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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number
December 31, 1997 O-15204
NATIONAL BANKSHARES, INCORPORATED
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(Exact name of Registrant as specified in its charter)
Virginia 54-1375874
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 South Main Street
Blacksburg, Virginia 24060
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (540) 552-2011
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.50 per Share
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(Title of Class)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 18, 1998 was $96,689,655. The aggregate market value was
computed based on a price determined from transactions known to management of
the Registrant since its stock is not extensively traded, listed on any
exchange, or quoted by NASDAQ. (In determining this amount, the registrant
assumes that all of its Directors and principal Officers are affiliates. Such
assumption shall not be deemed conclusive for any other purposes.)
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 18, 1998
- ------------------------------ -------------------------------
COMMON STOCK, $2.50 PAR VALUE 3,792,833
DOCUMENTS INCORPORATED BY REFERENCE
Selected information from the Registrants' Annual Report to Stockholders for the
year ended December 31, 1997, is incorporated by reference into Parts I and II
of this report.
Selected information from the Registrant's Proxy Statement for the Annual
Meeting to be held April 14, 1998 and filed with the Securities and Exchange
Commission pursuant to Regulation 14A, is incorporated by reference into Part
III of this report.
(This report contains 40 pages.)
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(The Index of Exhibits are on pages 39-40.)
NATIONAL BANKSHARES, INCORPORATED
ANNUAL REPORT FOR 1997 ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business 3-29
Item 2. Properties 29
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of
Security Holders 29
Executive Officers of the Registrant 30
PART II
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters 31
Item 6. Selected Financial Data 31
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 31
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 31-33
Item 8. Financial Statements and
Supplementary Data 34
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 34
PART III
Item 10. Directors and Executive Officers of
the Registrant 34
Item 11. Executive Compensation 34
Item 12. Security Ownership of Certain
Beneficial Owners and Management 34
Item 13. Certain Relationships and Related
Transactions 35
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 35-37
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PART I
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Item 1. Business.
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History and Business
National Bankshares, Inc. (Bankshares) is a bank holding company organized
under the laws of Virginia in 1986 and registered under the Bank Holding Company
Act (BHCA). Bankshares conducts its operations through its two wholly-owned
subsidiaries, The National Bank of Blacksburg (NBB) and Bank of Tazewell County
(BTC), collectively referred to as "the Company".
On June 1, 1996, Bankshares issued 1,888,209 shares of its common stock in a
one-for-one exchange for all the outstanding common stock of Bank of Tazewell
County, Tazewell, Virginia. This business combination has been accounted for as
a pooling-of-interests and, accordingly, the consolidated financial statements
for the periods prior to the combination have been restated to include the
accounts and results of operations of Bank of Tazewell County. There were no
adjustments of a material amount resulting from Bank of Tazewell County's
adoption of Bankshares' accounting policies.
In May 1996, Bankshares declared a stock split of .11129 per share effected
in the form of a stock dividend to the holders of Bankshares common stock just
prior to the merger effective date to facilitate the one-for-one common stock
exchange ratio. All stockholders' equity accounts, share and per share data
have been adjusted retroactively to reflect the stock split.
The National Bank of Blacksburg
The National Bank of Blacksburg was originally chartered as the Bank of
Blacksburg in 1891. Its state charter was converted to a national charter in
1922 and it became The National Bank of Blacksburg. NBB operates a full-service
banking business from its headquarters in Blacksburg, Virginia, and its eight
area branch offices. NBB offers general retail and commercial banking services
to individuals, businesses, local government units and institutional customers.
These products and services include accepting deposits in the form of checking
accounts, money market deposit accounts, interest-bearing demand deposit
accounts, savings accounts and time deposits; making real estate, commercial,
revolving, consumer and agricultural loans; offering letters of credit;
providing other consumer financial services, such as automatic funds transfer,
collections, night depository, safe deposit, travelers checks, savings bond
sales and utility payment services; and providing other miscellaneous services
normally offered by commercial banks. NBB also conducts a general trust
business in Blacksburg near its headquarters location. Through its trust
operation, NBB offers a variety of personal and corporate trust services.
NBB makes loans in all major loan categories, including commercial,
commercial and residential real estate, construction and consumer loans.
Bank of Tazewell County
The antecedents of BTC are in a charter issued on September 28, 1889 for
Clinch Valley Bank. On December 22, 1893, a second charter was issued in
substantially the same form for Bank of Clinch Valley. In 1929, Bank of Clinch
Valley merged with Farmers Bank under the charter of the former, and the name of
the resulting institution became Farmers Bank of Clinch Valley. Bank of
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Tazewell County resulted from the 1964 merger of Bank of Graham, Bluefield,
Virginia with Farmers Bank of Clinch Valley. BTC provides general retail and
commercial banking services to individuals, businesses and local government
units. These services include commercial, real estate and consumer loans.
Deposit accounts offered include demand deposit accounts, interest-bearing
demand deposit accounts, money market deposit accounts, savings accounts and
certificates of deposit. Other services include automatic funds transfer,
collections, night depository, safe deposit, travelers checks, savings bond
sales and utility payment services; and providing other miscellaneous service
normally offered by commercial banks. BTC also conducts a general trust
business.
BTC makes commercial, residential real estate and consumer loans.
Commercial Loans
NBB and BTC make both secured and unsecured loans to businesses and to
individuals for business purposes. Loan requests are granted based upon several
factors including credit history, past and present relationships with the bank
and marketability of collateral. Unsecured commercial loans must be supported
by a satisfactory balance sheet and income statement. Business loans made on a
secured basis may be secured by a security interest in marketable equipment,
accounts receivable, business equipment and/or general intangibles of the
business. In addition, or in the alternative, the loan may be secured by a deed
of trust lien on business real estate.
The risks associated with commercial loans are related to the strength of the
individual business, the value of loan collateral and the general health of the
economy.
Residential Real Estate Loans
Loans secured by residential real estate are originated by both bank
subsidiaries. Loans originated by BTC are typically held in the bank's loan
portfolio. NBB sells a substantial percentage of the residential real estate
loans it originates in the secondary market on a servicing released basis.
There are occasions when a borrower or the real estate do not qualify under
secondary market criteria, but the loan request represents a reasonable credit
risk. Also, an otherwise qualified borrower may choose not to have their
mortgage loan sold. On these occasions, if the loan meets NBB's internal
underwriting criteria, the loan will be closed and placed in NBB's portfolio.
In its secondary market operation, NBB participates in insured loan programs
sponsored by the Department of Housing and Urban Development, the Veterans
Administration and the Virginia Housing Development Authority.
Residential real estate loans carry risk associated with the continued
credit-worthiness of the borrower and changes in the value of the collateral.
Construction Loans
NBB makes loans for the purpose of financing the construction of business and
residential structures to financially responsibly business entities and
individuals. These loans are subject to the same credit criteria as commercial
and residential real estate loans. Although BTC offers construction loans, its
involvement in this area of lending is more limited than NBB's due to the nature
of its market area.
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In addition to the risks associated with all real estate loans, construction
loans bear the risks that the project will not be finished according to
schedule, the project will not be finished according to budget and the value of
the collateral may at any point in time be less than the principal amount of the
loan. Construction loans also bear the risk that the general contractor, who
may or may not be the bank's loan customer, is unable to finish the construction
project as planned because of financial pressures unrelated to the project.
Loans to customers that are made as permanent financing of construction loans
may likewise under certain circumstances be affected by external financial
pressures on those customers.
