National Bankshares
1998 Annual Report
Financial Highlights
$ In thousands, except per share data.
1998 1997 1996
---- ---- ----
Net income $ 6,798 6,560 6,117
Basic net income per share 1.79 1.73 1.61
Cash dividends declared per share 0.74 0.68 0.62
Book value per share 16.00 14.73 13.56
Loans, net $236,578 214,552 193,598
Total securities 166,754 149,974 171,244
Total assets 445,166 402,907 388,850
Total deposits 382,696 344,867 334,584
Stockholders' equity 58,503 54,029 49,801
Contents
To Our Stockholders 2
Selected Consolidated
Financial Data 4
Management's Discussion and
Analysis 5
Independent Auditors' Report 13
Consolidated Financial
Statements 14
Notes to Consolidated
Financial Statements 18
Board of Directors 38
Corporate Information 41
National Bankshares
"Picture of James G. from $0.68 per share in 1997 to $0.74
Rakes, President & CEO of per share in 1998.
National Bankshares, Inc. and
the National Bank" Bank of Tazewell County began a new
era in May of 1998 when Cameron L.
To Our Stockholders Forrester joined the bank as President
National Bankshares, Inc. and Chief Executive Officer. In
experienced a year of growth addition to many years of banking
and change in 1998. Your experience, Mr. Forrester brings his
company ended the year with strong community bank lending background
total assets of $445.17 and his connections in the area to the
million, an increase of 10.49% management team at BTC. Bank employees
over 1997. Total loans and were very positive during the leadership
total deposits each grew by transition, and they are working
more than 10%, with total throughout the organization to reach
loans 10.05% above 1997 challenging new goals.
figures and total deposits up
by 10.97% over last year. A "Picture of Cameron L.
portion of these increases is Forrester, President & CEO of
attributable to The National Bank of Tazewell County,
Bank's acquisition of the shaking hands with fellow
office in Galax, Virginia in employee"
April 1998. However, loans
and deposits grew at all NBB One goal of both Bank of Tazewell
offices and at Bank of County's and National Bankshares' was
Tazewell County as well. met late in 1998, when BTC completed the
With good economic times conversion from its previous in-house
and mortgage loan interest information processing system. The bank
rates near historic lows, 1998 now has an updated computer network, and
was an exceptional year for BTC is processing its work using The
construction and secondary National Bank's host computer hardware
market mortgage lending. At and software. The Tazewell computer
year-end, the banks had a conversion marked the end of a two year
total of nearly $12.83 million long, company wide project that also
in outstanding construction included NBB's 1997 purchase of a new
loans, up 50.73% from the end host computer. This investment in
of 1997. Even more remarkable infrastructure permits more efficient
is the total of loans operations and offers some economies of
originated by our secondary scale. In addition, it supports state
market mortgage lenders, an of the art banking services for the
increase of nearly 117% over customers of The National Bank and Bank
last year. of Tazewell County.
"Picture of a newly "Picture of Two Bank of Tazewell
constructed home" county employees in the Computer Room"
We were pleased to Although it was planned for other
achieve a record level of net business reasons, the Company's computer
income yet again in 1998. The upgrade project came at a good time.
year's total was $6.80 Because of the upgrade, National
million. As has been past Bankshares now has the latest versions
practice, National Bankshares of host computer hardware and software.
shared this achievement with This helped us prepare to make this
stockholders through an mission critical system Y2K compliant.
increase in cash dividends The banking industry, including
2
National Bankshares, has been anticipate occupying the new building in
at the forefront in addressing late summer or early fall.
the challenges posed for
information processing systems "Picture of the Construction
by the upcoming century date Site of NBB's new Hubbard
change ("Y2K"). Federal Street Building"
regulators established an
ambitious compliance schedule In a year like 1998, when growth
and have been conducting and change are the dominant themes, it
regular examinations to insure is nice to remember that there are
that banks meet the deadlines. certain fundamentals that remain the
As we move into the final few same. Among these is the commitment of
months of this multi-year National Bankshares to offer our
process, we perceive that our customers the best in community banking.
greatest remaining challenge We continue to recognize the importance
is to counter what may well be of the contributions to our success of
widespread misinformation our Directors, our officers and our
about the threat of the employees. Finally, there is no change
century date change. We want in our sincere appreciation for the
to be certain that our support and loyalty of our valued
customers make financial stockholders and customers.
preparations for the end of
the century armed with factual
information and not motivated James G. Rakes
by unwarranted fears. We hope Chairman of the Board
that you will encourage anyone President and Chief
who has questions about our Executive Officer
Y2K preparedness program to
contact us directly and not to
rely on media reports and
predictions.
"Picture of employee
demonstrating Internet
Banking"
The changes at Bankshares
and its subsidiaries did not
stop with the end of 1998. On
February 1 of this year, The
National Bank introduced
Internet Banking. This new
product has been well
received, and we anticipate
that it will become even more
popular as customers discover
the convenience of banking
when and where they choose.
We are also making good
progress toward completion of
NBB's new Hubbard Street
building in Blacksburg that
will house a branch office,
the Trust and Bank Card
departments and National
Bankshares headquarters. If
the weather and construction
schedules cooperate, we
3
National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data
$ In thousands, except per share data. Years ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Selected Interest income $ 31,828 29,797 28,647 28,094 26,062
Income Interest expense 13,928 13,106 13,036 12,703 10,684
Statement Net interest income 17,900 16,691 15,611 15,391 15,378
Data: Provision for loan
losses 624 435 331 282 553
Noninterest income 3,174 2,834 2,693 2,382 2,047
Noninterest expense 11,061 10,031 9,515 10,033 9,725
Income taxes 2,591 2,499 2,341 1,933 1,844
Net income 6,798 6,560 6,117 5,525 5,303
Per Share Basic net income $ 1.79 1.73 1.61 1.46 1.40
Data: Cash dividends
declared 0.74 0.68 0.62 0.57 0.52
Book value per
share(1) 16.00 14.73 13.56 12.70 11.25
Selected Loans, net $236,578 214,552 193,598 163,193 156,289
Balance Total securities 166,754 149,974 171,244 187,635 184,231
Sheet Total assets 445,166 402,907 388,850 380,915 373,132
Data at Total deposits 382,696 344,867 334,584 330,313 327,686
End Stockholders'
of Year: equity 58,503 54,029 49,801 48,154 42,658
204,540
Selected Loans, net $225,613 157,179 177,419 160,643 152,976
Balance Total securities 152,432 395,932 177,403 183,994 185,365
Sheet Total assets 420,988 339,439 388,045 378,406 369,962
Daily Total deposits 359,970 335,938 330,261 325,167
Averages: Stockholders' 53,712
equity(1) 58,282 49,459 45,726 42,402
Selected Return on average 1.66
Ratios: assets 1.61 1.58 1.46 1.43
Return on average 12.21
equity(1) 11.66 12.37 12.08 12.51
Dividend payout 39.31
ratio 41.29 37.55 37.32 37.13
Average equity to 13.57
average assets(1) 13.84 12.75 12.08 11.46
(1) Includes amount related to common stock subject to ESOP put option
excluded from stockholders' equity on the Consolidated Balance Sheets.
(Dollars) (Dollars)
Book Value Per Share Graph Cash Dividends Per Share
Graph
1994 1995 1996 1997 1998 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
$11.25 12.70 13.56 14.7316.00 $0.52 0.57 0.62 0.68 0.74
4
($ In thousands, except per share data.)
PERFORMANCE SUMMARY
Net income in 1998 for National Bankshares, Inc. (Bankshares) and its
wholly-owned subsidiaries, The National Bank of Blacksburg (NBB) and Bank of
Tazewell County (BTC), (the Company), was $6,798, an increase of $238 or 3.63%
over the previous year. This produced a return on average assets and a return
on average equity of 1.61% and 11.66%, respectively.
(Millions)
Net Income Graph
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$5.3 5.5 6.1 6.6 6.8
Net income for the Company for 1997 was $6,560, an increase of $443 or
7.24% over 1996. The return on average assets and return on average equity for
1997 were 1.66% and 12.21%, respectively.
(Ratio)
Average Equity to Average Assets Graph
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
11.46% 12.08% 12.75% 13.57% 13.84%
The Company's net income for 1996 was $6,117 which produced a return on
average assets of 1.58% and a return on average equity of 12.37%.
Basic net income per share increased steadily over the three-year period
rising from $1.61 per share in 1996 to $1.73 in 1997, and $1.79 in 1998.
The Company continues to enjoy good profitability as indicated by the
return on average assets and steadily increasing earnings per share. The
increased level of bad debt expense was primarily in response to the growth in
the loan portfolio and the need to provide adequate reserves. The decline in
the return on average equity in 1998 was due to a net increase in the Company's
capital resulting from continued good earnings offset by dividends paid to the
Company's stockholders. The dividend payout ratio for 1998 was 41.29%, which
compares to 39.31% in 1997 and 37.55% in 1996.
NET INTEREST INCOME
Net interest income for 1998 was $17,900, an increase of $1,209 or 7.24%
over 1997. In 1997, net interest income was $16,691, up $1,080 or 6.92% from
1996 net interest income of $15,611.
The net yield on earnings assets for 1998 was 4.77%. In 1997 and 1996,
the net yield on earning assets was 4.75% and 4.59%, respectively.
The Company experienced a higher level of deposit growth in 1998 relative
to the two preceding years. This allowed loan growth to be funded by deposits.
The investment portfolio grew as well.
In 1997 and 1996, management's strategy was to fund increases in the loan
portfolio through liquidity generated principally from the securities
portfolio. In 1997, overall loan growth was strong, particularly in commercial
loans and loans to individuals.
In 1996, a substantial amount of loan growth took place in the highly
rate-competitive commercial loan area. This limited the effect of the loan
growth on net interest income.
INTEREST RATE SENSITIVITY
The Company considers interest rate risk to be a significant market risk
and has systems in place to measure the exposure of net interest income and
5
Management's Discussion and Analysis
fair market values to adverse movement in interest rates. Interest rate
sensitivity analyses indicate repricing opportunities, and interest rate shock
simulations indicate potential economic loss due to future interest rate
changes. Management realizes certain risks are inherent and minimizes these by
adjusting asset/liability management responses to changing economic conditions.
The Company reduces the volatility of its net interest income by managing
the relationship of interest-rate sensitive assets to interest-rate sensitive
liabilities. The Company would be impacted by rising interest rate changes, as
it is liability sensitive for the time period up to one year. Beyond one year,
the cumulative interest rate position is asset sensitive, indicating that the
effect of rising rates would dissipate in the one to five year time period.
The impact of rate fluctuations is dependent, however, upon the magnitude,
the length of the rising or falling rate trend, and the period of time rates
remain stable at a given level. Based on the information and assumptions in
effect at December 31, 1998, management believes that an immediate 200 basis
point rate shock, up or down, over a twelve-month period could affect the
Company's annualized net interest income or net economic value if not countered
by management's pricing strategies.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The adequacy of the allowance for loan losses is based on management's
judgement and analysis of current and historical loss experience, risk
characteristics of the loan portfolio, concentrations of credit and asset
quality, as well as other internal and external factors such as general
economic conditions.
An internal credit review department performs pre-credit analyses of large
credits and also conducts credit review activities that provide management with
an early warning of asset quality deterioration.
Changing trends in the loan mix are also evaluated in determining the
adequacy of the allowance for loan losses.
Loan loss and other industry indicators related to asset quality are
presented in the Loan Loss Data table.
Loan Loss Data
($ In thousands) 1998 1997 1996
---- ---- ----
Provision for loan losses $ 624 435 331
Net charge-offs to average
net loans 0.17% 0.28% 0.21%
Allowance for loan losses to
loans, net of unearned
income and deferred fees 1.12% 1.12% 1.31%
Allowance for loan losses to
nonperforming loans 9,567.86% 2,802.30% 418.02%
Allowance for loan losses to
nonperforming assets 408.38% 479.92% 236.24%
Nonperforming assets to loans,
net of unearned income
and deferred fees, plus
other real estate owned 0.27% 0.23% 0.55%
Nonaccrual loans $ 28 87 616
Other real estate owned, net 628 421 474
--------- --------- -------
Total nonperforming assets $ 656 508 1,090
========= ========= =======
Accruing loans past due 90 days
or more $ 550 672 458
========= ========= =======
6
National Bankshares, Inc. and Subsidiaries
Nonperforming loans include nonaccrual loans and do not include accruing loans
past due 90 days or more. Nonperforming assets for 1998 have increased $148 or
29.13% from 1997. The majority of the increase in nonperforming assets was due
to an increase in foreclosed properties. Nonperforming assets for 1997
decreased by $582 or 53.39% from the 1996 total of $1,090.
