NATIONAL BANKSHARES
1996 Annual Report
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Contents
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In the Community 2
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To Our Stockholders 6
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Selected Consolidated Financial Data 7
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Management's Discussion and Analysis 8
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Statement of Management's Responsibility 20
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Independent Auditors' Report 21
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Consolidated Financial Statements 22
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Notes to Consolidated Financial Statements 28
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Corporate Information 52
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NBB
The National Bank
"For a Future You Can Bank On...Bank on Us!" It's not just a slogan, it's
The National Bank's commitment to be there for you and your family. It also
reflects our promise to remain true to our hometown roots. This is not a
commitment we take lightly. It's one we've made to generations of New River
Valley residents. The National Bank has been a local fixture for over a
century, through good times and bad. We intend to work hard to continue the
tradition of offering our neighbors a full range of financial services with a
personal touch.
PHOTOGRAPH OF MAIN OFFICE MANAGER SERVING REFRESHMENTS
TO CUSTOMERS DURING 4TH OF JULY CELEBRATION.
PHOTOGRAPH OF NBB HOSTING 1996 ANNUAL COMMUNITY BREAKFAST.
We understand what makes a community bank different. We know that our
customers deserve exceptional service. They expect a personal greeting and a
friendly smile. They want to develop long term relationships with our banking
and trust professionals, and they look for honest advice from bankers who will
be with them for the long haul. Our customers want their bank to keep up with
the times and to offer new and more convenient ways for them to manage their
finances. They would also like The National Bank to take an active and visible
role in their hometown.
PHOTOGRAPH OF "PENNIES FROM HEAVEN" HELD AT
HETHWOOD BRANCH FOR KIPPS ELEMENTARY STUDENTS.
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PHOTOGRAPH OF CHRISTMAS WITH HEAD START
PHOTOGRAPH OF PEMBROKE HERITAGE FESTIVAL
NBB is proud to be a part of the community. The bank and its employees
contribute time, talent and resources to a large number of important
activities. Every year we consult with community leaders and seek their advice
on how The National Bank can most effectively serve our locality. NBB's
bankers work with school children, and they volunteer with senior citizens.
They generously share their expertise with groups promoting economic
development at the regional and local levels. We like to participate, both as
a company and as individuals, in community festivals and celebrations. The New
River Valley is our home, and we believe that it is important to give something
back to the citizens who have rewarded us with their support and confidence for
almost 106 years.
PHOTOGRAPH OF WILDERNESS TRAIL FESTIVAL
PHOTOGRAPH OF RICH CREEK AUTUMN FEST
The National Bank--For a Future You Can Bank On... Bank On Us!
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Bank of Tazewell County
We are excited about the future of Bank of Tazewell County and its
affiliation with National Bankshares, Inc. Since this is the first year that
BTC will appear as a part of National Bankshares' Annual Report, a brief
description of BTC might be fitting.
PHOTOGRAPH OF R.E. DODSON AND ALONZO CROUSE
PHOTOGRAPH OF MAIN STREET FESTIVAL
BTC began in 1889 as "The Clinch Valley Bank", with roots in Tazewell,
Virginia. In 1893 the name was changed to "Bank of Clinch Valley". In 1929
Bank of Clinch Valley merged with "Farmers National Bank", also located in
Tazewell, to form the "Farmers Bank of Clinch Valley". In 1964 the Farmers
Bank of Clinch Valley merged with the Bank of Graham, Bluefield, Virginia,
establishing the "Bank of Tazewell County". Bank of Graham was organized in
1890 and had operated continuously in Bluefield, Virginia in the eastern
section of Tazewell County since that date. On May 31, 1996, in what is
believed to be the most significant development in its history, BTC became a
wholly owned subsidiary of National Bankshares, Inc.
PHOTOGRAPH OF DAYCARE AND PRESCHOOL STUDENTS AT BTC ON HALLOWEEN
BTC has always prided itself on its mission of satisfying the banking
needs of its customers in the areas where it operates. We are particularly
gratified that because of the affiliation with Bankshares, we will be able to
enlarge the scope of services offered. We are currently cooperating with the
highly skilled staff of Bankshares in working out the details of a
Visa/MasterCard credit card, secondary market mortgage loans and home equity
lines. These are just a few of the increased services the merger will allow
BTC to provide.
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PHOTOGRAPH OF KIDZOWN PLAYGROUND
Our history has been built on a philosophy of safety and soundness,
service to our customers, and the goal of being a good corporate citizen. We
support and participate in numerous activities and projects that make the
communities in which we do our banking very desirable areas in which to live
and rear our families.
PHOTOGRAPH OF A GINGERBREAD HOUSE DISPLAY
PHOTOGRAPH OF 1996 CHRISTMAS PARADE
Finally, we would like to express our appreciation to all who have made
BTC what it is today. The cornerstone of any business is the strength of its
people, whether they are shareholders, customers or bank personnel. We face
the future with the optimism and confidence that will enable us to embrace a
vision of success equal to or greater than our previous accomplishments.
PHOTOGRAPH OF THE TAZEWELL COUNTY FAIR
Bank of Tazewell County---We''ll Be There To Serve You All The Days Of
Your Life.
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National Bankshares
To Our Stockholders:
This past year proved to be momentous for National Bankshares, Inc. At the
same time the holding company was celebrating its tenth anniversary, we were
completing our first major expansion, a merger with Bank of Tazewell County.
We learned many things from this endeavor. We found that it takes stacks of
paper and numerous regulatory approvals before banking firms can combine. We
now know that mergers require a major commitment of time from directors,
employees and consultants. Most significantly, we discovered the importance of
working with the right merger partner. We were extremely fortunate to have the
Tazewell bank affiliate with us, where we dealt with individuals of integrity
and goodwill throughout the long and complex process.
In the several months since the completion of the merger, directors, officers
and employees of National Bankshares, The National Bank and Bank of Tazewell
County have worked together and come to know each other better. There are many
more similarities than differences among us. Both banks have deep roots in the
localities they serve. They are true community banks, committed to providing
high quality, personalized service to customers. NBB and BTC each has a
dedicated board of directors and a staff of experienced bankers. Looking to
the future, we plan to build on the strengths which both banks bring to
National Bankshares.
It is gratifying to report positive financial results to you at the end of the
first year of combined operations. When you review this Annual Report, you
will notice that 1996 net income reached over $6.1 million, 10.71% higher than
the combined totals of Bankshares and BTC in 1995. A solid 18.63% increase in
net loans, growth of 13.06% in noninterest income and a 5.16% reduction in
noninterest expense contributed to increased earnings. National Bankshares
ended 1996 with total assets of $388.9 million.
As National Bankshares, Inc. embarks on its first full year with more than one
subsidiary, we felt that it would be a fitting time to introduce a new
corporate logo. We hope you will agree that this design, which depicts
"...energy and the dynamic image of a rising sun..", is an appropriate symbol
for a corporation that has a positive view of growth and change, but also an
appreciation for the importance of enduring fundamentals. This is also a good
opportunity to thank you, our stockholders, for your continued support and to
restate our commitment to build and operate an exceptional community bank
holding company.
James G. Rakes
President and PICTURE OF
Chief Executive Officer JAMES G. RAKES
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National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data
$ In thousands, except per share data. Years ended December 31,
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Selected Interest income $ 28,647 28,094 26,062 25,827 28,304
Income Interest expense 13,036 12,703 10,684 10,752 13,965
Statement Net interest income 15,611 15,391 15,378 15,075 14,339
Data: Provision for loan
losses 331 282 553 953 1,208
Noninterest income 2,693 2,382 2,047 2,399 1,360
Noninterest expense 9,515 10,033 9,725 9,002 8,396
Income taxes 2,341 1,933 1,844 1,903 1,376
Net income 6,117 5,525 5,303 5,644 4,719
Per Share Net income $ 1.61 1.46 1.40 1.49 1.25
Data: Cash dividends declared 0.62 0.57 0.52 0.45 0.39
Book value per share(1) 13.56 12.70 11.25 10.81 9.81
Selected Loans, net $193,598 163,193 156,289 150,156 150,555
Balance Total securities 171,244 187,635 184,231 174,964 164,842
Sheet Total assets 388,850 380,915 373,132 357,773 352,977
Data at Total deposits 334,584 330,313 327,686 314,001 312,840
End Stockholders' equity 49,801 48,154 42,658 40,951 37,106
of Year:
Selected Loans, net $177,419 160,643 152,976 149,027 153,487
Balance Total securities 177,403 183,994 185,365 154,740 161,406
Sheet Total assets 388,045 378,406 369,962 349,747 353,673
Daily Total deposits 335,938 330,261 325,167 307,645 314,518
Averages: Stockholders' equity(1) 49,459 45,726 42,402 39,435 35,552
Selected Return on average assets 1.58 1.46 1.43 1.61 1.33
Ratios: Return on average
equity(1) 12.37 12.08 12.51 14.31 13.27
Dividend payout ratio 37.55 37.32 37.13 32.18 34.29
Average equity to
average assets(1) 12.75 12.08 11.46 11.28 10.05
(1) Includes amount related to common stock subject to ESOP put
option. The effect is immaterial.
Average Equity to Average Assets Graph
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
10.05% 11.28% 11.46% 12.08% 12.75%
(Dollars)
Cash Dividends Per Share Graph
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
0.39 0.45 0.52 0.57 0.62
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Management's Discussion and Analysis
($ In millions)
Net Income Graph
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
$ 4.7 5.6 5.3 5.5 6.1
Net Interest Income Graph
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
$ 14.3 15.1 15.4 15.4 15.6
($ In thousands, except per share data.)
PERFORMANCE SUMMARY 1996 v. 1995 Net income in 1996 for National Bankshares,
Inc. (Bankshares) and its wholly owned subsidiaries, The National Bank of
Blacksburg (NBB) and Bank of Tazewell County (BTC), (the Company) was $6,117,
an increase of $592 or 10.71%. This produced a return on average assets and
average equity of 1.58% and 12.37%, respectively.
Net income for 1995 was $5,525 which resulted in a return on average
assets of 1.46% and a return on average equity of 12.08%.
Earnings per share for 1996 was $1.61, which represents an increase of
$.15 per share over 1995.
NET INTEREST INCOME Net interest income for 1996 was $15,611, an increase of
$220 or 1.43% when compared with 1995. This increase was primarily due to an
increase in interest-earning assets which rose by $7,785 or 2.15%. The net
yield on interest-earning assets for 1996 was 4.59%, a four basis point
decrease from 1995 caused by a slight decline in the yield on interest-earning
assets. The cost to fund interest-earning assets was 3.57% in 1996 and 3.56%
in 1995.
During 1996, management's strategy was to fund increases in the loan
portfolio through liquidity generated principally from the securities
portfolio. While the Company experienced a good degree of success in this
endeavor, a substantial portion of the growth took place in the highly rate-
competitive commercial loan area. This limited the effect of the loan growth
on the yield on interest-earning assets and net interest income.
The Company continues to have excess liquidity which will permit it to
increase the loan portfolio through the use of existing funds.
INTEREST RATE SENSITIVITY The Company has systems and procedures in place to
monitor interest rate sensitivity and modifies its asset and liability
management strategies in response to changing economic conditions. The Company
is sensitive to rising interest rate changes as liabilities generally reprice
or mature more quickly than interest-earning assets.
Future earnings may be adversely affected by a sharp upturn in interest
rates as the Company is liability sensitive for a period extending beyond one
year. In a falling rate environment earnings would benefit to some extent from
this position as assets at higher rate levels would generally reprice downward
at a slower rate than interest sensitive liabilities.
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Beyond one year, the Company's cumulative interest sensitive position
reflects a slightly liability sensitive position indicating that the adverse
effect of rising rates or benefit from falling rates would dissipate in the one
to five year time period.
The impact of rising rates is dependent, however, upon the magnitude, the
length of the rising or falling rate trend and the period of time rates remain
stable at a given level. Management typically adjusts its asset/liability
strategies during times of rising and falling rates to minimize or maximize the
impact of changing rate scenarios.
