UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1996 O-15204
NATIONAL BANKSHARES, INCORPORATED
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(Exact name of Registrant as specified in its charter)
Virginia 54-1375874
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 South Main Street
Blacksburg, Virginia 24060
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (540) 552-2011
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.50 per Share
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(Title of Class)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 14, 1997 was $87,477,875. The aggregate market value was
computed based on a price determined from transactions known to management of
the Registrant since its stock is not extensively traded, listed on any
exchange, or quoted by NASDAQ. (In determining this amount, the registrant
assumes that all of its Directors and principal Officers are affiliates. Such
assumption shall not be deemed conclusive for any other purposes.)
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 14, 1997
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COMMON STOCK, $2.50 PAR VALUE 3,792,833
DOCUMENTS INCORPORATED BY REFERENCE
Selected information from the Registrants' Annual Report to Stockholders for the
year ended December 31, 1996, is incorporated by reference into Parts I and II
of this report.
Selected information from the Registrant's Proxy Statement for the Annual
Meeting to be held April 8, 1997 and filed with the Securities and Exchange
Commission pursuant to Regulation 14A, is incorporated by reference into Part
III of this report.
(This report contains 40 pages.)
(The Index of Exhibits are on pages 39-40.)
NATIONAL BANKSHARES, INCORPORATED
ANNUAL REPORT FOR 1996 ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 4-31
Item 2. Properties 31
Item 3. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of
Security Holders 31
Executive Officers of the Registrant 32
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters 33
Item 6. Selected Financial Data 33
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 33
Item 8. Financial Statements and
Supplementary Data 33
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 34
PART III
Item 10. Directors and Executive Officers of
the Registrant 34
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain
Beneficial Owners and Management 34
Item 13. Certain Relationships and Related
Transactions 34
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 35-37
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PART I
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Item 1. Business.
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History and Business
National Bankshares, Inc. (Bankshares) is a bank holding company organized
under the laws of Virginia in 1986 and registered under the Bank Holding Company
Act (BHCA). Bankshares conducts its operations through its two wholly-owned
subsidiaries, The National Bank of Blacksburg (NBB) and Bank of Tazewell County
(BTC), collectively referred to as "the Company".
On June 1, 1996, Bankshares issued 1,888,209 shares of its common stock in a
one-for-one exchange for all the outstanding common stock of Bank of Tazewell
County, Tazewell, Virginia. This business combination has been accounted for as
a pooling-of-interests and, accordingly, the consolidated financial statements
for the periods prior to the combination have been restated to include the
accounts and results of operations of Bank of Tazewell County. There were no
adjustments of a material amount resulting from Bank of Tazewell County's
adoption of Bankshares' accounting policies.
In May 1996, Bankshares declared a stock split of .11129 per share effected in
the form of a stock dividend to the holders of Bankshares common stock just
prior to the merger effective date to facilitate the one-for-one common stock
exchange ratio. All stockholders' equity accounts, share and per share data
have been adjusted retroactively to reflect the stock split.
The National Bank of Blacksburg
The National Bank of Blacksburg was originally chartered in 1891. NBB
operates a full-service banking business from its headquarters in Blacksburg,
Virginia, and its six area branch offices. A seventh branch is expected to open
in the second quarter of 1997. NBB offers general retail and commercial banking
services to individuals, businesses, local government units and institutional
customers. These products and services include accepting deposits in the form
of checking accounts, money market deposit accounts, interest-bearing demand
deposit accounts, savings accounts and time deposits; making real estate,
commercial, revolving, consumer and agricultural loans; offering letters of
credit; providing other consumer financial services, such as automatic funds
transfer, collections, night depository, safe deposit, travelers checks, savings
bond sales and utility payment services; and providing other miscellaneous
services normally offered by commercial banks. NBB also conducts a general
trust business in Blacksburg near its headquarters location. Through its trust
operation, NBB offers a variety of personal and corporate trust services.
NBB makes loans in all major loan categories, including commercial, commercial
and residential real estate, construction and consumer loans.
Bank of Tazewell County
The antecedents of BTC are in a charter issued on September 28, 1889 for
Clinch Valley Bank. On December 22, 1893, a second charter was issued in
substantially the same form for Bank of Clinch Valley. In 1929, Bank of Clinch
Valley merged with Farmers Bank under the charter of the former, and the name of
the resulting institution became Farmers Bank of Clinch Valley. Bank of
Tazewell County resulted from the 1964 merger of Bank of Graham, Bluefield,
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Virginia with Farmers Bank of Clinch Valley. BTC provides general retail and
commercial banking services to individuals, businesses and local government
units. These services include commercial, real estate and consumer loans.
Deposit accounts offered include demand deposit accounts, interest-bearing
demand deposit accounts, money market deposit accounts, savings accounts and
certificates of deposit. Other services include automatic funds transfer,
collections, night depository, safe deposit, travelers checks, savings bond
sales and utility payment services; and providing other miscellaneous service
normally offered by commercial banks. BTC also conducts a general trust
business.
BTC makes commercial, residential real estate and consumer loans.
Commercial Loans
NBB and BTC make loans to businesses and to individuals for business purposes
on both secured and unsecured bases. Loan requests are granted based upon
several factors including credit history, past and present relationships with
the bank and marketability of collateral. Unsecured commercial loans must be
supported by a satisfactory balance sheet and income statement. Business loans
made on a secured basis may be secured by a security interest in marketable
equipment, accounts receivable, business equipment and/or general intangibles of
the business. In addition, or in the alternative, the loan may be secured by a
deed of trust lien on business real estate.
The risks associated with commercial loans are related to the strength of the
individual business, the value of loan collateral and the general health of the
economy.
Residential Real Estate Loans
Loans secured by residential real estate are originated by both bank
subsidiaries. Loans originated by BTC are typically held in the bank's loan
portfolio. NBB sells in the secondary market on a servicing released basis a
substantial percentage of the residential real estate loans it originates.
There are occasions when a borrower or the real estate do not qualify under
secondary market criteria, but the loan request represents a reasonable credit
risk. Also, an otherwise qualified borrower may choose not to have their
mortgage loan sold. On these occasions, if the loan meets NBB's internal
underwriting criteria, the loan will be closed and placed in NBB's portfolio.
In its secondary market operation, NBB participates in insured loan programs
sponsored by the Department of Housing and Urban Development, the Veterans
Administration and the Virginia Housing Development Authority. It is
anticipated that BTC will also become engaged in sales of mortgages in the
secondary market.
Residential real estate loans carry risk associated with the continued credit-
worthiness of the borrower and changes in the value of the collateral.
Construction Loans
NBB makes loans for the purpose of financing the construction of business and
residential structures to financially responsibly business entities and
individuals. These loans are subject to the same credit criteria as commercial
and residential real estate loans. Although BTC offers construction loans, its
involvement in this area of lending is limited due to the nature of its market
area.
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In addition to the risks associated with all real estate loans, construction
loans bear the risks that the project will not be finished according to
schedule, the project will not be finished according to budget and the value of
the collateral may be at any point in time less than the principal amount of the
loan.
Construction loans also bear the risk that the general contractor, who may or
may not be the bank's loan customer, is unable to finish the construction
project as planned because of financial pressures unrelated to the project.
Loans to customers that are permanent financing of construction loans may
likewise under certain circumstances be affected by external financial pressures
on those customers.
Consumer Loans
NBB and BTC routinely make consumer loans, both secured and unsecured. The
credit history and character of individual borrowers is evaluated as a part of
the credit decision. Loans used to purchase vehicles or other specific personal
property and loans associated with real estate are usually secured with a lien
on the subject vehicle or property. NBB also originates a small number of
student loans that are sold to the Student Loan Marketing Association.
Negative changes in a customer's financial circumstances due to a large number
of factors, such as illness or loss of employment, can place the repayment of a
consumer loan at risk. In addition, deterioration in collateral value can add
risk to consumer loans.
Sales and Purchases of Loans
NBB and BTC will occasionally buy or sell all or a portion of a loan. These
purchases and sales are in addition to the secondary market mortgage loans and
student loans regularly sold by NBB. Because the demand for loans, particularly
for commercial loans, is greater in NBB's market area than in BTC's market area,
NBB regularly sells loans and participations in loans to BTC. BTC's loan to
deposit ratio is at a level where additional loans are desirable, and NBB's loan
to deposit ratio is at a level which its management considers to be optimal
without the loans sold to BTC.
Both banks will consider selling a loan or a participation in a loan, if: (i)
the full amount of the loan will exceed the bank's legal lending limit to a
single borrower; (ii) the full amount of the loan, when combined with a
borrower's previously outstanding loans, will exceed the bank's legal lending
limit to a single borrower; (iii) the Board of Directors or an internal Loan
Committee believes that a particular borrower has a sufficient level of debt
with the bank; (iv) the borrower requests the sale; (v) the loan to deposit
ratio is at or above the optimal level as determined by bank management; and/or
(vi) the loan may create too great a concentration of loans in one particular
location or in one particular type of loan.
The banks will consider purchasing a loan, or a participation in a loan, from
another financial institution (including from another subsidiary of the Company)
if the loan meets all applicable credit quality standards and (i) the bank's
loan to deposit ratio is at a level where additional loans would be desirable;
and/or (ii) a common customer requests the purchase.
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The following table sets forth, for the three fiscal years ended December 31,
1996, 1995 and 1994 the percentage of total operating revenue contributed by
each class of similar services which contributed 15% or more of total operating
revenues of the Company during such periods.