Consumer Loans
NBB and BTC routinely make consumer loans, both secured and unsecured. The
credit history and character of individual borrowers is evaluated as a part of
the credit decision. Loans used to purchase vehicles or other specific personal
property and loans associated with real estate are usually secured with a lien
on the subject vehicle or property. NBB also originates a small number of
student loans that are sold to the Student Loan Marketing Association.
Negative changes in a customer's financial circumstances due to a large
number of factors, such as illness or loss of employment, can place the
repayment of a consumer loan at risk. In addition, deterioration in collateral
value can add risk to consumer loans.
Sales and Purchases of Loans
NBB and BTC will occasionally buy or sell all or a portion of a loan. These
purchases and sales are in addition to the secondary market mortgage loans and
student loans regularly sold by NBB. Because the demand for loans, particularly
for commercial loans, is greater in NBB's market area than in BTC's market area,
NBB regularly sells loans and participations in loans to BTC. BTC's loan to
deposit ratio is at a level where additional loans are desirable, and NBB's loan
to deposit ratio is at a level which its management considers to be optimal
without the loans sold to BTC.
Both banks will consider selling a loan or a participation in a loan, if: (i)
the full amount of the loan will exceed the bank's legal lending limit to a
single borrower; (ii) the full amount of the loan, when combined with a
borrower's previously outstanding loans, will exceed the bank's legal lending
limit to a single borrower; (iii) the Board of Directors or an internal Loan
Committee believes that a particular borrower has a sufficient level of debt
with the bank; (iv) the borrower requests the sale; (v) the loan to deposit
ratio is at or above the optimal level as determined by bank management; and/or
(vi) the loan may create too great a concentration of loans in one particular
location or in one particular type of loan.
The banks will consider purchasing a loan, or a participation in a loan, from
another financial institution (including from another subsidiary of the Company)
if the loan meets all applicable credit quality standards and (i) the bank's
loan to deposit ratio is at a level where additional loans would be desirable;
and/or (ii) a common customer requests the purchase.
The following table sets forth, for the three fiscal years ended December 31,
1997, 1996 and 1995 the percentage of total operating revenue contributed by
each class of similar services which contributed 15% or more of total operating
revenues of the Company during such periods.
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Percentage of
Period Class of Service Total Revenues
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December 31, 1997 Interest and Fees on Loans 59.92%
Interest on Investments 29.31%
December 31, 1996 Interest and Fees on Loans 54.98%
Interest on Investments 34.61%
December 31, 1995 Interest and Fees on Loans 51.72%
Interest on Investments 38.16%
Market Area
The National Bank of Blacksburg Market Area
NBB's primary market area consists of the northern portion of Montgomery
County and all of Giles County, Virginia. This area includes the towns of
Blacksburg and Christiansburg in Montgomery County and the towns of Pearisburg,
Pembroke and Rich Creek, in Giles County. The local economy is diverse and is
oriented toward higher education, retail and service, light manufacturing and
agriculture. For the years 1997, 1996 and 1995 the unemployment rate in
Montgomery County was 2.6%, 3.3% and 3.0%, respectively, and the rate in Giles
County during those years was 6.7% in 1997 and 8.4% in 1996 and 1995.
Montgomery County's largest employer is Virginia Polytechnic Institute and State
University (VPI & SU) located in Blacksburg. VPI & SU is the Commonwealth's
land grant college and also its largest university. Employment at VPI & SU has
remained stable over the past three years, and it is not expected to change
materially in the next few years. A second state supported university, Radford
University, is located in the western edge of NBB's service area. It too has
provided stable employment opportunities in the region.
Giles County's primary employer is the Celco plant, that manufactures the
material from which cigarette filters are made. In 1995 and 1996 employment at
that plant was stable, however, in late 1997 temporary employee furloughs were
announced, and it is anticipated that some percentage of these temporary layoffs
will become permanent. Several other small manufacturing concerns are located
in Montgomery and Giles Counties. These concerns manufacture diverse products
and are not dependent upon one sector of the economy.
Since 1988, Montgomery County has developed into a regional retail center,
with the construction of two large shopping areas. Two area hospitals, each of
which are affiliated with different large health care systems, have in the past
several years constructed additional facilities and have attracted additional
health care providers to Montgomery County, making it a center for basic health
care services. VPI & SU's Corporate Research Center has brought several small
high tech companies to Blacksburg, and further expansion is planned.
Montgomery County has experienced good growth, with the total fair market
value of real estate, measured in constant dollars, increasing 49% in the years
between 1980 and 1992. Growth is predicted to continue through the year 2000;
however, the rate is likely to be slower, as the predicted rate of population
growth in Montgomery County is expected to moderate. Neighboring Giles County
is more rural and had only 22% of Montgomery County's total population in 1990.
Giles County has experienced a slight decline in population since the 1990
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census. Total fair market value of real estate, measured in real dollars,
increased in Giles County by 54% between 1980 and 1992, but declined by 9% over
that twelve-year period, as measured in constant dollars. The continued slow
decline of Giles County's population is predicted to continue through the year
2000. However, since the total population of the County reported in the 1990
census was only 16,366, and the population projected by the Virginia Employment
Commission for Giles in the year 2000 is 16,121, the predicted decline of 245
individuals is not expected to materially impact NBB's business in Giles County.
NBB's primary market area offers the advantages of a good quality of life,
scenic beauty, moderate climate and the cultural attractions of two major
universities. The region has marketed itself as a retirement destination, and
it has had some recent success attracting retirees, particularly from the
Northeast and urban Northern Virginia. These marketing efforts are expected to
continue.
Bank of Tazewell County Market Area
Most of BTC's business originates from Tazewell County, Virginia and Mercer
County, West Virginia. This includes the towns of Tazewell and Bluefield,
Virginia and Bluefield, West Virginia. BTC's primary market area has largely
depended on the coal mining industry and farming for its economic base. In
recent years, coal companies have mechanized and this has reduced the number of
individuals required for the production of coal. There are still a number of
support industries for the coal mining business that continue to provide
employment in the area. Additionally, several new businesses have been
established in the area, and Bluefield, West Virginia has begun to emerge as a
regional medical center. Unemployment has stabilized, and real estate values
also remain stable and comparable to other areas in southwest Virginia.
For 1997, 1996 and 1995 the unemployment rate for Tazewell County was 9.5%,
9.5% and 10.2%, respectively. In the same years, Mercer County, West Virginia's
unemployment rate was 5.3%, 5.2% and 5.7%, respectively.
Competition
The banking and financial service business in Virginia generally, and in
NBB's and BTC's market areas specifically, is highly competitive. The
increasingly competitive environment is a result of changes in regulation,
changes in technology and product delivery systems and the accelerating pace of
consolidation among financial service providers. The Company's bank
subsidiaries compete for loans and deposits with other commercial banks, savings
and loan associations, securities and brokerage companies, mortgage companies,
money market funds, credit unions and other nonbank financial service providers.
Many of these competitors are much larger in total assets and capitalization,
have greater access to capital markets and offer a broader array of financial
services than NBB and BTC. In order to compete with these other financial
service providers, NBB and BTC rely upon service-based business philosophies,
personal relationships with customers, specialized services tailored to meet
customers' needs and the convenience of office locations. In addition, the
banks are generally competitive with other financial institutions in their
market areas with respect to interest rates paid on deposit accounts, interest
rates charged on loans and other service charges on loans and deposit accounts.