PROVISION AND ALLOWANCE FOR LOAN LOSSES The adequacy of the allowance for loan
losses is based on management's judgement and analysis of current and
historical loss experience, risk characteristics of the loan portfolio,
concentrations of credit and asset quality, as well as other internal and
external factors such as general economic conditions.
An internal credit review department performs pre-credit reviews of large
credits and provides management with an early warning of asset quality
deterioration. Changing trends in the loan mix are also evaluated in
determining the adequacy of the allowance for loan losses.
Loan loss and other industry indicators related to asset quality are
presented in the following table.
Loan Loss Data
($ In thousands) 1996 1995
------ ------
Provision for loan losses $ 331 282
Net charge-offs to average net loans 0.21% 0.13%
Allowance for loan losses to loans,
net of unearned income and deferred fees 1.31% 1.58%
Allowance for loan losses to
nonperforming loans 418.02% 365.60%
Allowance for loan losses to
nonperforming assets 236.24% 177.37%
Nonperforming assets to loans,
net of unearned income, plus
other real estate owned 0.55% 0.89%
Nonaccrual loans $ 616 718
Restructured loans --- ---
Other real estate owned, net 474 762
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Total nonperforming assets $ 1,090 1,480
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Accruing loans past due 90 days
or more $ 458 574
------- -------
Nonperforming loans include nonaccrual and restructured loans.
Nonperforming loans do not include accruing loans past due 90 days or more.
Nonperforming assets shown in the above table have decreased by $390 or 26.35%
from 1995 and represent the continuation of a declining trend.
Net charge-offs for 1996 were .21% up slightly from 1995 when that ratio
was .13%. While the Company did experience a small increase in net charge-
offs, overall the trend of improving assets quality continues. The provision
for loan losses, which was up $49 or 17.38%, was made to not only cover current
year net charge-offs, but to prevent excessive deterioration of the ratio of
the allowance for loan losses to loans, net of unearned income.
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Management's Discussion and Analysis
While continual efforts are made to improve overall asset quality,
management is unable to estimate when and under what exact terms problem
credits will be resolved. With the information available to it, management
does not anticipate any significant deterioration in asset quality and expects
the positive trend to continue. However, changing economic conditions, the
timing and extent of such and the ultimate impact on the Company's asset
quality is not within management's ability to predict with any degree of
precision.
At December 31, 1996, the recorded investment in loans which have been
identified as impaired, in accordance with SFAS No. 114, totaled $725. Of this
amount, $354 related to loans with no valuation allowance, and $371 related to
loans with a corresponding valuation allowance of $290. For the year ended
December 31, 1996, the average recorded investment in impaired loans was
approximately $800, and the total interest income recognized on impaired loans
was $33, of which $23 was recognized on a cash basis.
NONINTEREST INCOME Noninterest income for 1996 was $2,693 up $311 or 13.06%
from 1995.
Service charges on deposit accounts were up $190 or 19.13% from the
previous year. The level of these charges is driven by demand deposit volume,
service charge rates in effect, waiver policy, types of accounts opened and the
willingness of account holders to bear penalty charges such as overdraft fees.
While management can exert direct influence over some of the above variables,
it can do so only in varying degrees with others. Increases for 1996 were
largely attributable to volume.
Other service charges and fees are composed of safe deposit box rent,
charges associated with letters of credit and other miscellaneous items. These
charges were up $41 or 17.98% over 1995.
Trust income in 1996 rose by $123 or 25.63% over 1995. Factors affecting
this increase include an increase in estate settlement income and the retention
of managed assets after the closing of estates. Due to its nature, estate
business volume and the related income is not within management's ability to
predict. Management accordingly cannot determine if such income levels are
sustainable.
Credit card income is composed of numerous types of fees and charges,
including overlimit charges, annual fees, and merchant discount. Credit card
income for 1996 was $511 up $61 or 13.56% over 1995. Given the highly
competitive market which limits the amount of charges set, volume increases are
the principal means used by the Company to enhance revenues.
Net gains from securities activities were down $85 or 46.70% from 1995.
Gains and losses can occur as a result of portfolio restructuring, called
securities and certain market adjustments. The majority of the gains for 1996
consisted of market adjustments to an allowance set up to cover potential
losses on certain bonds held by BTC. The amount of these bonds not covered by
reserves is not material to the Company's consolidated financial statements,
hence is not expected to have a material effect on future operating results.
NONINTEREST EXPENSE Noninterest expenses for 1996 were $9,515 compared to
$10,033 in 1995, which represents a $518 or 5.16% decrease.
Salaries and fringe benefits expense for 1996 increased $244 or 4.85% over
1995. This increase was largely due to a $177 increase in net pension cost,
routine merit adjustments, promotions and other normal compensation related
items.
Occupancy and furniture and fixtures expense experienced a slight decrease
in 1996 of 3.91%, however, expenses in this area are expected to increase in
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National Bankshares, Inc. and Subsidiaries
1997 due to the scheduled opening of a new branch facility in the second
quarter.
The cost of Federal Deposit Insurance continued to decline significantly
in 1996 by $375 or 98.94% from 1995. With the Bank Insurance Fund reaching
mandated levels, banks in general became eligible in 1995 for refunds on
premiums previously paid and for reduced premiums in future periods. The
Company expects future premiums to be nominal in amount, based on information
currently available.
Net costs of other real estate owned decreased sharply by $190 or 97.44%
from 1995 due primarily to a $119 reduction in the provision for losses on
other real estate owned in 1996. Efforts to market the remaining properties
continue, however, the exact timing, terms and conditions of sale of such
properties remains unknown.
The other operating expense category decreased by $251 or 9.65% from 1995
and was due primarily to a $111 reduction in expenses associated with the
merger, from $268 in 1995 to $157 in 1996, and a reduction in charitable
contributions of $70. Other operating expenses in 1995 included a contribution
to a community development corporation which was not incurred in 1996.
INCOME TAXES Higher taxable income in 1996 resulted in a $408 increase in
income tax expense when compared to 1995. Tax exempt interest income continues
to be the primary difference between the "expected" and reported income tax
expense. The Company's effective tax rate for 1996 and 1995 was 27.68% and
25.92%, respectively. The increase in the effective tax rate for 1996 was due
primarily to the level of tax exempt interest income being comparable to 1995.
The Company has determined that a valuation allowance for the gross
deferred tax assets is not necessary due to the fact that realization of the
entire amount of gross deferred tax assets can be supported by the amount of
taxes paid during the carryback period under current tax laws.
EFFECTS OF INFLATION The Company's consolidated statements of income generally
reflect the effects of inflation. Since interest rates, loan demand and
deposit levels are related to inflation, the resulting changes are included in
net income. The most significant item which does not reflect the effects of
inflation is depreciation expense, because historical dollar values used to
determine this expense do not reflect the effect of inflation on the market
value of depreciable assets after their acquisition.
BALANCE SHEET Total assets at year-end 1996 were $388,850 which represents an
increase of $7,935 or 2.08% over the previous year. Excluding corporate
acquisitions, deposits are the Company's primary method of achieving growth.
In both 1996 and 1995, the Company experienced excess liquidity, therefore
management's strategy has been to stress the absorption of those funds before
pursuing external sources. Accordingly, rates paid to attract deposits have
moderated which in turn produces a lower level of deposit growth. In 1996,
deposits grew by a nominal $4,271 or 1.29%.
Total Assets Graph
(Millions)
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
$353.0 357.8 373.1 380.9 388.9
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Management's Discussion and Analysis
LOANS Loans, net of unearned income and deferred fees grew by $30,355 or
18.31% in 1996. Commercial loans which grew by $27,910 or 46.82% accounted for
the largest portion of increase.
Loans to individuals increased by $4,071 and represented a 7.15% increase
over 1995.
The Company routinely engages in the origination and sale of mortgage
loans in the secondary market. During 1996, the Company originated $17,907 in
mortgage loans and sold $18,271, respectively.
Management, as a part of its strategic plan, will continue to pursue loan
growth as long as the market can provide such growth without compromising
underwriting standards.
SECURITIES Overall bank owned securities declined by $16,391 or 8.74%. The
largest portion of the decrease took place in the available for sale portfolio
which declined by $13,336 or 17.58%. Funds were in turn used to fund loan
growth.
The Company's investment policy stresses safety with a program of
purchasing high quality securities such as U.S. Treasury and U.S. Government
agency issues, state, county, and municipal bonds, corporate bonds, mortgage-
backed securities and other bank qualified investments. The Company has
classified all of its investment securities as either held to maturity or
available for sale, as the Company does not engage in trading activities.
Investment strategies are adjusted in response to market conditions and
available investment vehicles.
At December 31, 1996, the Company had no investment concentrations in any
single issue (excluding U.S. Government) that exceeded ten percent of capital.
DEPOSITS Total deposits at year-end 1996 were $334,584 which represents only a
nominal increase from 1995. Noninterest-bearing demand deposits grew $4,280,
an increase of 10.75%. Savings deposits declined by $2,384 or 4.72%. This
decline was offset by increases in interest-bearing demand deposits and the
majority of the funds shifted to the higher earning time deposits category.
Limited growth in the deposit area is expected to continue until excess
liquidity in the securities portfolio is absorbed and a need for external
funding arises.
LIQUIDITY Liquidity is the ability to provide sufficient cash flow to meet
financial commitments and to fund additional loan demands or withdrawal of
existing deposits. Sources of liquidity include deposits, loan principal and
interest repayments, sales, calls and maturities of securities and short-term
borrowings. The Company maintained an adequate liquidity level during 1996 and
1995. Management is not aware of any trends, commitments or events that will
result in or that are reasonably likely to result in a material increase or
decrease in liquidity.
Net cash from operating activities of $7,968 in 1996 increased $1,604 from
1995 and was primarily attributable to the increase in net income and the
change in the mortgage loans held for sale category which fluctuates based upon
loan demand and the timing of loan sales in the secondary market.
Cash flows from investing activities continue to reflect the shifting of
securities to the loan portfolio and securities held to maturity to available
for sale. Net cash flows provided by operating activities, federal funds sold,
securities and financing activities for 1996 of $7,968, $5,815, $15,541 and
$1,930, respectively, were used principally to fund the net increase in loans
of $31,633.
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National Bankshares, Inc. and Subsidiaries
CAPITAL RESOURCES Total stockholders' equity increased $1,647 from 1995 to
1996, with net income, less cash dividends on common stock of $2,297, and
common stock subject to ESOP put option of $1,643 recorded outside
stockholders' equity at December 31, 1996, accounting primarily for the
increase. Net unrealized gains (losses) on securities available for sale, net
of income taxes, were ($248) at December 31, 1996, and $282 at December 31,
1995. These unrealized net gains and losses are recorded as a separate
component of stockholders' equity and will continue to be subject to change in
future years due to fluctuations in fair values, sales, purchases, maturities
and calls of securities classified as available for sale.
Stockholders' Equity Graph
(Millions)
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
$ 37.1 41.0 42.7 48.2 49.8
Book Value Graph
(Dollars)
1992 1993 1994 1995 1996
----- ----- ----- ----- -----
$ 9.81 10.81 11.25 12.70 13.56
In November 1996, the Company entered into contracts for the construction
of a new branch facility totaling $342. Construction is expected to be
completed in Spring 1997. Total remaining commitments under the construction
and related equipment purchases contracts as of December 31, 1996, approximated
$178. There are no other material commitments for capital expenditures as of
December 31, 1996. In addition, there are no expected material changes in the
mix or relative cost of capital resources.
The Company has operated from a consistently strong capital position. The
ratio of total stockholders' equity to total assets was 12.81% at year-end 1996
compared to 12.64% at year-end 1995. Banks are required to apply percentages
to various assets, including off-balance sheet assets, to reflect their
perceived risk. Regulatory defined capital is divided by risk-weighted assets
in determining the bank's risk-based capital ratio. No regulatory authorities
have advised National Bankshares, Inc., The National Bank of Blacksburg or Bank
of Tazewell County of any specific leverage ratios applicable to them. National
Bankshares, Inc., The National Bank of Blacksburg and Bank of Tazewell County's
capital adequacy ratios exceed regulatory requirements and provide added
flexibility to take advantage of business opportunities as they arise. See
note 11 of the Notes to Consolidated Financial Statements for additional
information.