Percentage of
Period Class of Service Total Revenues
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December 31, 1996 Interest and Fees on Loans 54.98%
Interest on Investments 34.61%
December 31, 1995 Interest and Fees on Loans 51.72%
Interest on Investments 38.16%
December 31, 1994 Interest and Fees on Loans 48.97%
Interest on Investments 42.15%
Market Area
The National Bank of Blacksburg Market Area
NBB's primary market area consists of the northern portion of Montgomery
County and all of Giles County, Virginia. This area includes the towns of
Blacksburg and Christiansburg in Montgomery County and the towns of Pearisburg
and Pembroke in Giles County. The local economy is diverse and is oriented
toward higher education, retail and service, light manufacturing and
agriculture. For the years 1996, 1995 and 1994 the unemployment rate in
Montgomery County was 3.3%, 3.0% and 3.2%, respectively, and the rate in Giles
County during those years was 8.4%, 8.4% and 7.4%, respectively. Montgomery
County's largest employer is Virginia Polytechnic Institute and State University
(VPI & SU) located in Blacksburg. VPI & SU is the Commonwealth's land grant
college and also its largest university. Employment at VPI & SU has remained
stable over the past three years, and it is not expected to change materially in
the next few years. A second state supported university, Radford University, is
located in the western edge of NBB's service area. It too has provided stable
employment opportunities in the region.
Giles County's primary employer is a Hoechst-Celanese plant, which
manufactures the material from which cigarette filters are made. Employment at
that location has remained steady or declined slightly in the past three years.
Several other small manufacturing concerns are located in Montgomery and Giles
Counties. These concerns manufacture diverse products and are not dependent
upon one sector of the economy.
Since 1988, Montgomery County has developed into a regional retail center,
with the construction of two large shopping areas. Two area hospitals, each of
which are affiliated with different large health care systems, have in the past
several years constructed additional facilities and attracted additional health
care providers to Montgomery County, making it a center for basic health care
services. VPI & SU's Corporate Research Center has brought several small high
tech companies to Blacksburg, and further expansion is planned.
Montgomery County has experienced good growth, with the total fair market
value of real estate, measured in constant dollars, increasing 49% in the years
between 1980 and 1992. Growth is predicted to continue through the year 2000;
however, the rate may be somewhat slower, as the predicted rate of population
growth in Montgomery County is expected to moderate. Neighboring Giles County
is more rural and had only 22% of Montgomery County's total population in 1990.
Giles County has experienced a slight decline in population since the 1990
census. Total fair market value of real estate, measured in real dollars,
increased in Giles County by 54% between 1980 and 1992, but declined by 9% over
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that twelve-year period, as measured in constant dollars. The continued slow
decline of Giles County's population is predicted to continue through the year
2000. However, since the total population of the County reported in the 1990
census was only 16,366, and the population projected by the Virginia Employment
Commission for Giles in the year 2000 is 16,121, the predicted decline of 245
individuals is not expected to materially impact NBB's business in Giles County.
NBB's primary market area offers the advantages of a good quality of life,
scenic beauty, moderate climate and the cultural attractions of two major
universities. The region has marketed itself as a retirement destination, and
it has had some recent success attracting retirees, particularly from the
Northeast and urban Northern Virginia. These marketing efforts are expected to
continue.
Bank of Tazewell County Market Area
Most of BTC's business originates from Tazewell County, Virginia and Mercer
County, Virginia. This includes the towns of Tazewell and Bluefield, Virginia
and Bluefield, West Virginia. BTC's primary market area has largely depended on
the coal mining industry and farming for its economic base. In recent years,
coal companies have mechanized and this has reduced the number of individuals
required for the production of coal. There are still a number of support
industries for the coal mining business that continue to provide employment in
the area. Additionally, several new businesses have been established in the
area, and Bluefield, West Virginia has begun to emerge as a regional medical
center. Unemployment has stabilized, and real estate values also remain stable
and comparable to other areas in southwest Virginia.
For 1996, 1995 and 1994 the unemployment rate for Tazewell County was 9.5%,
10.2% and 13.9%, respectively. In the same years, Mercer County, West
Virginia's unemployment rate was 5.2%, 5.7% and 7.2%, respectively.
Competition
The banking and financial service business in Virginia generally, and in NBB's
and BTC's market areas specifically, is highly competitive. The increasingly
competitive environment is a result of changes in regulation, changes in
technology and product delivery systems and the accelerating pace of
consolidation among financial service providers. The Company's bank
subsidiaries compete for loans and deposits with other commercial banks, savings
and loan associations, securities and brokerage companies, mortgage companies,
money market funds, credit unions and other nonbank financial service providers.
Many of these competitors are much larger in total assets and capitalization,
have greater access to capital markets and offer a broader array of financial
services than NBB and BTC. In order to compete with these other financial
service providers, NBB and BTC rely upon service-based business philosophies,
personal relationships with customers, specialized services tailored to meet
customers' needs and the convenience of office locations. In addition, the
banks are generally competitive with other financial institutions in their
market areas with respect to interest rates paid on deposit accounts, interest
rates charged on loans and other service charges on loans and deposit accounts.
Registrant's Organization and Employment
Bankshares, NBB and BTC are organized in a holding company/subsidiary bank
structure. Bankshares has no employees, except for executive officers, and
conducts substantially all of its operations through its subsidiaries. All
compensation paid to officers and employees is paid by NBB, except for fees paid
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by Bankshares to President and Chief Executive Officer James G. Rakes for his
service as a director of the Company.
At December 31, 1996, NBB employed 103 full time equivalent employees at its
main office, operations center and branch offices. BTC at December 31, 1996
employed 67 in its various offices and operational areas.
Certain Regulatory Considerations
Bankshares, NBB and BTC are subject to various state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. As a result of the substantial regulatory burdens on banking,
financial institutions, including Bankshares, NBB and BTC, are disadvantaged
relative to other competitors who are not as highly regulated, and their costs
of doing business are much higher. The following is a brief summary of the
material provisions of certain statutes, rules and regulations which affect
Bankshares, NBB and/or BTC. This summary is qualified in its entirety by
reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of the statutes or
regulations which are applicable to the businesses of Bankshares, NBB and/or
BTC. Any change in applicable laws or regulations may have a material adverse
effect on the business and prospects of Bankshares, NBB and/or BTC.
National Bankshares, Inc.
Bankshares is a bank holding company within the meaning of the BHCA and
Chapter 13 of the Virginia Banking Act, as amended (the Virginia Banking Act).
The activities of Bankshares also are governed by the Glass-Steagall Act of 1933
(the Glass-Steagall Act).
The Bank Holding Company Act. The BHCA is administered by the Federal Reserve
Board, and Bankshares is required to file with the Federal Reserve Board an
annual report and such additional information as the Federal Reserve Board may
require pursuant to the BHCA. The Federal Reserve Board also is authorized to
examine Bankshares and its subsidiaries. The BHCA requires every bank holding
company to obtain the prior approval of the Federal Reserve Board before (i) it
or any of its subsidiaries (other than a bank) acquires substantially all the
assets of any bank; (ii) it acquires ownership or control of any voting shares
of any bank if after such acquisition it would own or control, directly or
indirectly, more than 5% of the voting shares of such bank; or (iii) it merges
or consolidates with any other bank holding company.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve Board, require that, depending on the
particular circumstances, either Federal Reserve Board approval must be obtained
or notice must be furnished to the Federal Reserve Board and not disapproved
prior to any person or company acquiring "control" of a bank holding company,
such as Bankshares, subject to certain exemptions. Control is conclusively
presumed to exist if an individual or company acquires 25% or more of any class
of voting securities of Bankshares. Control is rebuttably presumed to exist if
a person acquires 10% or more, but less than 25%, of any class of voting
securities of Bankshares. The regulations provide a procedure for challenging
the rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares
of any company engaged in nonbanking activities, unless the Federal Reserve
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Board, by order or regulation, has found those activities to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Some of the activities that the Federal Reserve Board has determined
by regulation to be proper incidents to the business of a bank holding company
include making or servicing loans and certain types of leases, engaging in
certain insurance and discount brokerage activities, performing certain data
processing services, acting in certain circumstances as a fiduciary or
investment or financial adviser, owning savings associations and making
investments in certain corporations or projects designed primarily to promote
community welfare.
The Federal Reserve Board imposes certain capital requirements on Bankshares
under the BHCA, including a minimum leverage ratio and a minimum ratio of
"qualifying" capital to risk-weighted assets. Subject to its capital
requirements and certain other restrictions, Bankshares can borrow money to make
a capital contribution to NBB or BTC, and such loans may be repaid from
dividends paid from NBB or BTC to Bankshares (although the ability of NBB or BTC
to pay dividends are subject to regulatory restrictions). Bankshares can raise
capital for contribution to NBB and BTC by issuing securities without having to
receive regulatory approval, subject to compliance with federal and state
securities laws.
The Virginia Banking Act. All Virginia bank holding companies must register
with the Virginia State Corporation Commission (the Commission) under the
Virginia Banking Act. A registered bank holding company must provide the
Commission with information with respect to the financial condition, operations,
management and intercompany relationships of the holding company and its
subsidiaries. The Commission also may require such other information as is
necessary to keep itself informed about whether the provisions of Virginia law
and the regulations and orders issued thereunder by the Commission have been
complied with, and may make examinations of any bank holding company and its
subsidiaries.