Registrant's Organization and Employment
Bankshares, NBB and BTC are organized in a holding company/subsidiary bank
structure. Bankshares has no employees, except for executive officers, and
conducts substantially all of its operations through its subsidiaries. All
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compensation paid to officers and employees is paid by NBB, except for fees paid
by Bankshares to President and Chief Executive Officer James G. Rakes for his
service as a director of the Company.
At December 31, 1997, NBB employed 107 full time equivalent employees at its
main office, operations center and branch offices. BTC at December 31, 1997
employed 69 in its various offices and operational areas.
Certain Regulatory Considerations
Bankshares, NBB and BTC are subject to various state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. As a result of the substantial regulatory burdens on banking,
financial institutions, including Bankshares, NBB and BTC, are disadvantaged
relative to other competitors who are not as highly regulated, and their costs
of doing business are much higher. The following is a brief summary of the
material provisions of certain statutes, rules and regulations which affect
Bankshares, NBB and/or BTC. This summary is qualified in its entirety by
reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of the statutes or
regulations which are applicable to the businesses of Bankshares, NBB and/or
BTC. Any change in applicable laws or regulations may have a material adverse
effect on the business and prospects of Bankshares, NBB and/or BTC.
National Bankshares, Inc.
Bankshares is a bank holding company within the meaning of the BHCA and
Chapter 13 of the Virginia Banking Act, as amended (the Virginia Banking Act).
The activities of Bankshares also are governed by the Glass-Steagall Act of 1933
(the Glass-Steagall Act).
The Bank Holding Company Act. The BHCA is administered by the Federal
Reserve Board, and Bankshares is required to file with the Federal Reserve Board
an annual report and such additional information as the Federal Reserve Board
may require pursuant to the BHCA. The Federal Reserve Board also is authorized
to examine Bankshares and its subsidiaries. The BHCA requires every bank
holding company to obtain the prior approval of the Federal Reserve Board before
(i) it or any of its subsidiaries (other than a bank) acquires substantially all
the assets of any bank; (ii) it acquires ownership or control of any voting
shares of any bank if after such acquisition it would own or control, directly
or indirectly, more than 5% of the voting shares of such bank; or (iii) it
merges or consolidates with any other bank holding company.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve Board, require that, depending on the
particular circumstances, either Federal Reserve Board approval must be obtained
or notice must be furnished to the Federal Reserve Board and not disapproved
prior to any person or company acquiring "control" of a bank holding company,
such as Bankshares, subject to certain exemptions. Control is conclusively
presumed to exist if an individual or company acquires 25% or more of any class
of voting securities of Bankshares. Control is rebuttably presumed to exist if
a person acquires 10% or more, but less than 25%, of any class of voting
securities of Bankshares. The regulations provide a procedure for challenging
the rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares
of any company engaged in nonbanking activities, unless the Federal Reserve
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Board, by order or regulation, has found those activities to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. Some of the activities that the Federal Reserve Board has determined
by regulation to be proper incidents to the business of a bank holding company
include making or servicing loans and certain types of leases, engaging in
certain insurance and discount brokerage activities, performing certain data
processing services, acting in certain circumstances as a fiduciary or
investment or financial adviser, owning savings associations and making
investments in certain corporations or projects designed primarily to promote
community welfare.
The Federal Reserve Board imposes certain capital requirements on Bankshares
under the BHCA, including a minimum leverage ratio and a minimum ratio of
"qualifying" capital to risk-weighted assets. Subject to its capital
requirements and certain other restrictions, Bankshares can borrow money to make
a capital contribution to NBB or BTC, and such loans may be repaid from
dividends paid from NBB or BTC to Bankshares (although the ability of NBB or BTC
to pay dividends are subject to regulatory restrictions). Bankshares can raise
capital for contribution to NBB and BTC by issuing securities without having to
receive regulatory approval, subject to compliance with federal and state
securities laws.
The Virginia Banking Act. All Virginia bank holding companies must register
with the Virginia State Corporation Commission (the Commission) under the
Virginia Banking Act. A registered bank holding company must provide the
Commission with information with respect to the financial condition, operations,
management and intercompany relationships of the holding company and its
subsidiaries. The Commission also may require such other information as is
necessary to keep itself informed about whether the provisions of Virginia law
and the regulations and orders issued thereunder by the Commission have been
complied with, and may make examinations of any bank holding company and its
subsidiaries.
In March 1994, the Virginia General Assembly adopted an amendment to Chapter
15 of the Virginia Banking Act to allow bank holding companies located in any
state to acquire a Virginia bank or bank holding company if the Virginia bank or
bank holding company could acquire a bank holding company in their state and the
Virginia bank or bank holding company to be acquired has been in existence and
continuously operated for more than two years. This amendment may permit bank
holding companies from throughout the United States to enter the Virginia
market, subject to federal and state approval.
Glass-Steagall Act. Bankshares is also restricted in its activities by the
provisions of the Glass-Steagall Act, which prohibit Bankshares from owning
subsidiaries that are engaged principally in the issue, flotation, underwriting,
public sale or distribution of securities. Bankshares does not presently engage
in securities-related activities in any material respect.
NBB and BTC
General. NBB is a national banking association incorporated under the laws
of the United States and is subject to examination by the Office of the
Comptroller of the Currency (the OCC). Deposits in NBB are insured by the FDIC
up to a maximum amount (generally $100,000 per depositor, subject to aggregation
rules). The OCC and the FDIC regulate or monitor all areas of NBB's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
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reorganizations and maintenance of books and records. The OCC requires NBB to
maintain certain capital ratios. NBB is required by the OCC to prepare
quarterly reports on NBB's financial condition and to conduct an annual audit of
its financial affairs in compliance with minimum standards and procedures
prescribed by the OCC. NBB also is required by the OCC to adopt internal
control structures and procedures in order to safeguard assets and monitor and
reduce risk exposure. While appropriate for safety and soundness of banks,
these requirements impact banking overhead costs.
BTC is organized as a Virginia-chartered banking corporation and is regulated
and supervised by the Bureau of Financial Institutions (BFI) of the Virginia
State Corporation Commission. In addition, as a federally insured bank, BTC is
regulated and supervised by the Federal Reserve Board, which serves as its
primary federal regulator and is subject to certain regulations promulgated by
the FDIC. Under the provisions of federal law, federally insured banks are
subject, with certain exceptions, to certain restrictions on extensions of
credit to their affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, such banks are prohibited from engaging in certain tie-
in-arrangements in connection with any extension of credit or the providing of
any property of service.
The Virginia State Corporation Commission and the Federal Reserve Board
conduct regular examinations of BTC reviewing the adequacy of the loan loss
reserves, quality of the loans and investments, propriety of management
practices, compliance with laws and regulations and other aspects of the bank's
operations. In addition to these regular examinations, Virginia chartered banks
must furnish to the Federal Reserve Board quarterly reports containing detailed
financial statements and schedules.
Community Reinvestment Act. NBB and BTC are subject to the provisions of the
Community Reinvestment Act of 1977 (the CRA), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of a
bank, to assess the bank's record in meeting the credit needs of the community
served by the bank, including low and moderate-income neighborhoods. Under the
implementing CRA regulations, banks have the option of being assessed for CRA
compliance under one of several methods. Small banks are evaluated differently
than larger banks and technically are not subject to some data collection
requirements. The focus of the regulations is on the volume and distribution of
a bank's loans, with particular emphasis on lending activity in low and
moderate-income areas and to low and moderate-income persons. The regulations
place substantial importance on a bank's product delivery system, particularly
branch localities. The new regulations require banks, other than small banks,
to comply with significant data collection requirements. The regulatory
agency's assessment of the bank's record is made available to the public.