Net charge-offs to average net loans for 1998 were .17%, down 39.29% when
compared to 1997. Allocations for these net charge-offs were made in previous
periods. In 1998, overall asset quality continued to be satisfactory and
general economic conditions favorable. The provision for loan loss increased
by $189 or 43.45%. This increased level of bad debt expense was primarily in
response to the growth in the loan portfolio and the need to provide for an
adequate reserve.
Net charge-offs to average net loans for 1997 were .28%, up from 1996 when
that ratio was .21%. While the Company did experience a slight increase in net
charge-offs, there was an overall trend of improving asset quality. The
provision for loan losses, which increased $104 in 1997 or 31.42% over 1996's
provision of $331, was increased to cover 1997's net charge-offs. See note 5
of Notes to Consolidated Financial Statements for additional information
relating to nonperforming assets, past due loans, impaired loans and allowance
for loan losses.
While past efforts directed at improving asset quality have been largely
successful, management is unable to estimate when and under what exact terms
problem assets will be resolved. Changing economic conditions, the timing and
extent of changes and the ultimate impact on the Company's asset quality is not
within management's ability to predict with any degree of precision.
In addition, precise loss predictions may be difficult to determine due to
the complex circumstances that often surround troubled debts.
NONINTEREST INCOME
Noninterest income for 1998 was $3,174, an increase of $340 or 12.00%
over 1997. Noninterest income for 1997 was $2,834, up $141 or 5.24% from 1996.
Service charges on deposits for 1998 totaled $1,165, an increase of $34 or
3.01% from 1997. Service charges on deposit accounts in 1997 were down $52 or
4.40% from the previous year. The level of these charges is driven by demand
deposit volume, types of accounts opened, service charge rates in effect, the
level of charges such as overdraft fees and the waiver policy concerning these
fees. The increase for 1998 was largely attributable to the overall increase
in demand deposit volume. The decrease for 1997 was largely attributable to
fluctuations in overdraft volumes.
Other service charges and fees are composed of safe deposit box rent,
charges associated with letters of credit and other miscellaneous items. In
1998, these charges were $231, a decrease of $19 or 7.60% from 1997. For 1997,
these charges totaled $250, a decrease of $19 or 7.06% from 1996.
Trust income for 1998 was $774 which represents an increase of $36 or
4.88% over 1997. In 1997, trust income was $738, an increase of $135 or 22.39%
over 1996. Factors affecting the growth in trust income include an increase in
the number of accounts managed, an increase in the average value of the
accounts managed and an increase in both the number and value of estates
settled. Due to its nature, estate business volume and the related income is
not within management's ability to predict.
Credit card income is composed of several types of fees and charges,
including transaction or interchange fees, merchant discount fees and overlimit
charges. In 1998, credit card income totaled $653, an increase of $47 or 7.76%
over 1997. Credit card income for 1997 was $606, up $95 or 18.59% over 1996.
Credit card income increased in 1998 largely because of a higher volume of
interchange transactions, created in part by the Company's debit card product.
7
Management's Discussion and Analysis
The Company's debit card product was introduced late in the first quarter of
1997. Accordingly, 1998 reflects the first full year of income derived from
this product. Given the highly competitive market which limits the amount of
set charges, revenue increases result from growth in the number of merchant
accounts processed and increases in the number of customer credit and debit
card accounts that result in higher transaction volume.
Net securities gains were $188 in 1998, up $151 or 408.11% from 1997. In
1997, net securities gains were $37, down 61.86% from 1996. Gains and losses
can occur as a result of portfolio restructuring, securities called before
maturity and certain market adjustments.
NONINTEREST EXPENSE
Noninterest expense in 1998 totaled $11,061, up $1,030 or 10.27% from
1997. In 1997, noninterest expense was $10,031, an increase of $516 or 5.42%
from 1996.
Salaries and benefits increased $426 or 7.89% from 1997. The increase in
salaries was due in part to the acquisition of the Galax office by NBB at the
beginning of the second quarter, to salary adjustments and from increases in
other normal compensation related items.
In 1997, salaries and benefits expense totaled $5,398, up $120 or 2.27%
from 1996. The increase resulted from the addition of staff in connection with
NBB's opening of a new branch office early in 1997 and from salary adjustments,
promotions and other normal compensation related items, offset by a $119
decrease in net pension cost.
Occupancy and furniture and fixtures expense increased $40 or 4.18% for
1998 when compared to 1997. This increase was due to higher costs associated
with the Galax office acquired by NBB in the second quarter and also to regular
planned maintenance of facilities. Management anticipates occupancy and
furniture and fixtures expense will continue to increase. The expected
increase in occupancy and furniture and fixtures expense will be somewhat
moderated by a future reduction in expenses for leased premises. Occupancy and
furniture and fixtures expense experienced an increase in 1997 of 8.37% over
1996. A portion of this increase was the result of a new branch opened by NBB
in the Rich Creek area of Giles County.
Data processing and ATM expense was $771 for 1998, an increase over 1997
of $193 or 33.39%. This increase was due to costs associated with the upgrade
of information system hardware and software and costs related to an expanded
microcomputer network. Data processing and ATM expense is also likely to
increase in 1999, as BTC completes a planned upgrade of its information system
hardware and software and an expansion of its microcomputer network. In 1997,
data processing and ATM expense was $578, an increase of $81 or 16.30% over
1996. In the fourth quarter of 1997 the Company began an overall upgrade of
its data processing systems. This upgrade was principally due to capacity
limitations of the existing system that prevented both of the Company's
affiliates from using a single system.
The cost of Federal Deposit Insurance decreased in 1998 by $6 from 1997.
While the banks' base premiums remain at the minimum required by law,
legislation enacted in late 1996 levied an assessment on banks for the purpose
of financing certain costs associated with the resolution of the savings and
loan crisis. This additional levy is expected to remain in effect until 2018-
2019. In 1997, the Company's affiliates paid a premium of $43, an increase of
$39 over 1996.
Credit card processing expense for 1998 was $599, an increase of $48 or
8.71% over 1997. This increase reflects additional expense due to the
introduction of a debit card product, higher merchant processing costs and an
overall increase in business activity. In 1997, credit card processing expense
8
National Bankshares, Inc. and Subsidiaries
was $551, an increase of 18.24% which was primarily the result of increased
business activity from the introduction of the debit card product.
Net costs of other real estate owned for 1998 were $37, an increase of $29
or 362.50% from 1997. Other real estate owned net of valuation allowance
increased in 1998 by $207. Efforts to market existing properties continue,
however, the exact timing, terms and conditions of the sale of the properties
remain unknown. In 1997, net costs of other real estate owned were $8,
increasing $3 from 1996.
Other operating expenses were $2,759 in 1998, up $294 or 11.93% from 1997,
which was primarily the result of miscellaneous operational upgrades at BTC and
expenditures made in conjunction with the computer system upgrade at BTC. The
other operating expense category in 1997 was $2,465, increasing 4.85% from
1996.
INCOME TAXES
Higher pre-tax income in 1998 resulted in a $92 increase in income tax
expense when compared to 1997. Tax exempt interest income continues to be the
primary difference between the "expected" and reported income tax expense. The
Company's effective tax rates for 1998, 1997 and 1996 were 27.60%, 27.59% and
27.68%, respectively.
See note 9 of Notes to Consolidated Financial Statements for additional
information relating to income taxes.
EFFECTS OF INFLATION
The Company's consolidated statements of income generally reflect the
effects of inflation. Since interest rates, loan demand and deposit levels are
related to inflation, the resulting changes are included in net income. The
most significant item which does not reflect the effects of inflation is
depreciation expense, because historical dollar values used to determine this
expense do not reflect the effect of inflation on the market value of
depreciable assets after their acquisition.
BALANCE SHEET
(Millions)
Total Assets Graph
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$373.1 380.9 388.9 402.9 445.2
Total assets at year-end 1998 were $445,166 which represents an increase
of $42,259 or 10.49% over the previous year. The Company's primary methods of
achieving growth are to seek to increase deposits at its bank subsidiaries and
to grow through corporate acquisitions and mergers. Until 1998, management's
strategy was to fund loan growth through maturities and calls of securities.
In 1998, deposit growth was sufficient to fund loan growth as well as some
expansion of the securities portfolio. Profitable growth continues to be a
management objective. In 1998 and 1997, total average deposits grew by $20,531
and $3,501, respectively, which represents growth rates of 6.05% and 1.04%,
respectively.
LOANS
Loans, net of unearned income and deferred fees, grew by $22,267 or
10.26% in 1998. Commercial loans grew by $9,130 or 9.01% with loans to
individuals increasing by $2,858 or 4.29%.
9
Management's Discussion and Analysis
In 1997, loans, net of unearned income and deferred fees, grew by $20,817
or 10.61%. Commercial loans, which grew by $13,860 or 15.84%, accounted for
the largest portion of the increase.
The Company engages in the origination and sale of mortgage loans in the
secondary market. In 1998 and 1997, the Company originated $41,472 and
$19,120, respectively, and sold $39,697 and $19,231 in 1998 and 1997,
respectively, of mortgage loans.
SECURITIES
In 1998, bank-owned securities increased by $16,780 or 11.19% compared to
1997.
In 1997, total bank-owned securities decreased by $21,270 or 12.42% from
1996. In 1997, cash flows resulting from the reduction in the securities
portfolio were used to fund loan growth.
The Company's investment policy stresses safety, with a program of
purchasing high quality securities such as U.S. Treasury and U.S. Government
agency issues, state, county, and municipal bonds, corporate bonds, mortgage-
backed securities and other bank qualified investments. The Company has
classified all of its investment securities as either held to maturity or
available for sale, as the Company does not engage in trading activities.
Investment strategies are adjusted in response to market conditions and
available investment vehicles.
At December 31, 1998 and 1997, the Company had no investment
concentrations in any single issues (excluding U.S. Government) that exceeded
ten percent of capital.
DEPOSITS
At year-end 1998, total deposits were $382,696 which represent a $37,829
or 10.97% increase over 1997. At December 31, 1997, total deposits were
$344,867, an increase of 3.07% over 1996.
Average noninterest-bearing deposits of $49,552 grew by $5,359 or 12.13%
in 1998, $2,196 or 5.23% in 1997 and $3,164 or 8.15% in 1996. Average
interest-bearing deposits were $310,418 in 1998, an increase of
$15,172 over 1997. In 1997, average interest-bearing deposits of $295,246
increased $1,305 from the 1996 total.
DERIVATIVES AND MARKET RISK EXPOSURES
The Company is not a party to derivative financial instruments with off-
balance sheet risks such as futures, forwards, swaps and options. The Company
is a party to financial instruments with off-balance sheet risks such as
commitments to extend credit, standby letters of credit, and recourse
obligations in the normal course of business to meet the financing needs of its
customers. See note 13 of Notes to Consolidated Financial Statements for
additional information relating to financial instruments with off-balance sheet
risk. Management does not plan any future involvement in high risk derivative
products. The Company has investments in mortgage-backed securities,
principally GNMA's, with a fair value of approximately $17,728 which includes
$2,816 of structured notes. In addition, the Company has investments in
nonmortgage-backed structured notes with a fair value of approximately $5,327.
See note 3 of Notes to Consolidated Financial Statements for additional
information relating to securities.
