UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended Commission file number
December 31, 1998 O-15204
National Bankshares, Incorporated
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(Exact name of Registrant as specified in its charter)
Virginia 54-1375874
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 South Main Street
Blacksburg, Virginia 24060
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (540) 552-2011
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.50 per Share
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(Title of Class)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of February 8, 1999 was $81,628,092. The aggregate market value
was computed based on a price determined from transactions known to management
of the Registrant since its stock is not extensively traded, listed on any
exchange, or quoted by NASDAQ. (In determining this amount, the registrant
assumes that all of its Directors and principal Officers are affiliates. Such
assumption shall not be deemed conclusive for any other purposes.)
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 8, 1999
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Common Stock, $2.50 Par Value 3,792,833
DOCUMENTS INCORPORATED BY REFERENCE
Selected information from the Registrants' Annual Report to Stockholders for the
year ended December 31, 1998, is incorporated by reference into Parts I and II
of this report.
Selected information from the Registrant's Proxy Statement for the Annual
Meeting to be held April 13, 1999 and filed with the Securities and Exchange
Commission pursuant to Regulation 14A, is incorporated by reference into Part
III of this report.
(This report contains 42 pages.)
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(The Index of Exhibits are on pages 41-42.)
National Bankshares, Incorporated
Annual Report For 1998 on Form 10-K
Table of Contents
Page
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Part I
Item 1. Business 3-30
Item 2. Properties 30
Item 3. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of
Security Holders 30
Executive Officers of the Registrant 31
Part II
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters 32
Item 6. Selected Financial Data 32
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 32
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 32-35
Item 8. Financial Statements and
Supplementary Data 36
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 36
Part III
Item 10. Directors and Executive Officers of
the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain
Beneficial Owners and Management 36
Item 13. Certain Relationships and Related
Transactions 37
Part IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 37-39
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Part I
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Item 1. Business.
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History and Business
National Bankshares, Inc. (Bankshares) is a bank holding company organized
under the laws of Virginia in 1986 and registered under the Bank Holding Company
Act (BHCA). Except for a separate investment portfolio, Bankshares conducts all
of its business operations through its two wholly-owned subsidiaries, The
National Bank of Blacksburg (NBB) and Bank of Tazewell County (BTC),
collectively referred to as "the Company".
On June 1, 1996, Bankshares issued 1,888,209 shares of its common stock in a
one-for-one exchange for all the outstanding common stock of Bank of Tazewell
County, Tazewell, Virginia. This business combination has been accounted for as
a pooling-of-interests and, accordingly, the consolidated financial statements
for the periods prior to the combination have been restated to include the
accounts and results of operations of Bank of Tazewell County. There were no
adjustments of a material amount resulting from Bank of Tazewell County's
adoption of Bankshares' accounting policies.
In May 1996, Bankshares declared a stock split of .11129 per share effected
in the form of a stock dividend to the holders of Bankshares common stock just
prior to the merger effective date to facilitate the one-for-one common stock
exchange ratio. All stockholders' equity accounts, share and per share data
have been adjusted retroactively to reflect the stock split.
The National Bank of Blacksburg
The National Bank of Blacksburg was originally chartered as the Bank of
Blacksburg in 1891. Its state charter was converted to a national charter in
1922 and it became The National Bank of Blacksburg. NBB operates a full-service
banking business from its headquarters in Blacksburg, Virginia, and its eight
area branch offices. NBB offers general retail and commercial banking services
to individuals, businesses, local government units and institutional customers.
These products and services include accepting deposits in the form of checking
accounts, money market deposit accounts, interest-bearing demand deposit
accounts, savings accounts and time deposits; making real estate, commercial,
revolving, consumer and agricultural loans; offering letters of credit;
providing other consumer financial services, such as automatic funds transfer,
collections, night depository, safe deposit, travelers checks, savings bond
sales and utility payment services; and providing other miscellaneous services
normally offered by commercial banks. NBB also conducts a general trust
business in Blacksburg near its headquarters location. Through its trust
operation, NBB offers a variety of personal and corporate trust services.
NBB makes loans in all major loan categories, including commercial,
commercial and residential real estate, construction and consumer loans.
Bank of Tazewell County
The antecedents of BTC are in a charter issued on September 28, 1889 for
Clinch Valley Bank. On December 22, 1893, a second charter was issued in
substantially the same form for Bank of Clinch Valley. In 1929, Bank of Clinch
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Valley merged with Farmers Bank under the charter of the former, and the name of
the new institution became Farmers Bank of Clinch Valley. Bank of Tazewell
County resulted from the 1964 merger of Bank of Graham, Bluefield, Virginia with
Farmers Bank of Clinch Valley. BTC provides general retail and commercial
banking services to individuals, businesses and local government units. These
services include commercial, real estate and consumer loans. Deposit accounts
offered include demand deposit accounts, interest-bearing demand deposit
accounts, money market deposit accounts, savings accounts and certificates of
deposit. Other services include automatic funds transfer, collections, night
depository, safe deposit, travelers checks, savings bond sales and utility
payment services; and providing other miscellaneous service normally offered by
commercial banks. BTC also conducts a general trust business.
Commercial Loans
NBB and BTC make both secured and unsecured loans to businesses and to
individuals for business purposes. Loan requests are granted based upon several
factors including credit history, past and present relationships with the bank
and marketability of collateral. Unsecured commercial loans must be supported
by a satisfactory balance sheet and income statement. Business loans made on a
secured basis may be secured by a security interest in marketable equipment,
accounts receivable, business equipment and/or general intangibles of the
business. In addition, or in the alternative, the loan may be secured by a deed
of trust lien on business real estate.
The risks associated with commercial loans are related to the strength of the
individual business, the value of loan collateral and the general health of the
economy.
Residential Real Estate Loans
Loans secured by residential real estate are originated by both bank
subsidiaries. NBB sells a substantial percentage of the residential real estate
loans it originates in the secondary market on a servicing released basis.
There are occasions when a borrower or the real estate do not qualify under
secondary market criteria, but the loan request represents a reasonable credit
risk. Also, an otherwise qualified borrower may choose not to have their
mortgage loan sold. On these occasions, if the loan meets NBB's internal
underwriting criteria, the loan will be closed and placed in NBB's portfolio.
Some loans originated by BTC are held in the bank's loan portfolio and others
are sold in the secondary market. In their secondary market operations, NBB
and BTC participates in insured loan programs sponsored by the Department of
Housing and Urban Development, the Veterans Administration and the Virginia
Housing Development Authority.
Residential real estate loans carry risk associated with the continued
credit-worthiness of the borrower and changes in the value of the collateral.
Construction Loans
NBB makes loans for the purpose of financing the construction of business and
residential structures to financially responsibly business entities and
individuals. These loans are subject to the same credit criteria as commercial
and residential real estate loans. Although BTC offers construction loans, its
involvement in this area of lending is more limited than NBB's due to the nature
of its market area.
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In addition to the risks associated with all real estate loans, construction
loans bear the risks that the project will not be finished according to
schedule, the project will not be finished according to budget and the value of
the collateral may at any point in time be less than the principal amount of the
loan. Construction loans also bear the risk that the general contractor, who
may or may not be the bank's loan customer, is unable to finish the construction
project as planned because of financial pressures unrelated to the project.
Loans to customers that are made as permanent financing of construction loans
may likewise under certain circumstances be affected by external financial
pressures.
Consumer Loans
NBB and BTC routinely make consumer loans, both secured and unsecured. The
credit history and character of individual borrowers is evaluated as a part of
the credit decision. Loans used to purchase vehicles or other specific personal
property and loans associated with real estate are usually secured with a lien
on the subject vehicle or property. NBB also originates a small number of
student loans that are sold to the Student Loan Marketing Association.
Negative changes in a customer's financial circumstances due to a large
number of factors, such as illness or loss of employment, can place the
repayment of a consumer loan at risk. In addition, deterioration in collateral
value can add risk to consumer loans.
Sales and Purchases of Loans
NBB and BTC will occasionally buy or sell all or a portion of a loan. These
purchases and sales are in addition to the secondary market mortgage loans and
student loans regularly sold by NBB. Because the demand for loans, particularly
for commercial loans, is greater in NBB's market area than in BTC's market area,
NBB regularly sells loans and participations in loans to BTC.
Both banks will consider selling a loan or a participation in a loan, if: (i)
the full amount of the loan will exceed the bank's legal lending limit to a
single borrower; (ii) the full amount of the loan, when combined with a
borrower's previously outstanding loans, will exceed the bank's legal lending
limit to a single borrower; (iii) the Board of Directors or an internal Loan
Committee believes that a particular borrower has a sufficient level of debt
with the bank; (iv) the borrower requests the sale; (v) the loan to deposit
ratio is at or above the optimal level as determined by bank management; and/or
(vi) the loan may create too great a concentration of loans in one particular
location or in one particular type of loan.
The banks will consider purchasing a loan, or a participation in a loan, from
another financial institution (including from another subsidiary of the Company)
if the loan meets all applicable credit quality standards and (i) the bank's
loan to deposit ratio is at a level where additional loans would be desirable;
and/or (ii) a common customer requests the purchase.
The following table sets forth, for the three fiscal years ended December 31,
1998, 1997 and 1996 the percentage of total operating revenue contributed by
each class of similar services which contributed 15% or more of total operating
revenues of the Company during such periods.