FUTURE ACCOUNTING CONSIDERATIONS In June 1996, the Financial Accounting
Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities". SFAS No. 125 is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. This Statement provides accounting and reporting standards for
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Management's Discussion and Analysis
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Management of the Company does not
expect that adoption of SFAS No. 125 will have a material impact on the
Company's financial position, results of operations or liquidity.
MERGER On June 1, 1996, Bankshares issued 1,888,209 shares of its common stock
in a one-for-one exchange for all the outstanding common stock of Bank of
Tazewell County, Tazewell, Virginia. This business combination has been
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements for the periods prior to the combination have been
restated to include the accounts and results of operations of Bank of Tazewell
County. There were no adjustments of a material amount resulting from Bank of
Tazewell County's adoption of Bankshares' accounting policies.
In May, 1996, Bankshares declared a stock split of .11129 per share
effected in the form of a stock dividend to the holders of Bankshares common
stock just prior to the merger effective date to facilitate the one-for-one
common stock exchange ratio. All stockholders' equity accounts, share and per
share data have been adjusted retroactively to reflect the stock split. The
Bank of Tazewell County is well capitalized with excess liquidity, and should
provide the Company with an expanded market place.
COMMON STOCK INFORMATION AND DIVIDENDS National Bankshares, Inc.'s common
stock is traded on a limited basis in the over-the-counter market and is not
listed on any exchange or quoted on NASDAQ. Local brokerage firms are familiar
with and active in trading in the common stock of National Bankshares, Inc. As
of December 31, 1996, there were 1,184 stockholders of Bankshares common stock.
The following is a summary of the market price per share and cash dividend per
share of the common stock of National Bankshares, Inc. for 1996 and 1995.
Prices do not necessarily reflect the prices which would have prevailed had
there been an active trading market, nor do they reflect unreported trades,
which may have been at lower or higher prices.
Common Stock Market Prices
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Dividend
1996 1995 Per Share
High Low High Low 1996 1995
------ ------ ------ ------ ------ ------
First Quarter $26.50 24.00 23.50 21.50 -- --
Second Quarter 26.25 24.50 25.00 22.00 .30 .27
Third Quarter 27.00 24.50 25.00 23.00 -- --
Fourth Quarter 26.50 25.00 25.50 24.00 .32 .30
Bankshares' primary source of funds for dividend payments is dividends
from its subsidiaries, The National Bank of Blacksburg and Bank of Tazewell
County. Bank regulatory agencies restrict dividend payments of the
subsidiaries as more fully disclosed in note 11 of the Notes to Consolidated
Financial Statements.
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National Bankshares, Inc. and Subsidiaries
PERFORMANCE SUMMARY 1995 v. 1994 The Company's net income for 1995 was
$5,525, an increase of $222 or 4.19%. This produced a return on average assets
and equity of 1.46% and 12.08%, respectively. Net income for 1994 was $5,303
which resulted in a return on average assets of 1.43% and a return on average
equity of 12.51%.
While these results reflect a slight improvement in the return on average
assets, the return on average equity declined. That decline was caused by the
continued high level of profitability coupled with a dividend payout ratio of
37.32%.
Earnings per share for 1995 was $1.46, up $.06 per share from 1994.
NET INTEREST INCOME Net interest income for 1995 was $15,391 compared to
$15,378 in 1994, a nominal increase. The net yield on interest-earning assets
for 1995 was 4.63%, slightly lower than in 1994 at which time the net yield was
4.71%.
In April 1994, the Company acquired the deposits of the Pembroke Office of
the First Union National Bank of Virginia which increased its deposits
approximately $14,514. This addition produced excess liquidity which was
initially absorbed by the securities portfolio. With the excess liquidity
position, the Company was allowed to take a less aggressive stance in
attracting external funds. The full absorption of excess liquidity created by
the acquisition of the Pembroke Office deposits and nominal deposit growth is
expected to continue.
This acquisition, in combination with the rising rate environment,
produced the slight decline in the net yield on interest-earning assets.
PROVISION AND ALLOWANCE FOR LOAN LOSSES Loan loss and other industry
indicators related to asset quality are presented in the following table.
Loan Loss Data
($ In thousands) 1995 1994
------ ------
Provision for loan losses $ 282 553
Net charge-offs to average net loans 0.13% 0.38%
Allowance for loan losses to loans,
net of unearned income and deferred fees 1.58% 1.61%
Allowance for loan losses to
nonperforming loans 365.60% 393.07%
Allowance for loan losses to
nonperforming assets 177.37% 141.80%
Nonperforming assets to loans,
net of unearned income, plus
other real estate owned 0.89% 1.12%
Nonaccrual loans $ 718 420
Restructured loans --- 229
Other real estate owned, net 762 1,150
------- ------
Total nonperforming assets $ 1,480 1,799
------- ------
Accruing loans past due 90 days or more $ 574 490
------- ------
-68-
Management's Discussion and Analysis
Nonperforming loans include nonaccrual and restructured loans.
Nonperforming loans and nonperforming assets do not include accruing loans past
due 90 days or more. Nonperforming assets totaled $1,480 at December 31, 1995
which represents a $319 or 17.73% decrease from December 31, 1994. In 1994,
other real estate owned increased by $884 as nonaccrual real estate loans moved
into foreclosure. Nonaccrual loans, which totaled $420 in 1994, increased $298
in 1995. The majority of this increase related to one impaired loan at the
Company's BTC subsidiary.
While continual efforts are made to improve overall asset quality,
management is unable to estimate when and under what exact terms problem assets
will be resolved.
Effective January 1, 1995, Bankshares adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan", as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures." At December 31,
1995, the recorded investment in loans which have been identified as impaired
loans, in accordance with SFAS No. 114, totaled $837. Of this amount, $133
related to loans with no valuation allowance, and $704 related to loans with a
corresponding valuation allowance of $419. For the year ended December 31,
1995, the average recorded investment in the impaired loans was approximately
$906 and the total interest income recognized on impaired loans was $47, of
which $5 was recognized on a cash basis. The balance of impaired loans at
January 1, 1995, totaled approximately $812. The initial adoption of SFAS No.
114 did not require an increase to the Company's allowance for loan losses.
The impact of SFAS No. 114, as amended by SFAS No. 118, was immaterial to the
Company's consolidated financial statements as of and for the year ended
December 31, 1995.
NONINTEREST INCOME Noninterest income for 1995 was $2,382, up $335 or 16.37%
from 1994.
Income from service charges on deposits is largely dictated by demand
deposit volume, service charge rates, waiver policy and the willingness of
account holders to bear penalty charges such as overdraft and insufficient
funds fees. While management can exert direct influence over some of these
variables, it can do so only in varying degrees with others. All of the above
factors contributed to the increase in this category of $82 or 9.00%.
Other service charges and fees is composed of fees associated with safe
deposit box rent, letters of credit and other services. The miscellaneous
nature of this category makes it subject to fluctuations. In 1995 this
category declined by $18 or 7.32%.
Trust income for 1995 was down from 1994 by $35 or 6.80%. Trust income
may fluctuate depending on the volume of business, particularly estate account
settlements. A continued financial relationship with heirs after an estate
closing can build business volume, but is unpredictable. Market factors also
affect the level of income earned.
Credit card income continues to show improvement. For 1995, credit card
income was up $95 or 26.76% over the previous year. Credit card income
includes various fees and charges, primarily annual fees and merchant discount.
Because of the highly competitive nature of this product, the Company must
offer fees at market levels in order to retain cardholders. Given this
inability to adjust fees, the Company generally relies on increased volume to
generate additional revenues.
Net securities gains for 1995 were $182, as opposed to a net loss of $14
in 1994. The increase in net gains was due principally to calls of securities.
-69-
National Bankshares, Inc. and Subsidiaries
NONINTEREST EXPENSE Noninterest expense for 1995 was $10,033 compared to
$9,725 in 1994. This represents a $308 increase or 3.17%.
Salaries and employee benefits increased $117 or 2.38%. This increase was
due to routine merit adjustments, promotions and other normal compensation
related items, offset by a decrease of $75 in net pension cost.
The cost of Federal Deposit Insurance declined sharply by $334 or 46.84%
from 1994. With the Bank Insurance Fund reaching mandated levels, banks in
general became eligible in 1995 for refunds on premiums previously paid and for
reduced premiums in future periods.
Net costs related to the liquidation and holding of other real estate
owned rose $158 in 1995 due primarily to a $124 increase in the provision for
losses on other real estate owned in 1995 to reduce the carrying amount of
certain properties to their net realizable values.
The other operating expense category increased by $302 or 13.13% from 1994
and was due primarily to expenses associated with the merger in the amount of
$268 incurred in 1995, and a contribution to a community development
corporation expensed in 1995. A substantial portion of the Company's
involvement in the community development corporation will be recovered through
future tax deductions and tax credits over a ten year period.
INCOME TAXES Higher taxable income in 1995 resulted in a $89 or 4.83% increase
in income tax expense when compared to 1994. Tax exempt interest income
continues to be the primary difference between the "expected" and reported
income tax expense. The Company's effective tax rate for 1995 and 1994 was
25.92% and 25.80%, respectively.
The Company has determined that a valuation allowance for the gross
deferred tax assets is not necessary due to the fact that realization of the
entire amount of gross deferred tax assets can be supported by the amount of
taxes paid during the carryback period under current tax laws.
EFFECTS OF INFLATION The Company's consolidated statements of income generally
reflect the effects of inflation. Since interest rates, loan demand and
deposit levels are related to inflation, the resulting changes are included in
net income. The most significant item which does not reflect the effects of
inflation is depreciation expense, because historical dollar values used to
determine this expense do not reflect the effect of inflation on the market
value of depreciable assets after their acquisition.
BALANCE SHEET Total assets at year-end 1995 totaled $380,915, an increase of
$7,783 or 2.09% over 1994. Average assets for 1995 totaled $378,406 an
increase of $8,444 or 2.28% over 1994. Loans, net outstanding at year-end 1995
were $163,193, an increase of 4.42% from the same point in time in 1994. This
growth was funded by a shift from securities to loans, increased internally
generated capital and a nominal growth in deposits.
The use of excess internal liquidity to fund loan growth allowed the
Company to place less emphasis on the procurement of external funds in the
market place and avoid the associated cost of such activities.
LOANS Loans, net of unearned interest and deferred fees, at December 31, 1995
were $165,818. This represents an increase of $6,978 or 4.39% over 1994 year
end. Management continues in its efforts to add to the loan portfolio as long
as such growth can be accomplished without compromising underwriting standards.
-70-
Management's Discussion and Analysis
SECURITIES In late 1995, the Financial Accounting Standards Board granted
financial institutions a one time opportunity to transfer securities from held
to maturity to available for sale. Conditions of this transfer provided that
institutions opting to make this shift could do so without bringing into
question their ability and positive intent to hold to maturity their remaining
held to maturity securities. The Company utilized this one time opportunity to
shift approximately $30,156 in securities held to maturity to the available for
sale category on December 1, 1995.
The year-end balances for securities available for sale were $75,870 and
$36,219 in 1995 and 1994, respectively, and the year-end balances for
securities held to maturity were $111,765 and $148,012 in 1995 and 1994,
respectively. Year-end 1995 balances reflect more clearly the shift of
investments associated with the one time transfer of $30,156 described above
and the general decline in securities held to maturity due to calls and
maturities.
The Company's investment policy stresses safety with a program of
purchasing high quality securities such as U.S. Treasury and U.S. Government
agency issues, state, county, and municipal bonds, corporate bonds, mortgage-
backed securities and other bank qualified investments. The Company has
classified all of its investment securities as either held to maturity or
available for sale, as the Company does not engage in trading activities.
Investment strategies are adjusted in response to market conditions and
available investment vehicles.