In March 1994, the Virginia General Assembly adopted an amendment to Chapter
15 of the Virginia Banking Act to allow bank holding companies located in any
state to acquire a Virginia bank or bank holding company if the Virginia bank or
bank holding company could acquire a bank holding company in their state and the
Virginia bank or bank holding company to be acquired has been in existence and
continuously operated for more than two years. This amendment may permit bank
holding companies from throughout the United States to enter the Virginia
market, subject to federal and state approval.
Glass-Steagall Act. Bankshares is also restricted in its activities by the
provisions of the Glass-Steagall Act, which prohibit Bankshares from owning
subsidiaries that are engaged principally in the issue, flotation, underwriting,
public sale or distribution of securities. The interpretation, scope and
application of the provisions of the Glass-Steagall Act currently are being
considered and reviewed by regulators and legislators, and the interpretation
and application of those provisions have been challenged in the federal courts.
Bankshares does not presently engage in securities-related activities in any
material respect.
NBB and BTC
General. NBB is a national banking association incorporated under the laws of
the United States and is subject to examination by the Office of the Comptroller
of the Currency (the OCC). Deposits in NBB are insured by the FDIC up to a
maximum amount (generally $100,000 per depositor, subject to aggregation rules).
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The OCC and the FDIC regulate or monitor all areas of NBB's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations and maintenance of books and records. The OCC requires NBB to
maintain certain capital ratios. NBB is required by the OCC to prepare
quarterly reports on NBB's financial condition and to conduct an annual audit of
its financial affairs in compliance with minimum standards and procedures
prescribed by the OCC. NBB also is required by the OCC to adopt internal
control structures and procedures in order to safeguard assets and monitor and
reduce risk exposure. While appropriate for safety and soundness of banks,
these requirements impact banking overhead costs.
BTC is organized as a Virginia-chartered banking corporation and is regulated
and supervised by the Bureau of Financial Institutions (BFI) of the Virginia
State Corporation Commission. In addition, as a federally insured bank, BTC is
regulated and supervised by the Federal Reserve Board, which serves as its
primary federal regulator and is subject to certain regulations promulgated by
the FDIC. Under the provisions of federal law, federally insured banks are
subject, with certain exceptions, to certain restrictions on extensions of
credit to their affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-
in-arrangements in connection with any extension of credit or the providing of
any property of service.
The Virginia State Corporation Commission and the Federal Reserve Board
conduct regular examinations of BTC reviewing the adequacy of the loan loss
reserves, quality of the loans and investments, propriety of management
practices, compliance with laws and regulations and other aspects of the bank's
operations. In addition to these regular examinations, Virginia chartered banks
must furnish to the Federal Reserve Board quarterly reports containing detailed
financial statements and schedules.
Community Reinvestment Act. NBB and BTC are subject to the provisions of the
Community Reinvestment Act of 1977 (the CRA), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of a
bank, to assess the bank's record in meeting the credit needs of the community
served by the bank, including low and moderate-income neighborhoods. The
banking regulators recently have substantially revised the implementing CRA
regulations. Under the new regulations, banks have the option of being assessed
for CRA compliance under one of several methods. Small banks are evaluated
differently than larger banks and technically are not subject to some data
collection requirements. The focus of the new regulations is on the volume and
distribution of a bank's loans, with particular emphasis on lending activity in
low and moderate-income areas and to low and moderate-income persons. The new
regulations place added importance on a bank's product delivery system,
particularly branch localities. The new regulations require banks, other than
small banks, to comply with significantly increased data collection
requirements. The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required for any bank
which has applied to, among other things, establish a new branch office that
will accept deposits, relocate an existing office, or merge, consolidate with or
acquire the assets or assume the liabilities of a federally regulated financial
institution. It is likely that banks' compliance with the CRA, as well as other
so-called fair lending laws, will face heightened government scrutiny and that
costs associated with compliance will increase.
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NBB and BTC received CRA ratings of "Outstanding" and "Satisfactory"
respectively, in their last examinations by their primary federal bank
regulators.
Branching. In 1986, the Virginia Banking Act was amended to remove the
geographic restrictions governing the establishment of branch banking offices.
Subject to the approval of the appropriate federal and state bank regulatory
authorities, BTC as a state bank, may establish a branch office anywhere in
Virginia.
National banks, like NBB, are required by the National Bank Act to adhere to
branch banking laws applicable to state banks in the states in which they are
located. Under current Virginia law, NBB may open branch offices throughout
Virginia with the prior approval of the OCC. In addition, with prior approval
of one or more of the Federal Reserve Board, the Virginia Commission, the OCC
and the FDIC, NBB will be able to acquire existing banking operations in
Virginia.
On September 29, 1994, President Clinton signed into law the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the Interstate Act).
The Interstate Act, which became effective September 29, 1995, allows bank
holding companies to acquire banks in any state, without regard to state law,
except that if the state has a minimum requirement for the amount of time a bank
must be in existence, that law must be preserved. Under the Virginia Banking
Act, a Virginia bank or all of the subsidiaries of Virginia holding companies
sought to be acquired must have been in continuous operation for more than two
years before the date of such proposed acquisition. The Interstate Act permits
banks to acquire out-of-state branches through interstate mergers, beginning
June 1, 1997. States can opt-in to interstate branching earlier, or opt-out
before June 1, 1997. De novo branching, where an out-of-state bank holding
company sets up a new branch in another state, would require a state's specific
approval. An acquisition or merger would not be permitted under the Interstate
Act if the bank, including its insured depository affiliates, would control more
than 10% of the total amount of deposits of insured depository institutions in
the United States, or would control 30% or more of the total amount of deposits
of insured depository institutions in any state.
Virginia has, by statute, elected to opt-in fully to interstate branching
under the Interstate Act, effective July 1, 1995. Under the Virginia statute,
Virginia state banks may, with the approval of the Virginia State Corporation
Commission, establish and maintain a de novo branch or acquire one or more
branches in a state other than Virginia, either separately or as part of a
merger. Procedures also are established to allow out-of-state domiciled banks
to establish or acquire branches in Virginia, provided the "home" state of the
bank permits Virginia banks to establish or acquire branches within its borders.
The activities of such branches would be subject to the same laws as Virginia
domiciled banks, unless such activities are prohibited by the law of the state
where the bank is organized. The Virginia State Corporation Commission would
have the authority to examine and supervise out-of-state state banks to ensure
that the branch is operating in a safe and sound manner and in compliance with
the laws of Virginia. The Virginia statute authorizes the Bureau of Financial
Institutions to enter into cooperative agreements with other state and federal
regulators for the examination and supervision of out-of-state state banks with
Virginia operations, or Virginia domiciled banks with operations in other
states. Likewise, national banks, with the approval of the OCC, may branch into
and out of the state of Virginia. Any Virginia branch of an out-of-state
national bank is subject to Virginia law (enforced by the OCC) with respect to
intrastate branching, consumer protection, fair lending and community
-12-
reinvestment as if it were a branch of a Virginia bank, unless preempted by
federal law.
The Interstate Act will permit banks and bank holding companies throughout the
United States to enter Virginia markets through the acquisition of Virginia
institutions and will make it easier for Virginia bank holding companies and
Virginia state and national banks to acquire institutions and to establish
branches in other states. Competition in market areas served by the Company may
increase as a result of the Interstate Act and the Virginia interstate banking
statutes.
Deposit Insurance. The FDIC establishes rates for the payment of premiums by
federally insured financial institutions. A Bank Insurance Fund (the BIF) is
maintained for commercial banks, with insurance premiums from the industry used
to offset losses from insurance payouts when banks fail. Beginning in 1993,
insured depository institutions like NBB and BTC paid for deposit insurance
under a risk-based premium system. Both NBB and BTC qualified for the minimum
annual premium rate of $2,000 per year in 1996. Beginning in 1997, all banks,
including NBB and BTC, will be subject to a higher FDIC assessment which will
fund interest payments for bank issues to resolve problems associated with the
savings and loan industry. This assessment will continue until 2018-2019. The
assessment will vary over the period from 1.29 cents to 2.43 cents per $100 of
deposits.
Government Policies. The operations of NBB and BTC are affected not only by
general economic conditions, but also by the policies of various regulatory
authorities. In particular, the Federal Reserve Board regulates money and
credit and interest rates in order to influence general economic conditions.
These policies have a significant influence on overall growth and distribution
of loans, investments and deposits and affect interest rates charged on loans or
paid for time and savings deposits. Federal Reserve Board monetary policies
have had a significant effect on the operating results of commercial banks in
the past and are expected to continue to do so in the future.
Limits on Dividends and Other Payments. As a national bank, NBB, may not pay
dividends from its capital; all dividends must be paid out of net profits then
on hand, after deducting expenses, losses, bad debts, accrued dividends on
preferred stock, if any, and taxes. In addition, a national bank is prohibited
from declaring a dividend on its shares of common stock until its surplus equals
its stated capital, unless there has been transferred to surplus no less than
one-tenth of the bank's net profits of (i) the preceding two consecutive half-
year periods (in the case of an annual dividend) or (ii) the preceding half-year
period (in the case of a quarterly or semi-annual dividend). The approval of
the OCC is required if the total of all dividends declared by a national bank in
any calendar year exceeds the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required
transfers to surplus or to fund the retirement of preferred stock.
