Bank of Tazewell County; James
A. Deskins, Sr., Retired; Cameron L. Forrester, President and Chief Executive
Officer, Bank of Tazewell County; Paul A. Duncan, President, Holiday Motor Corp.
38
The National Bank Board of Directors
Photograph of
"NBB Board Members"
From left: J. Louis Webb, Jr., Dentist; Jeffrey R. Stewart,
Chairman of the Board, Educational Consultant; L. Allen
Bowman, Vice-Chairman of the Board, Retired; Paul P. Wisman,
Vice President of Investments, Grundy National Bank, Manager
of Assets, Nicewonder Investments; James G. Rakes, Chairman,
President and Chief Executive Officer, National Bankshares,
Inc., President and Chief Executive Officer, The National
Bank; Charles L. Boatwright, Physician; James M. Shuler,
Delegate, Virginia House of Delegates; Ellen G. Burnop,
Co-Owner, New River Office Supply; Paul A. Duncan,
President, Holiday Motor Corp.
Bank of Tazewell County Board of Directors
Photograph of
"BTC Board Members"
Seated, from left: E.P. Greever, Retired; Cameron L.
Forrester, President and Chief Executive Officer, Bank of
Tazewell County; William T. Peery, Chairman of the Board,
President, Cargo Oil, Inc.; James G. Rakes, Chairman,
President and Chief Executive Officer, National Bankshares,
Inc., President and Chief Executive Officer, The National
Bank; William H. VanDyke, Vice President, Candlewax
Smokeless Fuel Co. Standing, from left: J.M. Pope, Retired;
Alonzo A. Crouse, Executive Vice President, Secretary, Bank
of Tazewell County; James A. Deskins, Retired; James S.
Gillespie, Jr., President, Jim Sam Gillespie Farm. Not
pictured: Charles E. Green, III, Financial Planner, AXA
Advisors, LLC; Jack Harry, President, Harry's Enterprises,
Inc.
39
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 10, 2001 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
jrakes@nbbank.com bbuchanan@nbbank.com
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
mbuhyoff@nbbank.com
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, Virginia 24060
P.O. Box 90002
Blacksburg, Virginia 24062-9002
www.nationalbankshares.com
40