At December 31, 1995, the Company had no investment concentrations in any
single issue (excluding U.S. Government) that exceeded ten percent of capital.
DEPOSITS Average total deposits at December 31, 1995, totaled $330,261
compared to $325,167 in 1994, an increase of $5,094 or 1.57%. The low growth
rate was in part due to the Company's excess liquidity position and its ability
to meet funding needs.
LIQUIDITY Liquidity is the ability to provide sufficient cash flow to meet
financial commitments and to fund additional loan demand or withdrawal of
existing deposits. Sources of liquidity include deposits, loan principal and
interest repayments, sales, calls and maturities of securities and short-term
borrowings. The Company maintained an adequate liquidity level during 1995 and
1994. Management is not aware of any trends, commitments or events that will
result in or that are reasonably likely to result in a material increase or
decrease in liquidity.
Net cash from operating activities of $6,364 in 1995 decreased $1,357 from
1994 and was primarily attributable to the change in the mortgage loans held
for sale category which fluctuates based upon loan demand and the timing of
loan sales in the secondary market.
CAPITAL RESOURCES Total stockholders' equity increased $5,496 from 1994 to
1995, with net income, less cash dividends on common stock of $2,062,
accounting primarily for the increase. Net unrealized gains (losses) on
securities available for sale, net of income taxes, were $282 at December 31,
1995 and ($1,751) at December 31, 1994. These unrealized net gains and losses
are recorded as a separate component of stockholders' equity and will continue
to be subject to change in future years due to fluctuations in fair values,
sales, purchases, maturities and calls of securities classified as available
for sale.
-71-
National Bankshares, Inc. and Subsidiaries
The Company has operated from a consistently strong capital position. The
ratio of total stockholders' equity to total assets was 12.64% at year-end
1995. Banks are required to apply percentages to various assets, including
off-balance sheet assets, to reflect their perceived risk. Regulatory defined
capital is divided by risk-weighted assets in determining the bank's risk-based
capital ratio. No regulatory authorities have advised National Bankshares,
Inc. or its subsidiaries, The National Bank of Blacksburg or Bank of Tazewell
County, of any specific leverage ratios applicable to them. Bankshares' and
its subsidiaries' capital adequacy ratios exceed regulatory requirements and
provide added flexibility to take advantage of business opportunities as they
arise. See note 11 of the Notes to Consolidated Financial Statements for
additional information.
-72-
Statement of Management's Responsibility
Management is responsible for the preparation, content and integrity of
the consolidated financial statements, related notes and all other information
included in this annual report. The financial data has been prepared in
accordance with generally accepted accounting principles and, management
believes, fairly and consistently presents Bankshares' financial position and
results of operations.
Bankshares maintains a system of internal controls which provides
reasonable assurances that assets are protected and that accounting records are
reliable for the preparation of consolidated financial statements.
The Audit Committee of the Board of Directors is comprised entirely of
outside directors. Bankshares' internal auditor reports to the committee. On
a periodic basis, the committee meets with the internal auditor, independent
auditors and management to discuss matters relating to the quality of internal
control, financial reporting and audit scope. Both the internal auditor and
independent auditors have access to the Audit Committee, without management
present if desired, to freely discuss their evaluation of Bankshares' system of
internal controls and any other matters.
James G. Rakes Joan C. Nelson
President and Treasurer
Chief Executive Officer
-73-
Independent Auditors' Report
The Board of Directors and Stockholders
National Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of National
Bankshares, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We did not audit the
financial statements of Bank of Tazewell County, a wholly owned subsidiary,
which statements reflect total assets constituting 46.6 percent and 46.5
percent and total interest income constituting 42.8 percent and 44.1 percent in
1995 and 1994, respectively, of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for Bank of
Tazewell County for 1995 and 1994, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of National Bankshares, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in notes 1(D) and 5 to the consolidated financial statements,
the Company adopted the provisions of Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan", as
amended by Statement of Financial Accounting Standards No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures", as of
January 1, 1995. As discussed in notes 1(C) and 3 to the consolidated
financial statements, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities", as of January 1, 1994.
KPMG Peat Marwick LLP
Roanoke, Virginia
February 17, 1997
-74-
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
$ In thousands except share and per share data, 1996 1995
December 31, 1996 and 1995 ------ ------
Assets Cash and due from banks (notes 2 and 16) $ 10,080 10,055
Federal funds sold (note 16) 1,910 7,725
Securities available for sale
(notes 3 and 16) 62,534 75,870
Securities held to maturity (fair value
$108,755 in 1996 and $112,778 in 1995) 108,710 111,765
Mortgage loans held for sale (notes 14,
15 and 16) 516 880
Loans (notes 4, 5, 15 and 16):
Real estate construction loans 6,295 6,007
Real estate mortgage loans 43,917 45,589
Commercial and industrial loans 87,519 59,609
Loans to individuals 60,991 56,920
-------- --------
Total loans 198,722 168,125
Less unearned income and deferred fees (2,549) (2,307)
-------- --------
Loans, net of unearned income and
deferred fees 196,173 165,818
Less allowance for loan losses (note 5) (2,575) (2,625)
-------- --------
Loans, net 193,598 163,193
-------- --------
Bank premises and equipment, net (note 6) 5,037 4,679
Accrued interest receivable 3,510 3,621
Other real estate owned, net (note 5) 474 762
Other assets (note 9) 2,481 2,365
-------- --------
Total assets $388,850 380,915
======== ========
Liabilities Noninterest-bearing demand deposits $ 44,096 39,816
and Interest-bearing demand deposits 73,804 73,101
Stockholders' Savings deposits 48,164 50,548
Equity Time deposits (note 7) 168,520 166,848
-------- --------
Total deposits (note 16) 334,584 330,313
-------- --------
Other borrowed funds (note 16) 627 161
Accrued interest payable 700 744
Other liabilities (note 8) 1,495 1,543
-------- --------
Total liabilities 337,406 332,761
-------- --------
Common stock subject to ESOP put option
(note 8) 1,643 ---
-75-
Stockholders' equity (notes 9, 10, 11
and 17):
Preferred stock of no par value.
Authorized 5,000,000 shares;
none issued and outstanding --- ---
Common stock of $2.50 par value.
Authorized 5,000,000 shares; issued and
outstanding 3,792,833 shares 9,482 9,482
Retained earnings 42,210 38,390
Net unrealized gains (losses) on
securities available for sale (248) 282
Common stock subject to ESOP put option
(64,796 shares at $25.35 per share)
(note 8) (1,643) ---
-------- --------
Total stockholders' equity 49,801 48,154
Commitments and contingent liabilities
(notes 6, 8 and 14)
-------- --------
Total liabilities and stockholders'
equity $388,850 380,915
======== ========
See accompanying notes to consolidated financial statements.
-76-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
$ In thousands, except per share data. Years ended
December 31, 1996, 1995 and 1994 1996 1995 1994
------ ------ ------
Interest Interest and fees on loans $ 17,232 15,761 13,764
Income Interest on federal funds sold 567 704 450
Interest on securities - taxable 8,877 9,723 9,966
Interest on securities - nontaxable 1,971 1,906 1,882
-------- ------- -------
Total interest income 28,647 28,094 26,062
-------- ------- -------
Interest Interest on time deposits of
Expense $100,000 or more (note 7) 2,070 1,898 1,364
Interest on other deposits 10,939 10,770 9,284
Interest on borrowed funds 27 35 36
-------- ------- -------
Total interest expense 13,036 12,703 10,684
-------- ------- -------
Net interest income 15,611 15,391 15,378
Provision for loan losses (note 5) 331 282 553
-------- ------- -------
Net interest income after
provision for loan losses 15,280 15,109 14,825
-------- ------- -------
Noninterest Service charges on deposit accounts 1,183 993 911
Income Other service charges and fees 269 228 246
Credit card fees 511 450 355
Trust income 603 480 515
Other income 30 49 34
Realized securities gains (losses),
net (note 3) 97 182 (14)
-------- ------- -------
Total noninterest income 2,693 2,382 2,047
-------- ------- -------
Noninterest Salaries and employee benefits (note 8) 5,278 5,034 4,917
Expense Occupancy and furniture and fixtures 884 920 936
Data processing and ATM 497 462 462
FDIC assessment 4 379 713
Credit card processing 466 411 340
Goodwill amortization 30 30 20
Net costs of other real estate owned 5 195 37
Other operating expense 2,351 2,602 2,300
-------- ------- -------
Total noninterest expense 9,515 10,033 9,725
-------- ------- -------
Income before income tax expense 8,458 7,458 7,147
Income tax expense (note 9) 2,341 1,933 1,844
-------- ------- -------
Net income $ 6,117 5,525 5,303
======== ======= =======
Net income per share $ 1.61 1.46 1.40
======== ======= =======
See accompanying notes to consolidated financial statements.
-77-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Net Unrealized Common
Gains (Losses) Stock
on Securities Subject to
$ in thousands except share and per share data. Common Retained Available ESOP Put
Years ended December 31, 1996, 1995 and 1994. Stock Surplus Earnings For Sale Option Total
-------- ------- -------- -------------- ---------- -------
Balances, December 31, 1993 as previously
reported $ 4,274 1,112 12,868 --- --- 18,254
.11129 for one stock split 190,472 additional
shares issued 476 (476) --- --- --- ---
Adjustment in connection with pooling-of-
interests 4,721 (711) 18,725 (38) --- 22,697
------- ------ ------- ------ ------ ------
Balances, December 31, 1993 as restated 9,471 (75) 31,593 (38) --- 40,951
Cumulative effect of change in accounting for
securities available for sale at January 1,
1994, net of income taxes of $141 --- --- --- 273 --- 273
Net Income --- --- 5,303 --- --- 5,303
Net proceeds from issuance of common stock
(4,480 shares) (note 10) 11 75 --- --- --- 86
Cash dividends ($.52 per share) --- --- (993) --- --- (993)
Cash dividends of BTC declared prior to merger --- --- (976) --- --- (976)
Change in net unrealized gains (losses)
on securities available for sale, net of
income tax benefit of $1,023 --- --- --- (1,986) --- (1,986)
------- ------ ------- ------ ------ ------
Balances, December 31, 1994 as restated 9,482 --- 34,927 (1,751) --- 42,658
Net income --- --- 5,525 --- --- 5,525
Cash dividends ($.57 per share) --- --- (1,080) --- --- (1,080)
Cash dividends of BTC declared prior to merger --- --- (982) --- --- (982)
Change in net unrealized gains (losses) on
securities available for sale, net of income
taxes of $1,047 --- --- --- 2,033 --- 2,033
------- ------ ------- ------ ------ ------
Balances, December 31, 1995 as restated 9,482 --- 38,390 282 --- 48,154
Net income --- --- 6,117 --- --- 6,117
Cash dividends ($.62 per share) --- --- (1,787) --- --- (1,787)
Cash dividends of BTC declared prior to merger --- --- (510) --- --- (510)
Change in net unrealized gains (losses) on
securities available for sale, net of income
tax benefit of $273 --- --- --- (530) --- (530)
Common stock subject to ESOP put option --- --- --- --- (1,643) (1,643)
------- ------ ------- ------ ------ ------
Balances, December 31, 1996 $ 9,482 --- 42,210 (248) (1,643) 49,801
======= ====== ======= ====== ====== ======
See accompanying notes to consolidated financial statements.