The OCC has promulgated regulations that became effective on December 13,
1990, which significantly affect the level of allowable dividend payments for
national banks. The effect is to make the calculation of national banks'
dividend-paying capacity consistent with generally accepted accounting
principles. The allowance for loan and lease losses will not be considered an
element of "undivided profits then on hand" and provisions to the allowance are
treated as expenses and therefore not part of "net profits." Accordingly, a
national bank with an allowance greater than its statutory bad debts may not
include the excess in calculating undivided profits for dividend purposes.
Further, a national bank may be able to use a portion of its earned capital
surplus account as "undivided profits then on hand," depending on the
-13-
composition of that account.
As a state member bank subject to the regulations of the Federal Reserve
Board, BTC must obtain the approval of the Federal Reserve Board for any
dividend if the total of all dividends declared in any calendar year would
exceed the total of its net profits, as defined by the Federal Reserve Board,
for that year, combined with its retained net profits for the preceding two
years. In addition, a state member bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and
bad debts. For this purpose, bad debts are generally defined to include the
principal amount of loans which are in arrears with respect to interest by six
months or more, unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, a state member bank is
not permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand; however, it may net the sum of its bad debts as
so defined against the balance in its allowance for loan losses account and
deduct from undivided profits only bad debts as so defined in excess of that
account.
In addition, the Federal Reserve Board is authorized to determine, under
certain circumstances relating to the financial condition of a state member
bank, that the payment of dividends would be an unsafe or unsound practice and
to prohibit payment thereof. The payment of dividends that depletes a bank's
capital base could be deemed to constitute such an unsafe or unsound practice.
The Federal Reserve Board has indicated that banking organizations should
generally pay dividends only out of current operating earnings.
Virginia law also imposes restrictions on the ability of BTC to pay dividends.
A Virginia state bank is permitted to declare a dividend out of its "net
undivided profits", after providing for all expenses, losses, interest and taxes
accrued or due by the bank. In addition, a deficit in capital originally paid
in must be restored to its initial level, and no dividend can be paid which
could impair the bank's paid in capital. The Bureau of Financial Institutions
further has authority to limit the payment of dividends by a Virginia bank if it
determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
provides that no insured depository institution may make any capital
distribution (which would include a cash dividend) if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements.
Capital Requirements. The Federal Reserve Board has adopted risk-based
capital guidelines in final form which are applicable to Bankshares and BTC.
The Federal Reserve Board guidelines redefine the components of capital,
categorize assets into different risk classes and include certain off-balance
sheet items in the calculation of risk-weighted assets. The minimum ratio of
qualified total capital to risk-weighted assets (including certain off-balance
sheet items, such as standby letters of credit) is 8.0%. At least half of the
total capital must be comprised of Tier 1 capital for a minimum ratio of Tier 1
Capital to risk-weighted assets of 4.0%. The remainder may consist of a limited
amount of subordinated debt, other preferred stock, certain other instruments
and a limited amount of loan and lease loss reserves. The OCC has adopted
similar regulations applicable to NBB.
In addition, the Federal Reserve Board has established minimum leverage ratio
(Tier 1 capital to total assets less intangibles) guidelines that are applicable
to Bankshares and BTC. The OCC has adopted similar regulations applicable to
-14-
NBB. These guidelines provide for a minimum ratio of 3.0% for banks that meet
certain specified criteria, including that they have the highest regulatory
CAMEL rating and are not anticipating or experiencing significant growth and
have well-diversified risk. All other banks will be required to maintain an
additional cushion of at least 100 to 200 basis points, based upon their
particular circumstances and risk profiles. The guidelines also provide that
banks experiencing internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets.
Bank regulators from time to time have indicated a desire to raise capital
requirements applicable to banking organizations beyond current levels. In
addition, the number of risks which may be included in risk-based capital
restrictions, as well as the measurement of these risks, is likely to change,
resulting in increased capital requirements for banks. Bankshares, NBB and BTC
are unable to predict whether higher capital ratios would be imposed and, if so,
at what levels and on what schedule.
Legislative Developments
The difficulties encountered nationwide by financial institutions during 1990
and 1991 prompted federal legislation designed to reform the banking industry
and to promote the viability of the industry and of the deposit insurance
system. FDICIA, which became effective on December 19, 1991, bolsters the
deposit insurance fund, tightens bank regulation and trims the scope of federal
deposit insurance as summarized below.
FDIC Funding. The legislation bolsters the bank deposit insurance fund with
$70 billion in borrowing authority and increases to $30 billion from $5 billion
the amount the FDIC can borrow from the U.S. Treasury to cover the cost of bank
failures. The loans, plus interest, would be repaid by premiums that banks pay
on domestic deposits over the next fifteen years.
Prompt Corrective Action. Among other things, FDICIA requires the federal
banking agencies to take "prompt corrective action" in respect to banks that do
not meet minimum capital requirements. FDICIA establishes five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized."
If a bank does not meet all of the minimum capital ratios necessary to be
considered adequately capitalized, it will be considered undercapitalized,
significantly undercapitalized or critically undercapitalized, depending on the
amount of the shortfall in its capital.
If a depository institution's principal federal regulator determines that an
otherwise adequately capitalized institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, it may require the
institution to submit a corrective action plan, restrict its asset growth and
prohibit branching, new acquisitions and new lines of business. An
institution's principal federal regulator may deem the institution to be
engaging in an unsafe or unsound practice if it receives a less than
satisfactory rating for asset quality, management, earnings or liquidity in its
most recent examination.
Among other possible sanctions, an undercapitalized depository institution may
not pay dividends and is required to submit a capital restoration plan to its
principal federal regulator. In addition, its holding company may be required
to guarantee compliance with the capital restoration plan under certain
circumstances. If an undercapitalized depository institution fails to submit or
-15-
implement an acceptable capital restoration plan, it can be subject to more
severe sanctions, including an order to sell sufficient voting stock to become
adequately capitalized. More severe sanctions and remedial actions can be
mandated by the regulators if an institution is considered significantly or
critically undercapitalized.
In addition, FDICIA requires regulators to draft a new set of non-capital
measures of bank safety, such as loan underwriting standards and minimum
earnings levels. The legislation also requires regulators to perform annual on-
site bank examinations, places limits on real estate lending by banks and
tightens auditing requirements. In April 1995, the regulators adopted safety
and soundness standards as required by FDICIA in the following areas: (i)
operational and managerial; (ii) asset quality earnings and stock valuation; and
(iii) employee compensation.
Deposit Insurance. FDICIA reduces the scope of federal deposit insurance.
The most significant change ended the "too big to fail" doctrine, under which
the government protects all deposits in most banks, including those exceeding
the $100,000 insurance limit. The FDIC's ability to reimburse uninsured
deposits--those over $100,000 and foreign deposits--has been sharply limited.
Since December 1993, the Federal Reserve Board's ability to finance
undercapitalized banks with extended loans from its discount window has been
restricted. In addition, only the best capitalized banks will be able to offer
insured brokered deposits without FDIC permission or to insure accounts
established under employee pension plans.
As of September 29, 1996, "The Depository Insurance Fund Act of 1996" became
law. This legislation provided for a one time assessment on banks that had
previously acquired certain deposits from savings and loan institutions.
Neither NBB or BTC were subject to that special assessment. Beginning in 1997,
all banks will be subject to increased assessments that are designed to finally
resolve problems associated with the savings and loan industry.
Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks, thrifts and other financial institutions are
periodically considered by the executive branch of the federal government,
Congress and various state governments, including Virginia. New proposals,
could significantly change the regulation of banks and the financial services
industry. It cannot be predicted what might be proposed or adopted on how these
proposals would affect the Company.
Other Business Concerns
The banking industry is particularly sensitive to interest rate fluctuations,
as the spread between the rates which must be paid on deposits and those which
may be charged on loans is an important component of profit. In addition, the
interest which can be earned on a bank's invested funds has a significant effect
on profits. Rising interest rates typically reduce the demand for new loans,
particularly the real estate loans which represent a significant portion of
NBB's and BTC's loan demand, as well as certain NBB loans in which BTC
participates.
-16-
STATISTICAL DISCLOSURE BY NATIONAL BANKSHARES, INC.
AND SUBSIDIARY (BANKSHARES)
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
----------------------------------------------------------------------
RATES AND INTEREST DIFFERENTIAL
-------------------------------
A. AVERAGE BALANCE SHEETS
The following table presents, for the years indicated, condensed daily
average balance sheet information.
($ in thousands)
December 31,
ASSETS 1996 1995 1994
------ ---- ---- ----
Cash and due from banks $ 11,493 10,189 9,108
Federal funds sold 8,903 12,105 11,245
Securities available for sale:
Taxable 65,992 41,695 40,023
Nontaxable 6,679 930 ---
Securities held to maturity:
Taxable 79,599 105,701 111,091
Nontaxable 25,133 35,668 34,251
Mortgage loans held for sale 850 723 995
Loans, net 177,419 159,920 152,976
Other assets 11,977 11,475 10,273
-------- ------- -------
Total assets $388,045 378,406 369,962
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Noninterest-bearing demand
deposits $ 41,997 38,833 36,724
Interest-bearing demand deposits 76,017 77,545 77,182
Savings deposits 49,783 54,698 67,905
Time deposits 168,141 159,185 143,356
-------- ------- -------
Total deposits 335,938 330,261 325,167
Short-term borrowings 433 593 891
Other liabilities 2,215 1,826 1,502
-------- ------- -------
Total liabilities 335,586 332,680 327,560
Stockholders' equity 49,459 45,726 42,402
-------- ------- -------
Total liabilities and
stockholders' equity $388,045 378,406 369,962
======== ======= =======
-17-
B. ANALYSIS OF NET INTEREST EARNINGS
The following table shows the major categories of interest-earning assets and interest-bearing
liabilities, the interest earned or paid, the average yield or rate on the daily average balance
outstanding, net interest income and net yield on average interest-earning assets for the years
indicated.