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Percentage of
Period Class of Service Total Revenues
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December 31, 1998 Interest and Fees on Loans 61.97%
Interest on Investments 25.99%
December 31, 1997 Interest and Fees on Loans 59.92%
Interest on Investments 29.31%
December 31, 1996 Interest and Fees on Loans 54.98%
Interest on Investments 34.61%
Market Area
The National Bank of Blacksburg Market Area
NBB's primary market area consists of the northern portion of Montgomery
County, all of Giles County, the City of Galax and adjacent portions of Carroll
and Grayson Counties, Virginia. This area includes the towns of Blacksburg and
Christiansburg in Montgomery County and the towns of Pearisburg, Pembroke and
Rich Creek, in Giles County. The local economy is diverse and is oriented
toward higher education, retail and service, light manufacturing and
agriculture. For the years 1998, 1997 and 1996 the unemployment rate in
Montgomery County was 1.9%, 2.6% and 3.3%, respectively, and the rate in Giles
County during those years was 5.8% in 1998, 6.7% in 1997 and 8.4% in 1996. The
City of Galax had an unemployment rate of 3.9% in 1998, 2.6% in 1997 and 4.7% in
1996.
Montgomery County's largest employer is Virginia Polytechnic Institute and
State University (VPI & SU) located in Blacksburg. VPI & SU is the
Commonwealth's land grant college and also its largest university. Employment
at VPI & SU has remained stable over the past three years, and it is not
expected to change materially in the next few years. A second state supported
university, Radford University, is located in the western edge of NBB's service
area. It too has provided stable employment opportunities in the region.
Giles County's primary employer is the Celanese Corp. plant, a manufacturer
of the material from which cigarette filters are made. In 1995 and 1996
employment at that plant was stable, however, in late 1997 temporary employee
furloughs were announced, and a small number of these temporary layoffs have
become permanent.
The City of Galax is located in the Virginia-North Carolina furniture-
manufacturing region. Three furniture companies, Vaughan Bassett Furniture
Company, Vaughan Furniture Company, Inc. and Webb Furniture Company together
employ the largest percentage of the area's work force. The Galax economy is
stable.
Several other small manufacturing concerns are located in Montgomery and
Giles Counties and in the City of Galax. These concerns manufacture diverse
products and are not dependent on one sector of the economy. Agriculture and
tourism are also important to the region, especially in Giles County and in the
area near Galax.
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Since 1988, Montgomery County has developed into a regional retail center,
with the construction of two large shopping areas. Two area hospitals, each of
which are affiliated with different large health care systems, have in the past
several years constructed additional facilities and have attracted additional
health care providers to Montgomery County, making it a center for basic health
care services. VPI & SU's Corporate Research Center has brought several small
high tech companies to Blacksburg, and further expansion is planned.
Montgomery County, with an approximate population of 77,000, has experienced
moderate population growth and this trend is predicted to continue. Neighboring
Giles County is more rural, with a total population of approximately 16,500.
The population of Giles County is expected to slowly decline over the next few
years. It is not anticipated that this decline will materially impact NBB's
business in Giles County. The City of Galax has a population of approximately
7,000, and the neighboring, mostly rural, counties of Carroll and Grayson have a
total of approximately 50,000 in habitants. The area's population is stable,
and no dramatic changes are predicted.
NBB's primary market area offers the advantages of a good quality of life,
scenic beauty, moderate climate and the cultural attractions of two major
universities. The region has marketed itself as a retirement destination, and
it has had some recent success attracting retirees, particularly from the
Northeast and urban Northern Virginia. These marketing efforts are expected to
continue.
Bank of Tazewell County Market Area
Most of BTC's business originates from Tazewell County, Virginia and Mercer
County, West Virginia. This includes the towns of Tazewell and Bluefield,
Virginia and Bluefield, West Virginia. BTC's primary market area has largely
depended on the coal mining industry and farming for its economic base. In
recent years, coal companies have mechanized and this has reduced the number of
individuals required for the production of coal. There are still a number of
support industries for the coal mining business that continue to provide
employment in the area. Additionally, several new businesses have been
established in the area, and Bluefield, West Virginia has begun to emerge as a
regional medical center. Unemployment has stabilized, and real estate values
also remain stable and comparable to other areas in southwest Virginia.
For 1998, 1997 and 1996 the unemployment rate for Tazewell County was 7.0%,
9.5% and 9.5%, respectively. In the same years, Mercer County, West Virginia's
unemployment rate was 4.2%, 5.3% and 5.2%, respectively.
Competition
The banking and financial service business in Virginia generally, and in
NBB's and BTC's market areas specifically, is highly competitive. The
increasingly competitive environment is a result of changes in regulation,
changes in technology and product delivery systems and new competition from non-
traditional financial services provides the accelerating pace of consolidation
among financial service providers. The Company's bank subsidiaries compete for
loans and deposits with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, money market funds,
credit unions and other nonbank financial service providers. Many of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader array of financial services than
NBB and BTC. In order to compete with these other financial service providers,
NBB and BTC rely upon service-based business philosophies, personal
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relationships with customers, specialized services tailored to meet customers'
needs and the convenience of office locations. In addition, the banks are
generally competitive with other financial institutions in their market areas
with respect to interest rates paid on deposit accounts, interest rates charged
on loans and other service charges on loans and deposit accounts.
Registrant's Organization and Employment
Bankshares, NBB and BTC are organized in a holding company/subsidiary bank
structure. Bankshares has no employees, except for officers, and conducts
substantially all of its operations through its subsidiaries. All compensation
paid to officers and employees is paid by NBB, except for fees paid by
Bankshares to President and Chief Executive Officer James G. Rakes for his
service as a director of the Company.
At December 31, 1998, NBB employed 115 full time equivalent employees at its
main office, operations center and branch offices. BTC at December 31, 1998
employed 70 in its various offices and operational areas.
Certain Regulatory Considerations
Bankshares, NBB and BTC are subject to various state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. As a result of the substantial regulatory burdens on banking,
financial institutions, including Bankshares, NBB and BTC, are disadvantaged
relative to other competitors who are not as highly regulated, and their costs
of doing business are much higher. The following is a brief summary of the
material provisions of certain statutes, rules and regulations which affect
Bankshares, NBB and/or BTC. This summary is qualified in its entirety by
reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of the statutes or
regulations which are applicable to the businesses of Bankshares, NBB and/or
BTC. Any change in applicable laws or regulations may have a material adverse
effect on the business and prospects of Bankshares, NBB and/or BTC.
National Bankshares, Inc.
Bankshares is a bank holding company within the meaning of the BHCA and
Chapter 13 of the Virginia Banking Act, as amended (the Virginia Banking Act).
The activities of Bankshares also are governed by the Glass-Steagall Act of 1933
(the Glass-Steagall Act).
The Bank Holding Company Act. The BHCA is administered by the Federal
Reserve Board, and Bankshares is required to file with the Federal Reserve Board
an annual report and any additional information the Federal Reserve Board may
require under the BHCA. The Federal Reserve Board also is authorized to examine
Bankshares and its subsidiaries. The BHCA requires every bank holding company
to obtain the approval of the Federal Reserve Board before (i) it or any of its
subsidiaries (other than a bank) acquires substantially all the assets of any
bank; (ii) it acquires ownership or control of any voting shares of any bank if
after the acquisition it would own or control, directly or indirectly, more than
5% of the voting shares of the bank; or (iii) it merges or consolidates with any
other bank holding company.
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The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve Board, require that, depending on the
particular circumstances, either Federal Reserve Board approval must be obtained
or notice must be furnished to the Federal Reserve Board and not disapproved
prior to any person or company acquiring "control" of a bank holding company,
such as Bankshares, subject to certain exemptions. Control is conclusively
presumed to exist if an individual or company acquires 25% or more of any class
of voting securities of Bankshares. Control is rebuttably presumed to exist if
a person acquires 10% or more, but less than 25%, of any class of voting
securities of Bankshares. The regulations provide a procedure for challenging
the rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares
of any company engaged in nonbanking activities, unless the Federal Reserve
Board, by order or regulation, has found those activities to be so closely
related to banking or managing or controlling banks as to be incident to
banking. Some of the activities that the Federal Reserve Board has determined
by regulation to be proper incidents to the business of a bank holding company
include making or servicing loans and certain types of leases, engaging in
certain insurance and discount brokerage activities, performing certain data
processing services, acting in certain circumstances as a fiduciary or
investment or financial adviser, owning savings associations and making
investments in certain corporations or projects designed primarily to promote
community welfare.
The Federal Reserve Board imposes certain capital requirements on Bankshares
under the BHCA, including a minimum leverage ratio and a minimum ratio of
"qualifying" capital to risk-weighted assets. Subject to its capital
requirements and certain other restrictions, Bankshares can borrow money to make
a capital contribution to NBB or BTC, and these loans may be repaid from
dividends paid from NBB or BTC to Bankshares (although the ability of NBB or BTC
to pay dividends are subject to regulatory restrictions). Bankshares can raise
capital for contribution to NBB and BTC by issuing securities without having to
receive regulatory approval, subject to compliance with federal and state
securities laws.
The Virginia Banking Act. All Virginia bank holding companies must register
with the Virginia State Corporation Commission (the Commission) under the
Virginia Banking Act. A registered bank holding company must provide the
Commission with information with respect to the financial condition, operations,
management and intercompany relationships of the holding company and its
subsidiaries. The Commission also may require such other information as is
necessary to keep itself informed about whether the provisions of Virginia law
and the regulations and orders issued under Virginia law by the Commission have
been complied with, and may make examinations of any bank holding company and
its subsidiaries.
In March 1994, the Virginia General Assembly adopted an amendment to Chapter
15 of the Virginia Banking Act to allow bank holding companies located in any
state to acquire a Virginia bank or bank holding company if the Virginia bank or
bank holding company could acquire a bank holding company in their state and the
Virginia bank or bank holding company to be acquired has been in existence and
continuously operated for more than two years. This amendment may permit bank
holding companies from throughout the United States to enter the Virginia
market, subject to federal and state approval.