Further, such assessment is required for any bank which has applied to, among
other things, establish a new branch office that will accept deposits, relocate
an existing office, or merge, consolidate with or acquire the assets or assume
the liabilities of a federally regulated financial institution. It is likely
that banks' compliance with the CRA, as well as other so-called fair lending
laws, will face ongoing government scrutiny and that costs associated with
compliance will continue to increase.
NBB has received a CRA rating of "Outstanding" in its last examination by
federal bank regulators. BTC was rated as "Satisfactory".
-11-
Branching. In 1986, the Virginia Banking Act was amended to remove the
geographic restrictions governing the establishment of branch banking offices.
Subject to the approval of the appropriate federal and state bank regulatory
authorities, BTC as a state bank, may establish a branch office anywhere in
Virginia.
National banks, like NBB, are required by the National Bank Act to adhere to
branch banking laws applicable to state banks in the states in which they are
located. Under current Virginia law, NBB may open branch offices throughout
Virginia with the prior approval of the OCC. In addition, with prior approval
of one or more of the Federal Reserve Board, the Virginia Commission, the OCC
and the FDIC, NBB will be able to acquire existing banking operations in
Virginia.
On September 29, 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the Interstate Act) became law. The Interstate Act,
which became effective September 29, 1995, allows bank holding companies to
acquire banks in any state, without regard to state law, except that if the
state has a minimum requirement for the amount of time a bank must be in
existence, that law must be preserved. Under the Virginia Banking Act, a
Virginia bank or all of the subsidiaries of Virginia holding companies sought to
be acquired must have been in continuous operation for more than two years
before the date of such proposed acquisition. The Interstate Act permits banks
to acquire out-of-state branches through interstate mergers, beginning June 1,
1997. States could opt-in to interstate branching earlier, or opt-out before
June 1, 1997. De novo branching, where an out-of-state bank holding company
sets up a new branch in another state, requires a state's specific approval. An
acquisition or merger is not permitted under the Interstate Act if the bank,
including its insured depository affiliates, will control more than 10% of the
total amount of deposits of insured depository institutions in the United
States, or will control 30% or more of the total amount of deposits of insured
depository institutions in any state.
Virginia has, by statute, elected to opt-in fully to interstate branching
under the Interstate Act, effective July 1, 1995. Under the Virginia statute,
Virginia state banks may, with the approval of the Virginia State Corporation
Commission, establish and maintain a de novo branch or acquire one or more
branches in a state other than Virginia, either separately or as part of a
merger. Procedures also are established to allow out-of-state domiciled banks
to establish or acquire branches in Virginia, provided the "home" state of the
bank permits Virginia banks to establish or acquire branches within its borders.
The activities of such branches will be subject to the same laws as Virginia
domiciled banks, unless such activities are prohibited by the law of the state
where the bank is organized. The Virginia State Corporation Commission has the
authority to examine and supervise out-of-state state banks to ensure that the
branch is operating in a safe and sound manner and in compliance with the laws
of Virginia. The Virginia statute authorizes the Bureau of Financial
Institutions to enter into cooperative agreements with other state and federal
regulators for the examination and supervision of out-of-state state banks with
Virginia operations, or Virginia domiciled banks with operations in other
states. Likewise, national banks, with the approval of the OCC, may branch into
and out of the state of Virginia. Any Virginia branch of an out-of-state
national bank is subject to Virginia law (enforced by the OCC) with respect to
intrastate branching, consumer protection, fair lending and community
reinvestment as if it were a branch of a Virginia bank, unless preempted by
federal law.
-12-
The Interstate Act permits banks and bank holding companies from throughout
the United States to enter Virginia markets through the acquisition of Virginia
institutions and makes it easier for Virginia bank holding companies and
Virginia state and national banks to acquire institutions and to establish
branches in other states. Competition in market areas served by the Company may
increase as a result of the Interstate Act and the Virginia interstate banking
statutes.
Deposit Insurance. The FDIC establishes rates for the payment of premiums by
federally insured financial institutions. A Bank Insurance Fund (the BIF) is
maintained for commercial banks, with insurance premiums from the industry used
to offset losses from insurance payouts when banks fail. Beginning in 1993,
insured depository institutions like NBB and BTC paid for deposit insurance
under a risk-based premium system. Both NBB and BTC qualified for the minimum
annual premium rate of $2,000 per year in 1996. Beginning in 1997, all banks,
including NBB and BTC, were subject to a higher FDIC assessment which funds
interest payments for bank issues to resolve problems associated with the
savings and loan industry. This assessment will continue until 2018-2019. The
assessment will vary over the period from 1.29 cents to 2.43 cents per $100 of
deposits.
Government Policies. The operations of NBB and BTC are affected not only by
general economic conditions, but also by the policies of various regulatory
authorities. In particular, the Federal Reserve Board regulates money and
credit and interest rates in order to influence general economic conditions.
These policies have a significant influence on overall growth and distribution
of loans, investments and deposits and affect interest rates charged on loans or
paid for time and savings deposits. Federal Reserve Board monetary policies
have had a significant effect on the operating results of commercial banks in
the past and are expected to continue to do so in the future.
Limits on Dividends and Other Payments. As a national bank, NBB, may not pay
dividends from its capital; all dividends must be paid out of net profits then
on hand, after deducting expenses, losses, bad debts, accrued dividends on
preferred stock, if any, and taxes. In addition, a national bank is prohibited
from declaring a dividend on its shares of common stock until its surplus equals
its stated capital, unless there has been transferred to surplus no less than
one-tenth of the bank's net profits of (i) the preceding two consecutive half-
year periods (in the case of an annual dividend) or (ii) the preceding half-year
period (in the case of a quarterly or semi-annual dividend). The approval of
the OCC is required if the total of all dividends declared by a national bank in
any calendar year exceeds the total of its net profits for that year combined
with its retained net profits for the preceding two years, less any required
transfers to surplus or to fund the retirement of preferred stock.
The OCC has promulgated regulations that became effective on December 13,
1990, which significantly affect the level of allowable dividend payments for
national banks. The effect is to make the calculation of national banks'
dividend-paying capacity consistent with generally accepted accounting
principles. The allowance for loan and lease losses will not be considered an
element of "undivided profits then on hand" and provisions to the allowance are
treated as expenses and therefore not part of "net profits." Accordingly, a
national bank with an allowance greater than its statutory bad debts may not
include the excess in calculating undivided profits for dividend purposes.
Further, a national bank may be able to use a portion of its earned capital
surplus account as "undivided profits then on hand," depending on the
composition of that account.
-13-
As a state member bank subject to the regulations of the Federal Reserve
Board, BTC must obtain the approval of the Federal Reserve Board for any
dividend if the total of all dividends declared in any calendar year would
exceed the total of its net profits, as defined by the Federal Reserve Board,
for that year, combined with its retained net profits for the preceding two
years. In addition, a state member bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and
bad debts. For this purpose, bad debts are generally defined to include the
principal amount of loans which are in arrears with respect to interest by six
months or more, unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, a state member bank is
not permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand; however, it may net the sum of its bad debts as
so defined against the balance in its allowance for loan losses account and
deduct from undivided profits only bad debts as so defined in excess of that
account.