December 31, 1996 December 31, 1995 December 31, 1994
Average Average Average
Average Yield/ Average Yield/ Average Yield/
($ in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
Interest-earning
assets:
Loans, net (1)(2)(3) $178,269 17,339 9.73% 160,643 15,897 9.90% 153,971 13,857 9.00%
Taxable securities 145,591 8,877 6.10% 147,396 9,723 6.60% 151,114 9,966 6.60%
Nontaxable
securities (1) 31,812 2,971 9.34% 36,598 2,856 7.80% 34,251 2,910 8.50%
Federal funds sold 8,903 567 6.37% 12,105 704 5.82% 11,245 450 4.00%
-------- ------- ------- ------- ------- -------
Total interest-
earning assets $364,575 29,754 8.16% 356,742 29,180 8.18% 350,581 27,183 7.75%
======== ======= ======= ======= ======= =======
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 76,017 2,182 2.87% 77,545 2,353 3.03% 77,182 1,975 2.56%
Savings deposits 49,783 1,646 3.31% 54,698 1,798 3.29% 67,905 2,613 3.85%
Time deposits 168,141 9,181 5.46% 159,185 8,517 5.35% 143,356 6,060 4.23%
Short-term borrowings 433 27 6.24% 593 35 5.90% 891 36 4.04%
Long-term debt --- --- --- --- --- --- --- --- ---
-------- ------- ------- ------- ------- -------
Total interest-
bearing liabilities $294,374 13,036 4.43% 292,021 12,703 4.35% 289,334 10,684 3.69%
======== ======= ======= ======= ======= =======
Net interest income
and interest rate
spread 16,718 3.73% 16,477 3.83% 16,499 4.06%
======= ======= =======
Net yield on average
interest-earning
assets 4.59% 4.62% 4.71%
(1) Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a
Federal income tax rate of 34%.
(2) Loan fees of $374 in 1996, $305 in 1995 and $274 in 1994 are included in total interest income.
(3) Nonaccrual loans are included in average balances for yield computations.
-18-
C. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The Company's primary source of revenue is net interest income, which is the difference between the
interest and fees earned on loans and investments and the interest paid on deposits and other funds.
The Company's net interest income is affected by changes in the amount and mix of interest-earning
assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets and
rates paid on interest-bearing liabilities. The following table sets forth, for the years indicated,
a summary of the changes in interest income and interest expense resulting from changes in average
asset and liability balances (volume) and changes in average interest rates (rate).
1996 Over 1995 1995 Over 1994
Changes Due To Changes Due To
Net Dollar Net Dollar
($ in thousands) Rates(2) Volume(2) Change Rates(2) Volume(2) Change
-------- --------- ---------- -------- --------- ----------
Interest income:(1)
Loans $ (276) 1,718 1,442 1,421 619 2,040
Taxable securities (728) (118) (846) 2 (245) (243)
Nontaxable securities 518 (403) 115 (246) 192 (54)
Federal funds sold 62 (199) (137) 217 37 254
------ ------ ------ ------ ------ ------
Increase(decrease) in
income on interest-
earning assets $ (424) 998 574 1,394 603 1,997
------ ------ ------ ------ ------ ------
Interest expense:
Interest-bearing demand
deposits $ (125) (46) (171) 369 9 378
Savings deposits 10 (162) (152) (349) (466) (815)
Time deposits 178 486 664 1,736 721 2,457
Short-term borrowings 2 (10) (8) 13 (14) (1)
------ ------ ------ ------ ------ ------
Increase(decrease) in
expense of interest-
bearing liabilities $ 65 268 333 1,769 250 2,019
------ ------ ------ ------ ------ ------
Increase (decrease) in net
interest income $ (489) 730 241 (375) 353 (22)
====== ====== ====== ====== ====== ======
(1) Taxable equivalent basis using a Federal income tax rate of 34%.
(2) Variances caused by the change in rate times the change in volume have been allocated to rate and
volume changes proportional to the relationship of the absolute dollar amounts of the change in each.
-19-
ANALYSIS OF INTEREST RATE SENSITIVITY
The table below sets forth, as of December 31, 1996, the distribution of
repricing opportunities of the Company's interest-earning assets and
interest-bearing liabilities, the interest rate sensitivity gap (i.e.,
interest rate sensitive assets less interest rate sensitive liabilities), the
cumulative interest rate sensitivity gap ratio (i.e., interest rate
sensitivity gap divided by total interest-earning assets) and the cumulative
interest rate sensitivity gap ratio. The table sets forth the time periods
during which interest-earning assets and interest-bearing liabilities will
mature or may reprice in accordance with their contracted terms.
Certain shortcomings are inherent in the method of analysis presented in the
following table. For example, although certain assets and liabilities may
have similar maturities or periods of repricing, they may react in different
degrees and at different times to changes in market interest rates. Also,
loan prepayments and early withdrawals of certificates of deposit could cause
the interest sensitivities to vary from those which appear on the table.
An interest rate sensitivity gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would generally tend
to affect adversely net interest income while a positive gap would generally
tend to result in an increase in net interest income. During a period of
declining interest rates, a negative gap would generally tend to result in
increased net interest income, while a positive gap would generally tend to
affect adversely net interest income. The Company's future earnings may be
adversely affected by a sharp upturn in interest rates as Bankshares is
liability sensitive for a period extending beyond one year. In a falling
rate environment earnings might benefit to a certain degree from this
position, because assets at higher rate levels would reprice downward at a
slower rate than interest sensitive liabilities. Over the one to five year
period, the Company's cumulative interest-sensitivity position reflects an
asset sensitive position. This would mean the Company would benefit
initially from falling rates but would be adversely affected by rising rates.
This would depend, however, on the length of time rates were rising and
falling and the length of time rates remained stable at the level ultimately
reached.
-20-
An interest-sensitivity table showing all major interest sensitive asset and liability categories for the
time intervals indicated and cumulative "gaps" for each interval is set forth on the following table.
INTEREST RATE December 31, 1996
SENSITIVITY TABLE (1) Interest-sensitive (days)
1-5 >5
($ in thousands) 1-90 91-180 181-365 Years Years Total
---- ------ ------- ----- ----- -----
Interest-earning assets:
Commercial and industrial loans $ 20,528 5,928 14,293 29,064 17,585 87,398
Real estate mortgage loans 1,475 4,407 9,481 14,625 13,434 43,422
Real estate construction loans 6,295 --- --- --- --- 6,295
Loans to individuals 19,367 2,828 5,242 29,150 1,855 58,442
-------- ------- ------- ------- ------- -------
Total loans, net of unearned income (2) $ 47,665 13,163 29,016 72,839 32,874 195,557
-------- ------- ------- ------- ------- -------
Federal funds sold $ 1,910 --- --- --- --- 1,910
Securities available for sale 24,587 9,250 2,750 13,300 12,647 62,534
Securities held to maturity 21,265 16,800 7,175 38,548 24,922 108,710
Mortgage loans held for sale 516 --- --- --- --- 516
-------- ------- ------- ------- ------- -------
Total interest-earning assets $ 95,943 39,213 38,941 124,687 70,443 369,227
======== ======= ======= ======= ======= =======
Interest-bearing liabilities:
Interest-bearing demand deposits $ 73,804 --- --- --- --- 73,804
Savings deposits 48,164 --- --- --- --- 48,164
Time deposits 42,042 26,977 52,905 46,455 141 168,520
Other borrowings 627 --- --- --- --- 627
-------- ------- ------- ------- ------- ---
-------
Total interest-bearing liabilities $164,637 26,977 52,905 46,455 141 291,115
======== ======= ======= ======= ======= =======
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities 0.58 0.71 0.71 1.03 1.27 1.27
======== ======= ======= ======= ======= =======
Cumulative interest-sensitivity gap $(68,694) (56,458) (70,422) 7,810 78,112 78,112
======== ======= ======= ======= ======= =======
(1) The Company is sensitive to interest rate changes, as liabilities generally reprice or mature
before interest-earning assets. The above gap table reflects the Company's rate-sensitive
position at December 31, 1996, and is not necessarily reflective of its position throughout the
year. The carrying amounts of interest-rate sensitive assets and liabilities are presented in
the periods in which they reprice to market rates or mature and are summed to show the
interest-rate sensitivity gap.
(2) Excludes nonaccrual loans.