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Glass-Steagall Act. Bankshares is also restricted in its activities by the
provisions of the Glass-Steagall Act, which prohibit Bankshares from owning
subsidiaries that are engaged principally in the issue, flotation, underwriting,
public sale or distribution of securities. Bankshares does not presently engage
in securities-related activities in any material respect.
NBB and BTC
General. NBB is a national banking association incorporated under the laws
of the United States and is subject to examination by the Office of the
Comptroller of the Currency (the OCC). Deposits in NBB are insured by the FDIC
up to a maximum amount (generally $100,000 per depositor, subject to aggregation
rules). The OCC and the FDIC regulate or monitor all areas of NBB's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations and maintenance of books and records. The OCC requires NBB to
maintain certain capital ratios. NBB is required by the OCC to prepare
quarterly reports on NBB's financial condition and to conduct an annual audit of
its financial affairs in compliance with minimum standards and procedures
prescribed by the OCC. NBB also is required by the OCC to adopt internal
control structures and procedures in order to safeguard assets and monitor and
reduce risk exposure. While appropriate for safety and soundness of banks,
these requirements impact banking overhead costs.
BTC is organized as a Virginia-chartered banking corporation and is regulated
and supervised by the Bureau of Financial Institutions (BFI) of the Virginia
State Corporation Commission. In addition, as a federally insured bank, BTC is
regulated and supervised by the Federal Reserve Board, which serves as its
primary federal regulator and is subject to certain regulations promulgated by
the FDIC. Under the provisions of federal law, federally insured banks are
subject, with certain exceptions, to certain restrictions on extensions of
credit to their affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, these banks are prohibited from engaging in certain tie-
in-arrangements in connection with any extension of credit or the providing of
any property of service.
The Virginia State Corporation Commission and the Federal Reserve Board
conduct regular examinations of BTC reviewing the adequacy of the loan loss
reserves, quality of the loans and investments, propriety of management
practices, compliance with laws and regulations and other aspects of the bank's
operations. In addition to these regular examinations, Virginia chartered banks
must furnish to the Federal Reserve Board quarterly reports containing detailed
financial statements and schedules.
Community Reinvestment Act. NBB and BTC are subject to the provisions of the
Community Reinvestment Act of 1977 (the CRA), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of a
bank, to assess the bank's record in meeting the credit needs of the community
served by the bank, including low and moderate-income neighborhoods. Under the
implementing CRA regulations, banks have the option of being assessed for CRA
compliance under one of several methods. Small banks are evaluated differently
than larger banks and technically are not subject to some data collection
requirements. The focus of the regulations is on the volume and distribution of
a bank's loans, with particular emphasis on lending activity in low and
moderate-income areas and to low and moderate-income persons. The regulations
-10-
place substantial importance on a bank's product delivery system, particularly
branch locations. The regulations require banks, other than small banks, to
comply with significant data collection requirements. The regulatory agency's
assessment of the bank's record is made available to the public. Further, this
assessment is required for any bank which has applied to, among other things,
establish a new branch office that will accept deposits, relocate an existing
office, or merge, consolidate with or acquire the assets or assume the
liabilities of a federally regulated financial institution. It is likely that
banks' compliance with the CRA, as well as other so-called fair lending laws,
will face ongoing government scrutiny and that costs associated with compliance
will continue to increase.
NBB has received a CRA rating of "Outstanding" in its last examination by
federal bank regulators. BTC was rated as "Satisfactory".
Federal Deposit Insurance Corporation Improvement Act of 1991. The
difficulties encountered nationwide by financial institutions during 1990 and
1991 prompted federal legislation designed to reform the banking industry and to
promote the viability of the industry and of the deposit insurance system.
FDICIA, which became effective on December 19, 1991, bolsters the deposit
insurance fund, tightens bank regulation and trims the scope of federal deposit
insurance.
The legislation bolsters the bank deposit insurance fund with $70 billion in
borrowing authority and increases to $30 billion from $5 billion the amount the
FDIC can borrow from the U.S. Treasury to cover the cost of bank failures. The
loans, plus interest, would be repaid by premiums that banks pay on domestic
deposits over the next fifteen years.
Among other things, FDICIA requires the federal banking agencies to take
"prompt corrective action" in respect to banks that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized."
If a depository institution's principal federal regulator determines that an
otherwise adequately capitalized institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, it may require the
institution to submit a corrective action plan, restrict its asset growth and
prohibit branching, new acquisitions and new lines of business. An
institution's principal federal regulator may deem the institution to be
engaging in an unsafe or unsound practice if it receives a less than
satisfactory rating for asset quality, management, earnings or liquidity in its
most recent examination.
Among other possible sanctions, an undercapitalized depository institution
may not pay dividends and is required to submit a capital restoration plan to
its principal federal regulator. In addition, its holding company may be
required to guarantee compliance with the capital restoration plan under certain
circumstances. If an undercapitalized depository institution fails to submit or
implement an acceptable capital restoration plan, it can be subject to more
severe sanctions, including an order to sell sufficient voting stock to become
adequately capitalized. More severe sanctions and remedial actions can be
mandated by the regulators if an institution is considered significantly or
critically undercapitalized.
-11-
In addition, FDICIA requires regulators to draft a new set of non-capital
measures of bank safety, such as loan underwriting standards and minimum
earnings levels. The legislation also requires regulators to perform annual on-
site bank examinations, places limits on real estate lending by banks and
tightens auditing requirements. In April 1995, the regulators adopted safety
and soundness standards as required by FDICIA in the following areas: (i)
operational and managerial; (ii) asset quality earnings and stock valuation; and
(iii) employee compensation.
FDICIA reduces the scope of federal deposit insurance. The most significant
change ended the "too big to fail" doctrine, under which the government protects
all deposits in most banks, including those exceeding the $100,000 insurance
limit. The FDIC's ability to reimburse uninsured deposits--those over $100,000
and foreign deposits--has been sharply limited. Since December 1993, the
Federal Reserve Board's ability to finance undercapitalized banks with extended
loans from its discount window has been restricted. In addition, only the best
capitalized banks will be able to offer insured brokered deposits without FDIC
permission or to insure accounts established under employee pension plans.
Branching. In 1986, the Virginia Banking Act was amended to remove the
geographic restrictions governing the establishment of branch banking offices.
Subject to the approval of the appropriate federal and state bank regulatory
authorities, BTC as a state bank, may establish a branch office anywhere in
Virginia.
National banks, like NBB, are required by the National Bank Act to adhere to
branch banking laws applicable to state banks in the states in which they are
located. Under current Virginia law, NBB may open branch offices throughout
Virginia with the prior approval of the OCC. In addition, with prior approval
of one or more of the Federal Reserve Board, the Virginia Commission, the OCC
and the FDIC, NBB will be able to acquire existing banking operations in
Virginia.
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the Interstate Act) became law. The Interstate Act,
which became effective September 29, 1995, allows bank holding companies to
acquire banks in any state, without regard to state law, except that if the
state has a minimum requirement for the amount of time a bank must be in
existence, that law must be preserved. Under the Virginia Banking Act, a
Virginia bank or all of the subsidiaries of Virginia holding companies sought to
be acquired must have been in continuous operation for more than two years
before the date of such proposed acquisition. The Interstate Act permits banks
to acquire out-of-state branches through interstate mergers, beginning June 1,
1997. States could opt-in to interstate branching earlier, or opt-out before
June 1, 1997. De novo branching, where an out-of-state bank holding company
sets up a new branch in another state, requires a state's specific approval. An
acquisition or merger is not permitted under the Interstate Act if the bank,
including its insured depository affiliates, will control more than 10% of the
total amount of deposits of insured depository institutions in the United
States, or will control 30% or more of the total amount of deposits of insured
depository institutions in any state.
Virginia has, by statute, elected to opt-in fully to interstate branching
under the Interstate Act, effective July 1, 1995. Under the Virginia statute,
Virginia state banks may, with the approval of the Virginia State Corporation
Commission, establish and maintain a de novo branch or acquire one or more
branches in a state other than Virginia, either separately or as part of a
merger. Procedures also are established to allow out-of-state domiciled banks
-12-
to establish or acquire branches in Virginia, provided the "home" state of the
bank permits Virginia banks to establish or acquire branches within its borders.
The activities of these branches will be subject to the same laws as Virginia
domiciled banks, unless such activities are prohibited by the law of the state
where the bank is organized. The Virginia State Corporation Commission has the
authority to examine and supervise out-of-state state banks to ensure that the
branch is operating in a safe and sound manner and in compliance with the laws
of Virginia. The Virginia statute authorizes the Bureau of Financial
Institutions to enter into cooperative agreements with other state and federal
regulators for the examination and supervision of out-of-state state banks with
Virginia operations, or Virginia domiciled banks with operations in other
states. Likewise, national banks, with the approval of the OCC, may branch into
and out of the state of Virginia. Any Virginia branch of an out-of-state
national bank is subject to Virginia law (enforced by the OCC) with respect to
intrastate branching, consumer protection, fair lending and community
reinvestment as if it were a branch of a Virginia bank, unless preempted by
federal law.
The Interstate Act permits banks and bank holding companies from throughout
the United States to enter Virginia markets through the acquisition of Virginia
institutions and makes it easier for Virginia bank holding companies and
Virginia state and national banks to acquire institutions and to establish
branches in other states. Competition in market areas served by the Company has
increased as a result of the Interstate Act and the Virginia interstate banking
statutes.