The Company's securities and loans are subject to credit and interest rate
risk and its deposits are subject to interest rate risk. Management considers
its credit risk when a loan is granted and monitors its credit risk after the
loan is granted. The Company maintains an allowance for loan losses to absorb
losses in the collection of its loans. See note 5 of Notes to Consolidated
10
National Bankshares, Inc. and Subsidiaries
Financial Statements for information relating to nonperforming assets, past due
loans, impaired loans and allowance for loan losses. See note 14 of Notes to
Consolidated Financial Statements for information relating to concentrations of
credit risk. The Company has an asset/liability program to manage its interest
rate risk. This program provides management with information related to the
rate sensitivity of certain assets and liabilities and the effect of changing
rates on profitability and capital accounts. While this planning process is
designed to protect the Company over the long term, it does not provide near
term protection from interest rate shocks, as interest rate sensitive assets
and liabilities do not, by their nature, move up or down in tandem in response
to changes in the overall rate environment. The Company's profitability in the
near term may be temporarily affected either positively by a falling interest
rate scenario or negatively by a period of rising rates. See note 15 of Notes
to Consolidated Financial Statements for information relating to fair value of
financial instruments.
LIQUIDITY
Liquidity is the ability to provide sufficient cash flow to meet financial
commitments and to fund additional loan demand or withdrawal of existing
deposits. Sources of liquidity include deposits, loan principal and interest
repayments, sales, calls and maturities of securities and short-term
borrowings. The Company maintained an adequate liquidity level during 1998 and
1997. Management is not aware of any trends, commitments or events that will
result in, or are reasonably likely to result in, a material increase or
decrease in liquidity.
Net cash from operating activities of $5,247 in 1998 decreased $2,326 from
1997 due primarily to the increase in mortgage loans held for sale offset by
the increase in net income. Net cash flows provided by operating activities
and financing activities for 1998 of $5,247 and $34,751, respectively, were
used to fund the net increases in federal funds sold, securities, loans made to
customers and purchases of loan participations of $790, $15,429, $18,675 and
$4,635, respectively.
Net cash from operating activities of $7,573 in 1997 decreased $395 from
1996 due primarily to the increase in net income offset by the change in other
liabilities. Net cash flows provided by operating activities, securities and
financing activities for 1997 of $7,573, $21,966 and $7,562, respectively, were
used to fund the net increases in federal funds sold, interest-bearing
deposits, loans made to customers and purchases of loan participations of
$2,390, $9,637, $17,400 and $6,189, respectively.
CAPITAL RESOURCES
(Millions)
Stockholders' Equity Graph
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
$42.7 48.2 49.8 54.0 58.5
Total stockholders' equity increased $4,474 from 1997 to 1998 and $4,228
from 1996 to 1997. Net income, less cash dividends on common stock of $2,807
in 1998 and $2,579 in 1997, accounted primarily for the increase. Net
unrealized gains (losses) on securities available for sale, net of deferred
income taxes, were $1,019 at December 31, 1998, $194 at December 31, 1997 and
$(248) at December 31, 1996. These unrealized net gains and losses are
recorded as a separate component of stockholders' equity and will continue to
11
Management's Discussion and Analysis
be subject to change in future years due to fluctuations in fair values, sales,
purchases, maturities and calls of securities classified as available for sale.
The Company has operated from a consistently strong capital position. The
ratio of total stockholders' equity to total assets was 13.14% at year end 1998
compared to 13.41% at year end 1997 and 12.81% at year end 1996. Banks are
required to apply percentages to various assets, including off-balance sheet
assets, to reflect their perceived risk. Regulatory defined capital is divided
by risk weighted assets in determining the banks' risk-based capital ratios.
No regulatory authorities have advised National Bankshares, Inc., The National
Bank of Blacksburg or Bank of Tazewell County of any specific leverage ratios
applicable to them. National Bankshares, Inc., The National Bank of Blacksburg
and Bank of Tazewell County's capital adequacy ratios exceed regulatory
requirements and provide added flexibility to take advantage of business
opportunities as they arise. See note 10 of Notes to Consolidated Financial
Statements for additional information.
RECENT ACCOUNTING PRONOUNCEMENTS
See notes 1 and 18 of Notes to Consolidated Financial Statements for
information relating to recent accounting pronouncements.
BUSINESS COMBINATIONS
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. Bank
of Tazewell County is well-capitalized with excess liquidity, and provides the
Company with an expanded market place.
On December 26, 1997, NBB entered into an agreement to purchase the
assets, including real estate and improvements, and assume the liabilities of
the Galax, Virginia branch office of First American Federal Savings Bank.
Settlement of this purchase agreement occurred on April 3, 1998 and did not
have a material impact on the Company's results of operations or liquidity.
FUTURE MANAGEMENT CONSIDERATIONS
Year 2000
The Company recognizes the risks and challenges presented by the impact of
the century date change on information processing and other microchip
controlled systems. The Year 2000 ("Y2K") involves several issues for
financial institutions. The Company's own internal information processing and
microchip controlled systems, as well as those of its major service vendors,
must be Y2K compliant. Banks face credit, earnings and liquidity risk should
commercial loan customers or large depositors suffer significant business
disruptions as a result of the impact of computer failures in their own
operations or in those of their suppliers or customers. Banks could encounter
temporary funding shortages if customers withdraw unusually large sums of cash
because they are unduly concerned about the effects of Y2K. And, although
management believes the level of counterpart trading risk is low, there could
12
National Bankshares, Inc. and Subsidiaries
be a temporary or permanent effect on the investment portfolio resulting from
the negative impact of Y2K on the underlying entities.
Both of the Company's bank subsidiaries have established Y2K project
management teams that have developed Y2K plans with assessment, testing, and
remediation phases. The internal audit department is conducting Y2K audits,
and both banks are subject to the guidelines promulgated by the Federal
Financial Institutions Examination Counsel (FFIEC) and to regular Year 2000
compliance examinations by their respective federal regulators.
The assessment phase outlined in both NBB's and BTC's Y2K plans has been
completed. The banks have identified all internal mission critical information
technology and microchip controlled systems. Outside vendors that provide
mission critical service to the institutions have also been identified.
Because of their importance to daily business operations, substantial
attention has been focused on the banks' customer information processing
hardware and software. In 1997, in the normal course of business, NBB
purchased a new Unisys host computer and peripherals and installed the latest
version of its Information Technology, Inc. (ITI) software. In the last
quarter of 1998, BTC converted from its previous in-house information
processing system. BTC is now processed using NBB's hardware and software.
The NBB system has been tested, including century date rollover and other
critical dates, and validation of the ITI application is complete.
Each bank has identified as mission critical independent information
technology systems in their Trust Departments. NBB has successfully completed
proxy testing of its external service provider, and BTC has successfully tested
its internal system. Microchip controlled bank security systems are also
mission critical. Testing of these systems at both banks determined that minor
renovations were necessary at three offices.
The Federal Reserve Bank of Richmond has provided comprehensive procedures
and instructions for interface testing. During the first quarter of 1999, NBB
and BTC will test all utilized services, including wire transfer, automated
clearing house and savings bonds.
Both NBB and BTC deal with outside vendors that provide mission critical
support for bank card processing and ATM servicing. The banks are monitoring
these vendors' progress to assure their Y2K readiness. The vendors regularly
provide status reports and testing criteria. However, because both banks have
decided to convert to a new ATM servicer in the first half of 1999, testing of
that application will be delayed until the NBB conversion is complete in March
1999.
Each bank has developed and implemented programs to assess the level of
Y2K risk among large loan customers. NBB's Credit Review department performs a
precredit analysis of all new large loans made by both banks. An assessment of
the potential effects of the Year 2000 on the credit-worthiness of borrowers is
a part of this analysis. BTC is asking new commercial borrowers to sign an
agreement to insure compliance with minimum standards with regard to Y2K
issues. That bank is also following up with these borrowers to insure that
promised deadlines are met. Both NBB and BTC have also completed assessments
of Year 2000 preparedness among existing large commercial loan customers.
The banks have ongoing initiatives designed to educate customers about Y2K
issues and to allay any unwarranted concerns about the safety and soundness of
the institutions. Leaflets discussing the topic were sent to all customers,
and the banks have posted information on their Web sites. NBB held a public
forum directed at small businesses and has established a toll free information
hotline. Employee training and awareness campaigns have been completed.
Contingency plans have been drafted by NBB and BTC to 1) identify
alternatives if mission critical applications do not meet the banks' readiness
plan, and 2) develop a course of action to assure business continuity in the
13
Management's Discussion and Analysis
event there are system failures on critical dates. Both institutions are
providing their Boards of Directors with regular reports on Y2K initiatives and
preparedness.
At this time, National Bankshares, Inc. believes that in the most likely
worst-case scenarios, Y2K will not have a material effect on the Company's
operations, liquidity or financial condition. Although contingency plans
address multiple alternative scenarios, the Company believes it is impossible
for any business to address the potentially unlimited number of possible
circumstances relating to Y2K issues. Even though it is highly unlikely,
National Bankshares recognizes that if its Y2K assessment, remediation or
contingency plans prove to be inadequate, this could have a material impact on
its operations and therefore result in a material adverse effect on the
Company's results of operations and financial condition.
The Company's recently completed upgrade of internal processing systems
does enhance Y2K preparedness. However, the major goals of the upgrade were to
provide a shared information processing system for affiliates and to provide
additional processing capacity and the ability to use the most advanced version
of software available. The costs of the upgrade were substantial, but the
total of costs of the upgrade directly related to the Y2K component was not
material.
COMMON STOCK INFORMATION AND DIVIDENDS
National Bankshares, Inc.'s common stock is traded on a limited basis in
the over-the-counter market and is not listed on any exchange or quoted on
NASDAQ. Some trades in the Company's stock are reported on the OTC Bulletin
Board under the trading symbol NKSH. Local brokerage firms are familiar with
and active in trading in the common stock of National Bankshares, Inc. As of
December 31, 1998, there were 1,154 stockholders of Bankshares common stock.
The following is a summary of the market price per share and cash dividend per
share of the common stock of National Bankshares, Inc. for 1998 and 1997.
Prices do not necessarily reflect the prices which would have prevailed had
there been an active trading market, nor do they reflect unreported trades,
which may have been at lower or higher prices.
Common Stock Market Prices
Dividends
1998 1997 Per Share
-------- -------- ---------
High Low High Low 1998 1997
---- --- ---- --- ---- ----
First Quarter $27.75 24.75 26.25 25.00 --- ---
Second Quarter 28.00 26.50 25.87 23.50 .36 .33
Third Quarter 27.50 23.25 25.75 23.81 --- ---
Fourth Quarter 24.25 21.25 26.50 23.50 .38 .35
Bankshares' primary source of funds for dividend payments is dividends
from its subsidiaries, The National Bank of Blacksburg and Bank of Tazewell
County. Bank regulatory agencies restrict dividend payments of the
subsidiaries as more fully disclosed in note 10 of Notes to Consolidated
Financial Statements.
14
Independent Auditors' Report
The Board of Directors and Stockholders
National Bankshares, Inc.:
We have audited the accompanying consolidated balance sheets of National
Bankshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income and comprehensive income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National
Bankshares, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
As discussed in note 1(R) to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as of October
1, 1998.
KPMG LLP
Roanoke, Virginia
February 5, 1999
15
National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
$ In thousands, except share and per share data.
December 31, 1998 and 1997 1998 1997
---- ----
Assets Cash and due from banks (notes 2 and 15) $ 14,421 12,435
Interest-bearing deposits (note 15) 7,027 9,728
Federal funds sold (note 15) 5,090 4,300
Securities available for sale (notes 3 and 15) 136,078 65,582
Securities held to maturity (fair value $31,151
in 1998 and $85,005 in 1997) (notes 3 and 15) 30,676 84,392
Mortgage loans held for sale (notes 13, 14 and 15) 2,180 405
Loans (notes 4, 5, 14 and 15):
Real estate construction loans 12,827 8,510
Real estate mortgage loans 48,724 42,969
Commercial and industrial loans 110,509 101,379
Loans to individuals 69,493 66,635
-------- -------
Total loans 241,553 219,493
Less unearned income and deferred fees (2,296) (2,503)
-------- -------
Loans, net of unearned income and
deferred fees 239,257 216,990
Less allowance for loan losses (note 5) (2,679) (2,438)
-------- -------
Loans, net 236,578 214,552
-------- -------
Bank premises and equipment, net (note 6) 6,657 5,739
Accrued interest receivable 3,777 3,445
Other real estate owned, net (note 5) 628 421
Other assets (note 9) 2,054 1,908
-------- -------
Total assets $445,166 402,907
======== =======
Liabilities Noninterest-bearing demand deposits $ 55,479 45,093
and Interest-bearing demand deposits 84,319 77,863
Stockholders' Savings deposits 46,387 46,773
Equity Time deposits (note 7) 196,511 175,138
-------- -------
Total deposits (note 15) 382,696 344,867
-------- -------
16
Other borrowed funds (note 15) 214 485
Accrued interest payable 647 722
Other liabilities (note 8) 926 966
-------- -------
Total liabilities 384,483 347,040
-------- -------
Common stock subject to ESOP put option (note 8) 2,180 1,838
-------- -------
Stockholders' equity (notes 9, 10 and 16):
Preferred stock of no par value. Authorized
5,000,000 shares; none issued and
outstanding --- ---
Common stock of $2.50 par value. Authorized
5,000,000 shares; issued and outstanding
3,792,833 shares 9,482 9,482
Retained earnings 50,182 46,191
Accumulated other comprehensive income 1,019 194
Common stock subject to ESOP put option
(77,301 shares at $28.20 per share in 1998
and 72,783 shares at $25.25 per share in
1997) (note 8) (2,180) (1,838)
-------- -------
Total stockholders' equity 58,503 54,029
Commitments and contingent liabilities (notes 6, 8
and 13)
Total liabilities and stockholders' -------- -------
equity
$445,166 402,907
======== =======
See accompanying notes to consolidated financial statements.