-21-
II. INVESTMENT PORTFOLIO
A. BOOK VALUE OF INVESTMENTS
The amortized costs and fair values of securities available for sale as of December 31, 1996,
1995 and 1994 were as follows:
December 31,
1996 1995 1994
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
($ in thousands) COSTS VALUES COSTS VALUES COSTS VALUES
--------- ------ --------- ------ --------- ------
Securities available for sale:
U.S. Treasury $ 8,740 8,790 14,991 15,322 5,497 5,237
U.S. Government agencies and
corporations 33,840 33,640 42,586 42,809 26,887 24,942
States and political subdivisions 8,868 8,619 7,613 7,567 --- ---
Mortgage-backed securities (1) 4,568 4,452 4,748 4,645 4,802 4,402
Other securities 7,074 7,033 5,505 5,527 1,686 1,638
------- ------ ------ ------ ------ ------
Total securities available for sale $62,910 62,534 75,443 75,870 38,872 36,219
======= ====== ====== ====== ====== ======
The amortized costs of securities held to maturity as of December 31, 1996, 1995 and 1994 were as
follows:
December 31,
($ in thousands) 1996 1995 1994
---- ---- ----
Securities held to maturity:
U.S. Treasury $ 11,547 19,330 35,317
U.S. Government agencies and corporations 54,804 49,938 66,192
States and political subdivisions 34,144 36,428 38,482
Mortgage-backed securities (1) 767 961 1,147
Other securities 7,448 5,108 6,874
-------- ------- -------
Total securities held to maturity $108,710 111,765 148,012
======== ======= =======
(1) The majority of Mortgage-backed Securities and Collateralized Mortgage Obligations held at
December 31, 1996 were backed by U.S. agencies. Certain holdings are required to be
periodically subjected to the Financial Institution Examination Council's (FFIEC) high risk
mortgage security test. These tests address possible fluctuations in the average life and
price sensitivity which are the primary risks associated with this type of security. Such
tests are usually subject to regulatory review.
Except for U.S. Government securities, the Company has no securities with any issuer that exceeds
10% of stockholders' equity.
-22-
B. MATURITIES AND ASSOCIATED YIELDS
The following table presents the maturities for those securities available for sale and held to
maturity as of December 31, 1996 and weighted average yield for each range of maturities.
Maturities and Yields
December 31, 1996
($ in thousands except for % data) < 1 Year 1-5 Years 5-10 Years > 10 Years None Total
-------- --------- ---------- ---------- ---- -----
Available for Sale
------------------
U.S. Treasury $ 2,006 3,339 3,445 --- --- $ 8,790
6.99% 6.87% 6.06% --- --- 6.58%
U.S. Agencies 3,442 16,344 13,363 491 --- 33,640
5.02% 5.99% 7.01% 7.41% --- 6.32%
Mortgage-backed securities 315 28 2,896 1,213 --- 4,452
6.06% 7.24% 5.99% 5.86% --- 5.97%
Taxable Securities --- --- 1,557 806 --- 2,363
--- --- 6.67% 7.63% --- 6.98%
Nontaxable Securities --- 351 4,906 999 --- 6,256
--- 6.15% 6.95% 7.20% --- 6.95%
Corporate 1,001 2,214 1,487 1,523 --- 6,225
5.58% 6.39% 6.79% 7.07% --- 6.53%
Other securities --- --- --- --- 808 808
--- --- --- --- 7.03% 7.03%
------ ------ ------ ------ ------ -------
Total 6,764 22,276 27,654 5,032 808 62,534
5.73% 6.16% 6.74% 6.91% 7.03% 6.24%
====== ====== ====== ====== ====== =======
Held To Maturity
----------------
U.S. Treasury 5,003 4,022 2,522 --- --- 11,547
6.08% 4.91% 5.58% --- --- 5.56%
U.S. Agencies 10,598 32,732 10,974 500 --- 54,804
5.15% 6.02% 6.73% 8.07% --- 6.02%
Mortgage-backed securities --- 394 373 --- --- 767
--- 8.00% 7.97% --- --- 7.99%
Taxable Securities 210 605 1,329 495 --- 2,639
8.47% 6.48% 6.97% 7.45% --- 7.07%
Nontaxable Securities 2,571 13,519 13,110 2,305 --- 31,505
9.00% 7.67% 7.67% 8.30% --- 7.79%
Corporate 251 3,527 1,961 460 --- 6,199
8.05% 6.49% 7.15% 7.45% --- 6.83%
Other securities 148 694 210 197 --- 1,249
7.52% 5.87% 9.41% 8.99% --- 7.16%
------ ------ ------ ------ ------ -------
Total 18,781 55,493 30,479 3,957 --- 108,710
6.02% 6.39% 7.08% 8.10% --- 6.45%
====== ====== ====== ====== ====== =======
(1) Rates shown represent weighted average yield on a fully taxable basis.
-23-
III. LOAN PORTFOLIO
--------------
The Company concentrates its lending activities in commercial and
industrial loans, real estate mortgage loans both residential and
business, and loans to individuals. The following tables set forth (i)
a comparison of the Company's loan portfolio by major category of loans
as of the dates indicated and (ii) the maturities and interest rate
sensitivity of the loan portfolio at December 31, 1996.
A. TYPES OF LOANS
December 31,
($ in thousands) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Commercial and industrial
loans $ 87,519 59,609 59,213 67,359 69,984
Real estate mortgage
loans 43,917 45,589 44,447 40,236 42,771
Real estate construction
loans 6,295 6,007 5,643 3,967 4,062
Loans to individuals 60,991 56,920 52,031 43,084 37,349
-------- ------- ------- ------- -------
Total loans 198,722 168,125 161,334 154,646 154,166
Less unearned income (2,549) (2,307) (2,494) (1,907) (1,284)
-------- ------- ------- ------- -------
Total loans, net of
unearned income 196,173 165,818 158,840 152,739 152,882
Less allowance for loans
losses (2,575) (2,625) (2,551) (2,583) (2,327)
-------- ------- ------- ------- -------
Total loans, net $193,598 163,193 156,289 150,156 150,555
======== ======= ======= ======= =======
B. MATURITIES AND INTEREST RATE SENSITIVITIES
December 31, 1996
After
($ in thousands) <1 Year 1-5 Years 5 Years Total
------- --------- ------- -----
Commercial and
industrial $41,255 29,366 16,898 87,519
Real estate
construction 6,295 --- --- 6,295
Less loans with
predetermined interest
rates (8,640) (9,616) (14,443) (32,699)
------- ------- ------- -------
Loans with adjustable
rates $38,910 19,750 2,455 61,115
======= ======= ======= =======
-24-
C. RISK ELEMENTS
1. Nonaccrual, Past Due and Restructured Loans
The following table presents aggregate amounts for nonaccrual
loans, restructured loans, other real estate owned, net and
accruing loans which are contractually past due ninety days or
more as to interest or principal payments.
December 31,
($ in thousands) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Nonaccrual loans:
Commercial and industrial $ 121 270 --- 710 483
Real estate mortgage 495 418 390 1,123 884
Real estate construction --- --- --- --- ---
Loans to individuals --- 30 30 31 23
------ ----- ----- ----- -----
$ 616 718 420 1,864 1,390
------ ----- ----- ----- -----
Restructured loans:
Commercial and industrial --- --- 229 598 ---
------ ----- ----- ----- -----
Total nonperforming loans $ 616 718 649 2,462 1,390
Other real estate owned, net 474 762 1,150 225 837
------ ----- ----- -----
Total nonperforming assets $1,090 1,480 1,799 2,687 2,227
====== ===== ===== ===== =====
Accruing loans past due 90
days or more:
Commercial and industrial $ 14 11 4 45 144
Real estate mortgage 252 250 219 198 377
Real estate construction --- --- 87 243 237
Loans to individuals 192 313 180 128 144
------ ----- ----- ----- -----
$ 458 574 490 614 902
====== ===== ===== ===== =====
The effect of nonaccrual and restructured loans on interest
income is presented below:
($ in thousands) 1996 1995 1994
---- ---- ----
Scheduled interest:
Nonaccrual loans $ 68 59 38
Restructured loans --- --- 19
---- ---- ----
Total scheduled interest $ 68 59 57
---- ---- ----
Recorded interest:
Nonaccrual loans $ 24 5 1
Restructured loans --- --- 9
---- ---- ----
Total recorded interest $ 24 5 10
==== ==== ====
-25-
Interest is recognized on the cash basis for all loans carried
in nonaccrual status. Loans generally are placed in
nonaccrual status when the collection of principal or interest
is ninety days or more past due, unless the obligation is both
well-secured and in the process of collection.
2. Potential Problem Loans
At December 31, 1996, the recorded investment in loans which
have been identified as impaired loans totaled $725,000. Of
this amount, $354,000 related to loans with no valuation
allowance and $371,000 related to loans with a corresponding
valuation allowance of $290,000. For the year-ended December
31, 1996, the average recorded investment in impaired loans
was approximately $800,000 and the total interest income
recognized on impaired loans was $33,000 of which $23,000 was
recognized on a cash basis.
At December 31, 1995, the recorded investment in loans which
have been identified as impaired loans totaled $837,000. Of
this amount, $133,000 related to loans with no valuation
allowance and $704,000 related to loans with a corresponding
valuation allowance of $419,000. For the year ended December
31, 1995, the average recorded investment in impaired loans
was approximately $906,000, and the total interest income
recognized on impaired loans was $47,000 of which $5,000 was
recognized on a cash basis. The balance of impaired loans at
January 1, 1995 totaled approximately $812,000. The initial
adoption of SFAS No. 114 did not require an increase to the
Company's allowance for loan losses. The impact of SFAS No.
114, as amended by SFAS No. 118, was immaterial to the
Company's consolidated financial statements as of and for the
year ended December 31, 1995.