Deposit Insurance. The FDIC establishes rates for the payment of premiums by
federally insured financial institutions. A Bank Insurance Fund (the BIF) is
maintained for commercial banks, with insurance premiums from the industry used
to offset losses from insurance payouts when banks fail. Beginning in 1993,
insured depository institutions like NBB and BTC paid for deposit insurance
under a risk-based premium system. Both NBB and BTC qualified for the minimum
annual premium rate of $2,000 per year in 1996. Beginning in 1997, all banks,
including NBB and BTC, were subject to a higher FDIC assessment which funds
interest payments for bank issues to resolve problems associated with the
savings and loan industry. This assessment will continue until 2018-2019. The
assessment will vary over the period from 1.29 cents to 2.43 cents per $100 of
deposits.
Government Policies. The operations of NBB and BTC are affected not only by
general economic conditions, but also by the policies of various regulatory
authorities. In particular, the Federal Reserve Board regulates money and
credit and interest rates in order to influence general economic conditions.
These policies have a significant influence on overall growth and distribution
of loans, investments and deposits and affect interest rates charged on loans or
paid for time and savings deposits. Federal Reserve Board monetary policies
have had a significant effect on the operating results of commercial banks in
the past and are expected to continue to do so in the future.
Limits on Dividends and Other Payments. As a national bank, NBB, may not pay
dividends from its capital; all dividends must be paid out of net profits then
on hand, after deducting expenses, losses, bad debts, accrued dividends on
preferred stock, if any, and taxes. In addition, a national bank is prohibited
from declaring a dividend on its shares of common stock until its surplus equals
its stated capital, unless there has been transferred to surplus no less than
one-tenth of the bank's net profits of (i) the preceding two consecutive half-
year periods (in the case of an annual dividend) or (ii) the preceding half-year
period (in the case of a quarterly or semi-annual dividend). The approval of
-13-
the OCC is required if the total of all dividends declared by a national bank in
any calendar year exceeds the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required
transfers to surplus or to fund the retirement of preferred stock.
The OCC has promulgated regulations that became effective on December 13,
1990, which significantly affect the level of allowable dividend payments for
national banks. The effect is to make the calculation of national banks'
dividend-paying capacity consistent with generally accepted accounting
principles. The allowance for loan and lease losses will not be considered an
element of "undivided profits then on hand" and provisions to the allowance are
treated as expenses and therefore not part of "net profits." Accordingly, a
national bank with an allowance greater than its statutory bad debts may not
include the excess in calculating undivided profits for dividend purposes.
Further, a national bank may be able to use a portion of its earned capital
surplus account as "undivided profits then on hand," depending on the
composition of that account.
As a state member bank subject to the regulations of the Federal Reserve
Board, BTC must obtain the approval of the Federal Reserve Board for any
dividend if the total of all dividends declared in any calendar year would
exceed the total of its net profits, as defined by the Federal Reserve Board,
for that year, combined with its retained net profits for the preceding two
years. In addition, a state member bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and
bad debts. For this purpose, bad debts are generally defined to include the
principal amount of loans which are in arrears with respect to interest by six
months or more, unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, a state member bank is
not permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand; however, it may net the sum of its bad debts as
so defined against the balance in its allowance for loan losses account and
deduct from undivided profits only bad debts as so defined in excess of that
account.
In addition, the Federal Reserve Board is authorized to determine, under
certain circumstances relating to the financial condition of a state member
bank, that the payment of dividends would be an unsafe or unsound practice and
to prohibit payment thereof. The payment of dividends that depletes a bank's
capital base could be deemed to constitute such an unsafe or unsound practice.
The Federal Reserve Board has indicated that banking organizations should
generally pay dividends only out of current operating earnings.
Virginia law also imposes restrictions on the ability of BTC to pay
dividends. A Virginia state bank is permitted to declare a dividend out of its
"net undivided profits", after providing for all expenses, losses, interest and
taxes accrued or due by the bank. In addition, a deficit in capital originally
paid in must be restored to its initial level, and no dividend can be paid which
could impair the bank's paid in capital. The Bureau of Financial Institutions
further has authority to limit the payment of dividends by a Virginia bank if it
determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
provides that no insured depository institution may make any capital
distribution (which would include a cash dividend) if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements.
-14-
Capital Requirements. The Federal Reserve Board has adopted risk-based
capital guidelines which are applicable to Bankshares and BTC. The Federal
Reserve Board guidelines redefine the components of capital, categorize assets
into different risk classes and include certain off-balance sheet items in the
calculation of risk-weighted assets. The minimum ratio of qualified total
capital to risk-weighted assets (including certain off-balance sheet items, such
as standby letters of credit) is 8.0%. At least half of the total capital must
be comprised of Tier 1 capital for a minimum ratio of Tier 1 Capital to risk-
weighted assets of 4.0%. The remainder may consist of a limited amount of
subordinated debt, other preferred stock, certain other instruments and a
limited amount of loan and lease loss reserves. The OCC has adopted similar
regulations applicable to NBB.
In addition, the Federal Reserve Board has established minimum leverage ratio
(Tier 1 capital to total assets less intangibles) guidelines that are applicable
to Bankshares and BTC. The OCC has adopted similar regulations applicable to
NBB. These guidelines provide for a minimum ratio of 4.0% for banks that meet
certain specified criteria, including that they have the highest regulatory
CAMEL rating and are not anticipating or experiencing significant growth and
have well-diversified risk. All other banks will be required to maintain an
additional cushion of at least 100 to 200 basis points, based upon their
particular circumstances and risk profiles. The guidelines also provide that
banks experiencing internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets.
Bank regulators from time to time have indicated a desire to raise capital
requirements applicable to banking organizations beyond current levels. In
addition, the number of risks which may be included in risk-based capital
restrictions, as well as the measurement of these risks, is likely to change,
resulting in increased capital requirements for banks. Bankshares, NBB and BTC
are unable to predict whether higher capital ratios would be imposed and, if so,
at what levels and on what schedule.
Legislative Developments
As of September 29, 1996, "The Depository Insurance Fund Act of 1996" became
law. This legislation provided for a one time assessment on banks that had
previously acquired certain deposits from savings and loan institutions.
Neither NBB or BTC were subject to that special assessment. Beginning in 1997,
all banks were subject to increased assessments that are designed to finally
resolve problems associated with the savings and loan industry.
Other Legislative and Regulatory Concerns
Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks, thrifts and other financial institutions are
periodically considered by the executive branch of the federal government,
Congress and various state governments, including Virginia. New proposals could
significantly change the regulation of banks and the financial services
industry. It cannot be predicted what might be proposed or adopted or how these
proposals would affect the Company.
-15-
Other Business Concerns
The banking industry is particularly sensitive to interest rate fluctuations,
as the spread between the rates which must be paid on deposits and those which
may be charged on loans is an important component of profit. In addition, the
interest which can be earned on a bank's invested funds has a significant effect
on profits. Rising interest rates typically reduce the demand for new loans,
particularly the real estate loans which represent a significant portion of
NBB's and BTC's loan demand, as well as certain NBB loans in which BTC
participates.
-16-
Statistical Disclosure by National Bankshares, Inc.
and Subsidiaries (The Company)
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential
------------------------------------------------------------------------
A. Average Balance Sheets
The following table presents, for the years indicated, condensed
daily average balance sheet information.
($ in thousands)
December 31,
------------
Assets 1998 1997 1996
------ ---- ---- ----
Cash and due from banks $ 10,281 9,954 9,842
Interest bearing deposits 12,889 4,165 1,651
Federal funds sold 6,389 8,181 8,903
Securities available for sale:
Taxable 94,247 54,213 65,992
Nontaxable 29,284 6,312 6,679
Securities held to maturity:
Taxable 9,972 67,046 79,599
Nontaxable 18,929 29,608 25,133
Mortgage loans held for sale 1,017 413 850
Loans, net 225,613 204,540 177,419
Other assets 12,367 11,500 11,977
-------- ------- -------
Total assets $420,988 395,932 388,045
======== ======= =======
Liabilities and Stockholders' Equity
------------------------------------
Noninterest-bearing demand
deposits $ 49,552 44,193 41,997
Interest-bearing demand deposits 77,842 75,519 76,017
Savings deposits 47,475 47,781 49,783
Time deposits 185,101 171,946 168,141
-------- ------- -------
Total deposits 359,970 339,439 335,938
Short-term borrowings 216 319 433
Other liabilities 2,520 2,462 2,215
-------- ------- -------
Total liabilities 362,706 342,220 338,586
Stockholders' equity 58,282 53,712 49,459
-------- ------- -------
Total liabilities and
stockholders' equity $420,988 395,932 388,045
======== ======= =======
-17-
B. Analysis of Net Interest Earnings
The following table shows the major categories of interest-earning assets and interest-bearing
liabilities, the interest earned or paid, the average yield or rate on the daily average balance
outstanding, net interest income and net yield on average interest-earning assets for the years
indicated.