17
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
$ In thousands, except per share data. Years ended
December 31, 1998, 1997 and 1996 1998 1997 1996
---- ---- ----
Interest Interest and fees on loans $ 21,691 19,553 17,232
Income Interest on federal funds sold 345 451 476
Interest on interest-bearing deposits 696 230 91
Interest on securities - taxable 7,201 7,776 8,877
Interest on securities - nontaxable 1,895 1,787 1,971
-------- ------- -------
Total interest income 31,828 29,797 28,647
-------- ------- -------
Interest Interest on time deposits of $100,000
Expense or more 2,457 2,335 2,070
Interest on other deposits 11,460 10,754 10,939
Interest on borrowed funds 11 17 27
-------- ------- -------
Total interest expense 13,928 13,106 13,036
-------- ------- -------
Net interest income 17,900 16,691 15,611
Provision for loan losses (note 5) 624 435 331
-------- ------- -------
Net interest income after
provision for loan losses 17,276 16,256 15,280
-------- ------- -------
Noninterest Service charges on deposit accounts 1,165 1,131 1,183
Income Other service charges and fees 231 250 269
Credit card fees 653 606 511
Trust income 774 738 603
Other income 163 72 30
Realized securities gains, net (note 3) 188 37 97
-------- ------- -------
Total noninterest income 3,174 2,834 2,693
-------- ------- -------
Noninterest Salaries and employee benefits (note 8) 5,824 5,398 5,278
Expense Occupancy and furniture and fixtures 998 958 884
Data processing and ATM 771 578 497
FDIC assessment 37 43 4
Credit card processing 599 551 466
Goodwill amortization 36 30 30
Net costs of other real estate owned 37 8 5
Other operating expenses 2,759 2,465 2,351
-------- ------- -------
Total noninterest expense 11,061 10,031 9,515
-------- ------- -------
18
Income before income tax expense 9,389 9,059 8,458
Income tax expense (note 9) 2,591 2,499 2,341
-------- ------- -------
Net income 6,798 6,560 6,117
-------- ------- -------
Other comprehensive income (loss), net
of income taxes:
Net unrealized gains (losses) on
securities available for sale (notes
1 and 17):
Arising during the year 356 442 (530)
Cumulative accounting change 469 --- ---
-------- ------- -------
Total 825 442 (530)
-------- ------- -------
Comprehensive income $ 7,623 7,002 5,587
======== ======= =======
Basic net income per share (note 1) $ 1.79 1.73 1.61
======== ======= =======
See accompanying notes to consolidated financial statements.
19
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
Common
Stock
Accumulated Subject
$ In thousands, except per share Other to ESOP
data. Years ended December 31, Common Retained Comprehensive Put
1998, 1997 and 1996 Stock Earnings Income Option Total
------ -------- ------------- ------- -----
Balances, December 31, 1995 $ 9,482 38,390 282 --- 48,154
Net income --- 6,117 --- --- 6,117
Cash dividends ($.62 per share) --- (1,787) --- --- (1,787)
Cash dividends of BTC declared
prior to merger --- (510) --- --- (510)
Change in net unrealized gains
(losses) on securities available
for sale, net of income tax
benefit of $273 --- --- (530) --- (530)
Change in common stock subject to
ESOP put option --- --- --- (1,643) (1,643)
------- ------ ------ ------ ------
Balances, December 31, 1996 9,482 42,210 (248) (1,643) 49,801
Net income --- 6,560 --- --- 6,560
Cash dividends ($.68 per share) --- (2,579) --- --- (2,579)
Change in net unrealized gains
(losses) on securities available
for sale, net of income tax
expense of $228 --- --- 442 --- 442
Change in common stock subject to
ESOP put option --- --- --- (195) (195)
------- ------ ------ ------ ------
Balances at December 31, 1997 9,482 46,191 194 (1,838) 54,029
Net income --- 6,798 --- --- 6,798
Cash dividends ($.74 per share) --- (2,807) --- --- (2,807)
Change in net unrealized gains
(losses) on securities available
for sale, net of income tax
expense of $425:
Arising during the year, net of
income tax expense of $183 --- --- 356 --- 356
Cumulative accounting change,
net of income tax expense of
$242 --- --- 469 --- 469
------- ------ ------ ------ ------
Total --- --- 825 --- 825
------- ------ ------ ------ ------
Change in common stock subject to
ESOP put option --- --- --- (342) (342)
------- ------ ------ ------ ------
Balances, December 31, 1998 $ 9,482 50,182 1,019 (2,180) 58,503
======= ====== ====== ====== ======
See accompanying notes to consolidated financial statements.
20
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
$ In thousands. Years ended December 31, 1998, 1997 and 1996 1998 1997 1996
---- ---- ----
Cash Flows Net income $ 6,798 6,560 6,117
from Adjustments to reconcile net income to net cash
Operating provided by operating activities:
Activities Provision for loan losses 624 435 331
(Note 12) Recovery of bond losses --- (10) (89)
Provision for deferred income taxes (135) 300 (4)
Depreciation of bank premises and equipment 811 586 517
Amortization of intangibles 144 121 121
Amortization of premiums and accretion of
discounts, net 87 11 52
Gains on sales and calls of
securities available for sale, net (145) (5) (3)
Other (135) (18) (7)
(Increase) decrease in:
Mortgage loans held for sale (1,775) 111 364
Accrued interest receivable (332) 65 111
Other assets (580) (76) 40
Increase (decrease) in:
Accrued interest payable (75) 22 (44)
Other liabilities (40) (529) 462
-------- ------- -------
Net cash provided by operating
activities 5,247 7,573 7,968
-------- ------- -------
Cash Flows Net (increase) decrease in federal funds sold (790) (2,390) 5,815
from Net decrease (increase) in interest-bearing
Investing deposits 2,701 (9,637) (91)
Activities Proceeds from repayments of mortgage-backed
(Note 12) securities available for sale 1,065 396 180
Proceeds from sales of other securities available
for sale 2,999 --- 1,000
Proceeds from calls and maturities of other
securities available for sale 35,180 9,443 21,758
Proceeds from calls and maturities of
securities held to maturity 34,187 35,673 35,569
Purchases of mortgage-backed securities available
for sale (14,175) --- ---
Purchases of other securities available for sale (73,685) (12,201) (10,397)
Purchases of securities held to maturity (1,000) (11,345) (32,477)
21
Purchases of loan participations (4,635) (6,189) (1,704)
Collections of loan participations 4,074 1,934 2,448
Loans purchased including premium (4,051) --- ---
Net increase in loans made to customers (18,675) (17,400) (31,633)
Proceeds from disposal of other real estate owned 194 216 325
Recoveries on loans charged off 255 107 125
Bank premises and equipment expenditures (1,770) (1,304) (882)
Proceeds from sale of bank premises and equipment 114 8 ---
-------- ------- -------
Net cash used in investing
activities (38,012) (12,689) (9,964)
-------- ------- -------
Cash Flows
from Deposits acquired, net of premium 7,016 --- ---
Financing Net increase in time deposits 14,357 6,618 1,672
Activities Net increase in other deposits 16,456 3,665 2,599
(Note 12) Net increase (decrease) in other borrowed funds (271) (142) 466
Cash dividends paid (2,807) (2,579) (2,807)
-------- ------- -------
Net cash provided by
financing activities 34,751 7,562 1,930
-------- ------- -------
Net increase (decrease) in cash and due from banks 1,986 2,446 (66)
Cash and due from banks at beginning of year 12,435 9,989 10,055
-------- ------- -------
Cash and due from banks at end of year $ 14,421 12,435 9,989
======== ======= =======
See accompanying notes to consolidated financial statements.
22
Notes to Consolidated Financial Statements
$ In thousands, except share and per share data.
December 31, 1998, 1997 and 1996
Note 1: Summary of Significant Accounting Policies
The accounting and reporting policies of National Bankshares, Inc.
(Bankshares) and its wholly-owned subsidiaries, The National Bank of
Blacksburg (NBB) and Bank of Tazewell County (BTC), conform to generally
accepted accounting principles and general practices within the banking
industry (see note 16 for merger with BTC).
The following is a summary of the more significant accounting policies.
(A) Consolidation
The consolidated financial statements include the accounts of
National Bankshares, Inc. and its wholly-owned subsidiaries (the
Company). All significant intercompany balances and transactions have
been eliminated.
(B) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and due from banks.
(C) Securities
Securities available for sale are reported at fair value, with
unrealized gains and losses excluded from net income and reported, net of
income taxes, in a separate component of stockholders' equity.
Securities held to maturity are stated at cost, adjusted for amortization
of premiums and accretion of discounts on a basis which approximates the
level yield method. The Company does not engage in securities trading.
Gains and losses on securities are accounted for on the completed
transaction basis by the specific identification method.
A decline in the fair value of any available for sale or held to
maturity security below cost that is deemed other than temporary is
charged to income resulting in the establishment of a new cost basis for
the security.
(D) Loans
Loans are stated at the amount of funds disbursed plus the
applicable amount, if any, of unearned income and deferred fees less
payments received. Income on installment loans, including impaired
installment loans that have not been placed in nonaccrual status, is
recognized on methods which approximate the level yield method. Interest
on all other loans, including impaired other loans that have not been
placed in nonaccrual status, is accrued based on the balance outstanding
times the applicable interest rate.
Interest is recognized on the cash basis for all loans carried in
nonaccrual status. Loans generally are placed in nonaccrual status when
the collection of principal or interest is 90 days or more past due,
unless the obligation is both well-secured and in the process of
collection.
Impaired loans are presented in the financial statements at the
present value of expected future cash flows or at the fair value of the
loan's collateral if the loan is deemed "collateral dependent." A
valuation allowance is required to the extent that the measure of the
impaired loans is less than the recorded investment. This requirement
does not apply to large groups of small-balance homogeneous loans such as
residential real estate mortgage, consumer installment, home equity and
bank card loans, which are collectively evaluated for impairment.
Loan origination and commitment fees and certain direct costs are
being deferred, and the net amount amortized as an adjustment to the
related loan's yield. These amounts are being amortized over the
contractual life of the related loans.
23
Notes to Consolidated Financial Statements
Mortgage loans held for sale are carried at the lower of cost or
fair value on an individual loan basis.
(E) Allowance for Loan Losses
The allowance for loan losses is a valuation allowance consisting of
the cumulative effect of the provision for loan losses, plus any amounts
recovered on loans previously charged off, minus loans charged off. The
provision for loan losses charged to expense is the amount necessary in
management's judgement to maintain the allowance for loan losses at a
level it believes adequate to absorb losses in the collection of its
loans.
(F) Bank Premises and Equipment
Bank premises and equipment are stated at cost, net of accumulated
depreciation. Depreciation is charged to expense over the estimated
useful lives of the assets on the straight-line basis. Depreciable lives
include 40 years for premises, 3-10 years for furniture and equipment,
and 5 years for computer software. Costs of maintenance and repairs are
charged to expense as incurred and improvements are capitalized.