-78-
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
$ In thousands. Years ended December 31, 1996, 1995 1996 1995 1994
and 1994 ------ ------ ------
Cash Flows Net income $ 6,117 5,525 5,303
from Adjustments to reconcile net income to net
Operating cash provided by operating activities:
Activities Provision for loan losses 331 282 553
(Note 13) Recovery of bond losses (89) --- ---
Provision for deferred income taxes (4) (120) (32)
Depreciation of bank premises and
equipment 517 535 544
Amortization of intangibles 121 145 123
Amortization of premiums and accretion
of discounts, net 52 (32) 69
(Gains) losses on bank premises and
equipment disposals 7 (9) ---
(Gains) losses on sales and calls of
securities available for sale, net (3) (2) 27
Gains on calls of securities held to
maturity, net (5) (180) (13)
Net (increase) decrease in mortgage
loans held for sale 364 (488) 1,360
(Gains) losses and write-downs on other
real estate owned (9) 168 8
(Increase) decrease in:
Accrued interest receivable 111 88 (242)
Other assets 40 129 (343)
Increase (decrease) in:
Accrued interest payable (44) 170 40
Other liabilities 462 153 324
------- ------- -------
Net cash provided by operating
activities 7,968 6,364 7,721
------- ------- -------
Cash Flows Net (increase) decrease in federal funds
from sold 5,815 (100) 6,270
Investing Proceeds from sales of securities
Activities available for sale 1,000 1,867 ---
(Notes 3 Proceeds from calls and maturities of
and 13) securities available for sale 21,938 8,134 9,964
Proceeds from calls and maturities of
securities held to maturity 35,569 28,592 30,865
Purchases of securities available for sale (10,397) (16,432) (16,068)
Purchases of securities held to maturity (32,477) (22,271) (36,707)
Purchases of loan participations (1,704) --- (1,000)
Collections of loan participations 2,448 1,928 510
Net increase in loans made to customers (31,633) (9,197) (7,213)
Proceeds from disposal of other real
estate owned 325 220 91
Recoveries on loans charged off 125 83 54
Bank premises and equipment expenditures
Proceeds from sale of bank premises and (882) (492) (1,112)
equipment --- 9 1
------- ------- -------
Net cash used in investing activities (9,873) (7,659) (14,345)
------- ------- -------
-79-
Cash Flows Deposits assumed, net of premium paid --- --- 13,159
from Net increase in time deposits 1,672 18,179 8,471
Financing Net increase (decrease) in other deposits 2,599 (15,552) (9,300)
Activities Net proceeds from issuance of common stock --- --- 86
(Note 13) Net increase (decrease) in other borrowed
funds 466 (630) (397)
Cash dividends paid (2,807) (2,056) (1,969)
------- ------- -------
Net cash provided by (used in)
financing activities 1,930 (59) 10,050
------- ------- -------
Net increase (decrease) in cash and due
from banks 25 (1,354) 3,426
Cash and due from banks at beginning of
year 10,055 11,409 7,983
------- ------- -------
Cash and due from banks at end of year $10,080 10,055 11,409
======= ======= =======
See accompanying notes to consolidated financial statements.
-80-
Notes to Consolidated Financial Statements
$ In thousands, except share and per share data.December 31, 1996, 1995 and 1994
Note 1: Summary of Significant Accounting Policies The accounting and reporting
policies of National Bankshares, Inc. (Bankshares) and its wholly owned
subsidiaries, The National Bank of Blacksburg (NBB) and Bank of Tazewell County
(BTC), conform to generally accepted accounting principles and general practices
within the banking industry (see note 17 for merger with BTC). In preparing the
consolidated financial statements, management is required to make certain
estimates, assumptions and loan evaluations that affect its consolidated
financial statements for the period. Actual results could vary significantly
from those estimates.
Changing economic conditions, adverse economic prospects for borrowers, as
well as regulatory agency action as a result of an examination, could cause NBB
and BTC to recognize additions to the allowance for loan losses and may also
affect the valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans.
The following is a summary of the more significant accounting policies.
(A) Consolidation The consolidated financial statements include the accounts
of National Bankshares, Inc. and its wholly owned subsidiaries (the Company).
All significant intercompany balances and transactions have been eliminated.
(B) Cash and Cash Equivalents For purposes of reporting cash flows, cash and
cash equivalents include cash on hand and due from banks.
(C) Securities Effective January 1, 1994, the Company adopted the provisions
of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities," and accordingly, has
recorded the effect of this adoption in the accompanying consolidated
financial statements for the year ended December 31, 1994.
Securities available for sale are reported at fair value, with unrealized
gains and losses excluded from net income and reported, net of income taxes,
in a separate component of stockholders' equity. Securities held to maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts on a basis which approximates the level yield method. The Company
does not engage in securities trading. Gains and losses on securities are
accounted for on the completed transaction basis by the specific
identification method.
A decline in the fair value of any available for sale or held to maturity
security below cost that is deemed other than temporary is charged to income
resulting in the establishment of a new cost basis for the security.
(D) Loans Loans are stated at the amount of funds disbursed plus the
applicable amount, if any, of unearned interest and other charges less
payments received. Income on installment loans, including impaired
installment loans that have not been placed in nonaccrual status, is
recognized on methods which approximate the level yield method. Interest on
all other loans, including impaired other loans that have not been placed in
nonaccrual status, is accrued based on the balance outstanding times the
applicable interest rate.
Interest is recognized on the cash basis for all loans carried in
nonaccrual status. Loans generally are placed in nonaccrual status when the
collection of principal or interest is 90 days or more past due, unless the
obligation is both well-secured and in the process of collection.
Loan origination and commitment fees and certain direct costs are being
deferred, and the net amount amortized as an adjustment to the related loan's
yield. These amounts are being amortized over the contractual life of the
related loans.
-81-
National Bankshares, Inc. and Subsidiaries
Effective January 1, 1995, the Company adopted the provisions of SFAS No.
114, "Accounting by Creditors for Impairment of a Loan", as amended by SFAS
No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". SFAS No. 114, as amended by SFAS No. 118,
requires that impaired loans within the scope of the statements be presented
in the financial statements at the present value of expected future cash
flows or at the fair value of the loan's collateral if the loan is deemed
"collateral dependent." A valuation allowance is required to the extent that
the measure of the impaired loans is less than the recorded investment. SFAS
No. 114 does not apply to large groups of small-balance homogeneous loans
such as residential real estate mortgage, consumer installment, home equity
and bank card loans, which are collectively evaluated for impairment. SFAS
No. 118 allows a creditor to use existing methods for recognizing interest
income on an impaired loan.
Mortgage loans held for sale are carried at the lower of cost or fair
value.
(E) Allowance for Loan Losses The allowance for loan losses is a valuation
allowance consisting of the cumulative effect of the provision for loan
losses, plus any amounts recovered on loans previously charged off, minus
loans charged off. The provision for loan losses charged to expense is the
amount necessary in management's judgement to maintain the allowance for loan
losses at a level it believes adequate to absorb losses in the collection of
its loans.
(F) Bank Premises and Equipment Bank premises and equipment are stated at
cost, net of accumulated depreciation. Depreciation is charged to expense
over the estimated useful lives of the assets on the straight-line basis.
Depreciable lives include 40 years for premises and 3-10 years for furniture
and equipment. Costs of maintenance and repairs are charged to expense as
incurred and improvements are capitalized.
(G) Other Real Estate Owned Other real estate, acquired through foreclosure
or deed in lieu of foreclosure, is carried at the lower of the recorded
investment or its fair value, less estimated costs to sell (net realizable
value). When the property is acquired, any excess of the loan balance over
net realizable value is charged to the allowance for loan losses. Increases
or decreases in the net realizable value of such properties are credited or
charged to income by adjusting the valuation allowance for other real estate
owned. Net costs of maintaining or operating foreclosed properties are
expensed as incurred.
(H) Intangible Assets Included in other assets are deposit intangibles of
$666 and $757 at December 31, 1996 and 1995, respectively, and goodwill of
$367 and $397 at December 31, 1996 and 1995, respectively. Deposit
intangibles are being amortized on a straight-line basis over a ten-year
period and goodwill is being amortized on a straight-line basis over a
fifteen-year period.
(I) Pension Plans The Company sponsors two separate defined benefit pension
plans which cover substantially all full-time officers and employees. The
benefits are based upon length of service and a percentage of the employee's
compensation during the final years of employment. Pension costs are
computed based upon the provisions of SFAS No. 87. The Company contributes
to the pension plans amounts deductible for federal income tax purposes.
(J) Income Taxes Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
-82-
Notes to Consolidated Financial Statements
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(K) Trust Assets and Income Assets (other than cash deposits) held by the
Trust Departments in a fiduciary or agency capacity for customers are not
included in the consolidated financial statements since such items are not
assets of the Company. Trust income is recognized on the accrual basis.
(L) Net Income Per Share Net income per share is based upon the weighted
average number of common shares outstanding (3,792,833 shares in 1996 and
1995 and 3,788,859 shares in 1994).
(M) Off-Balance Sheet Financial Instruments In the ordinary course of
business, the Company has entered into off-balance sheet financial
instruments consisting of commitments to extend credit and standby letters of
credit. Such financial instruments are recorded in the financial statements
when they become payable.
(N) Fair Value of Financial Instruments The following methods and
assumptions were used to estimate the fair value of each class of financial
instrument for which it is practicable to estimate that value:
(1) Cash and Due from Banks The carrying amount is a reasonable estimate
of fair value.
(2) Federal Funds Sold The carrying amount is a reasonable estimate of
fair value.
(3) Securities The fair values of securities are determined by quoted
market prices or dealer quotes. The fair value of certain state and
municipal securities is not readily available through market sources
other than dealer quotations, so fair value estimates are based on quoted
market prices of similar instruments, adjusted for differences between
the quoted instruments and the instruments being valued.
(4) Loans Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as mortgage
loans held for sale, commercial, real estate - commercial, real estate -
construction, real estate - mortgage, credit card and other consumer
loans. Each loan category is further segmented into fixed and adjustable
rate interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk
inherent in the loan, as well as estimates for operating expenses and
prepayments. The estimate of maturity is based on the Company's
historical experience with repayments for each loan classification,
modified, as required, by an estimate of the effect of current economic
and lending conditions.
Fair value for significant nonperforming loans is based on estimated
cash flows which are discounted using a rate commensurate with the risk
associated with the estimated cash flows. Assumptions regarding credit
risk, cash flows and discount rates are judgmentally determined using
available market information and specific borrower information.
(5) Deposits The fair value of demand and savings deposits is the amount
payable on demand. The fair value of fixed maturity time deposits and
certificates of deposit is estimated using the rates currently offered
for deposits with similar remaining maturities.
(6) Other Borrowed Funds Other borrowed funds represents treasury tax
and loan deposits. The carrying amount is a reasonable estimate of fair
value because the deposits are generally repaid within 1 to 120 days from
the transaction date.
-83-
National Bankshares, Inc. and Subsidiaries
(7) Commitments to Extend Credit and Standby Letters of Credit T h e
only amounts recorded for commitments to extend credit, standby letters
of credit and financial guarantees written are the deferred fees arising
from these unrecognized financial instruments. These deferred fees are
not deemed significant at December 31, 1996 and 1995, and as such, the
related fair values have not been estimated.
(O) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of this Statement did not have a
material impact on the Company's financial position, results of operations or
liquidity.
(P) Reclassifications Certain reclassifications have been made to prior
years' consolidated financial statements to place them on a basis comparable
with the 1996 consolidated financial statements.
Note 2: Restrictions on Cash To comply with Federal Reserve regulations, the
Company is required to maintain certain average reserve balances. The daily
average reserve requirements were $2,914 and $2,530 for the weeks including
December 31, 1996 and 1995, respectively.
Note 3: Securities As discussed in note 1(C), effective January 1, 1994, the
Company adopted the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". The cumulative effect of this
change in accounting at January 1, 1994, was to increase securities available
for sale by $414, decrease the net deferred tax asset by $141 and increase
stockholders' equity by $273.