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
($ in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
Interest-earning
assets:
Loans, net (1)(2)(3) $226,630 21,726 9.59% $204,953 19,667 9.60% 178,269 17,339 9.73%
Taxable securities 104,219 7,201 6.91% 121,259 7,776 6.41% 145,591 8,877 6.10%
Nontaxable
securities (1) 48,213 2,899 6.01% 35,920 2,708 7.54% 31,812 2,971 9.34%
Federal funds sold 6,389 345 5.40% 8,181 470 5.75% 8,903 567 6.37%
Interest bearing
deposits 12,889 696 5.40% 4,165 230 5.52% 1,651 91 5.51%
-------- ------- ----- -------- ------ ----- ------- ------ -----
Total interest-
earning assets $398,340 32,867 8.25% $374,478 30,851 8.24% 366,226 29,845 8.15%
======== ======= ===== ======== ====== ===== ======= ====== =====
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 77,842 2,203 2.83% $ 75,519 2,161 2.86% 76,017 2,182 2.87%
Savings deposits 47,475 1,511 3.18% 47,781 1,571 3.29% 49,783 1,646 3.31%
Time deposits 185,101 10,203 5.51% 171,946 9,357 5.44% 168,141 9,181 5.46%
Short-term
borrowings 216 11 5.09% 319 17 5.33% 433 27 6.24%
Long-term debt --- --- --- --- --- --- --- --- ---
-------- ------- ----- -------- ------ ----- ------- ------ -----
Total interest-
bearing liabilities $310,634 13,928 4.48% 295,565 13,106 4.43% 294,374 13,036 4.43%
======== ======= ===== ======== ====== ===== ======= ====== =====
Net interest income
and interest rate
spread $18,939 3.77% 17,745 3.81% 16,809 3.72%
======= ===== ====== ===== ====== =====
Net yield on average
interest-earning
assets 4.75% 4.74% 4.59%
===== ===== =====
(1) Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using
a Federal income tax rate of 34%.
(2) Loan fees of $414 in 1998, $339 in 1997 and $374 in 1996 are included in total interest income.
(3) Nonaccrual loans are included in average balances for yield computations.
-18-
C. Analysis of Changes in Interest Income and Interest Expense
The Company's primary source of revenue is net interest income, which is the difference between the
interest and fees earned on loans and investments and the interest paid on deposits and other
funds. The Company's net interest income is affected by changes in the amount and mix of interest-
earning assets and interest-bearing liabilities and by changes in yields earned on interest-earning
assets and rates paid on interest-bearing liabilities. The following table sets forth, for the
years indicated, a summary of the changes in interest income and interest expense resulting from
changes in average asset and liability balances (volume) and changes in average interest rates
(rate).
1998 Over 1997 1997 Over 1996
-------------- --------------
Changes Due To Changes Due To
-------------- --------------
Net Dollar Net Dollar
($ in thousands) Rates(2) Volume(2) Change Rates(2) Volume(2) Change
-------- --------- ---------- -------- --------- ----------
Interest income:(1)
Loans $ (19) 2,078 2,059 (200) 2,528 2,328
Taxable securities 572 (1,147) (575) 441 (1,542) (1,101)
Nontaxable securities (618) 809 191 (617) 354 (263)
Federal funds sold (98) (27) (125) (53) (44) (97)
Interest bearing deposits 471 (5) 466 --- 139 139
------ ----- ----- ----- ------ ------
Increase(decrease) in
income on interest-
earning assets $ 308 1,708 2,016 (429) 1,435 1,006
------ ----- ----- ----- ------ ------
Interest expense:
Interest-bearing demand
deposits $ 66 (24) 42 (7) (14) (21)
Savings deposits (50) (10) (60) (9) (66) (75)
Time deposits 724 122 846 (31) 207 176
Short-term borrowings (1) (5) (6) (4) (6) (10)
------ ----- ----- ----- ------ ------
Increase(decrease) in
expense of interest-
bearing liabilities $ 739 83 822 (51) 121 70
------ ----- ----- ----- ------ ------
Increase (decrease) in net
interest income $ (431) 1,625 1,194 (378) 1,314 936
====== ===== ===== ===== ====== ======
(1) Taxable equivalent basis using a Federal income tax rate of 34%.
(2) Variances caused by the change in rate times the change in volume have been allocated to rate and
volume changes proportional to the relationship of the absolute dollar amounts of the change in
each.
-19-
II. Investment Portfolio
A. Book Value of Investments
The amortized costs and fair values of securities available for sale as of December 31, 1998,
1997 and 1996 were as follows:
December 31,
------------
1998 1997 1996
---- ---- ----
Amortized Fair Amortized Fair Amortized Fair
($ in thousands) Costs Values Costs Values Costs Values
--------- ------ --------- ------ --------- ------
Available for sale:
U.S. Treasury $ 9,253 9,671 6,742 6,862 8,740 8,790
U.S. Government agencies and
corporations 59,365 59,595 36,252 36,276 33,840 33,640
States and political subdivisions 32,183 32,865 9,540 9,639 8,688 8,619
Mortgage-backed securities (1) 17,282 17,200 4,172 4,119 4,568 4,452
Corporate debt securities 14,528 14,824 7,780 7,824 6,810 6,762
Federal Home Loan Bank stock 1,214 1,214 537 537 --- ---
Other securities 709 709 265 325 264 271
-------- ------- ------- ------- ------- ------
Total securities available for sale $134,534 136,078 65,288 65,582 62,910 62,534
======== ======= ======= ======= ======= ======
The amortized costs of securities held to maturity as of December 31, 1998, 1997 and 1996 were
as follows:
December 31,
------------
($ in thousands) 1998 1997 1996
---- ---- ----
Securities held to maturity:
U.S. Treasury $ 1,006 7,527 11,547
U.S. Government agencies and corporations 7,497 36,853 54,804
States and political subdivisions 21,160 32,949 34,144
Mortgage-backed securities (1) 513 630 767
Corporate 500 6,433 7,448
------- ------ -------
Total securities held to maturity $30,676 84,392 108,710
======= ====== =======
(1) The majority of mortgage-backed securities and collateralized mortgage obligations held
at December 31, 1998 were backed by U.S. agencies. Certain holdings are required to be
periodically subjected to the Financial Institution Examination Council's (FFIEC) high
risk mortgage security test. These tests address possible fluctuations in the average
life and price sensitivity which are the primary risks associated with this type of
security. Such tests are usually subject to regulatory review.
Except for U.S. Government securities, the Company has no securities with any issuer that
exceeds 10% of stockholders' equity.
-20-
B. Maturities and Associated Yields
The following table presents the maturities for those securities available for sale and held to
maturity as of December 31, 1998 and weighted average yield for each range of maturities.
Maturities and Yields
December 31, 1998
---------------------
($ in thousands except for % data) < 1 Year 1-5 Years 5-10 Years > 10 Years None Total
-------- --------- ---------- ---------- ---- -----
Available for Sale
------------------
U.S. Treasury $ 2,302 6,311 1,058 --- --- $ 9,671
7.65% 5.99% 5.67% ---% ---% 6.35%
U.S. Government agencies 3,504 15,572 25,682 14,837 --- 59,595
6.99% 6.29% 6.54% 6.70% ---% 6.54%
Mortgage-backed securities --- --- 2,436 14,764 --- 17,200
---% ---% 5.16% 7.42% ---% 7.10%
States and Political --- 1,737 509 1,316 --- 3,562
Subdivision - taxable ---% 7.21% 7.40% 7.80% ---% 7.46%
States and Political 680 5,914 7,343 15,366 --- 29,303
Subdivision 7.82% 7.21% 7.43% 7.05% ---% 7.20%
- nontaxable
Corporate 509 3,606 3,578 7,131 --- 14,824
3.68% 6.62% 7.05% 6.80% ---% 6.71%
Federal Home Loan Bank stock --- --- --- --- 1,214 1,214
---% ---% ---% ---% 7.34% 7.34%
Other securities 464 --- --- --- 245 709
5.00% ---% ---% ---% 6.00% 5.34%
Total 7,459 33,140 40,606 53,414 1,459 136,078
6.92% 6.48% 6.65% 7.04% 7.34% 6.78%
Held to Maturity
----------------
U.S. Treasury 500 506 --- --- --- 1,006
4.84% 5.20% ---% ---% ---% 5.02%
U.S. Government agencies --- 6,497 1,000 --- --- 7,497
---% 5.69% 2.61% ---% ---% 5.28%
Mortgage-backed securities --- 29 166 318 --- 513
---% 9.00% 7.65% 7.74% ---% 7.78%
States and Political 200 1,472 359 200 --- 2,231
Subdivision - taxable 6.50% 6.82% 7.19% 9.00% ---% 7.05%
States and Political 2,824 12,615 2,424 1,066 --- 18,929
Subdivision - nontaxable 4.72% 7.33% 7.90% 7.65% ---% 7.03%
Corporate 500 --- --- --- --- 500
6.75% ---% ---% ---% ---% 6.75%
Other securities --- --- --- --- --- ---
---% ---% ---% ---% ---% ---%
Total 4,024 21,119 3,949 1,584 --- 30,676
5.07% 6.74% 6.48% 7.84% ---% 6.54%
(1) Rates shown represent weighted average yield on a fully taxable basis.
-21-
III. Loan Portfolio
--------------
The Company concentrates its lending activities in commercial and
industrial loans, real estate mortgage loans both residential and
business, and loans to individuals. The following tables set forth (i)
a comparison of the Company's loan portfolio by major category of loans
as of the dates indicated and (ii) the maturities and interest rate
sensitivity of the loan portfolio at December 31, 1998.
A. Types of Loans
December 31,
------------
($ in thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Commercial and industrial
loans $110,509 101,379 87,519 59,609 59,213
Real estate mortgage
loans 48,724 42,969 43,917 45,589 44,447
Real estate construction
loans 12,827 8,510 6,295 6,007 5,643
Loans to individuals 69,493 66,635 60,991 56,920 52,031
-------- ------- ------- ------- -------
Total loans 241,553 219,493 198,722 168,125 161,334
Less unearned income and
deferred fees (2,296) (2,503) (2,549) (2,307) (2,494)
-------- ------- ------- ------- -------
Total loans, net of
unearned income 239,257 216,990 196,173 165,818 158,840
Less allowance for loans
losses (2,679) (2,438) (2,575) (2,625) (2,551)
-------- ------- ------- ------- -------
Total loans, net $236,578 214,552 193,598 163,193 156,289
======== ======= ======= ======= =======
B. Maturities and Interest Rate Sensitivities
December 31, 1998
-----------------
After
($ in thousands) <1 Year 1-5 Years 5 Years Total
------- --------- ------- -----
Commercial and
industrial $ 28,858 31,927 49,724 110,509
Real estate
construction 10,638 2,189 --- 12,827
Less loans with
predetermined interest
rates (28,272) (23,555) (24,507) (76,334)
-------- ------- ------- -------
Loans with adjustable
rates $ 11,224 10,561 25,217 47,002
======== ======= ======= =======
-22-
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans
The following table presents aggregate amounts for nonaccrual
loans, restructured loans, other real estate owned, net and
accruing loans which are contractually past due ninety days or
more as to interest or principal payments.