In addition, the Federal Reserve Board is authorized to determine, under
certain circumstances relating to the financial condition of a state member
bank, that the payment of dividends would be an unsafe or unsound practice and
to prohibit payment thereof. The payment of dividends that depletes a bank's
capital base could be deemed to constitute such an unsafe or unsound practice.
The Federal Reserve Board has indicated that banking organizations should
generally pay dividends only out of current operating earnings.
Virginia law also imposes restrictions on the ability of BTC to pay
dividends. A Virginia state bank is permitted to declare a dividend out of its
"net undivided profits", after providing for all expenses, losses, interest and
taxes accrued or due by the bank. In addition, a deficit in capital originally
paid in must be restored to its initial level, and no dividend can be paid which
could impair the bank's paid in capital. The Bureau of Financial Institutions
further has authority to limit the payment of dividends by a Virginia bank if it
determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
provides that no insured depository institution may make any capital
distribution (which would include a cash dividend) if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements.
Capital Requirements. The Federal Reserve Board has adopted risk-based
capital guidelines in final form which are applicable to Bankshares and BTC.
The Federal Reserve Board guidelines redefine the components of capital,
categorize assets into different risk classes and include certain off-balance
sheet items in the calculation of risk-weighted assets. The minimum ratio of
qualified total capital to risk-weighted assets (including certain off-balance
sheet items, such as standby letters of credit) is 8.0%. At least half of the
total capital must be comprised of Tier 1 capital for a minimum ratio of Tier 1
Capital to risk-weighted assets of 4.0%. The remainder may consist of a limited
amount of subordinated debt, other preferred stock, certain other instruments
and a limited amount of loan and lease loss reserves. The OCC has adopted
similar regulations applicable to NBB.
In addition, the Federal Reserve Board has established minimum leverage ratio
(Tier 1 capital to total assets less intangibles) guidelines that are applicable
to Bankshares and BTC. The OCC has adopted similar regulations applicable to
NBB. These guidelines provide for a minimum ratio of 4.0% for banks that meet
certain specified criteria, including that they have the highest regulatory
-14-
CAMEL rating and are not anticipating or experiencing significant growth and
have well-diversified risk. All other banks will be required to maintain an
additional cushion of at least 100 to 200 basis points, based upon their
particular circumstances and risk profiles. The guidelines also provide that
banks experiencing internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets.
Bank regulators from time to time have indicated a desire to raise capital
requirements applicable to banking organizations beyond current levels. In
addition, the number of risks which may be included in risk-based capital
restrictions, as well as the measurement of these risks, is likely to change,
resulting in increased capital requirements for banks. Bankshares, NBB and BTC
are unable to predict whether higher capital ratios would be imposed and, if so,
at what levels and on what schedule.
Legislative Developments
The difficulties encountered nationwide by financial institutions during 1990
and 1991 prompted federal legislation designed to reform the banking industry
and to promote the viability of the industry and of the deposit insurance
system. FDICIA, which became effective on December 19, 1991, bolsters the
deposit insurance fund, tightens bank regulation and trims the scope of federal
deposit insurance as summarized below.
FDIC Funding. The legislation bolsters the bank deposit insurance fund with
$70 billion in borrowing authority and increases to $30 billion from $5 billion
the amount the FDIC can borrow from the U.S. Treasury to cover the cost of bank
failures. The loans, plus interest, would be repaid by premiums that banks pay
on domestic deposits over the next fifteen years.
Prompt Corrective Action. Among other things, FDICIA requires the federal
banking agencies to take "prompt corrective action" in respect to banks that do
not meet minimum capital requirements. FDICIA establishes five capital tiers:
"well capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized."
If a depository institution's principal federal regulator determines that an
otherwise adequately capitalized institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, it may require the
institution to submit a corrective action plan, restrict its asset growth and
prohibit branching, new acquisitions and new lines of business. An
institution's principal federal regulator may deem the institution to be
engaging in an unsafe or unsound practice if it receives a less than
satisfactory rating for asset quality, management, earnings or liquidity in its
most recent examination.
Among other possible sanctions, an undercapitalized depository institution
may not pay dividends and is required to submit a capital restoration plan to
its principal federal regulator. In addition, its holding company may be
required to guarantee compliance with the capital restoration plan under certain
circumstances. If an undercapitalized depository institution fails to submit or
implement an acceptable capital restoration plan, it can be subject to more
severe sanctions, including an order to sell sufficient voting stock to become
adequately capitalized. More severe sanctions and remedial actions can be
mandated by the regulators if an institution is considered significantly or
critically undercapitalized.
-15-
In addition, FDICIA requires regulators to draft a new set of non-capital
measures of bank safety, such as loan underwriting standards and minimum
earnings levels. The legislation also requires regulators to perform annual on-
site bank examinations, places limits on real estate lending by banks and
tightens auditing requirements. In April 1995, the regulators adopted safety
and soundness standards as required by FDICIA in the following areas: (i)
operational and managerial; (ii) asset quality earnings and stock valuation; and
(iii) employee compensation.
Deposit Insurance. FDICIA reduces the scope of federal deposit insurance.
The most significant change ended the "too big to fail" doctrine, under which
the government protects all deposits in most banks, including those exceeding
the $100,000 insurance limit. The FDIC's ability to reimburse uninsured
deposits--those over $100,000 and foreign deposits--has been sharply limited.
Since December 1993, the Federal Reserve Board's ability to finance
undercapitalized banks with extended loans from its discount window has been
restricted. In addition, only the best capitalized banks will be able to offer
insured brokered deposits without FDIC permission or to insure accounts
established under employee pension plans.
As of September 29, 1996, "The Depository Insurance Fund Act of 1996" became
law. This legislation provided for a one time assessment on banks that had
previously acquired certain deposits from savings and loan institutions.
Neither NBB or BTC were subject to that special assessment. Beginning in 1997,
all banks were subject to increased assessments that are designed to finally
resolve problems associated with the savings and loan industry.
Other Legislative and Regulatory Concerns
Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks, thrifts and other financial institutions are
periodically considered by the executive branch of the federal government,
Congress and various state governments, including Virginia. New proposals,
could significantly change the regulation of banks and the financial services
industry. It cannot be predicted what might be proposed or adopted on how these
proposals would affect the Company.
Other Business Concerns
The banking industry is particularly sensitive to interest rate fluctuations,
as the spread between the rates which must be paid on deposits and those which
may be charged on loans is an important component of profit. In addition, the
interest which can be earned on a bank's invested funds has a significant effect
on profits. Rising interest rates typically reduce the demand for new loans,
particularly the real estate loans which represent a significant portion of
NBB's and BTC's loan demand, as well as certain NBB loans in which BTC
participates.
-16-
STATISTICAL DISCLOSURE BY NATIONAL BANKSHARES, INC.
AND SUBSIDIARIES (BANKSHARES)
I. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
---------------------------------------------------------------------
A. AVERAGE BALANCE SHEETS
The following table presents, for the years indicated, condensed
daily average balance sheet information.