(G) Other Real Estate Owned
Other real estate, acquired through foreclosure or deed in lieu of
foreclosure, is carried at the lower of the recorded investment or its
fair value, less estimated costs to sell (net realizable value). When
the property is acquired, any excess of the loan balance over net
realizable value is charged to the allowance for loan losses. Increases
or decreases in the net realizable value of such properties are credited
or charged to income by adjusting the valuation allowance for other real
estate owned. Net costs of maintaining or operating foreclosed
properties are expensed as incurred.
(H) Intangible Assets
Included in other assets are deposit intangibles of $706 and $575 at
December 31, 1998 and 1997, respectively, and goodwill of $420 and $337
at December 31, 1998 and 1997, respectively. Deposit intangibles are
being amortized on a straight-line basis over a ten-year period and
goodwill is being amortized on a straight-line basis over a fifteen-year
period.
(I) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
Long-lived assets and certain identifiable intangibles are reviewed
for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less
costs to sell.
(J) Pension Plans
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosure about Pension and
Other Post-retirement Benefits." Statement 132 revises the Company's
disclosure about pension and other post-retirement benefit plans.
Statement 132 does not change the method of accounting for such plans.
The Company sponsors two separate defined benefit pension plans
which cover substantially all full-time officers and employees. The
benefits are based upon length of service and a percentage of the
employee's compensation during the final years of employment. Pension
costs are computed based upon the provisions of Statement 87. The
24
National Bankshares, Inc. and Subsidiaries
Company contributes to the pension plans amounts deductible for federal
income tax purposes.
(K) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(L) Trust Assets and Income
Assets (other than cash deposits) held by the Trust Departments in a
fiduciary or agency capacity for customers are not included in the
consolidated financial statements since such items are not assets of the
Company. Trust income is recognized on the accrual basis.
(M) Net Income Per Share
Basic net income per share is based upon the weighted average number
of common shares outstanding (3,792,833 shares in 1998, 1997 and 1996).
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share." Statement 128 established new standards for computing and
presenting earnings per share (EPS) and applies to entities with
publicly-held common stock or potential common stock. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the
entity.
Statement 128 was adopted by the Company at December 31, 1997. The
Statement requires restatement of prior years EPS data previously
presented. Adoption of this Statement did not have any effect on current
or prior years' EPS data presented due to the Company's simple capital
structure.
(N) Off-Balance Sheet Financial Instruments
In the ordinary course of business, the Company has entered into
off-balance sheet financial instruments consisting of commitments to
extend credit and standby letters of credit. Such financial instruments
are recorded in the financial statements when they become payable.
(O) Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable
to estimate that value:
(1) Cash and Due from Banks, Interest-Bearing Deposits and Federal
Funds Sold
The carrying amounts are a reasonable estimate of fair
value.
25
Notes to Consolidated Financial Statements
(2) Securities
The fair values of securities are determined by quoted
market prices or dealer quotes. The fair value of certain
state and municipal securities is not readily available through
market sources other than dealer quotations, so fair value
estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted
instruments and the instruments being valued.
(3) Loans
Fair values are estimated for portfolios of loans with
similar financial characteristics. Loans are segregated by
type such as mortgage loans held for sale, commercial, real
estate - commercial, real estate - construction, real estate -
mortgage, credit card and other consumer loans. Each loan
category is further segmented into fixed and adjustable rate
interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity
using estimated market discount rates that reflect the credit
and interest rate risk inherent in the loan, as well as
estimates for prepayments. The estimate of maturity is based
on the Company's historical experience with repayments for each
loan classification, modified, as required, by an estimate of
the effect of current economic and lending conditions.
Fair value for significant nonperforming loans is based on
estimated cash flows which are discounted using a rate
commensurate with the risk associated with the estimated cash
flows. Assumptions regarding credit risk, cash flows and
discount rates are judgmentally determined using available
market information and specific borrower information.
(4) Deposits
The fair value of demand and savings deposits is the
amount payable on demand. The fair value of fixed maturity
time deposits and certificates of deposit is estimated using
the rates currently offered for deposits with similar remaining
maturities.
(5) Other Borrowed Funds
Other borrowed funds represents treasury tax and loan
deposits. The carrying amount is a reasonable estimate of fair
value because the deposits are generally repaid within 1 to 120
days from the transaction date.
(6) Commitments to Extend Credit and Standby Letters of Credit
The only amounts recorded for commitments to extend
credit, standby letters of credit and financial guarantees
written are the deferred fees arising from these unrecognized
financial instruments. These deferred fees are not deemed
significant at December 31, 1998 and 1997, and as such, the
related fair values have not been estimated.
(P) Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities
The Company adopted the provisions of Statement No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," on January 1, 1997. This Statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. Under that
approach, after a transfer of financial assets, an entity recognizes the
26
National Bankshares, Inc. and Subsidiaries
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. This Statement also provides implementation guidance for
assessing isolation of transferred assets and for accounting for
transfers of partial interests, servicing of financial assets,
securitizations, transfers of sales-type and direct financing lease
receivables, securities lending transactions, repurchase agreements
including "dollar rolls," "wash sales," loan syndications and
participations, risk participations in banker's acceptances, factoring
arrangements, transfers of receivables with recourse, and extinguishments
of liabilities. Statement No. 127, "Deferral of the Effective Date of
Certain Provisions of Statement 125," issued in December 1996, deferred
until January 1, 1998 the effective date (a) of paragraph 15 of Statement
125 and (b) for repurchase agreement, dollar-roll, securities lending,
and similar transactions, of paragraphs 9-12 and 237(b) of Statement 125.
Statement 125 was required to be adopted on a prospective basis and its
adoption did not have a material impact on the Company's financial
position, results of operations or liquidity.
(Q) Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income."
Statement 130 establishes standards for reporting and presentation of
comprehensive income and its components in a full set of general purpose
financial statements. Statement 130 was issued to address concerns over
the practice of reporting elements of comprehensive income directly in
equity.
The Company is required to classify items of "Other Comprehensive
Income" [such as net unrealized gains (losses) on securities available
for sale] by their nature in a financial statement and present the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in-capital in the equity section of
a statement of financial position. It does not require per share amounts
of comprehensive income to be disclosed.
In accordance with the provisions of the Statement, the Company has
included Consolidated Statements of Income and Comprehensive Income in
the accompanying consolidated financial statements. Comprehensive income
consists of net income and net unrealized gains (losses) on securities
available for sale. Also, accumulated other comprehensive income is
included as a separate disclosure within the Consolidated Statements of
Changes in Stockholders' Equity in the accompanying consolidated
financial statements. Comprehensive income for the years ended December
31, 1997 and 1996 is presented for comparative purposes. The adoption of
Statement 130 did not have any effect on the Company's consolidated
financial position, results of operation or liquidity.
(R) Derivatives
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." The Company adopted
Statement 133 as of October 1, 1998. In connection with the adoption of
Statement 133, the Company transferred securities with a carrying value
of approximately $20,516 from held to maturity to available for sale.
This transfer of securities resulted in an increase in unrealized gains
(losses) on securities available for sale, comprehensive income,
accumulated other comprehensive income and stockholders' equity of
27
Notes to Consolidated Financial Statements
approximately $469, net of income taxes of $242, as of October 1, 1998,
which is reported as a cumulative effect of an accounting change. Except
as discussed above, the adoption of Statement 133 did not have a material
effect on the consolidated financial position, results of operations or
liquidity of the Company.
(S) Use of Estimates
In preparing the consolidated financial statements, management is
required to make certain estimates, assumptions and loan evaluations that
affect its consolidated financial statements for the period. Actual
results could vary significantly from those estimates.
Changing economic conditions, adverse economic prospects for
borrowers, as well as regulatory agency action as a result of an
examination, could cause NBB and BTC to recognize additions to the
allowance for loan losses and may also affect the valuation of real
estate acquired in connection with foreclosures or in satisfaction of
loans.
(T) Reclassifications
Certain reclassifications have been made to prior years'
consolidated financial statements to place them on a basis comparable
with the 1998 consolidated financial statements.
Note 2: Restrictions on Cash
To comply with Federal Reserve regulations, the Company is required to
maintain certain average reserve balances. The daily average reserve
requirements were $4,813 and $3,699 for the weeks including December 31, 1998
and 1997, respectively.
Note 3: Securities
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities available for sale by major security type as of
December 31, 1998 and 1997 are as follows:
December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Available for sale:
U.S. Treasury $ 9,253 418 --- 9,671
U.S. Government agencies
and corporations 59,365 369 (139) 59,595
States and political
subdivisions 32,183 786 (104) 32,865
Mortgage-backed securities 17,282 12 (94) 17,200
Corporate debt securities 14,528 331 (35) 14,824
Federal Home Loan Bank
stock 1,214 --- --- 1,214
Other securities 709 --- --- 709
-------- ------ ----- -------
Total securities
available for sale $134,534 1,916 (372) 136,078
======== ====== ===== =======
28
National Bankshares, Inc. and Subsidiaries
December 31, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Available for sale:
U.S. Treasury $ 6,742 131 (11) 6,862
U.S. Government agencies
and corporations 36,252 141 (117) 36,276
States and political
subdivisions 9,540 101 (2) 9,639
Mortgage-backed securities 4,172 34 (87) 4,119
Corporate debt securities 7,780 61 (17) 7,824
Federal Home Loan Bank
stock 537 --- --- 537
Other securities 265 60 --- 325
-------- ----- ----- ------
Total securities
available for sale $ 65,288 528 (234) 65,582
======== ===== ===== ======
The amortized costs and fair values of single maturity securities
available for sale at December 31, 1998, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties. Mortgage-backed securities included in these
totals are allocated based upon estimated cash flows at December 31, 1998.
December 31, 1998
Amortized Fair
($ In thousands) Costs Values
--------- ------
Due in one year or less $ 7,397 7,459
Due after one year through five years 32,385 33,140
Due after five years through ten years 40,017 40,606
Due after ten years 53,277 53,414
No maturity 1,458 1,459
-------- -------
$134,534 136,078
======== =======
The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities held to maturity by major security type as of
December 31, 1998 and 1997 are as follows:
29
Notes to Consolidated Financial Statements
December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Held to maturity:
U.S. Treasury $ 1,006 3 --- 1,009
U.S. Government agencies
and corporations 7,497 55 (121) 7,431
States and political
subdivisions 21,160 537 (18) 21,679
Mortgage-backed securities 513 17 --- 530
Corporate debt securities 500 2 --- 502
------- ------- ----- -------
Total securities held
to maturity $30,676 614 (139) 31,151
======= ======= ===== =======
December 31, 1997
Gross Gross
Amortized Unrealized Unrealized Fair
($ In thousands) Costs Gains Losses Values
--------- ---------- ---------- ------
Held to maturity:
U.S. Treasury $ 7,527 27 (41) 7,513
U.S. Government agencies
and corporations 36,853 167 (362) 36,658
States and political
subdivisions 32,949 696 (32) 33,613
Mortgage-backed securities 630 28 --- 658
Corporate debt securities 6,433 131 (1) 6,563
------- ----- ---- -------
Total securities held
to maturity $84,392 1,049 (436) 85,005
======= ===== ==== =======
The amortized costs and fair values of single maturity securities held to
maturity at December 31, 1998, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities included in these totals are
allocated based upon estimated cash flows at December 31, 1998.
30
National Bankshares, Inc. and Subsidiaries
December 31, 1998
Amortized Fair
($ In thousands) Costs Values
--------- ------
Due in one year or less $ 4,024 4,046
Due after one year through five years 21,119 21,485
Due after five years through ten years 3,949 3,997
Due after ten years 1,584 1,623
------- -------
$30,676 31,151
======= =======
There were no sales of securities held to maturity during 1998, 1997 or
1996.
The carrying value of securities pledged to secure public and trust
deposits, and for other purposes as required or permitted by law, was $21,629
at December 31, 1998 and $21,257 at December 31, 1997.
The Federal Home Loan Bank stock is carried at cost and collateralizes
lines of credit available from the Federal Home Loan Bank. At December 31,
1998, amounts available under these unused lines of credit approximated $35
million.