3. Foreign Outstandings
At December 31, 1996, 1995 and 1994, there were no foreign
outstandings.
4. Loan Concentrations
The Company does a general banking business, serving the
commercial, agricultural and personal banking needs of its
customers. NBB's trade territory, commonly referred to as the
New River Valley, consists of Montgomery and Giles Counties,
Virginia and portions of adjacent counties. NBB's operating
results are closely correlated with the economic trends within
this area which are, in turn, influenced by the area's three
largest employers, Virginia Polytechnic Institute and State
University, Montgomery County Schools and Hoechst-Celanese.
Other industries include a wide variety of manufacturing,
retail and service concerns. Most of BTC's business
originates from the communities of Tazewell and Bluefield and
other communities in Tazewell County, Virginia and in Mercer
County, West Virginia. BTC's service area has largely
depended on the coal mining industry and farming for its
economic base. In recent years, coal companies have
mechanized and reduced the number of persons engaged in the
-26-
production of coal. There are still a number of support
industries for the coal mining business that continue to
provide employment in the area. Additionally, several new
businesses have been established in the area and Bluefield,
West Virginia has begun to emerge as a regional medical
center. The ultimate collectibility of the loan portfolios
and the recovery of the carrying amounts of repossessed
property are susceptible to changes in the market conditions
of these areas.
At December 31, 1996 and 1995, approximately $71 million and
$52 million, respectively, of the loan portfolio were
concentrated in commercial real estate. This represents
approximately 36% and 34% of the loan portfolio at December
31, 1996 and 1995, respectively. Included in commercial real
estate at December 31, 1996 and 1995 was approximately $49
million and $25 million, respectively, in loans for college
housing and professional office buildings. Loans for the
purpose of acquiring residential real estate were
approximately $60 million and $56 million at December 31, 1996
and 1995, respectively. This represents approximately 31% and
34% of the loan portfolio at December 31, 1996 and 1995,
respectively. Loans primarily for the purpose of purchasing
automobiles were approximately $29 million and $25 million at
December 31, 1996 and 1995, respectively. This represents
approximately 15% of the loan portfolio at December 31, 1996
and 1995.
The Company has established operating policies relating to the
credit process and collateral in loan originations. Loans to
purchase real and personal property are generally
collateralized by the related property and with loan amounts
established based on certain percentage limitations of the
property's total stated or appraised value. Credit approval
is primarily a function of collateral and the evaluation of
the creditworthiness of the individual borrower or project
based on available financial information.
-27-
IV. SUMMARY OF LOAN LOSS EXPERIENCE
-------------------------------
A. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The following tabulation shows average loan balances at the end of each period; changes in the
allowance for loan losses arising from loans charged off and recoveries on loans previously
charged off by loan category; and additions to the allowance which have been charged to operating
expense:
December 31,
($ in thousands) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Average loans outstanding $177,419 159,920 152,976 149,027 153,487
======== ======= ======= ======= =======
Balance at beginning of year 2,625 2,551 2,583 2,327 2,121
Charge-offs:
Commercial and industrial loans 95 23 72 231 441
Real estate mortgage loans 11 9 192 285 198
Real estate construction loans --- --- 53 --- ---
Loans to individuals 400 259 322 246 406
-------- ------- ------- ------- -------
Total loans charged off 506 291 639 762 1,045
-------- ------- ------- ------- -------
Recoveries:
Commercial and industrial loans 4 10 7 10 17
Real estate mortgage loans 64 16 4 5 ---
Real estate construction loans --- --- --- --- ---
Loans to individuals 57 57 43 50 26
-------- ------- ------- ------- -------
Total recoveries 125 83 54 65 43
-------- ------- ------- ------- -------
Net loans charged off 381 208 585 697 1,002
-------- ------- ------- ------- -------
Additions charged to operations 331 282 553 953 1,208
-------- ------- ------- ------- -------
Balance at end of year 2,575 2,625 2,551 2,583 2,327
======== ======= ======= ======= =======
Net charge-offs to average loans outstanding 0.21% 0.13% 0.38% 0.47% 0.65%
======== ======= ======= ======= =======
Factors influencing management's judgment in determining the amount of the loan loss
provision charged to operating expense include the quality of the loan portfolio as
determined by management, the historical loan loss experience, diversification as to type of
loans in the portfolio, the amount of secured as compared with unsecured loans and the value
of underlying collateral, banking industry standards and averages, and general economic
conditions.
-28-
B. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been allocated according to the amount deemed necessary to provide
for anticipated losses within the categories of loans for the years indicated as follows:
December 31,
1996 1995 1994 1993 1992
Percent Percent Percent Percent Percent
of of of of of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
($ in Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Commercial
and
industrial
loans $ 403 44.04% 411 35.46% 679 36.70% 860 43.56% 873 45.40%
Real estate
mortgage
loans 305 22.10% 363 27.12% 364 27.55% 373 26.02% 416 27.74%
Real estate
construction
loans 51 3.17% 100 3.57% 37 3.50% 54 2.56% 50 2.63%
Loans to
individuals 504 30.69% 271 33.85% 569 32.25% 685 27.86% 567 24.23%
Unallocated 1,312 1,480 902 611 421
------ ------ ------ ------ ------
$2,575 100.00% 2,625 100.00% 2,551 100.00% 2,583 100.00% 2,327 100.00%
======= ====== ====== ====== ======
-29-
V. DEPOSITS
--------
A. AVERAGE AMOUNTS OF DEPOSITS AND AVERAGE RATES PAID
Average amounts and average rates paid on deposit categories in
excess of 10% of average total deposits are presented below:
December 31,
1996 1995 1994
Average Average Average
Average Rates Average Rates Average Rates
($ in thousands) Amounts Paid Amounts Paid Amounts Paid
------- ------- ------- ------- ------- -------
Noninterest-bearing
demand deposits $ 41,997 --- 38,833 --- 36,724 ---
Interest-bearing
demand deposits 76,017 2.87% 77,545 3.03% 77,182 2.56%
Savings deposits 49,783 3.31% 54,698 3.29% 67,905 3.85%
Time deposits 168,141 5.46% 159,185 5.35% 143,356 4.23%
-------- ------- -------
Average total
deposits $335,938 4.43% 330,261 4.35% 325,167 3.69%
======== ======= =======
B. TIME DEPOSITS OF $100,000 OR MORE
The following table sets forth time certificates of deposit and
other time deposits of $100,000 or more:
DECEMBER 31, 1996
Over 3 Over 6
3 Months Months
Months Through 6 Through 12 Over 12
($ in thousands) or Less Months Months Months Total
------- --------- ---------- ------- -----
Certificates of
deposit $11,314 3,431 12,682 6,322 33,749
Other time deposits 292 105 --- 3,268 3,665
------- ------ ------- ------ ------
Total time
deposits of
$100,000 or more $11,606 3,536 12,682 9,590 37,414
======= ====== ======= ====== ======
-30-
VI. RETURN ON EQUITY AND ASSETS
---------------------------
The ratio of net income to average stockholders' equity and to average
total assets, and certain other ratios are presented below:
December 31,
1996 1995 1994
---- ---- ----
Return on average assets 1.58% 1.46% 1.43%
Return on average equity 12.37% 12.08% 12.51%
Dividend payout ratio 37.55% 37.32% 37.13%
Average equity to average assets 12.75% 12.08% 11.46%
Item 2. Properties
- -------------------
Bankshares' headquarters, including the Main Office of NBB, are located at
100 South Main Street, Blacksburg, Virginia. In addition to the Main Office
location, NBB owns six branch offices: two in the Town of Blacksburg; one in
the Town of Christiansburg; one in Montgomery County; one in the Town of
Pearisburg; and the sixth in the Town of Pembroke. An additional branch in
the Rich Creek area of Giles County is expected to open in the second quarter
of 1997. NBB leases office space near the Main Office which is occupied by
NBB's trust, marketing, audit, compliance and credit review departments. An
additional property was acquired in 1996 to provide for additional office
space, reducing the need for leased properties.
Bank of Tazewell County owns the land and building of six of its seven
offices. The bank leases the land and building for its seventh office. The
Main Office is located at Main Street, Tazewell, Virginia. Three additional
branches are located in Tazewell, one in North Tazewell and two are located
in Bluefield, Virginia. Management believes that its existing facilities are
adequate to meet present needs and any anticipated growth.
NBB owns all its computer and data processing hardware and is a licensee of
the software it utilizes. BTC also owns all of its computer and data
processing hardware and is a licensee of the software it utilizes. This
allows each bank to perform its data processing functions in-house.
Management anticipates that with the constantly changing technological
environment that significant future capital expenditures will be necessary.
Item 3. Legal Proceedings
- --------------------------
Bankshares, NBB nor BTC are currently involved in any material pending
legal proceedings, other than routine litigation incidental to NBB's and
BTC's banking business.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1996.
-31-
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 8, 1997.
The following is a list of names and ages of all executive officers of
Bankshares; their terms of office as officers; the positions and offices
within Bankshares held by each officer; and each person's principal
occupation or employment during the past five years.
YEAR ELECTED AN
NAME AGE OFFICES AND POSITIONS HELD OFFICER/DIRECTOR
-------------- --- -------------------------- ----------------
James G. Rakes 52 President and Chief 1986
Executive Officer, National
Bankshares, Inc.; and
President and Chief
Executive Officer of The
National Bank of Blacksburg
since 1983.