($ in thousands)
December 31,
-------------------------
ASSETS 1997 1996 1995
------ ---- ---- ----
Cash and due from banks $ 9,954 9,842 10,189
Interest bearing deposits 4,165 1,651 ---
Federal funds sold 8,181 8,903 12,105
Securities available for sale:
Taxable 54,213 65,992 41,695
Nontaxable 6,312 6,679 930
Securities held to maturity:
Taxable 67,046 79,599 105,701
Nontaxable 29,608 25,133 35,668
Mortgage loans held for sale 413 850 723
Loans, net 204,540 177,419 159,920
Other assets 11,500 11,977 11,475
-------- ------- -------
Total assets $395,932 388,045 378,406
======== ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Noninterest-bearing demand
deposits $ 44,193 41,997 38,833
Interest-bearing demand deposits 75,519 76,017 77,545
Savings deposits 47,781 49,783 54,698
Time deposits 171,946 168,141 159,185
-------- ------- -------
Total deposits 339,439 335,938 330,261
Short-term borrowings 319 433 593
Other liabilities 2,462 2,215 1,826
-------- ------- -------
Total liabilities 342,220 338,586 332,680
Stockholders' equity 53,712 49,459 45,726
-------- ------- -------
Total liabilities and
stockholders' equity $395,932 388,045 378,406
======== ======= =======
-17-
B. ANALYSIS OF NET INTEREST EARNINGS
The following table shows the major categories of interest-earning assets and interest-bearing liabilities,
the interest earned or paid, the average yield or rate on the daily average balance outstanding, net
interest income and net yield on average interest-earning assets for the years indicated.
December 31, 1997 December 31, 1996 December 31, 1995
------------------------- -------------------------- --------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
($ in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
Interest-earning
assets:
Loans, net (1)(2)(3) $204,953 19,667 9.60% 178,269 17,339 9.73% 160,643 15,897 9.90%
Taxable securities 121,259 7,776 6.41% 145,591 8,877 6.10% 147,396 9,723 6.60%
Nontaxable
securities (1) 35,920 2,708 7.54% 31,812 2,971 9.34% 36,598 2,856 7.80%
Federal funds sold 8,181 470 5.75% 8,903 567 6.37% 12,105 704 5.82%
Interest bearing
deposits 4,165 230 5.52% 1,651 91 5.51% --- --- ---
-------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-
earning assets $374,478 30,851 8.24% 366,226 29,845 8.15% 356,742 29,180 8.18%
======== ====== ==== ======= ====== ==== ======= ====== ====
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 75,519 3,073 4.07% 76,017 2,182 2.87% 77,545 2,353 3.03%
Savings deposits 47,781 1,571 3.29% 49,783 1,646 3.31% 54,698 1,798 3.29%
Time deposits 171,946 8,445 4.91% 168,141 9,181 5.46% 159,185 8,517 5.35%
Short-term borrowings 319 17 5.33% 433 27 6.24% 593 35 5.90%
Long-term debt --- --- --- --- --- --- --- --- ---
-------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-
bearing liabilities $295,565 13,106 4.43% 294,374 13,036 4.43% 292,021 12,703 4.35%
======== ====== ==== ======= ====== ==== ======= ====== ====
Net interest income
and interest rate
spread 17,745 3.81% 16,809 3.72% 16,477 3.83%
====== ==== ====== ==== ====== ====
Net yield on average
interest-earning
assets 4.74% 4.59% 4.62%
==== ==== ====
(1) Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a
Federal income tax rate of 34%.
(2) Loan fees of $339 in 1997, $374 in 1996 and $305 in 1995 are included in total interest income.
(3) Nonaccrual loans are included in average balances for yield computations.
-18-
C. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The Company's primary source of revenue is net interest income, which is the difference between the
interest and fees earned on loans and investments and the interest paid on deposits and other funds.
The Company's net interest income is affected by changes in the amount and mix of interest-earning
assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets and
rates paid on interest-bearing liabilities. The following table sets forth, for the years indicated,
a summary of the changes in interest income and interest expense resulting from changes in average
asset and liability balances (volume) and changes in average interest rates (rate).
1997 Over 1996 1996 Over 1995
------------------------------- -------------------------------
Changes Due To Changes Due To
------------------- -------------------
Net Dollar Net Dollar
($ in thousands) Rates(2) Volume(2) Change Rates(2) Volume(2) Change
-------- --------- ---------- -------- --------- ----------
Interest income:(1)
Loans $ (200) 2,528 2,328 (276) 1,718 1,442
Taxable securities 441 (1,542) (1,101) (728) (118) (846)
Nontaxable securities (617) 354 (263) 518 (403) 115
Federal funds sold (53) (44) (97) 62 (199) (137)
Interest bearing deposits --- 139 139 --- 91 91
------ ------ ------ ----- ------ ------
Increase(decrease) in
income on interest-
earning assets $ (429) 1,435 1,006 (424) 1,089 665
------ ------ ------ ----- ------ ------
Interest expense:
Interest-bearing demand
deposits $ 905 (14) 891 (125) (46) (171)
Savings deposits (9) (66) (75) 10 (162) (152)
Time deposits (940) 204 (736) 178 486 664
Short-term borrowings (4) (6) (10) 2 (10) (8)
------ ------ ------ ----- ------ ------
Increase(decrease) in
expense of interest-
bearing liabilities $ (48) 118 70 65 268 333
------ ------ ------ ----- ------ ------
Increase (decrease) in net
interest income $ (381) 1,317 936 (489) 821 332
====== ====== ====== ===== ====== ======
(1) Taxable equivalent basis using a Federal income tax rate of 34%.
(2) Variances caused by the change in rate times the change in volume have been allocated to rate and
volume changes proportional to the relationship of the absolute dollar amounts of the change in each.
-19-
II. INVESTMENT PORTFOLIO
A. BOOK VALUE OF INVESTMENTS
The amortized costs and fair values of securities available for sale as of December 31, 1997, 1996
and 1995 were as follows:
December 31,
----------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
($ in thousands) COSTS VALUES COSTS VALUES COSTS VALUES
--------- ------ --------- ------ --------- ------
Securities available for sale:
U.S. Treasury $ 6,742 6,862 8,740 8,790 14,991 15,322
U.S. Government agencies and corporations 36,252 36,276 33,840 33,640 42,586 42,809
States and political subdivisions 9,540 9,639 8,688 8,619 7,613 7,567
Mortgage-backed securities (1) 4,172 4,119 4,568 4,452 4,748 4,645
Other securities 8,582 8,686 7,074 7,033 5,505 5,527
------- ------ ------ ------ ------ ------
Total securities available for sale $65,288 65,582 62,910 62,534 75,443 75,870
======= ====== ====== ====== ====== ======
The amortized costs of securities held to maturity as of December 31, 1997, 1996 and 1995 were as
follows:
December 31,
------------------------------
($ in thousands) 1997 1996 1995
---- ---- ----
Securities held to maturity:
U.S. Treasury $ 7,527 11,547 19,330
U.S. Government agencies and corporations 36,853 54,804 49,938
States and political subdivisions 32,949 34,144 36,428
Mortgage-backed securities (1) 630 767 961
Other securities 6,433 7,448 5,108
------- ------- -------
Total securities held to maturity $84,392 108,710 111,765
======= ======= =======
(1) The majority of Mortgage-backed Securities and Collateralized Mortgage Obligations held at
December 31, 1997 were backed by U.S. agencies. Certain holdings are required to be periodically
subjected to the Financial Institution Examination Council's (FFIEC) high risk mortgage security
test. These tests address possible fluctuations in the average life and price sensitivity which
are the primary risks associated with this type of security. Such tests are usually subject to
regulatory review.