December 31,
------------
($ in thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Nonaccrual loans:
Commercial and industrial $ --- 55 121 270 ---
Real estate mortgage 28 32 495 418 390
Real estate construction --- --- --- --- ---
Loans to individuals --- --- --- 30 30
----- ----- ----- ----- -----
$ 28 87 616 718 420
----- ----- ----- ----- -----
Restructured loans:
Commercial and industrial --- --- --- --- 229
----- ----- ----- ----- -----
Total nonperforming loans $ 28 87 616 718 649
Other real estate owned, net 628 421 474 762 1,150
----- ----- ----- ----- -----
Total nonperforming assets $ 656 508 1,090 1,480 1,799
===== ===== ===== ===== =====
Accruing loans past due 90
days or more:
Commercial and industrial $ 186 82 14 11 4
Real estate mortgage 160 358 252 250 219
Real estate construction --- --- --- --- 87
Loans to individuals 204 232 192 313 180
----- ----- ----- ----- -----
$ 550 672 458 574 490
===== ===== ===== ===== =====
The effect of nonaccrual and restructured loans on interest
income is presented below:
($ in thousands) 1998 1997 1996
---- ---- ----
Scheduled interest:
Nonaccrual loans $ 4 8 68
Restructured loans --- --- ---
----- ----- -----
Total scheduled interest $ 4 8 68
----- ----- -----
Recorded interest:
Nonaccrual loans $ --- 1 24
Restructured loans --- --- ---
----- ----- -----
Total recorded interest $ --- 1 24
===== ===== =====
-23-
Interest is recognized on the cash basis for all loans carried
in nonaccrual status. Loans generally are placed in
nonaccrual status when the collection of principal or interest
is ninety days or more past due, unless the obligation is both
well-secured and in the process of collection.
2. Potential Problem Loans
At December 31, 1998, the recorded investment in loans which
have been identified as impaired loans totaled $373,000. Of
this amount, $228,000 related to loans with no valuation
allowance and $145,000 related to loans with a corresponding
valuation allowance of $145,000. For the year-ended December
31, 1998, the average recorded investment in impaired loans
was approximately $387,000 and the total interest income
recognized on impaired loans was $32,000 of which $0 was
recognized on a cash basis.
At December 31, 1997, the recorded investment in loans which
have been identified as impaired loans totaled $177,000. Of
this amount, $124,000 related to loans with no valuation
allowance and $53,000 related to loans with a corresponding
valuation allowance of $53,000. For the year ended December
31, 1997, the average recorded investment in impaired loans
was approximately $458,000, and the total interest income
recognized on impaired loans was $23,000 of which $12,000 was
recognized on a cash basis.
Subsequent to December 31, 1998, two loans collateralized by
commercial real estate, totaling approximately $1.7 million
became 90 days past due. It is reasonably possible that these
loans will be placed in nonaccrual status in the first quarter
of 1999, thereby increasing the level of impaired loans. Due
to the circumstances surrounding these credits, it is not
possible to estimate a loss, if any, that will be incurred.
3. Foreign Outstandings
At December 31, 1998, 1997 and 1996, there were no foreign
outstandings.
4. Loan Concentrations
The Company does a general banking business, serving the
commercial, agricultural and personal banking needs of its
customers. NBB's trade territory, consists of Montgomery and
Giles Counties, and the City of Galax, Virginia and portions
of adjacent counties. NBB's operating results are closely
correlated with the economic trends within this area which
are, in turn, influenced by the area's three largest
employers, Virginia Polytechnic Institute and State
University, Montgomery County Schools and Celco. Other
industries include a wide variety of manufacturing, retail and
service concerns. Most of BTC's business originates from the
communities of Tazewell and Bluefield and other communities in
Tazewell County, Virginia and in Mercer County, West Virginia.
BTC's service area has largely depended on the coal mining
industry and farming for its economic base. In recent years,
-24-
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, 1998 and 1997, approximately $94 million and
$80 million, respectively, of the loan portfolio were
concentrated in commercial real estate. This represents
approximately 39% and 37% of the loan portfolio at December
31, 1998 and 1997, respectively. Included in commercial real
estate at December 31, 1998 and 1997 was approximately $64
million and $50 million, respectively, in loans for college
housing and professional office buildings. Loans secured by
residential real estate were approximately $67 million and $65
million at December 31, 1998 and 1997, respectively. This
represents approximately 28% and 30% of the loan portfolio at
December 31, 1998 and 1997, respectively. Loans secured by
automobiles were approximately $32 million and $34 million at
December 31, 1998 and 1997, respectively. This represents
approximately 13% of the loan portfolio at December 31, 1998
and 16% at December 31, 1997.
The Company has established operating policies relating to the
credit process and collateral in loan originations. Loans to
purchase real and personal property are generally
collateralized by the related property and with loan amounts
established based on certain percentage limitations of the
property's total stated or appraised value. Credit approval
is primarily a function of collateral and the evaluation of
the creditworthiness of the individual borrower or project
based on available financial information.
-25-
IV. Summary of Loan Loss Experience
-------------------------------
A. Analysis of the Allowance for Loan Losses
The following tabulation shows average loan balances at the end of each period; changes in the
allowance for loan losses arising from loans charged off and recoveries on loans previously
charged off by loan category; and additions to the allowance which have been charged to
operating expense:
December 31,
------------
($ in thousands) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Average loans outstanding $225,613 204,540 177,419 160,643 152,976
======== ======= ======= ======= =======
Balance at beginning of year 2,438 2,575 2,625 2,551 2,583
Charge-offs:
Commercial and industrial loans 32 257 95 23 72
Real estate mortgage loans 80 --- 11 9 192
Real estate construction loans --- --- --- --- 53
Loans to individuals 526 422 400 259 322
-------- ------- ------- ------- -------
Total loans charged off 638 679 506 291 639
-------- ------- ------- ------- -------
Recoveries:
Commercial and industrial loans --- 70 4 10 7
Real estate mortgage loans 2 --- 64 16 4
Real estate construction loans 190 --- --- --- ---
Loans to individuals 63 37 57 57 43
-------- ------- ------- ------- -------
Total recoveries 255 107 125 83 54
-------- ------- ------- ------- -------
Net loans charged off 383 572 381 208 585
-------- ------- ------- ------- -------
Additions charged to operations 624 435 331 282 553
-------- ------- ------- ------- -------
Balance at end of year $ 2,679 2,438 2,575 2,625 2,551
======== ======= ======= ======= =======
Net charge-offs to average net loans
outstanding 0.17% 0.28% 0.21% 0.13% 0.38%
======== ======= ======= ======= =======
Factors influencing management's judgment in determining the amount of the loan loss
provision charged to operating expense include the quality of the loan portfolio as
determined by management, the historical loan loss experience, diversification as to type of
loans in the portfolio, the amount of secured as compared with unsecured loans and the value
of underlying collateral, banking industry standards and averages, and general economic
conditions.
-26-
B. Allocation of the Allowance for Loan Losses
The allowance for loan losses has been allocated according to the amount deemed necessary to
provide for anticipated losses within the categories of loans for the years indicated as
follows:
December 31,
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of of of of of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
($ in Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Commercial
and
industrial
loans $ 222 45.75% 213 46.18% 403 44.04% 411 35.46% 679 36.70%
Real estate
mortgage
loans 73 20.17% 67 19.58% 305 22.10% 363 27.12% 364 27.55%
Real estate
construction
loans --- 5.31% --- 3.88% 51 3.17% 100 3.57% 37 3.50%
Loans to
individuals 497 28.77% 416 30.36% 504 30.69% 271 33.85% 569 32.25%
Unallocated 1,887 1,742 1,312 1,480 902
------ ------ ------ ------ ======
$2,679 100.00% 2,438 100.00% 2,575 100.00% 2,625 100.00% 2,551 100.00%
======= ====== ====== ====== ====== ====== ====== ====== ====== ======
-27-
Loan Loss Allowance
- -------------------
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 as well as other
internal and external factors such as general economic conditions.
The evaluation of the allowance for loan losses is performed by the internal
credit review department at NBB and by senior management at BTC.
Guidance for the evaluations performed are established by the regulatory
authorities who periodically review the results for compliance.
As a part of this process, loans are grouped into principally two classes.
The first involves loans that are individually reviewed and direct allocations
made based on collateral values, financial statements of the borrower and other
documentation. In addition, an estimate is made for losses inherent to this
portfolio.
The second class includes pools of loans. Allocations from this analysis are
derived and based on historical loss averages.
The unallocated portion of the allowance for loan losses is the residual
amount after allocation to the above classes.
As previously stated, adequacy of the allowance for loan losses is subject to
periodic regulatory review. These reviews cover the allocation process and
overall adequacy of the allowance for loan losses. Regulatory authorities at
their discretion may set minimum levels for the allowance and/or require the
charge-off of loans as a result of their examination. This independent grading
process by regulators serves as a standard to gage the effectiveness of the
internal credit review.