The amortized costs, gross unrealized gains, gross unrealized losses and fair
values for securities available for sale by major security type as of December
31, 1996 and 1995 are as follows:
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Available for sale:
U.S. Treasury $ 8,740 116 (66) 8,790
U.S. Government agencies and
corporations 33,840 149 (349) 33,640
States and political subdivisions 8,688 86 (155) 8,619
Mortgage-backed securities 4,568 12 (128) 4,452
Other securities 7,074 25 (66) 7,033
-------- ------ ------ -------
Total securities available for
sale $ 62,910 388 (764) 62,534
======== ====== ====== =======
-84-
Notes to Consolidated Financial Statements
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Available for sale:
U.S. Treasury $ 14,991 352 (21) 15,322
U.S. Government agencies and
corporations 42,586 476 (253) 42,809
States and political subdivisions 7,613 3 (49) 7,567
Mortgage-backed securities 4,748 8 (111) 4,645
Other securities 5,505 42 (20) 5,527
-------- ------ ------ -------
Total securities available for
sale $ 75,443 881 (454) 75,870
======== ====== ====== =======
The amortized costs and fair values of single maturity securities available
for sale at December 31, 1996, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities included in these totals are allocated
based upon estimated cash flows at December 31, 1996.
December 31, 1996
Amortized Fair
($ In thousands) Costs Values
--------- --------
Due in one year or less $ 6,768 6,764
Due after one year through five years 22,325 22,276
Due after five years through ten years 27,872 27,654
Due after ten years 5,144 5,032
No maturity 801 808
-------- -------
$ 62,910 62,534
======== =======
The amortized costs, gross unrealized gains, gross unrealized losses and fair
values for securities held to maturity by major security type as of December 31,
1996 and 1995 are as follows:
December 31, 1996
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Held to maturity:
U.S. Treasury $ 11,547 36 (148) 11,435
U.S. Government agencies and
corporations 54,804 215 (604) 54,415
States and political subdivisions 34,144 530 (105) 34,569
Mortgage-backed securities 767 29 --- 796
Other securities 7,448 103 (11) 7,540
-------- ------ ------ -------
Total securities held to
maturity $108,710 913 (868) 108,755
======== ====== ====== =======
-85-
National Bankshares, Inc. and Subsidiaries
December 31, 1995
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Held to maturity:
U.S. Treasury $ 19,330 167 (32) 19,465
U.S. Government agencies and
corporations 49,938 188 (16) 50,110
States and political subdivisions 36,428 802 (202) 37,028
Mortgage-backed securities 961 31 --- 992
Other securities 5,108 81 (6) 5,183
-------- ------ ------ -------
Total securities held to
maturity $111,765 1,269 (256) 112,778
======== ====== ====== =======
The amortized costs and fair values of single maturity securities held to
maturity at December 31, 1996, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities included in these totals are allocated
based upon estimated cash flows at December 31, 1996.
December 31, 1996
Amortized Fair
($ In thousands) Costs Values
--------- ------
Due in one year or less $ 18,781 18,820
Due after one year through five years 55,493 55,480
Due after five years through ten years 30,479 30,414
Due after ten years 3,957 4,041
-------- -------
$108,710 108,755
======== =======
There were no sales of securities held to maturity during 1996, 1995 or 1994.
The carrying value of securities pledged to secure public and trust deposits,
and for other purposes as required or permitted by law, was $18,446 at December
31, 1996 and $16,262 at December 31, 1995.
On November 15, 1995, the Financial Accounting Standards Board issued a
Special Report, "A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities." This Special Report
contained a unique provision that allowed entities to, concurrent with the
initial adoption of the implementation guidance but no later than December 31,
1995, reassess the appropriateness of the classifications of all securities held
at the time. In connection with this one-time reassessment, the Company
transferred securities classified as held to maturity with amortized costs of
approximately $30,156 to available for sale securities, increased by the related
unrealized gain in the amount of approximately $643 on December 1, 1995.
Entities opting to make such a transfer could do so without bringing into
question their ability and positive intent to hold the remaining held to
maturity portfolio until maturity.
-86-
Notes to Consolidated Financial Statements
Note 4: Loans to Officers and Directors In the normal course of business, loans
have been made to executive officers and directors of Bankshares and its
subsidiaries. As of December 31, 1996 and 1995, there were direct loans to
executive officers and directors of $2,567 and $3,332, respectively. In
addition, there were loans of $2,145 and $2,550 at December 31, 1996 and 1995,
respectively, which were endorsed by directors and/or executive officers or had
been made to companies in which directors and/or executive officers had an
equity interest.
The following schedule summarizes amounts receivable from executive officers
and directors of Bankshares and its subsidiaries, and their immediate families
or associates:
Year ended
December 31,
($ In thousands) 1996
------------
Aggregate balance, beginning of year $ 5,882
Additions 3,449
Collections (4,619)
-------
Aggregate balance, end of year $ 4,712
=======
Note 5: Nonperforming Assets, Past Due Loans, Impaired Loans and Allowance for
Loan Losses Nonperforming assets consist of the following:
December 31,
($ In thousands) 1996 1995 1994
------ ------ ------
Nonaccrual loans $ 616 718 420
Restructured loans --- --- 229
------- ------ ------
Total nonperforming loans 616 718 649
Other real estate owned, net 474 762 1,150
------- ------ ------
Total nonperforming assets $ 1,090 1,480 1,799
------- ------ ------
Accruing loans past due 90 days or more $ 458 574 490
======= ====== ======
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at December 31, 1996.
-87-
National Bankshares, Inc. and Subsidiaries
The following table shows the interest that would have been earned on
nonaccrual and restructured loans if they had been current in accordance with
their original terms and the recorded interest that was earned and included in
income on these loans:
Years ended December 31,
($ In thousands) 1996 1995 1994
------ ------ ------
Scheduled interest:
Nonaccrual loans $ 68 59 38
Restructured loans --- --- 19
------- ------ ------
Total scheduled interest $ 68 59 57
======= ====== ======
Recorded interest:
Nonaccrual loans $ 24 5 1
Restructured loans --- --- 9
------- ------ ------
Total recorded interest $ 24 5 10
======= ====== ======
Changes in the valuation allowance for other real estate owned are as
follows:
Years ended December 31,
($ In thousands) 1996 1995 1994
------ ------ ------
Balances, beginning of year $ 91 49 409
Provision for other real estate owned 5 124 ---
Write-offs --- (82) (360)
------- ------ ------
Balances, end of year $ 96 91 49
======= ====== ======
As discussed in note 1(D), effective January 1, 1995, the Company adopted the
provisions of SFAS No. 114, as amended by SFAS No. 118. At December 31, 1996,
the recorded investment in loans which have been identified as impaired loans,
in accordance with SFAS No. 114, totaled $725. Of this amount, $354 related to
loans with no valuation allowance and $371 related to loans with a corresponding
valuation allowance of $290. At December 31, 1995, the recorded investment in
loans which have been identified as impaired loans totaled $837. Of this
amount, $133 related to loans with no valuation allowance and $704 related to
loans with a corresponding valuation allowance of $419.
For the year ended December 31, 1996, the average recorded investment in
impaired loans was approximately $800, and the total interest income recognized
on impaired loans was $33 of which $23 was recognized on a cash basis. For the
year ended December 31, 1995, the average recorded investment in impaired loans
was approximately $906, and the total interest income recognized on impaired
loans was $47 of which $5 was recognized on a cash basis. The balance of
-88-
Notes to Consolidated Financial Statements
impaired loans at January 1, 1995 totaled approximately $812. The initial
adoption of SFAS No. 114 did not require an increase to the Company's allowance
for loan losses. The impact of SFAS No. 114, as amended by SFAS No. 118, was
immaterial to the Company's consolidated financial statements as of and for the
year ended December 31, 1995.
Changes in the allowance for loan losses are as follows:
Years ended December 31,
($ In thousands) 1996 1995 1994
------ ------ ------
Balances, beginning of year $ 2,625 2,551 2,583
Provision for loan losses 331 282 553
Recoveries 125 83 54
Loans charged off (506) (291) (639)
------- ------ ------
Balances, end of year $ 2,575 2,625 2,551
======= ====== ======
Note 6: Bank Premises and Equipment Bank premises and equipment stated at cost,
less accumulated depreciation, are as follows:
December 31,
($ In thousands) 1996 1995
------ ------
Premises $ 5,787 5,511
Furniture and equipment 3,936 3,764
Construction-in-progress 249 30
------- ------
9,972 9,305
Less accumulated depreciation (4,935) (4,626)
------- ------
Total bank premises and equipment $ 5,037 4,679
======= ======
The Company leases a branch facility as well as certain other office space
under noncancellable operating leases that expire over the next seven years.
The future minimum lease payments under these leases (with initial or remaining
lease terms in excess of one year) as of December 31, 1996 are:
Years ending December 31, Amount
------
1997 $ 83
1998 60
1999 36
2000 13
2001 13
Later years through 2003 23
----
$228
====
-89-
National Bankshares, Inc. and Subsidiaries
Note 7: Time Deposits Included in time deposits are certificates of deposit and
other time deposits of $100 or more in the aggregate amounts of $37,414 at
December 31, 1996 and $35,127 at December 31, 1995. At December 31, 1996, the
scheduled maturities of time deposits are as follows: $120,448 in 1997; $19,701
in 1998; $3,137 in 1999; $24,530 in 2000; $563 in 2001; and $141 thereafter.
Note 8: Employee Benefit Plans NBB has a Retirement Accumulation Plan
qualifying under IRS Code Section 401(k). Eligible participants in the plan can
contribute up to 10% of their total annual compensation to the plan. Employee
contributions are matched by NBB based on a percentage of an employee's total
annual compensation contributed to the plan. For the years ended December 31,
1996, 1995 and 1994, NBB contributed $83, $78 and $76, respectively, to the
plan.
Bankshares has a nonleveraged Employee Stock Ownership Plan (ESOP) which
enables employees with one year of service who have attained the age of 21 prior
to the plan's January 1 and July 1 enrollment dates to own Bankshares common
stock. Contributions to the ESOP are determined annually by the Board of
Directors. Contribution expense amounted to $200, $163 and $145 for the years
ended December 31, 1996, 1995 and 1994, respectively. Dividends on ESOP shares
are charged to retained earnings. As of December 31, 1996, the number of
allocated shares held by the ESOP was 47,560 and the number of unallocated
shares was 17,236. All shares held by the ESOP are treated as outstanding in
computing the Company's net income per share. Bankshares or the ESOP has the
right of first refusal for any shares distributed to a participant in the event
the participant elects to sell the shares. Upon reaching age 55 with ten years
of plan participation, a vested participant has the right to diversify 50% of
his or her allocated ESOP shares and Bankshares or the ESOP, with the agreement
of the Trustee, would be obligated to purchase those shares. The ESOP contains
a put option which allows a withdrawing participant to require Bankshares or the
ESOP, if the plan administrator agrees, to purchase his or her allocated shares
if the shares are not readily tradeable on an established market at the time of
its distribution. Accordingly, at December 31, 1996, 64,796 shares of stock
held by the ESOP, at their estimated fair value, which is based on the most
recent available independent valuation, is recorded outside of stockholders'
equity. Bankshares does not anticipate any material cash requirements in each
of the next five years relating to the ESOP.
The Company also sponsors two separate noncontributory defined benefit
pension plans which cover substantially all of its employees. The pension plans'
benefit formulas generally base payments to retired employees upon their length
of service and a percentage of qualifying compensation during their final years
of employment. The NBB pension plan's assets are invested principally in U.S.
Government agency obligations (53%), mutual funds (22%), and equity securities
(18%). The BTC pension plan's assets are invested principally in BTC
certificates of deposit (29%), U.S. Government agency obligations (26%), U.S.
Treasury securities (25%), and money market funds (18%).