Note 4: Loans to Officers and Directors
In the normal course of business, loans have been made to executive
officers and directors of Bankshares and its subsidiaries. As of December 31,
1998 and 1997, there were direct loans to executive officers and directors of
$1,782 and $1,351, respectively. In addition, there were loans of $1,844 and
$3,566 at December 31, 1998 and 1997, respectively, which were endorsed by
directors and/or executive officers or had been made to companies in which
directors and/or executive officers had an equity interest.
The following schedule summarizes amounts receivable from executive
officers and directors of Bankshares and its subsidiaries, and their immediate
families or associates:
Year ended
December 31,
($ In thousands) 1998
------------
Aggregate balance, beginning of year $ 4,917
Additions 4,359
Collections (5,650)
-------
Aggregate balance, end of year
$ 3,626
=======
Note 5: Nonperforming Assets, Past Due Loans, Impaired Loans and Allowance for
Loan Losses
31
Notes to Consolidated Financial Statements
Nonperforming assets consist of the following:
December 31,
($ In thousands) 1998 1997 1996
---- ---- ----
Nonaccrual loans $ 28 87 616
Other real estate owned, net 628 421 474
------- ------ ------
Total nonperforming assets $ 656 508 1,090
======= ====== ======
Accruing loans past due 90 days or
more $ 550 672 458
======= ====== ======
There were no material commitments to lend additional funds to customers
whose loans were classified as nonperforming at December 31, 1998.
The following table shows the interest that would have been earned on
nonaccrual loans if they had been current in accordance with their original
terms and the recorded interest that was earned and included in income on
these loans:
Years ended December 31,
($ In thousands) 1998 1997 1996
---- ---- ----
Scheduled interest:
Nonaccrual loans $ 4 8 68
======== ====== ======
Recorded interest:
Nonaccrual loans $ --- 1 24
======== ====== ======
Changes in the valuation allowance for other real estate owned are as
follows:
Years ended December 31,
($ In thousands) 1998 1997 1996
---- ---- ----
Balances, beginning of year $ 68 96 91
Provision for other real estate owned 25 --- 5
Write-offs --- (28) ---
------- ----- ----
Balances, end of year $ 93 68 96
======= ===== ====
At December 31, 1998, the recorded investment in loans which have been
identified as impaired loans, totaled $373. Of this amount, $228 related to
loans with no valuation allowance and $145 related to loans with a
corresponding valuation allowance of $145. At December 31, 1997, the recorded
investment in loans which have been identified as impaired loans totaled $177.
Of this amount, $124 related to loans with no valuation allowance and $53
related to loans with a corresponding valuation allowance of $53.
32
National Bankshares, Inc. and Subsidiaries
For the year ended December 31, 1998, the average recorded investment in
impaired loans was approximately $387, and the total interest income
recognized on impaired loans was $32 of which $0 was recognized on a cash
basis. For the year ended December 31, 1997, the average recorded investment
in impaired loans was approximately $458, and the total interest income
recognized on impaired loans was $23 of which $12 was recognized on a cash
basis. For the year ended December 31, 1996, the average recorded investment
in impaired loans was approximately $800, and the total interest income
recognized on impaired loans was $33 of which $23 was recognized on a cash
basis.
Changes in the allowance for loan losses are as follows:
Years ended December 31,
($ In thousands) 1998 1997 1996
---- ---- ----
Balances, beginning of year $ 2,438 2,575 2,625
Provision for loan losses 624 435 331
Recoveries 255 107 125
Loans charged off (638) (679) (506)
------- ------ ------
Balances, end of year $ 2,679 2,438 2,575
======= ====== ======
Note 6: Bank Premises and Equipment
Bank premises and equipment stated at cost, less accumulated
depreciation, are as follows:
December 31,
($ In thousands) 1998 1997
---- ----
Premises $ 6,321 6,148
Furniture and equipment 5,343 4,458
Construction-in-progress 632 33
-------- -------
Less accumulated depreciation 12,296 10,639
(5,639) (4,900)
Total bank premises and equipment -------- -------
$ 6,657 5,739
======== =======
The Company leases a branch facility as well as certain other office
space under noncancellable operating leases that expire over the next five
years. The future minimum lease payments under these leases (with initial or
remaining lease terms in excess of one year) as of December 31, 1998 are as
follows: $64 in 1999, $13 in the years 2000, 2001 and 2002, and $10 in 2003.
As of December 31, 1998, the Company had an outstanding commitment of
approximately $1,600 related to the construction of new company headquarters.
Note 7: Time Deposits
Included in time deposits are certificates of deposit and other time
deposits of $100 or more in the aggregate amounts of $46,257 at December 31,
1998 and $42,547 at December 31, 1997. At December 31, 1998, the scheduled
maturities of time deposits are as follows: $144,057 in 1999, $33,821 in 2000,
$6,742 in 2001, $3,963 in 2002 and $7,928 in 2003.
33
Notes to Consolidated Financial Statements
Note 8: Employee Benefit Plans
NBB has a Retirement Accumulation Plan qualifying under IRS Code Section
401(k). Eligible participants in the plan can contribute up to 10% of their
total annual compensation to the plan. Employee contributions are matched by
NBB based on a percentage of an employee's total annual compensation
contributed to the plan. For the years ended December 31, 1998, 1997 and
1996, NBB contributed $91, $87 and $83, respectively, to the plan.
Bankshares has a nonleveraged Employee Stock Ownership Plan (ESOP) which
enables employees of the sole participating employer, NBB, who have one year
of service and who have attained the age of 21 prior to the plan's January 1
and July 1 enrollment dates to own Bankshares common stock. Contributions to
the ESOP are determined annually by the Board of Directors. There was no
contribution to the plan in 1998. Contribution expense amounted to $219 and
$200 for the years ended December 31, 1997 and 1996, respectively. Dividends
on ESOP shares are charged to retained earnings. As of December 31, 1998, the
number of allocated shares held by the ESOP was 72,296 and the number of
unallocated shares was 5,005. All shares held by the ESOP are treated as
outstanding in computing the Company's net basic income per share. Bankshares
or the ESOP has the right of first refusal for any shares distributed to a
participant in the event the participant elects to sell the shares. Upon
reaching age 55 with ten years of plan participation, a vested participant has
the right to diversify 50% of his or her allocated ESOP shares and Bankshares
or the ESOP, with the agreement of the Trustee, would be obligated to purchase
those shares. The ESOP contains a put option which allows a withdrawing
participant to require Bankshares or the ESOP, if the plan administrator
agrees, to purchase his or her allocated shares if the shares are not readily
tradeable on an established market at the time of its distribution. Since the
shares are not readily tradeable, at December 31, 1998, 77,301 shares of stock
held by the ESOP, at their estimated fair value, which is based on the most
recent available independent valuation, is recorded outside of stockholders'
equity. Bankshares does not anticipate any material cash requirements in each
of the next five years relating to the purchase of shares held by the ESOP
participants.
The Company also sponsors two separate noncontributory defined benefit
pension plans which cover substantially all of its employees. The pension
plans' benefit formulas generally base payments to retired employees upon
their length of service and a percentage of qualifying compensation during
their final years of employment. The NBB pension plan's assets are invested
principally in U.S. Government agency obligations (34%), mutual funds (31%)
and equity securities (35%). BTC's pension plan's assets are invested
principally in BTC certificates of deposit (23%), U.S. Government agency
obligations (34%), U.S. Treasury securities (11%), corporate debt (20%) and
equity securities (12%).
34
National Bankshares, Inc. and Subsidiaries
Pension Benefits
----------------
December 31,
($ In thousands) 1998 1997
---- ----
Change in benefit obligation
Benefit obligation at beginning of year $ 4,967 5,161
Service cost 331 281
Interest cost 367 367
Actuarial gain 491 (559)
Benefits paid (161) (283)
-------- -------
Benefit obligation at end of year 5,995 4,967
-------- -------
Change in plan assets
Fair value of plan assets at beginning of year 4,337 3,950
Actual return on plan assets 430 327
Employer contribution 365 343
Benefits paid (161) (283)
-------- -------
Fair value of plan assets at end of year 4,971 4,337
-------- -------
Funded status (1,024) (630)
Unrecognized net actuarial loss 917 459
Unrecognized prior service cost 216 231
Unrecognized transition asset (183) (205)
-------- -------
Net accrued pension cost (includes accrued
pension cost of $363 in 1998 and $352 in
1997, included in other liabilities, and
prepaid pension cost of $289 in 1998 and
$207 in 1997 included in other assets) $ (74) (145)
======== =======
Pension Benefits
----------------
NBB BTC
($ In thousands) 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Weighted average
assumptions as of
December 31
Weighted average
discount rate 7.00% 7.50% 7.75% 7.00% 7.50% 7.00%
Expected return on
plan assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Rate of compensation
increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
35
Notes to Consolidated Financial Statements
Pension Benefits
----------------
Years Ended December 31,
($ In thousands) 1998 1997 1996
---- ---- ----
Components of net periodic
benefit cost
Service cost $ 331 281 327
Interest cost 367 367 353
Expected return on plan assets (400) (364) (323)
Amortization of prior service
cost 15 15 15
Recognized net actuarial loss 3 8 54
Amortization of transition
asset (22) (23) (23)
----- ----- -----
Net periodic benefit cost $ 294 284 403
===== ===== =====
Note 9: Income Taxes
Total income taxes were allocated as follows:
Years ended December 31,
($ In thousands) 1998 1997 1996
---- ---- ----
Income $ 2,591 2,499 2,341
Stockholders' equity, for net
unrealized gains (losses) on
securities available for sale
recognized for financial reporting
purposes 425 228 (273)
------- ------ -------
Total income taxes $ 3,016 2,727 2,068
======= ====== =======
The components of federal income tax expense attributable to income
before income tax expense are as follows:
36
National Bankshares, Inc. and Subsidiaries
Years ended December 31,
($ In thousands) 1998 1997 1996
---- ---- ----
Current $ 2,726 2,199 2,345
Deferred (135) 300 (4)
------- ------ -------
Total income tax expense $ 2,591 2,499 2,341
======= ====== =======
Taxes resulting from securities transactions amounted to a tax expense of
$64 for the year ended December 31, 1998, $13 for the year ended December 31,
1997 and $33 for the year ended December 31, 1996.
The following is a reconciliation of the "expected" income tax expense,
computed by applying the U.S. Federal income tax rate of 34% to
income before income tax expense, with the reported income tax expense:
Years ended December 31,
($ In thousands) 1998 1997 1996
---- ---- ----
Expected income tax expense (34%) $ 3,192 3,080 2,876
Tax-exempt interest income (742) (700) (756)
Nondeductible interest expense 97 90 99
Other, net 44 29 122
------- ------ ------
Reported income tax expense $ 2,591 2,499 2,341
======= ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1998 and 1997 are presented below:
37
Notes to Consolidated Financial Statements
December 31,
($ In thousands) 1998 1997
---- ----
Deferred tax assets:
Loans, principally due to allowance for loan
losses and unearned fee income $ 545 344
Other real estate owned, principally due to
valuation allowance 32 23
Deferred compensation and other liabilities,
due to accrual for financial reporting
purpose 96 114
Deposit intangibles and goodwill 51 42
Community development corporation related tax
credit 22 26
------- -------
Total gross deferred tax assets 746 549
Less valuation allowance --- ---
------- -------
Net deferred tax assets 746 549
------- -------
Deferred tax liabilities:
Bank premises and equipment, principally due
to differences in depreciation (102) (16)
Securities, due to differences in discount
accretion (52) (77)
Other assets (63) (62)
Net unrealized gains on securities available
for sale (525) (100)
------- -------
Total gross deferred liabilities (742) (255)
------- -------
Net deferred tax asset included in other
assets $ 4 294
======= =======
The Company has determined that a valuation allowance for the gross
deferred tax assets is not necessary at December 31, 1998 and 1997 due to the
fact that the realization of the entire gross deferred tax assets can be
supported by the amount of taxes paid during the carryback period available
under current tax laws.
Note 10: Restrictions on Payments of Dividends and Capital Requirements
Bankshares' principal source of funds for dividend payments is dividends
received from its subsidiary banks. For the years ended December 31, 1998,
1997 and 1996, dividends received from subsidiary banks were $5,341, $2,712
and $1,901, respectively. Included in the 1998 dividends was $2,534 which
represented a transfer of capital to Bankshares.