F. Brad Denardo 44 Corporate Officer, National 1989
Bankshares, Inc.; and
Executive Vice President
since 1989 and Senior Vice
President - Loans since 1985
of The National Bank of
Blacksburg.
Marilyn B. Buhyoff 48 Secretary & Counsel, 1989
National Bankshares, Inc.;
and Senior Vice President -
Administration since 1992,
Vice President/Administra-
tion since 1990 and
Personnel Officer since 1987
of The National Bank of
Blacksburg.
Joan C. Nelson 46 Treasurer, National 1993
Bankshares, Inc.; and
Cashier since 1993, Senior
Vice President/ Operations
since 1989 and Vice
President/Operations since
1986 of the National Bank of
Blacksburg.
The executive officers listed above have served Bankshares and/or its
subsidiaries in the aforementioned executive capacity for the past five
years.
-32-
PART II
-------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
- ----------------------------------------------------------
There is no established trading market for the stock of National
Bankshares, Inc. As of March 14, 1997, the total number of holders of the
Registrant's common stock was 1,184.
Information concerning Market Price and Dividend Data is set forth under
"Common Stock Information and Dividends" on page 13 of Bankshares' 1996
Annual Report to Stockholders and is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The table entitled "Selected Consolidated Financial Data" on page 7 of
Bankshares' 1996 Annual Report to Stockholders is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------------
The information contained under "Management's Discussion and Analysis" on
pages 8 through 17 of Bankshares' 1996 Annual Report to Stockholders is
incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The following consolidated financial statements of the Registrant and the
Independent Auditors' Report set forth on pages 19 through 43 of Bankshares'
1996 Annual Report to Stockholders are incorporated herein by reference:
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 1996 and 1995
3. Consolidated Statements of Income - Years Ended December 31, 1996, 1995
and 1994
4. Consolidated Statements of Changes in Stockholders' Equity - Years Ended
December 31, 1996, 1995 and 1994
5. Consolidated Statements of Cash Flows - Years Ended December 31, 1996,
1995 and 1994
6. Notes to Consolidated Financial Statements - December 31, 1996, 1995 and
1994
-33-
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
- -----------------------------------------------------------------------------
None.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Executive Officers of Bankshares as of December 31, 1996 are listed on page
32 herein.
Information with respect to the directors of Bankshares is set out under
the caption "Election of Directors" on pages 2 through 4 of Bankshares' Proxy
Statement dated March 14, 1997, which information is incorporated herein by
reference.
Item 11. Executive Compensation
- --------------------------------
The information set forth under "Executive Compensation" on pages 5 through
9 of Bankshares' Proxy Statement dated March 14, 1997 is incorporated herein
by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information set forth under "Voting Securities and Stock Ownership" on
page 1 and under "Election of Directors" on pages 2 through 4 of Bankshares'
Proxy Statement dated March 14, 1997 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under "Certain Transactions With Officers and
Directors" on page 11 through 12 of Bankshares' Proxy Statement dated March
14, 1997 is incorporated herein by reference.
-34-
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1996 Annual Report
To Stockholders Page(s)*
1. Financial Statements:
--------------------
Independent Auditors' Report 19
Consolidated Balance Sheets -
December 31, 1996 and 1995 20
Consolidated Statements of
Income - Years ended December
31, 1996, 1995 and 1994 21
Consolidated Statements of Changes
in Stockholders' Equity - Years
ended December 31, 1996, 1995 and
1994 22
Consolidated Statements of Cash
Flows - Years ended December 31,
1996, 1995 and 1994 23
Notes to Consolidated
Financial Statements - December
31, 1996, 1995 and 1994 24-43
2. Financial Statement Schedules:
-----------------------------
Independent Auditor's Report of
Cook & Associates, LLP covering
the financial statements of Bank
of Tazewell County as of and for
the years ended December 31, 1995
and 1994, is filed as an Exhibit
and is incorporated by reference
herein. Exhibit 99
* Incorporated by reference from the indicated pages of the 1996 Annual
Report to Stockholders.
-35-
3. Exhibits:
--------
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
3(i) Articles of Incorporation, as (incorporated
amended, of National herein by
Bankshares, Inc. reference to
Exhibit 3(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
3(ii) Bylaws, as amended, of National 41
Bankshares, Inc.
4(i) Specimen copy of certificate (incorporated
for National Bankshares, Inc. herein by
common stock, $2.50 par value reference to
Exhibit 4(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Article Four of the Articles of (incorporated
Incorporation of National herein by
Bankshares, Inc. included in reference to
Exhibit No. 3(a)) Exhibit 4(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
10(ii)(B) Computer software license (incorporated
agreement dated June 18, 1990, herein by
by and between Information reference to
Technology, Inc. and The Exhibit 10(e) of
National Bank of Blacksburg the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employment Agreement dated (incorporated
January 1, 1992, by and between herein by
National Bankshares, Inc. and reference to
James G. Rakes Exhibit 10(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Capital Accumulation Plan (incorporated
(included in Exhibit No. 10(a)) herein by
reference to
Exhibit 10(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
-36-
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
*10(iii)(A) Employee Lease Agreement dated (incorporated
May 7, 1992, by and between herein by
National Bankshares, Inc. and reference to
The National Bank of Blacksburg Exhibit 10(c) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
13(i) 1996 Annual Report to 53
Stockholders (such Report,
except to the extent
incorporated herein by
reference, is being furnished
for the information of the
Commission only and is not
deemed to be filed as part of
this Report on Form 10-K)
21(i) Subsidiaries of National 107
Bankshares, Inc.
27 Financial Data Schedule 108
99 Independent Auditor's Report of 109
Cook & Associates, LLP on
financial statements of Bank of
Tazewell County as of and for
the years ended December 31,
1995 and 1994
* Indicates a management contract or compensatory plan required to be
filed herein.
(b) Reports on Form 8-K filed during the last quarter of the period covered
by this report:
------------------------------------------------------------------------
None.
(c) Exhibits required by Item 601 of Regulation S-K:
-----------------------------------------------
See Item 14(a)3 above.
(d) Financial Statement Schedules required by Regulation S-X:
--------------------------------------------------------
See Item 14(a)2 above.
-37-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, National Bankshares, Inc. has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL BANKSHARES, INC.
BY: /s/James G. Rakes
------------------------------
James G. Rakes, President
and Chief Executive Officer
DATE: March 28, 1997
------------------------------
BY: /s/Joan C. Nelson
------------------------------
Joan C. Nelson
Treasurer
DATE: March 28, 1997
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and in the capacities and on the date indicated.
NAME DATE TITLE
---- ---- -----
/s/C. L. Boatwright March 28, 1997 Director and Vice
------------------------ -------------- Chairman of the Board
C. L. BOATWRIGHT
/s/T. C. Bowen, Jr. March 28, 1997 Director
------------------------ --------------
T. C. BOWEN, JR.
/s/A. A. Crouse March 28, 1997 Director
------------------------ --------------
A. A. CROUSE
/s/R. E. Christopher, Jr. March 27, 1997 Director and Chairman of
------------------------ -------------- the Board
R. E. CHRISTOPHER, JR.
/s/R. E. Dodson March 28, 1997 Director
------------------------ --------------
R. E. DODSON
Director
------------------------ --------------
P. A. DUNCAN
/s/W. T. Peery March 28, 1997 Director
------------------------ --------------
W. T. PEERY
/s/J. G. Rakes March 28, 1997 President and Chief
------------------------ -------------- Executive Officer -
J. G. RAKES National Bankshares, Inc.
/s/J. R. Stewart March 27, 1997 Director
------------------------ --------------
J. R. STEWART
-38-
INDEX TO EXHIBITS
-----------------
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
3(i) Articles of Incorporation, as (incorporated
amended, of National Bankshares, herein by
Inc. reference to
Exhibit 3(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
3(ii) Bylaws, as amended of National 41
Bankshares, Inc.
4(i) Specimen copy of certificate for (incorporated
National Bankshares, Inc. common herein by
stock, $2.50 par value reference to
Exhibit 4(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Article Fourth of the Articles (incorporated
of Incorporation of National herein by
Bankshares, Inc. included in reference to
Exhibit No. 3(a)) Exhibit 4(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
10(ii)(B) Computer software license (incorporated
agreement dated June 18, 1990, herein by
by and between Information reference to
Technology, Inc. and The Exhibit 10(e) of
National Bank of Blacksburg the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employment Agreement dated (incorporated
January 1, 1992, by and between herein by
National Bankshares, Inc. and reference to
James G. Rakes Exhibit 10(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
-39-
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
*10(iii)(A) Capital Accumulation Plan (incorporated
(included in Exhibit No. 10(a)) herein by
reference to
Exhibit 10(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employee Lease Agreement dated (incorporated
May 7, 1992, by and between herein by
National Bankshares, Inc. and reference to
The National Bank of Blacksburg Exhibit 10(c) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
13(i) 1996 Annual Report to 53
Stockholders (such Report,
except to the extent
incorporated herein by
reference, is being furnished
for the information of the
Commission only and is not
deemed to be filed as part of
this Report on Form 10-K)
21(i) Subsidiaries of National 107
Bankshares, Inc.
27 Financial Data Schedule 108
99 Independent Auditor's Report of 109
Cook & Associates, LLP on
financial statements of Bank of
Tazewell County as of and for
the years ended December 31,
1995 and 1994
* Indicates a management contract or compensatory plan required to be
filed herein.
-40-