-28-
V. Deposits
A. Average Amounts of Deposits and Average Rates Paid
Average amounts and average rates paid on deposit categories in
excess of 10% of average total deposits are presented below:
December 31,
------------
1998 1997 1996
---- ---- ----
Average Average Average
Average Rates Average Rates Average Rates
($ in thousands) Amounts Paid Amounts Paid Amounts Paid
------- ------- ------- ------- ------- -------
Noninterest-bearing
demand deposits $ 49,552 --- 44,193 --- 41,997 ---
Interest-bearing
demand deposits 77,842 2.83% 75,519 2.86% 76,017 2.87%
Savings deposits 47,475 3.18% 47,781 3.29% 49,783 3.31%
Time deposits 185,101 5.51% 171,946 5.44% 168,141 5.46%
-------- ------- -------
Average total
deposits $359,970 4.48% 339,439 4.43% 335,938 4.43%
======== ===== ======= ===== ======= =====
B. Time Deposits of $100,000 or More
The following table sets forth time certificates of deposit and
other time deposits of $100,000 or more:
December 31, 1998
-----------------
Over 3 Over 6
3 Months Months
Months Through 6 Through 12 Over 12
($ in thousands) or Less Months Months Months Total
------- --------- ---------- ------- -----
Certificates of
deposit $44,406 34,275 65,376 52,454 196,511
Other time deposits 33,515 24,225 49,156 43,358 150,254
------- ------ ------ ------ -------
Total time
deposits of
$100,000 or more $10,891 10,050 16,220 9,096 46,257
======= ====== ====== ====== =======
-29-
VI. Return on Equity and Assets
---------------------------
The ratio of net income to average stockholders' equity and to average
total assets, and certain other ratios are presented below:
December 31,
------------
1998 1997 1996
---- ---- ----
Return on average assets 1.61% 1.66% 1.58%
Return on average equity(1) 11.66% 12.21% 12.37%
Dividend payout ratio 41.29% 39.31% 37.55%
Average equity to average assets(1) 13.84% 13.57% 12.75%
(1) Includes amount related to common stock subject to ESOP put option
excluded from stockholders' equity on the Consolidated Balance
Sheets.
Item 2. Properties
- -------------------
Bankshares' headquarters, including the Main Office of NBB, are located at
100 South Main Street, Blacksburg, Virginia. In addition to the Main Office
location, NBB owns eight branch offices: two in the Town of Blacksburg; one in
the Town of Christiansburg; one in Montgomery County; and three in the County of
Giles and one in the City of Galax. NBB leases office space near the Main
Office which is occupied by NBB's trust, marketing, audit, compliance and credit
review departments. An additional property was acquired in 1996 to provide for
additional office space. Construction of an office building on this site began
in late 1998 and, when complete, in 1999, it will reduce the future need for
leased properties.
Bank of Tazewell County owns the land and building of six of its seven
offices. The bank leases the land and building for its seventh office. The
Main Office is located at Main Street, Tazewell, Virginia. Three additional
branches are located in Tazewell, one in North Tazewell and two are located in
Bluefield, Virginia. Management believes that its existing facilities are
adequate to meet present needs and any anticipated growth.
NBB owns all its computer and data processing hardware and is a licensee of
the software it utilizes. BTC utilizes this same system for data processing.
Item 3. Legal Proceedings
- --------------------------
Bankshares, NBB nor BTC are not currently involved in any material pending
legal proceedings, other than routine litigation incidental to NBB's and BTC's
banking business.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
-30-
Executive Officers of the Registrant
------------------------------------
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 13, 1999.
The following is a list of names and ages of all executive officers of
Bankshares; their terms of office as officers; the positions and offices within
Bankshares held by each officer; and each person's principal occupation or
employment during the past five years.
Year Elected an
Name Age Offices and Positions Held Officer/Director
---- --- -------------------------- ----------------
James G. Rakes 54 Chairman, President and 1986
Chief Executive Officer,
National Bankshares, Inc.;
and President and Chief
Executive Officer of The
National Bank of Blacksburg
since 1983.
J. Robert Buchanan 47 Treasurer, National 1998
Bankshares, Inc.; Senior
Vice President/Chief
Financial Officer of The
National Bank of Blacksburg,
since January 1, 1998; prior
thereto Senior Vice
President, Treasurer and
Chief Financial Officer,
Premier Bankshares Corporate
since 1991.
Marilyn B. Buhyoff 50 Secretary & Counsel, 1989
National Bankshares, Inc.;
and Senior Vice President/
Administration since 1992,
of The National Bank of
Blacksburg.
F. Brad Denardo 46 Corporate Officer, National 1989
Bankshares, Inc.; and
Executive Vice President/
Loans since 1989 of The
National Bank of Blacksburg.
Joan C. Nelson 48 Corporate Officer since 1993
1998; prior thereto
Treasurer since 1993,
National Bankshares, Inc.;
Cashier since 1993 and
Senior Vice President/
Operations since 1989 of The
National Bank of Blacksburg.
Except for J. Robert Buchanan and Joan C. Nelson, each of the executive officers
listed above have served Bankshares and/or its subsidiaries in the
aforementioned executive capacity for the past five years.
-31-
Part II
-------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
- ----------------------------------------------------------
There is no established trading market for the stock of National Bankshares,
Inc. As of February 8, 1999, the total number of holders of the Registrant's
common stock was 1,151.
Information concerning Market Price and Dividend Data is set forth under
"Common Stock Information and Dividends" on page 12 of Bankshares' 1998 Annual
Report to Stockholders and is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The table entitled "Selected Consolidated Financial Data" on page 4 of
Bankshares' 1998 Annual Report to Stockholders is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The information contained under "Management's Discussion and Analysis" on
pages 5 through 12 of Bankshares' 1998 Annual Report to Stockholders is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
See "Analysis of Interest Rate Sensitivity" set forth below. Additional
information is set forth under the section "Interest Rate Sensitivity" on page 5
and 6 and the section "Derivatives and Market Risk Exposure" on page 9 of
Bankshares' 1998 Annual Report to Stockholders and is incorporated herein by
reference.
-32-
Analysis of Interest Rate Sensitivity
The following discussion of interest rate sensitivity contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company's actual
results could differ materially from those set forth in the forward-looking
statements.
The table below sets forth, as of December 31, 1998, the distribution of
repricing opportunities of the Company's interest-earning assets and interest-
bearing liabilities, the interest rate sensitivity gap (i.e., interest rate
sensitive assets less interest rate sensitive liabilities), the cumulative
interest rate sensitivity gap ratio (i.e., interest rate sensitivity gap divided
by total interest-earning assets) and the cumulative interest rate sensitivity
gap ratio. The table sets forth the time periods during which interest-earning
assets and interest-bearing liabilities will mature or may reprice in accordance
with their contracted terms.
Certain shortcomings are inherent in the method of analysis presented in the
following table. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
and at different times to changes in market interest rates. Also, loan
prepayments and early withdrawals of certificates of deposit could cause the
interest sensitivities to vary from those which appear in the table.
An interest rate sensitivity gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would generally tend to
affect adversely net interest income while a positive gap would generally tend
to result in an increase in net interest income. During a period of declining
interest rates, a negative gap would generally tend to result in increased net
interest income, while a positive gap would generally tend to affect adversely
net interest income. The Company's future earnings may be adversely affected by
a sharp upturn in interest rates as the Company is liability sensitive for a
period extending beyond one year. In a falling rate environment, earnings might
benefit to a certain degree from this position, because assets at higher rate
levels would reprice downward at a slower rate than interest sensitive
liabilities. Over the one to five year period, the Company's cumulative
interest-sensitivity position reflects an asset sensitive position. This would
mean the Company would benefit initially from falling rates but would be
adversely affected by rising rates. This would depend, however, on the length
of time rates were rising or falling and the length of time rates remained
stable at the level ultimately reached.
-33-
An interest-sensitivity table showing all major interest sensitive asset and liability categories for the
time intervals indicated and cumulative "gaps" for each interval is set forth on the following table.
Interest Rate December 31, 1998
-----------------
Sensitivity Table (1) Interest-sensitive (days)
------------------------- 1-5 >5
($ in thousands) 1-90 91-180 181-365 Years Years Total
---- ------ ------- ----- ----- -----
Interest-earning assets:
Commercial and industrial loans $ 9,696 8,437 18,993 46,195 27,188 110,509
Real estate mortgage loans 1,948 3,602 8,946 21,520 12,708 48,724
Real estate construction loans 8,556 2,184 1,301 692 94 12,827
Loans to individuals 17,504 3,825 7,867 32,478 5,523 67,197
--------- -------- ------- ------- ------- -------
Total loans, net of unearned income (2) $ 37,704 18,048 37,107 100,885 45,513 239,257
--------- -------- ------- ------- ------- -------
Federal funds sold 5,090 --- --- --- --- 5,090
Interest bearing deposits 7,027 --- --- --- --- 7,027
Securities available for sale (3) 1,276 2,579 4,047 19,052 109,124 136,078
Securities held to maturity (3) 2,895 2,116 3,191 15,741 6,733 30,676
Mortgage loans held for sale 2,180 --- --- --- --- 2,180
--------- -------- ------- ------- ------- -------
Total interest-earning assets $ 56,172 22,743 44,345 135,678 161,370 420,308
========= ======== ======= ======= ======= =======
Interest-bearing liabilities:
Interest-bearing demand deposits $ 84,319 --- --- --- --- 84,319
Savings deposits 46,387 --- --- --- --- 46,387
Time deposits 44,406 34,275 65,376 52,454 --- 196,511
Other borrowings 214 --- --- --- --- 214
--------- ======== ------- ------- ------- -------
Total interest-bearing liabilities $ 175,326 34,275 65,376 52,454 --- 327,431
========= ======== ======= ======= ======= =======
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities .32 .38 .45 .79 1.28 1.28
========= ======== ======= ======= ======= =======
Cumulative interest-sensitivity gap $(119,154) (130,686) (151,717) (68,493) 92,877 92,877
========= ======== ======== ======= ======= =======
(1) The Company is sensitive to interest rate changes, as liabilities generally reprice or
mature before interest-earning assets. The above gap table reflects the Company's
rate-sensitive position at December 31, 1998, and is not necessarily reflective of its
position throughout the year. The carrying amounts of interest-rate sensitive assets and
liabilities are presented in the periods in which they reprice to market rates or mature
and are summed to show the interest-rate sensitivity gap.