-90-
Notes to Consolidated Financial Statements
The plans' funded status at December 31, 1996 and 1995 is as follows:
December 31,
($ In thousands) 1996 1995
------ ------
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested
benefits of $3,148 in 1996 and $3,110 in 1995 $ 3,252 3,210
======== =======
Projected benefit obligation for service rendered to
date (5,160) (5,094)
Plan assets at fair value 3,950 3,498
-------- -------
Projected benefit obligation in excess of plan
assets (1,210) (1,596)
Unrecognized net transition asset (228) (251)
Unrecognized net loss from past experience different
from that assumed 989 1,438
Prior service cost not yet recognized in net pension
cost 246 262
-------- -------
Net accrued pension cost (includes accrued
pension cost of $346 in 1996 and $276 in 1995
included in other liabilities, and prepaid
pension cost of $143 in 1996 and $129 in 1995
included in other assets) $ (203) (147)
======== =======
Net pension cost includes the following (income) expense components:
Years ended December 31,
($ In thousands) 1996 1995 1994
------ ------ ------
Service cost-benefits earned during the
year $ 327 223 273
Interest cost on projected benefit
obligation 353 288 281
Actual return on plan assets (185) (304) (13)
Net amortization and deferral (92) 19 (240)
------- ------ ------
Net pension cost $ 403 226 301
======= ====== ======
Assumptions used in accounting for the pension plans as of December 31, 1996,
1995 and 1994 are as follows:
NBB BTC
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
Weighted average discount rate 7.75% 7% 8.5% 7% 7% 8%
Expected long-term rate of return 9% 9% 9% 9% 7.5% 8%
Rate of increase in future
compensation 5% 5% 5% 5% 5% 5%
-91-
National Bankshares, Inc. and Subsidiaries
Note 9: Income Taxes Total income taxes were allocated as follows:
Years ended December 31,
($ In thousands) 1996 1995 1994
---- ---- ----
Income $ 2,341 1,933 1,844
Stockholders' equity, for net
unrealized gains (losses) on
securities available for sale
recognized for financial
reporting purposes (273) 1,047 (882)
------- ------ ------
Total income taxes $ 2,068 2,980 962
======= ====== ======
The components of federal income tax expense attributable to income before
income tax expense are as follows:
Years ended December 31,
($ In thousands) 1996 1995 1994
---- ---- ----
Current $ 2,345 2,053 1,876
Deferred (4) (120) (32)
------- ------ ------
Total income tax expense $ 2,341 1,933 1,844
======= ====== ======
Taxes resulting from securities transactions amounted to a tax expense of $33
for the year ended December 31, 1996, $62 for the year ended December 31, 1995,
and a tax benefit of $5 for the year ended December 31, 1994.
The following is a reconciliation of the "expected" income tax expense,
computed by applying the U.S. Federal income tax rate of 34% to income before
income tax expense, with the reported income tax expense:
Years ended December 31,
($ In thousands) 1996 1995 1994
---- ---- ----
Expected income tax expense (34%) $ 2,876 2,536 2,430
Tax-exempt interest income (756) (744) (740)
Nondeductible interest expense 99 88 75
Other, net 122 53 79
------- ------ ------
Reported income tax expense $ 2,341 1,933 1,844
======= ====== ======
-92-
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 and 1995 are presented below:
December 31,
($ In thousands) 1996 1995
---- ----
Deferred tax assets:
Loans, principally due to allowance for
loan losses and unearned fee income $ 545 560
Other real estate owned, principally
due to valuation allowance 33 33
Deferred compensation and other
liabilities, due to accrual for
financial reporting purpose 138 115
Deposit intangibles and goodwill 35 28
Nonaccrual interest on loans 23 19
Community development corporation
related tax credit 30 34
Net unrealized losses on securities
available for sale 128 ---
------ ------
Total gross deferred tax assets 932 789
Less valuation allowance --- ---
------ ------
Net deferred tax assets 932 789
------ ------
Deferred tax liabilities:
Bank premises and equipment,
principally due to differences in
depreciation (12) (20)
Securities, due to differences in
discount accretion (43) (30)
Other assets (55) (49)
Net unrealized gains on securities
available for sale --- (145)
------ ------
Total gross deferred liabilities (110) (244)
------ ------
Net deferred tax asset included in
other assets $ 822 545
====== ======
The Company has determined that a valuation allowance for the gross deferred
tax assets is not necessary at December 31, 1996 and 1995, due to the fact that
the realization of the entire gross deferred tax assets can be supported by the
amount of taxes paid during the carryback period available under current tax
laws.
-93-
National Bankshares, Inc. and Subsidiaries
Note 10: Common Stock Transactions During 1994, the ESOP purchased 4,480 shares
of the common stock of Bankshares at a price of $19.35 per share. There was no
stock purchased from Bankshares by the ESOP in 1996 and 1995. The net proceeds
from the stock issuance in 1994 have been credited to common stock and surplus.
Note 11: Restrictions on Payments of Dividends and Capital Requirements
Bankshares' principal source of funds for dividend payments is dividends
received from its subsidiary banks. For the years ended December 31, 1996, 1995
and 1994, dividends received from subsidiary banks were $1,901, $1,055 and
$1,133, respectively.
Bank regulatory agencies restrict, without prior approval, the total dividend
payments of a bank in any calendar year to the bank's retained net income of
that year to date, as defined, combined with its retained net income of the
preceding two years, less any required transfers to surplus. At December 31,
1996, retained net income which was free of such restriction amounted to
approximately $7,572.
Bankshares and its subsidiaries are subject to various regulatory capital
requirements administered by the bank regulatory agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, Bankshares and its subsidiaries must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Bankshares' and its subsidiaries' capital amounts and classification
are also subject to qualitative judgments by regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Bankshares and its subsidiaries to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December
31, 1996, that Bankshares and its subsidiaries meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996, the most recent notifications from the appropriate
regulatory authorities categorized Bankshares and its subsidiaries as adequately
capitalized under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized, Bankshares and its subsidiaries must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since those
notifications that management believes have changed Bankshares' and its
subsidiaries' category.
-94-
Notes to Consolidated Financial Statements
Bankshares' and its subsidiaries' actual regulatory capital amounts and
ratios are also presented in the following tables.
To Be Well
For Capital Capitalized Under
Actual Adequacy Purposes Prompt Corrective
Action Provisions
($ In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1996:
Total capital (to risk
weighted assets)
Bankshares consolidated $53,193 23.00% 18,497 8% n/a n/a
NBB 26,175 16.29% 12,855 8% 16,069 10%
BTC 27,007 38.30% 5,642 8% 7,052 10%
Tier I capital (to risk
weighted assets):
Bankshares consolidated $50,618 21.89% 9,249 4% n/a n/a
NBB 24,171 15.04% 6,428 4% 9,641 6%
BTC 26,436 37.49% 2,821 4% 4,231 6%
Tier I capital (to
average assets):
Bankshares consolidated $50,618 12.96% 15,620 4% n/a n/a
NBB 24,171 11.20% 8,636 4% 10,795 5%
BTC 26,436 15.14% 6,984 4% 8,730 5%
To Be Well
For Capital Capitalized Under
Actual Adequacy Purposes Prompt Corrective
Action Provisions
($ In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1995:
Total capital (to risk
weighted assets)
Bankshares consolidated $48,350 24.47% 15,799 8% n/a n/a
NBB 22,272 16.21% 10,991 8% 13,739 10%
BTC 25,991 43.24% 4,808 8% 6,011 10%
Tier I capital (to risk
weighted assets):
Bankshares consolidated $46,083 23.33% 7,900 4% n/a n/a
NBB 20,550 14.96% 5,496 4% 8,244 6%
BTC 25,446 42.33% 2,404 4% 3,607 6%
Tier I capital (to
average assets):
Bankshares consolidated $46,083 12.25% 15,051 4% n/a n/a
NBB 20,550 10.27% 8,007 4% 10,009 5%
BTC 25,446 14.45% 7,044 4% 881 5%
-95-
National Bankshares, Inc. and Subsidiaries
Note 12: Parent Company Financial Information Condensed financial information
of National Bankshares, Inc. (Parent) is presented below:
Condensed Balance Sheets
December 31,
($ In thousands) 1996 1995
---- ----
Assets Cash due from subsidiaries $ 20 14
Investment in subsidiaries, at equity 51,434 48,067
Refundable income taxes due from
subsidiaries 25 113
------- -------
Total assets $51,479 48,194
======= =======
Liabilities Other liabilities $ 35 40
and ------- -------
Stockholders' Common stock subject to ESOP put option
Equity (note 8) 1,643 ---
------- -------
Stockholders' equity (notes 9, 10, 11 and
17):
Preferred stock of no par value. Authorized
5,000,000 shares; none issued and
outstanding --- ---
Common stock of $2.50 par value. Authorized
5,000,000 shares; issued and outstanding
3,792,833 shares 9,482 9,482
Retained earnings 42,210 38,390
Net unrealized gains (losses) on securities
available for sale (248) 282
Common stock subject to ESOP put option
(64,796 shares at $25.35 per share)(note 8) (1,643) ---
------- -------
Total stockholders' equity 49,801 48,154
Commitments and contingent liabilities
(notes 6, 8 and 14)
------- -------
Total liabilities and stockholders' equity $51,479 48,194
======= =======
-96-
Notes to Consolidated Financial Statements
Condensed Statements of Income
Years ended December 31,
($ In thousands) 1996 1995 1994
---- ---- ----
Income Dividends from subsidiaries (note 11) $ 1,901 1,055 1,133
Expenses Other expenses 232 285 127
------- ------- -------
Income before income tax benefit and
equity in undistributed net income
of subsidiaries 1,669 770 1,006
Applicable income tax benefit 41 97 43
------- ------- -------
Income before equity in undistributed
net income of subsidiaries 1,710 867 1,049
Equity in undistributed net income of
subsidiaries 4,407 4,658 4,254
------- ------- -------
Net income $ 6,117 5,525 5,303
======= ======= =======
Condensed Statements of Cash Flows
Years ended December 31,
($ In thousands) 1996 1995 1994
---- ---- ----
Cash Flows Net income $ 6,117 5,525 5,303
from Adjustments to reconcile net income
Operating to net cash provided by operating
Activities activities:
Equity in undistributed net income
of subsidiaries (4,407) (4,658) (4,254)
(Increase) decrease in other assets --- 3 (2)
(Increase) decrease in refundable
income taxes due from subsidiaries 88 162 (43)
Increase (decrease) in other
liabilities (5) (9) 20
------- ------ ------
Net cash provided by operating
activities 1,793 1,023 1,024
------- ------ ------
Cash Flows Cash flows from financing activities:
from Purchase of common stock of
Financing subsidiaries --- --- (86)
Activities Net proceeds from issuance of
common stock --- --- 86
Dividends paid (1,787) (1,080) (993)
------- ------ ------
Net cash used in financing
activities (1,787) (1,080) (993)
------- ------ ------
Net increase (decrease) in cash 6 (57) 31
Cash due from subsidiary at beginning
of year 14 71 40
------- ------ ------
Cash due from subsidiary at end of
year $ 20 14 71
======= ====== ======
-97-
National Bankshares, Inc. and Subsidiaries
Note 13: Supplemental Cash Flow Information The Company paid $13,080, $12,533
and $10,644 for interest and $1,839, $1,942 and $2,159 for income taxes, net of
refunds, in 1996, 1995 and 1994, respectively. Noncash investing activities
consisted of $506, $291 and $639 of loans charged against the allowance for loan
losses in 1996, 1995 and 1994, respectively. Noncash investing activities also
included $28 in 1996 and $26 in 1994 of loans transferred to other real estate
owned. In addition, for the years ended December 31, 1996 , 1995 and 1994,
noncash investing activities included changes in net unrealized gains (losses)
on securities available for sale of ($803), $3,080 and ($2,595), respectively,
changes in deferred tax assets included in other assets of $273, ($1,047) and
$882, respectively, and changes in net unrealized gains (losses) on securities
available for sale included in stockholders' equity of ($530), $2,033 and
($1,713), respectively. See note 3 for noncash transfers of securities.
Note 14: Financial Instruments with Off-Balance Sheet Risk The Company is a
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
Those instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized in the consolidated balance sheets. The contract
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
The Company's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments
and conditional obligations as it does for on-balance sheet instruments.
The Company may require collateral or other security to support the following
financial instruments with credit risk:
December 31,
($ In thousands) 1996 1995
---- ----
Financial instruments whose contract amounts
represent credit risk:
Commitments to extend credit $ 32,087 32,378
======== ======
Standby letters of credit $ 1,380 1,969
======== ======
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
required by the Company upon extension of credit, is based on management's
credit evaluation of the customer. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment and income-
producing commercial properties. Extensions of credit arising from these
commitments are predominantly variable rate in nature; the principal exception
being construction loans which are at fixed rates, but have terms generally less
than one year.