Substantially all of Bankshares' retained earnings are undistributed
earnings of its banking subsidiaries, which are restricted by various
38
National Bankshares, Inc. and Subsidiaries
regulations administered by federal and state bank regulatory agencies. Bank
regulatory agencies restrict, without prior approval, the total dividend
payments of a bank in any calendar year to the bank's retained net income of
that year to date, as defined, combined with its retained net income of the
preceding two years, less any required transfers to surplus. At December 31,
1998, retained net income which was free of such restriction amounted to
approximately $5,461.
Bankshares and its subsidiaries are subject to various regulatory capital
requirements administered by the bank regulatory agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, Bankshares and its subsidiaries must meet
specific capital guidelines that involve quantitative measures of their
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. Bankshares' and its subsidiaries' capital
amounts and classification are also subject to qualitative judgments by
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require Bankshares and its subsidiaries to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital (as
defined in the regulations) to risk weighted assets (as defined), and of Tier
I capital (as defined) to average assets (as defined). Management believes,
as of December 31, 1998, that Bankshares and its subsidiaries meet all capital
adequacy requirements to which they are subject.
Bankshares' and its subsidiaries' actual regulatory capital amounts and
ratios are also presented in the following tables.
To Be Well
Capitalized
Under
Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- ------------- --------------
($ In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1998
Total capital (to risk
weighted assets)
Bankshares consolidated $61,216 22.4% 21,819 8.0% N/A N/A
NBB 30,411 16.5% 14,747 8.0% 18,433 10.0%
BTC 28,284 31.8% 7,112 8.0% 8,890 10.0%
Tier I capital (to risk
weighted assets)
Bankshares consolidated $58,537 21.5% 10,910 4.0% N/A N/A
NBB 28,511 15.5% 7,373 4.0% 11,060 6.0%
BTC 27,505 30.9% 3,536 4.0% 5,334 6.0%
Tier I capital (to
average assets)
Bankshares consolidated $58,537 13.4% 17,457 4.0% N/A N/A
NBB 28,511 11.1% 10,292 4.0% 12,865 5.0%
BTC 27,505 15.6% 7,068 4.0% 8,835 5.0%
39
Notes to Consolidated Financial Statements
To Be Well
Capitalized
Under Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
-------------- ------------- --------------
($ In thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1997
Total capital (to risk
weighted assets)
Bankshares consolidated $57,198 23.3% 19,652 8.0% N/A N/A
NBB 28,825 17.4% 13,232 8.0% 16,540 10.0%
BTC 28,313 34.7% 6,527 8.0% 8,159 10.0%
Tier I capital (to risk
weighted assets)
Bankshares consolidated $54,760 22.3% 9,826 4.0% N/A N/A
NBB 27,084 16.4% 6,616 4.0% 9,924 6.0%
BTC 27,616 33.9% 3,264 4.0% 4,895 6.0%
Tier I capital (to
average assets)
Bankshares consolidated $54,760 13.7% 15,988 4.0% N/A N/A
NBB 27,084 12.1% 8,985 4.0% 11,231 5.0%
BTC 27,616 15.8% 7,003 4.0% 8,754 5.0%
As of December 31, 1998, the most recent notifications from the
appropriate regulatory authorities categorized Bankshares and its subsidiaries
as adequately capitalized under the regulatory framework for prompt corrective
action. To be categorized as adequately capitalized, Bankshares and its
subsidiaries must maintain minimum total risk-based, Tier I risk-based, and
Tier I leverage ratios as set forth in the table. There are no conditions or
events since those notifications that management believes have changed
Bankshares' and its subsidiaries' category.
Note 11: Parent Company Financial Information
Condensed financial information of National Bankshares, Inc.
(Parent) is presented below:
40
National Bankshares, Inc. and Subsidiaries
Condensed Balance Sheets
December 31,
($ In thousands, except share and
per share data.) 1998 1997
---- ----
Assets Cash due from subsidiaries $ 28 69
Securities available for sale 2,521 ---
Investment in subsidiaries, at
equity 58,139 55,807
Refundable income taxes due
from subsidiaries 30 22
Other assets 30 ---
-------- -------
Total assets $ 60,748 55,898
======== =======
Liabilities Other liabilities $ 65 31
and -------- -------
Stockholders' Common stock subject to ESOP
Equity put option (note 8) 2,180 1,838
-------- -------
Stockholders' equity (notes 9,
10 and 16):
Preferred stock of no par
value. Authorized
5,000,000 shares; none
issued and outstanding --- ---
Common stock of $2.50 par
value. Authorized
5,000,000 shares; issued
and outstanding 3,792,833
shares 9,482 9,482
Retained earnings 50,182 46,191
Accumulated other
comprehensive income 1,019 194
Common stock subject to ESOP
put option (77,301 shares at
$28.20 per share in 1998 and
72,783 shares at $25.25 per
share in 1997) (note 8) (2,180) (1,838)
-------- -------
Total stockholders' equity 58,503 54,029
Commitments and contingent
liabilities (notes 6, 8
and 13) -------- -------
Total liabilities and
stockholders' equity $ 60,748 55,898
======== =======
41
Notes to Consolidated Financial Statements
Condensed Statements of Income and Comprehensive Income
Years ended December 31,
($ In thousands) 1998 1997 1996
---- ---- ----
Income Dividends from subsidiaries
(note 10) $5,341 2,712 1,901
Interest on securities -
taxable 29 --- ---
Interest on securities -
nontaxable 24 --- ---
------ ------ ------
5,394 2,712 1,901
Expenses Other expenses 173 125 232
------ ------ ------
Income before income tax
benefit and equity in
undistributed net income
of subsidiaries 5,221 2,587 1,669
Applicable income tax
benefit 47 42 41
------ ------ ------
Income before equity in
undistributed net income
of subsidiaries 5,268 2,629 1,710
Equity in undistributed net
income of subsidiaries 1,530 3,931 4,407
------ ------ ------
Net income 6,798 6,560 6,117
------ ------ ------
Other comprehensive income
(loss), net of income
taxes:
Net unrealized gains
(losses) on securities
available for sale
(notes 1 and 17):
Arising during the year 356 442 (530)
Cumulative accounting
change 469 --- ---
------ ------ ------
Total 825 442 (530)
------ ------ ------
Comprehensive income $7,623 7,002 5,587
====== ====== ======
42
National Bankshares, Inc. and Subsidiaries
Condensed Statements of Cash Flows
Years ended December 31,
($ In thousands) 1998 1997 1996
---- ---- ----
Cash Flows Net income $ 6,798 6,560 6,117
from Adjustments to reconcile
Operating net income to net cash
Activities provided by operating
activities:
Equity in undistributed
net income of
subsidiaries (1,530) (3,931) (4,407)
Amortization of premiums
and accretion of
discounts, net 4 --- ---
(Increase) decrease in
refundable income taxes
due from subsidiaries (8) 3 88
Increase in other assets (30) --- ---
Increase (decrease) in
other liabilities 22 (4) (5)
------- ------ -------
Net cash provided
by operating
activities 5,256 2,628 1,793
------- ------ -------
Cash Flows Purchases of securities
from available for sale (4,534) --- ---
Investing Maturities of securities
Activities available for sale 2,044 --- ---
------- ------ -------
Net cash used in
investing activities (2,490) --- ---
------- ------ -------
Cash Flows Cash dividends paid (2,807) (2,579) (1,787)
from ------- ------ -------
Financing
Activities Net cash used in
financing activities (2,807) (2,579) (1,787)
------- ------ -------
Net increase (decrease) in
cash (41) 49 6
Cash due from subsidiary
at beginning of year 69 20 14
------- ------ -------
Cash due from subsidiary
at end of year $ 28 69 20
======= ====== =======
43
Notes to Consolidated Financial Statements
Note 12: Supplemental Cash Flow Information
The Company paid $14,003, $13,084 and $13,080 for interest and $2,631,
$2,719 and $1,839 for income taxes, net of refunds, in 1998, 1997 and 1996,
respectively. Noncash investing activities consisted of $638, $679 and $506
of loans charged against the allowance for loan losses in 1998, 1997 and 1996,
respectively. Noncash investing activities also included $382 in 1998 and
$159 in 1997 of loans transferred to other real estate owned. In addition,
for the years ended December 31, 1998, 1997 and 1996, noncash investing
activities included changes in net unrealized gains (losses) on securities
available for sale of $1,250, $670 and ($803), respectively, changes in
deferred tax assets included in other assets of ($425), ($228) and $273,
respectively, and changes in net unrealized gains (losses) on securities
available for sale included in stockholders' equity of $825, $442 and ($530),
respectively. Securities, classified as held to maturity, totaling
approximately $20,516, were transferred to securities available for sale in
1998. This was in accordance with the reassessment of the classification of
securities allowed by the Financial Accounting Standards No. 133 "Accounting
for Derivative Instruments and Hedging Activities," which was adopted by the
Company on October 1, 1998.
Note 13: Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized in the consolidated
balance sheets. The contract amounts of those instruments reflect the extent
of involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss, in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit
and standby letters of credit, is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
The Company may require collateral or other security to support the
following financial instruments with credit risk:
December 31,
($ In thousands) 1998 1997
---- ----
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $53,498 37,700
======= ======
Standby letters of credit $ 3,320 1,949
======= ======
Mortgage loans sold with potential
recourse $39,697 19,231
======= ======
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
44
National Bankshares, Inc. and Subsidiaries
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if required by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties. Extensions of credit arising from
these commitments are predominantly variable rate in nature; the principal
exception being construction loans which are at fixed rates, but have terms
generally less than one year.
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. Collateral held varies but may
include accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties.
The Company originates mortgage loans for sale to secondary market
investors subject to contractually specified and limited recourse provisions.
In 1998, the Company originated $41,472 and sold $39,697 to investors,
compared to $19,120 originated and $19,231 sold in 1997. Every contract with
each investor contains certain recourse language. In general, the Company may
be required to repurchase a previously sold mortgage loan if there is major
noncompliance with defined loan origination or documentation standards,
including fraud, negligence or material misstatement in the loan documents.
Repurchase may also be required if necessary governmental loan guarantees are
canceled or never issued, or if an investor is forced to buy back a loan after
it has been resold as a part of a loan pool. In addition, the Company may
have an obligation to repurchase a loan if the mortgagor has defaulted early
in the loan term. This potential default period is approximately twelve
months after sale of a loan to the investor.
Note 14: Concentrations of Credit Risk
The Company does a general banking business, serving the commercial,
agricultural and personal banking needs of its customers. NBB's trade
territory, commonly referred to as the New River Valley, consists of
Montgomery and Giles Counties and the City of Galax, Virginia and portions of
adjacent counties. NBB's operating results are closely correlated with the
economic trends within this area which are, in turn, influenced by the area's
three largest employers, Virginia Polytechnic Institute and State University,
Montgomery County Schools and Celanese. Other industries include a wide
variety of manufacturing, retail and service concerns. Most of BTC's business
originates from the communities of Tazewell and Bluefield and other
communities in Tazewell County, Virginia and in Mercer County, West Virginia.
BTC's service area has largely depended on the coal mining industry and
farming for its economic base. In recent years, coal companies have
mechanized and reduced the number of persons engaged in the production of
coal. There are still a number of support industries for the coal mining
business that continue to provide employment in the area. Additionally,
several new businesses have been established in the area and Bluefield, West
Virginia has begun to emerge as a regional medical center. The ultimate
collectibility of the loan portfolios and the recovery of the carrying amounts
of repossessed property are susceptible to changes in the market conditions of
these areas.
At December 31, 1998 and 1997, approximately $94,000 and $80,000,
respectively, of the loan portfolio was concentrated in commercial real
estate. This represents approximately 39% and 37% of the loan portfolio at
45
Notes to Consolidated Financial Statements
December 31, 1998 and 1997, respectively. Included in commercial real estate
at December 31, 1998 and 1997 was approximately $64,000 and $50,000,
respectively, in loans for college housing and professional office buildings.
Loans secured by residential real estate were approximately $67,000 and
$65,000 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 $32,000 and
$34,000 at December 31, 1998 and 1997, respectively. This represents
approximately 13% of the loan portfolio at December 31, 1998 and 16% at
December 31, 1997.