Except for U.S. Government securities, the Company has no securities with any issuer that exceeds 10%
of stockholders' equity.
-20-
B. MATURITIES AND ASSOCIATED YIELDS
The following table presents the maturities for those securities available for sale and held to matrity
as of December 31, 1997 and weighted average yield for each range of maturities.
Maturities and Yields
December 31, 1997
---------------------------------------------------------
($ in thousands except for % data) < 1 Year 1-5 Years 5-10 Years > 10 Years None Total
-------- --------- ---------- ---------- ---- -----
Available for Sale
------------------
U.S. Treasury $ 995 3,867 2,000 --- --- $ 6,862
5.12% 7.10% 5.92% ---% ---% 6.47%
U.S. Agencies 6,476 17,395 11,403 1,001 --- 36,275
5.60% 6.19% 7.16% 7.35% ---% 6.42%
Mortgage-backed securities --- --- 622 3,501 --- 4,123
---% ---% 5.82% 6.03% ---% 6.00%
Taxable Securities --- 1,099 1,337 769 --- 3,205
---% 6.64% 7.09% 7.63% ---% 7.07%
Nontaxable Securities --- 2,263 3,696 473 --- 6,432
---% 6.68% 7.06% 7.38% ---% 6.95%
Corporate 1,204 1,521 3,041 2,057 --- 7,823
5.98% 6.72% 6.76% 7.07% ---% 6.71%
Other securities --- --- --- --- 862 862
---% ---% ---% ---% 13.51% 13.51%
------------------------------------------------------------
Total 8,675 26,145 22,099 7,801 862 65,582
5.60% 6.42% 6.93% 6.71% 13.51% 6.59%
============================================================
Held To Maturity
----------------
U.S. Treasury 3,000 6,035 --- --- --- 9,035
4.89% 6.04% ---% ---% ---% 5.66%
U.S. Agencies 10,249 16,614 8,480 --- --- 35,343
5.24% 5.99% 6.80% ---% ---% 5.97%
Mortgage-backed securities --- 42 192 395 --- 629
---% 6.65% 7.67% 8.08% ---% 7.86%
Taxable Securities 411 1,274 1,267 1,659 --- 4,611
6.72% 6.99% 7.50% 7.40% ---% 7.25%
Nontaxable Securities 2,990 17,954 6,664 1,697 --- 29,305
8.59% 7.47% 8.24% 7.90% ---% 7.79%
Corporate 1,500 3,005 471 493 --- 5,469
5.80% 6.98% 7.50% 8.00% ---% 6.79%
Other securities --- --- --- --- --- ---
---% ---% ---% ---% ---% ---%
------------------------------------------------------------
Total 18,150 44,924 17,074 4,244 --- 84,392
5.81% 6.68% 7.44% 7.73% ---% 6.70%
============================================================
(1) Rates shown represent weighted average yield on a fully taxable basis.
-21-
III. LOAN PORTFOLIO
--------------
The Company concentrates its lending activities in commercial and
industrial loans, real estate mortgage loans both residential and
business, and loans to individuals. The following tables set forth (i) a
comparison of the Company's loan portfolio by major category of loans as
of the dates indicated and (ii) the maturities and interest rate
sensitivity of the loan portfolio at December 31, 1997.
A. TYPES OF LOANS
December 31,
----------------------------------------
($ in thousands) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Commercial and industrial
loans $101,379 87,519 59,609 59,213 67,359
Real estate mortgage
loans 42,969 43,917 45,589 44,447 40,236
Real estate construction
loans 8,510 6,295 6,007 5,643 3,967
Loans to individuals 66,635 60,991 56,920 52,031 43,084
-------- ------- ------- ------- -------
Total loans 219,493 198,722 168,125 161,334 154,646
Less unearned income and
deferred fees (2,503) (2,549) (2,307) (2,494) (1,907)
-------- ------- ------- ------- -------
Total loans, net of
unearned income 216,990 196,173 165,818 158,840 152,739
Less allowance for loans
losses (2,438) (2,575) (2,625) (2,551) (2,583)
-------- ------- ------- ------- -------
Total loans, net $214,552 193,598 163,193 156,289 150,156
======== ======= ======= ======= =======
B. MATURITIES AND INTEREST RATE SENSITIVITIES
December 31, 1997
--------------------------------------
After
($ in thousands) <1 Year 1-5 Years 5 Years Total
------- --------- ------- -----
Commercial and
industrial $49,984 36,935 14,460 101,379
Real estate
construction 8,510 --- --- 8,510
Less loans with
predetermined interest
rates (9,718) (13,447) (13,262) (36,427)
------- ------- ------- -------
Loans with adjustable
rates $48,776 23,488 1,198 73,462
======= ======= ======= =======
-22-
C. RISK ELEMENTS
1. Nonaccrual, Past Due and Restructured Loans
The following table presents aggregate amounts for nonaccrual loans,
restructured loans, other real estate owned, net and accruing loans
which are contractually past due ninety days or more as to interest
or principal payments.
December 31,
----------------------------------
($ in thousands) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Nonaccrual loans:
Commercial and industrial $ 55 121 270 --- 710
Real estate mortgage 32 495 418 390 1,123
Real estate construction --- --- --- --- ---
Loans to individuals --- --- 30 30 31
------ ----- ----- ----- -----
$ 87 616 718 420 1,864
Restructured loans:
Commercial and industrial --- --- --- 229 598
------ ----- ----- ----- -----
Total nonperforming loans $ 87 616 718 649 2,462
Other real estate owned, net 421 474 762 1,150 225
------ ----- ----- ----- -----
Total nonperforming assets $ 508 1,090 1,480 1,799 2,687
====== ===== ===== ===== =====
Accruing loans past due 90
days or more:
Commercial and industrial $ 82 14 11 4 45
Real estate mortgage 358 252 250 219 198
Real estate construction --- --- --- 87 243
Loans to individuals 232 192 313 180 128
------ ----- ----- ----- -----
$ 672 458 574 490 614
====== ===== ===== ===== =====
The effect of nonaccrual and restructured loans on interest income
is presented below:
($ in thousands) 1997 1996 1995
---- ---- ----
Scheduled interest:
Nonaccrual loans $ 8 68 59
Restructured loans --- --- ---
----- ----- ----
Total scheduled interest $ 8 68 59
----- ----- ----
Recorded interest:
Nonaccrual loans $ 1 24 5
Restructured loans --- --- ---
----- ----- ----
Total recorded interest $ 1 24 5
===== ===== ====
Interest is recognized on the cash basis for all loans carried in
nonaccrual status. Loans generally are placed in nonaccrual status
when the collection of principal or interest is ninety days or more
past due, unless the obligation is both well-secured and in the
process of collection.
-23-
2. Potential Problem Loans
At December 31, 1997, the recorded investment in loans which have
been identified as impaired loans totaled $177,000. Of this amount,
$124,000 related to loans with no valuation allowance and $53,000
related to loans with a corresponding valuation allowance of
$53,000. For the year-ended December 31, 1997, the average recorded
investment in impaired loans was approximately $458,000 and the
total interest income recognized on impaired loans was $23,000 of
which $12,000 was recognized on a cash basis.
At December 31, 1996, the recorded investment in loans which have
been identified as impaired loans totaled $725,000. Of this amount,
$354,000 related to loans with no valuation allowance and $371,000
related to loans with a corresponding valuation allowance of
$290,000. For the year ended December 31, 1996, the average
recorded investment in impaired loans was approximately $800,000,
and the total interest income recognized on impaired loans was
$33,000 of which $23,000 was recognized on a cash basis.