-98-
Notes to Consolidated Financial Statements
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. Collateral held varies but may include
accounts receivable, inventory, property, plant and equipment and income-
producing commercial properties.
The Company originates mortgage loans for sale to secondary market investors
subject to contractually specified and limited recourse provisions. In 1996,
the Company originated $17,907 and sold $18,271 to investors, compared to
$15,515 originated and $15,027 sold in 1995. Every contract with each investor
contains certain recourse language. In general, the Company may be required to
repurchase a previously sold mortgage loan if there is major noncompliance with
defined loan origination or documentation standards, including fraud, negligence
or material misstatement in the loan documents. Repurchase may also be required
if necessary governmental loan guarantees are canceled or never issued, or if an
investor is forced to buy back a loan after it has been resold as a part of a
loan pool. In addition, the Company may have an obligation to repurchase a loan
if the mortgagor has defaulted early in the loan term. This potential default
period is approximately twelve months after sale of a loan to the investor.
Sold loans with potential recourse totaled approximately $18,271 at December 31,
1996.
Note 15: Concentrations of Credit Risk The Company does a general banking
business, serving the commercial, agricultural and personal banking needs of its
customers. NBB's trade territory, commonly referred to as the New River Valley,
consists of Montgomery and Giles Counties, Virginia and portions of adjacent
counties. NBB's operating results are closely correlated with the economic
trends within this area which are, in turn, influenced by the area's three
largest employers, Virginia Polytechnic Institute and State University,
Montgomery County Schools and Hoechst-Celanese. Other industries include a wide
variety of manufacturing, retail and service concerns. Most of BTC's business
originates from the communities of Tazewell and Bluefield and other communities
in Tazewell County, Virginia and in Mercer County, West Virginia. BTC's service
area has largely depended on the coal mining industry and farming for its
economic base. In recent years, coal companies have mechanized and reduced the
number of persons engaged in the production of coal. There are still a number
of support industries for the coal mining business that continue to provide
employment in the area. Additionally, several new businesses have been
established in the area and Bluefield, West Virginia has begun to emerge as a
regional medical center. The ultimate collectibility of the loan portfolios and
the recovery of the carrying amounts of repossessed property are susceptible to
changes in the market conditions of these areas.
At December 31, 1996 and 1995, approximately $71 million and $52 million,
respectively, of the loan portfolio were concentrated in commercial real estate.
This represents approximately 36% and 34% of the loan portfolio at December 31,
1996 and 1995, respectively. Included in commercial real estate at December 31,
1996 and 1995 was approximately $49 million and $25 million, respectively, in
loans for college housing and professional office buildings. Loans for the
purpose of acquiring residential real estate were approximately $60 million and
$56 million at December 31, 1996 and 1995, respectively. This represents
approximately 31% and 34% of the loan portfolio at December 31, 1996 and 1995,
respectively. Loans primarily for the purpose of purchasing automobiles were
approximately $29 million and $25 million at December 31, 1996 and 1995,
respectively. This represents approximately 15% of the loan portfolio at
December 31, 1996 and 1995.
-99-
National Bankshares, Inc. and Subsidiaries
The Company has established operating policies relating to the credit process
and collateral in loan originations. Loans to purchase real and personal
property are generally collateralized by the related property and with loan
amounts established based on certain percentage limitations of the property's
total stated or appraised value. Credit approval is primarily a function of
collateral and the evaluation of the creditworthiness of the individual borrower
or project based on available financial information.
Note 16: Fair Value of Financial Instruments The estimated fair values of the
Company's financial instruments at December 31, 1996 and 1995 are as follows:
December 31,
1996 1995
Carrying Estimated Carrying Estimated
($ In thousands) Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial assets:
Cash and due from banks $ 10,080 10,080 10,055 10,055
Federal funds sold 1,910 1,910 7,725 7,725
Securities 171,244 171,289 187,635 188,648
Mortgage loans held for
sale 516 516 880 880
Loans, net 193,598 192,201 163,193 163,290
-------- ------- ------- -------
Total financial assets $377,348 375,996 369,488 370,598
======== ======= ======= =======
Financial liabilities:
Deposits $334,584 331,758 330,313 334,066
Other borrowed funds 627 627 161 161
-------- ------- ------- -------
Total financial
liabilities $335,211 332,385 330,474 334,227
======== ======= ======= =======
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgements regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgement and therefore cannot be determined with precision.
Changes in assumptions could significantly affect these estimates.
Fair value estimates are based on existing on-and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets that are not considered financial
assets include deferred tax assets and bank premises and equipment. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
-100-
Notes to Consolidated Financial Statements
Note 17: Business Combination On June 1, 1996, Bankshares issued 1,888,209
shares of its common stock in a one-for-one exchange for all the outstanding
common stock of Bank of Tazewell County, Tazewell, Virginia. This business
combination has been accounted for as a pooling-of-interests and, accordingly,
the consolidated financial statements for the periods prior to the combination
have been restated to include the accounts and results of operations of Bank of
Tazewell County. There were no adjustments of a material amount resulting from
Bank of Tazewell County's adoption of Bankshares' accounting policies.
In May, 1996, Bankshares declared a stock split of .11129 per share effected
in the form of a stock dividend to the holders of Bankshares common stock just
prior to the merger effective date to facilitate the one-for-one common stock
exchange ratio. All stockholders' equity accounts, share and per share data
have been adjusted retroactively to reflect the stock split.
The results of operations previously reported by the separate enterprises and
the combined amounts presented in the accompanying financial statements are
summarized below:
Six months
ended June 30, Years ended December 31,
($ In thousands) 1996 1995 1994
---- ---- ----
Revenues:
National Bankshares, Inc. $ 9,286 17,848 16,169
Bank of Tazewell County 6,166 12,628 11,940
-------- ------ ------
Combined $ 15,452 30,476 28,109
======== ====== ======
Net Income:
National Bankshares, Inc. $ 1,883 3,256 2,916
Bank of Tazewell County 1,106 2,269 2,387
-------- ------ ------
Combined $ 2,989 5,525 5,303
======== ====== ======
Note 18: Future Accounting Considerations In June 1996, the Financial
Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". SFAS No. 125
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996 and is to be applied
prospectively. This Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Management of the Company does not
expect that adoption of SFAS No. 125 will have a material impact on the
Company's financial position, results of operations or liquidity.
-101-
The National Bank of Blacksburg Board of Directors
Robert E. Christopher, Jr.
Chairman of the Board
PICTURE OF ROBERT Retired
E. CHRISTOPHER, JR.,
CHARLES L. BOATWRIGHT Charles L. Boatwright
AND JAMES G. RAKES Vice Chairman of the Board
Physician
James G. Rakes
National Bankshares, Inc.
The National Bank
President and
Chief Executive Officer
James M. Shuler
Companion Animal Clinic, Inc.
President
Virginia House of Delegates PICTURE OF
Delegate JAMES M. SHULER, L.
ALLEN BOWMAN AND
L. Allen Bowman PAUL A. DUNCAN
Litton Poly-Scientific
Retiring President
Paul A. Duncan
Holiday Motor Corp.
President
Jeffrey R. Stewart
Educational Consultant
PICTURE OF
JEFFREY R. STEWART, J. Lewis Webb, Jr.
J. LEWIS WEBB, JR. AND Dentist
PAUL P. WISMAN
Paul P. Wisman
Grundy National Bank
Vice President of Investments
Nicewonder Investments
Manager of Assets
The National Bank of Blacksburg Advisory Boards
Montgomery County Advisory Board Dan A. Dodson, James L. Dowdy, W. Clinton
Graves, James J. Owen, Arlene A. Saari, James C. Stewart, T. Cooper Via
Giles Advisory Board Paul B. Collins, John H. Givens, Jr., Ross E. Martin,
Kenneth L. Rakes, Scarlet B. Ratcliffe, H.M. Scanland, Jr., Buford Steele
-102-
Bank of Tazewell County Board of Directors
Alonzo A. Crouse
Bank of Tazewell County
PICTURE OF Executive Vice President,
ALONZO A. CROUSE, CARL Secretary and Cashier
C. GILLESPIE AND R. E.
DODSON Carl C. Gillespie
Honorary Chairman of the Board
Attorney
R.E. Dodson
Bank of Tazewell County
President and
Chief Executive Officer
James A. Deskins
Deskins Super Market, Inc.
President PICTURE OF
JAMES A. DESKINS,
Ralph S. Bailey RALPH S. BAILEY AND
Retired JAMES S. GILLESPIE,
JR.
James S. Gillespie, Jr.
Jim Sam Gillespie Farm
President
E.P. Greever
Retired
PICTURE OF
E.P. GREEVER, WILLIAM William T. Peery
T. PEERY, CHARLES E. Cargo Oil Co., Inc.
GREEN, III AND JACK H. President
HARRY
Charles E. Green, III
Equitable Financial Services
District Manager
Jack H. Harry
Harry's Enterprises, Inc.
President
J.M. Pope
Retired
PICTURE OF
James G. Rakes J.M. POPE, JAMES G.
National Bankshares, Inc. RAKES AND WILLIAM H.
The National Bank VANDYKE
President and
Chief Executive Officer
William H. VanDyke
Candlewax Smokeless Fuel Co.
Vice President
T.C. Bowen, Jr.
Chairman of the Board
Attorney
-103-
National Bankshares, Inc. Board of Directors
James G. Rakes
National Bankshares, Inc.
PICTURE OF The National Bank
JAMES G. RAKES, ROBERT President and
E. CHRISTOPHER, JR. AND Chief Executive Officer
R.E. DODSON
Robert E. Christopher, Jr.
Chairman of the Board
Retired
R.E. Dodson
Bank of Tazewell County
President and
Chief Executive Officer
Alonzo A. Crouse
Bank of Tazewell County
Executive Vice President, PICTURE OF
Secretary and Cashier ALONZO A. CROUSE,
T.C. BOWEN, JR. AND
T.C. Bowen, Jr. CHARLES L.
Attorney BOATWRIGHT
Charles L. Boatwright
Vice Chairman of the Board
Physician
Paul A. Duncan
Holiday Motor Corp.
PICTURE OF President
PAUL A. DUNCAN, WILLIAM
T. PEERY AND JEFFREY R. William T. Peery
STEWART Cargo Oil Co., Inc.
President
Jeffrey R. Stewart
Educational Consultant
-104-
Corporate Information
NATIONAL BANKSHARES, INC. OFFICERS James G. Rakes
President and Chief Executive Officer
Marilyn B. Buhyoff
Secretary and Counsel
F. Brad Denardo
Corporate Officer
Shelby M. Evans
Corporate Compliance Officer
Joan C. Nelson
Treasurer
David K. Skeens
Corporate Auditor
ANNUAL MEETING The Annual meeting of stockholders will be held on Tuesday,
April 8, 1997 at 3:00 p.m. at the Best Western Red Lion Inn, 900 Plantation
Road, Blacksburg, Virginia.
REQUESTS FOR INFORMATION Analysts, investors and those seeking financial
information should contact:
James G. Rakes
President and Chief Executive Officer
540/552/2011 or
800/552/4123
Those seeking general stockholder information should
contact:
Marilyn B. Buhyoff
Secretary
540/552/2011 or
800/552/4123
FORM 10-K A form 10-K Report filed with the Securities and Exchange Commission
is available to stockholders without charge upon written request to the
Secretary of National Bankshares, Inc., 100 South Main Street, P.O. Box 90002,
Blacksburg, VA 24062-9002
CORPORATE OFFICE REGISTERED AGENT
National Bankshares, Inc. James G. Rakes
100 South Main Street 100 South Main Street
Blacksburg, VA 24060 Blacksburg, VA 24060
P.O. Box 90002 P.O. Box 90002
Blacksburg, VA 24062-9002 Blacksburg, VA 24062-9002
-105-
National Bankshares
100 South Main Street/P.O. Box 90002
Blacksburg, Virginia 24062
-106-