The Company has established operating policies relating to the credit
process and collateral in loan originations. Loans to purchase real and
personal property are generally collateralized by the related property and
with loan amounts established based on certain percentage limitations of the
property's total stated or appraised value. Credit approval is primarily a
function of collateral and the evaluation of the creditworthiness of the
individual borrower or project based on available financial information.
Interest-bearing deposits with banks represent deposits with the Federal Home
Loan Bank of Atlanta. Management considers the concentration of credit risk
to be minimal.
Note 15: Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments at
December 31, 1998 and 1997 are as follows:
December 31,
1998 1997
-------- --------
Carrying Estimated Carrying Estimated
($ In thousands) Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Financial assets:
Cash and due from banks $ 14,421 14,421 12,435 12,435
Interest-bearing
deposits 7,027 7,027 9,728 9,728
Federal funds sold 5,090 5,090 4,300 4,300
Securities 166,754 167,229 149,974 150,587
Mortgage loans held for
sale 2,180 2,180 405 405
Loans, net 236,578 241,064 214,552 215,285
-------- -------- ------- -------
Total financial assets $432,050 437,011 391,394 392,740
======== ======== ======= =======
Financial liabilities:
Deposits $382,696 384,080 344,867 344,589
Other borrowed funds 214 214 485 485
-------- -------- ------- -------
Total financial
liabilities $382,910 384,294 345,352 345,074
======== ======== ======= =======
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
46
National Bankshares, Inc. and Subsidiaries
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are based on
judgements regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments and other
factors. These estimates are subjective in nature and involve uncertainties
and matters of significant judgement and therefore cannot be determined with
precision. Changes in assumptions could significantly affect these estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. Significant assets that are not considered
financial assets include deferred tax assets and the bank premises and
equipment. In addition, the tax ramifications related to the realization of
the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
Note 16: Business Combinations
On June 1, 1996, Bankshares issued 1,888,209 shares of its common stock
in a one-for-one exchange for all the outstanding common stock of Bank of
Tazewell County, Tazewell, Virginia. This business combination has been
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements for the periods prior to the combination have been
restated to include the accounts and results of operations of Bank of Tazewell
County. There were no adjustments of a material amount resulting from Bank of
Tazewell County's adoption of Bankshares' accounting policies.
In May 1996, Bankshares declared a stock split of .11129 per share
effected in the form of a stock dividend to the holders of Bankshares common
stock just prior to the merger effective date to facilitate the one-for-one
common stock exchange ratio. All stockholders' equity accounts, share and per
share data have been adjusted retroactively to reflect the stock split.
The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying financial statements
are summarized below:
Six months
ended June 30,
--------------
($ In thousands) 1996
--------------
Revenues:
National Bankshares, Inc. $ 9,286
Bank of Tazewell County 6,166
-------
Combined $15,452
=======
Net Income:
National Bankshares, Inc. $ 1,883
Bank of Tazewell County 1,106
-------
Combined $ 2,989
=======
47
Notes to Consolidated Financial Statements
On December 26, 1997, NBB entered into an agreement to purchase the
assets, including real estate and improvements, and assume the liabilities of
the Galax, Virginia, branch office of First American Federal Savings Bank.
The transaction, which was subject to regulatory approval, closed in the
second quarter of 1998. It did not have a material impact on the Company's
results of operations or liquidity.
Note 17: Other Comprehensive Income
Other comprehensive income net of income taxes and net of
reclassification adjustments between net income and other comprehensive income
relating to securities available for sale are reported in the Consolidated
Statements of Income and Comprehensive Income. The information that follows
discloses the reclassification adjustments and the income taxes related to
securities available for sale that are included in other comprehensive income,
net of income taxes.
($ In thousands) 1998
----
Net unrealized gains on
securities available for sale:
Net unrealized holding gains
during the year $ 1,282
Less reclassification
adjustments for gains
included in net income (32)
Income tax expense (425)
-------
Other comprehensive income,
net of income taxes $ 825
=======
Note 18: Future Accounting Considerations
In March 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is applicable for
the costs of computer software developed or obtained for internal use. The
SOP requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. The SOP also requires that costs related to the
preliminary project stage and the post-implementation/operation stage as
defined in SOP 98-1 for computer software developed or obtained for internal
use be expensed as incurred.
SOP 98-1 is effective for financial statements issued for fiscal years
beginning after December 15, 1998. Earlier application is encouraged in
fiscal years for which annual financial statements have not been issued.
Initial application should be as of the beginning of the fiscal year in which
the SOP is first adopted and applied to costs incurred for all projects during
that fiscal year, including those in progress upon initial application. Costs
incurred prior to initial application of the SOP, whether capitalized or not,
should not be adjusted to the amounts that would have been capitalized had the
SOP been in effect when those costs were incurred.
The Company adopted SOP 98-1 on January 1, 1999, and it is not
anticipated SOP 98-1 will have a material effect on the consolidated financial
position, results of operations or liquidity of the Company.
There have been no other recent accounting pronouncements issued that
would have a material effect on the consolidated financial position, results
of operations or liquidity of the Company or require additional disclosures.
48
National Bankshares, Inc. Board of Directors
National Bankshares
"Picture of James G. James G. Rakes, Chairman
Rakes, Charles L. of the Board, National
Boatwright and Bankshares, Inc., The
William T. Peery" National Bank, President
and Chief Executive
Officer; Charles L.
Boatwright, Vice Chairman
of the Board, Physician;
William T. Peery, Cargo
Oil Co., Inc., President;
L. Allen Bowman, Litton "Picture of L. Allen
Poly-Scientific, Retired Bowman, James A.
President; James A. Deskins and Cameron
Deskins, Sr., Deskins L. Forrester"
Super Market, Inc.,
President; Cameron L.
Forrester, Bank of
Tazewell County,
President and Chief
Executive Officer;
"Picture of Alonzo A. Alonzo A. Crouse, Bank of
Crouse, Paul A. Tazewell County,
Duncan and Jeffrey R. Executive Vice President,
Stewart" Secretary and Cashier;
Paul A. Duncan, Holiday
Motor Corp., President;
Jeffrey R. Stewart,
Educational Consultant
49
The National Bank and Bank of Tazewell County Boards of Directors
NBB
The National Bank
"Picture of James G. Rakes, James G. Rakes, National Bankshares,
Paul P. Wisman, J. Lewis Inc., The National Bank, President and
Webb, Jr., Paul A. Duncan, Chief Executive Officer; Paul P.
James M. Shuler, Charles L. Wisman, Grundy National Bank, Vice
Boatwright, L. Allen Bowman President of Investments, Nicewonder
and Jeffrey R. Stewart Investments, Manager of Assets; J.
Lewis Webb, Jr., Dentist; Paul A.
Duncan, Holiday Motor Corp., President;
James M. Shuler, Veterinarian, Virginia
House of Delegates, Delegate; Charles
L. Boatwright, Physician; L. Allen
Bowman, Vice Chairman of the Board,
Litton Poly-Scientific, Retired
President; Jeffrey R. Stewart, Chairman
of the Board, Educational Consultant
BTC
Bank of Tazewell County
"Picture of James A. Deskins, James A. Deskins, Sr., Deskins Super
Sr., James G. Rakes, James S. Market, Inc., President; James G.
Gillespie, Jr., Charles E. Rakes, National Bankshares, Inc., The
Green, III, Alonzo A. Crouse, National Bank, President and Chief
E. P. Greever, Cameron L. Executive Officer; James S. Gillespie,
Forrester, William H. Jr., Jim Sam Gillespie Farm, President;
VanDyke, William T. Peery, Charles E. Green, III, Registered
Carl C. Gillespie and J. M. Representative, The Equitable Life
Pope Assurance Society of the United States;
Alonzo A. Crouse, Bank of Tazewell
County, Executive Vice President,
Secretary and Cashier; E.P. Greever,
Retired; Cameron L. Forrester, Bank of
Tazewell County, President and Chief
Executive Officer; William H. VanDyke,
Candlewax Smokeless Fuel Co., Vice
President; William T. Peery, Chairman
of the Board, Cargo Oil Co., Inc.,
President; Carl C. Gillespie, Honorary
Chairman of the Board, Attorney; J. M.
Pope, Retired
The National Bank Advisory Boards
Montgomery County Advisory Board Dan A. Dodson, W. Clinton Graves, James J.
Owen, Arlene A. Saari, James C. Stewart, T. Cooper Via
Giles County Advisory Board Paul B. Collins, John H. Givens, Jr., Ross E.
Martin, Kenneth L. Rakes, Scarlet B. Ratcliffe, H. M. Scanland, Jr., Buford
Steele
50
In Remembrance
On March 16, 1998 the directors, officers and employees of National
Bankshares, Inc. and of The National Bank and Bank of Tazewell County were
saddened by the death of BTC's President and CEO, Raymond L. Dodson. Mr.
Dodson had been the President and a director of BTC for more than 25 years.
He worked in the banking industry for over 48 years. Mr. Dodson was a strong
advocate of BTC's merger with National Bankshares, Inc., and he was elected to
the holding company Board in 1996 following the merger. The Bank of Tazewell
County and National Bankshares greatly benefited from Mr. Dodson's banking
background and skillful leadership. Mr. Dodson's enthusiasm and energy is
very much missed by those who knew and worked with him.
Our Company experienced another great loss with the untimely death of the
Chairman of the Board, Dr. Robert E. Christopher, Jr., on October 18, 1998.
As a member of the Board of Directors of NBB for more than 30 years and as a
director of National Bankshares from its formation in 1986, Dr. Christopher
made an important and lasting contribution to the growth and success of both
organizations. Dr. Christopher served as Chairman of both Boards of Directors
from 1992 until his death. He will be remembered as a quiet and honorable
leader who was very proud of his association with National Bankshares and The
National Bank.
When he retired in 1995 from the Boards of Directors of the National Bank
and of National Bankshares, John M. Barringer had more than 40 years of
service on the bank's Board. He was a founding director of National
Bankshares. In addition, Mayor Barringer was chairman of the NBB Board from
1979 to 1982. During his long association with the bank and the holding
company, Mayor Barringer willingly shared his professional expertise and his
understanding of the community. His death on January 9, 1999, left his
friends and colleagues with a deep sense of loss. They will fondly remember
Mayor Barringer's personal warmth and quick wit.
51
Corporate Information
National Bankshares, Inc. Officers
James G. Rakes Joan C. Nelson
President and Chief Executive Officer Corporate Officer
J. Robert Buchanan Shelby M. Evans
Treasurer Corporate Compliance Officer
Marilyn B. Buhyoff David K. Skeens
Secretary and Counsel Corporate Auditor
F. Brad Denardo
Corporate Officer
Annual Meeting
The Annual Meeting of Stockholders will be held on Tuesday, April 13, 1999 at
3:00 p.m. at the Best Western Red Lion Inn, 900 Plantation Road, Blacksburg,
Virginia.
Corporate Stock
The common stock of National Bankshares, Inc. is traded over the counter, and
certain trades are reported on the OTC Bulletin Board under the symbol "NKSH".
Financial Information
Investors and analysts seeking financial information about National
Bankshares, Inc. should contact:
James G. Rakes or J. Robert Buchanan
President and Chief Executive Officer Treasurer
(540)552-2011 or (800)552-4123 (540)552-2011 or (800)552-4123
Written requests may be directed to: National Bankshares, Inc., P.O. Box
90002, Blacksburg, VA 24062-9002.
Stockholder Services and Stock Transfer Agent
Stockholders seeking information about National Bankshares, Inc. stock
accounts should contact:
Marilyn B. Buhyoff
Secretary and Counsel
(540)552-2011 or (800)552-4123
The National Bank of Blacksburg serves as transfer agent for National
Bankshares, Inc. stock.
Written requests and requests for stock transfers may be directed to: National
Bankshares, Inc., P.O. Box 90002, Blacksburg, VA 24062-9002.
A copy of National Bankshares, Inc.'s annual report to the Securities and
Exchange Commission on Form 10-K will be furnished without charge to any
stockholder upon written request.
Corporate Office
National Bankshares, Inc.
100 South Main Street
Blacksburg, VA 24060
P.O. Box 90002
Blacksburg, VA 24062-9002
52