(2) Excludes nonaccrual loans.
(3) Call features on certain securities, if exercised could have the effect of materially shortening
the average life of the investment portfolio. The exercise of a call feature is dependent upon the
rate environment. The call decision is at the issuers discretion and ultimate benefit.
-34-
The Company also uses simulation analysis to forecast its balance sheet and
monitor interest rate sensitivity. One test used by NBI is shock analysis which
measures the effect of a hypothetical, immediate and parallel shift in interest
rates. The following table shows the results of a rate shock of 100, 200, and
300 basis points and the effects on net income and return on average assets and
return on average equity at December 31, 1998.
($ in thousands, except for percent data)
Rate Net Return on Return on
Shift Income Average Equity Average Assets
----- ------ -------------- --------------
300 $(101) 10.88% 1.49%
200 (67) 11.52% 1.58%
100 (33) 12.16% 1.67%
(-)100 33 13.44% 1.84%
(-)200 67 14.08% 1.93%
(-)300 90 14.51% 1.99%
Simulation analysis allows the Company to test asset and liability management
strategies under rising and falling rate conditions. As a part of simulation
process, certain estimates and assumptions must be made dealing with but, not
limited to, asset growth, the mix of assets and liabilities, rate environment,
local and national economic conditions. Asset growth and the mix of assets can
to a degree be influenced by management. Other areas such as the rate
environment and economic factors cannot be controlled. For this reason actual
results may vary materially from any particular forecast or shock analysis.
This shortcoming is offset to a degree by the periodic re-forecasting of the
balance sheet to reflect current trends and economic conditions. Shock analysis
must also be updated periodically as a part of the asset and liability
management process.
-35-
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The following consolidated financial statements of the Registrant and the
Independent Auditors' Report set forth on pages 13 through 37 of Bankshares'
1998 Annual Report to Stockholders are incorporated herein by reference:
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 1998 and 1997
3. Consolidated Statements of Income and Comprehensive Income - Years ended
December 31, 1998, 1997 and 1996
4. Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 1998, 1997 and 1996
5. Consolidated Statements of Cash Flows - Years ended December 31, 1998,
1997 and 1996
6. Notes to Consolidated Financial Statements - December 31, 1998, 1997 and
1996
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None.
Part III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Executive Officers of Bankshares as of December 31, 1998 are listed on page
30 herein.
Information with respect to the directors of Bankshares is set out under the
caption "Election of Directors" on pages 2 through 4 of Bankshares' Proxy
Statement dated March 17, 1999, which information is incorporated herein by
reference.
Item 11. Executive Compensation
- --------------------------------
The information set forth under "Executive Compensation" on pages 8 through
13 of Bankshares' Proxy Statement dated March 17, 1999 is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information set forth under "Voting Securities and Stock Ownership" on
page 1 and under "Stock Ownership of Certain Beneficial Owners" and "Stock
Ownership of Directors and Executive Officers" on pages 1 and 2 of Bankshares'
Proxy Statement dated March 17, 1999 is incorporated herein by reference.
-36-
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under "Certain Transactions With Officers and
Directors" on page 14 of Bankshares' Proxy Statement dated March 17, 1999 is
incorporated herein by reference.
Part IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1998 Annual Report
To Stockholders Page(s)*
------------------------
1. Financial Statements:
--------------------
Independent Auditors' Report 13
Consolidated Balance Sheets -
December 31, 1998 and 1997 14
Consolidated Statements of
Income and Comprehensive
Income - Years ended December
31, 1998, 1997 and 1996 15
Consolidated Statements of Changes
in Stockholders' Equity - Years
ended December 31, 1998, 1997 and
1996 16
Consolidated Statements of Cash
Flows - Years ended December 31,
1998, 1997 and 1996 17
Notes to Consolidated
Financial Statements - December
31, 1998, 1997 and 1996 18-37
2. Financial Statement Schedules:
-----------------------------
None
* Incorporated by reference from the indicated pages of the 1998 Annual Report
to Stockholders.
-37-
3. Exhibits:
--------
Page No. in
Exhibit No. Description Sequential System
----------- ----------- -----------------
3(i) Articles of Incorporation, as (incorporated
amended, of National herein by
Bankshares, Inc. reference to
Exhibit 3(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Specimen copy of certificate (incorporated
for National Bankshares, Inc. herein by
common stock, $2.50 par value reference to
Exhibit 4(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Article Four of the Articles of (incorporated
Incorporation of National herein by
Bankshares, Inc. included in reference to
Exhibit No. 3(a)) Exhibit 4(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
10(ii)(B) Computer software license (incorporated
agreement dated June 18, 1990, herein by
by and between Information reference to
Technology, Inc. and The Exhibit 10(e) of
National Bank of Blacksburg the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employment Agreement dated (incorporated
January 1, 1992, by and between herein by
National Bankshares, Inc. and reference to
James G. Rakes Exhibit 10(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Capital Accumulation Plan (incorporated
(included in Exhibit No. 10(a)) herein by
reference to
Exhibit 10(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
-38-
Page No. in
Exhibit No. Description Sequential System
----------- ----------- -----------------
*10(iii)(A) Employee Lease Agreement dated (incorporated
May 7, 1992, by and between herein by
National Bankshares, Inc. and reference to
The National Bank of Blacksburg Exhibit 10(c) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
13(i) 1998 Annual Report to
Stockholders (such Report,
except to the extent
incorporated herein by
reference, is being furnished
for the information of the
Commission only and is not
deemed to be filed as part of
this Report on Form 10-K)
21(i) Subsidiaries of National
Bankshares, Inc.
27 Financial Data Schedule
* Indicates a management contract or compensatory plan required to be filed
herein.
(b) Reports on Form 8-K filed during the last quarter of the period covered
by this report:
------------------------------------------------------------------------
None.
(c) Exhibits required by Item 601 of Regulation S-K:
-----------------------------------------------
See Item 14(a)3 above.
(d) Financial Statement Schedules required by Regulation S-X:
--------------------------------------------------------
See Item 14(a)2 above.
-39-
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, National Bankshares, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
National Bankshares, Inc.
BY: /s/JAMES G. RAKES
-------------------------------------
James G. Rakes, Chairman,
President and Chief Executive Officer
DATE: MARCH 12, 1999
-------------------------------------
BY: /s/J. ROBERT BUCHANAN
-------------------------------------
J. Robert Buchanan
Treasurer (Principal Financial Officer)
DATE: MARCH 12, 1999
-------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Name Date Title
---- ---- -----
/s/C. L. BOATWRIGHT Director and Vice
------------------------- -------------- Chairman of the Board
C. L. Boatwright
/s/L. A. BOWMAN Director
------------------------- --------------
L. A. Bowman
/s/A. A. CROUSE Director
------------------------- --------------
A. A. Crouse
/s/J. A. DESKINS SR Director
------------------------- --------------
J. A. Deskins, Sr.
/s/P. A. DUNCAN Director
------------------------- --------------
P. A. Duncan
/s/C. L. FORRESTER Director
------------------------- --------------
C. L. Forrester
/s/W. T. PEERY Director
------------------------- --------------
W. T. Peery
/s/J. G. RAKES Chairman of the Board
------------------------- -------------- President and Chief
J. G. Rakes Executive Officer -
National Bankshares, Inc.
/s/J. R. STEWART Director
------------------------- --------------
J. R. Stewart
-40-
Index to Exhibits
-----------------
Page No. in
Exhibit No. Description Sequential System
----------- ----------- -----------------
3(i) Articles of Incorporation, as (incorporated
amended, of National Bankshares, herein by
Inc. reference to
Exhibit 3(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Specimen copy of certificate for (incorporated
National Bankshares, Inc. common herein by
stock, $2.50 par value reference to
Exhibit 4(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Article Fourth of the Articles (incorporated
of Incorporation of National herein by
Bankshares, Inc. included in reference to
Exhibit No. 3(a)) Exhibit 4(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
10(ii)(B) Computer software license (incorporated
agreement dated June 18, 1990, herein by
by and between Information reference to
Technology, Inc. and The Exhibit 10(e) of
National Bank of Blacksburg the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employment Agreement dated (incorporated
January 1, 1992, by and between herein by
National Bankshares, Inc. and reference to
James G. Rakes Exhibit 10(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Capital Accumulation Plan (incorporated
(included in Exhibit No. 10(a)) herein by
reference to
Exhibit 10(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
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Page No. in
Exhibit No. Description Sequential System
----------- ----------- -----------------
*10(iii)(A) Employee Lease Agreement dated (incorporated
May 7, 1992, by and between herein by
National Bankshares, Inc. and reference to
The National Bank of Blacksburg Exhibit 10(c) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
13(i) 1998 Annual Report to
Stockholders (such Report,
except to the extent
incorporated herein by
reference, is being furnished
for the information of the
Commission only and is not
deemed to be filed as part of
this Report on Form 10-K)
21(i) Subsidiaries of National
Bankshares, Inc.
27 Financial Data Schedule
* Indicates a management contract or compensatory plan required to be filed
herein.
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