3. Foreign Outstandings
At December 31, 1997, 1996 and 1995, there were no foreign
outstandings.
4. Loan Concentrations
The Company does a general banking business, serving the commercial,
agricultural and personal banking needs of its customers. NBB's
trade territory, commonly referred to as the New River Valley,
consists of Montgomery and Giles Counties, Virginia and portions of
adjacent counties. NBB's operating results are closely correlated
with the economic trends within this area which are, in turn,
influenced by the area's three largest employers, Virginia
Polytechnic Institute and State University, Montgomery County
Schools and Celco. Other industries include a wide variety of
manufacturing, retail and service concerns. Most of BTC's business
originates from the communities of Tazewell and Bluefield and other
communities in Tazewell County, Virginia and in Mercer County, West
Virginia. BTC's service area has largely depended on the coal
mining industry and farming for its economic base. In recent years,
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, 1997 and 1996, approximately $80 million and $71
million, respectively, of the loan portfolio were concentrated in
commercial real estate. This represents approximately 37% and 36%
of the loan portfolio at December 31, 1997 and 1996, respectively.
Included in commercial real estate at December 31, 1997 and 1996 was
approximately $50 million and $49 million, respectively, in loans
for college housing and professional office buildings. Loans
secured by residential real estate were approximately $65 million
and $60 million at December 31, 1997 and 1996, respectively. This
-24-
represents approximately 30% and 31% of the loan portfolio at
December 31, 1997 and 1996, respectively. Loans secured by
automobiles were approximately $34 million and $29 million at
December 31, 1997 and 1996, respectively. This represents
approximately 16% of the loan portfolio at December 31, 1997 and 15%
at December 31, 1996.
The Company has established operating policies relating to the
credit process and collateral in loan originations. Loans to
purchase real and personal property are generally collateralized by
the related property and with loan amounts established based on
certain percentage limitations of the property's total stated or
appraised value. Credit approval is primarily a function of
collateral and the evaluation of the creditworthiness of the
individual borrower or project based on available financial
information.
-25-
IV. SUMMARY OF LOAN LOSS EXPERIENCE
-------------------------------
A. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The following tabulation shows average loan balances at the end of each period; changes in the
allowance for loan losses arising from loans charged off and recoveries on loans previously
charged off by loan category; and additions to the allowance which have been charged to
operating expense:
December 31,
----------------------------------------------
($ in thousands) 1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Average loans outstanding $204,540 177,419 159,920 152,976 149,027
======== ======= ======= ======= =======
Balance at beginning of year 2,575 2,625 2,551 2,583 2,327
Charge-offs:
Commercial and industrial loans 257 95 23 72 231
Real estate mortgage loans --- 11 9 192 285
Real estate construction loans --- --- --- 53 ---
Loans to individuals 422 400 259 322 246
-------- ------- ------- ------- -------
Total loans charged off 679 506 291 639 762
-------- ------- ------- ------- -------
Recoveries:
Commercial and industrial loans 70 4 10 7 10
Real estate mortgage loans --- 64 16 4 5
Real estate construction loans --- --- --- --- ---
Loans to individuals 37 57 57 43 50
-------- ------- ------- ------- -------
Total recoveries 107 125 83 54 65
-------- ------- ------- ------- -------
Net loans charged off 572 381 208 585 697
-------- ------- ------- ------- -------
Additions charged to operations 435 331 282 553 953
-------- ------- ------- ------- -------
Balance at end of year $ 2,438 2,575 2,625 2,551 2,583
======== ======= ======= ======= =======
Net charge-offs to average net loans
outstanding 0.28% 0.21% 0.13% 0.38% 0.47%
======== ======= ======= ======= =======
Factors influencing management's judgment in determining the amount of the loan loss
provision charged to operating expense include the quality of the loan portfolio as
determined by management, the historical loan loss experience, diversification as to type of
loans in the portfolio, the amount of secured as compared with unsecured loans and the value
of underlying collateral, banking industry standards and averages, and general economic
conditions.
-26-
B. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been allocated according to the amount deemed necessary to
provide for anticipated losses within the categories of loans for the years indicated as
follows:
December 31,
----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ ------------------
Percent Percent Percent Percent Percent
of of of of of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
($ in Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
Commercial
and
industrial
loans $ 213 46.18% 403 44.04% 411 35.46% 679 36.70% 860 43.56%
Real estate
mortgage
loans 67 19.58% 305 22.10% 363 27.12% 364 27.55% 373 26.02%
Real estate
construction
loans --- 3.88% 51 3.17% 100 3.57% 37 3.50% 54 2.56%
Loans to
individuals 416 30.36% 504 30.69% 271 33.85% 569 32.25% 685 27.86%
Unallocated 1,742 1,312 1,480 902 611
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$2,438 100.00% 2,575 100.00% 2,625 100.00% 2,551 100.00% 2,583 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
-27-
V. DEPOSITS
A. AVERAGE AMOUNTS OF DEPOSITS AND AVERAGE RATES PAID
Average amounts and average rates paid on deposit categories in
excess of 10% of average total deposits are presented below:
December 31,
--------------------------------------------------
1997 1996 1995
---------------- ---------------- ---------------
Average Average Average
Average Rates Average Rates Average Rates
($ in thousands) Amounts Paid Amounts Paid Amounts Paid
------- ------- ------- ------- ------- -------
Noninterest-bearing
demand deposits $ 44,193 --- 41,997 --- 38,833 ---
Interest-bearing
demand deposits 75,519 4.07% 76,017 2.87% 77,545 3.03%
Savings deposits 47,781 3.29% 49,783 3.31% 54,698 3.29%
Time deposits 171,946 4.91% 168,141 5.46% 159,185 5.35%
-------- ----- ------- ----- ------- -----
Average total
deposits $339,439 4.43% 335,938 4.43% 330,261 4.35%
======== ===== ======= ===== ======= =====
B. TIME DEPOSITS OF $100,000 OR MORE
The following table sets forth time certificates of deposit and
other time deposits of $100,000 or more:
DECEMBER 31, 1997
-----------------------------------------------
Over 3 Over 6
3 Months Months
Months Through 6 Through 12 Over 12
($ in thousands) or Less Months Months Months Total
------- --------- ---------- ------- -----
Certificates of
deposit $13,098 7,055 12,685 6,399 39,237
Other time deposits 232 --- 172 2,906 3,310
------- ------ ------ ------ ------
Total time
deposits of
$100,000 or more $13,330 7,055 12,857 9,305 42,547
======= ====== ====== ====== ======
-28-
VI. RETURN ON EQUITY AND ASSETS
---------------------------
The ratio of net income to average stockholders' equity and to average
total assets, and certain other ratios are presented below:
December 31,
------------------------
1997 1996 1995
---- ---- ----
Return on average assets 1.66% 1.58% 1.46%
Return on average equity(1) 12.21% 12.37% 12.08%
Dividend payout ratio 39.31% 37.55% 37.32%
Average equity to average assets(1) 13.57% 12.75% 12.08%
(1) Includes amount related to common stock subject to ESOP put
option excluded from stockholders' equity on the Consolidated
Balance Sheets.
Item 2. Properties
- -------------------
Bankshares' headquarters, including the Main Office of NBB, are located at
100 South Main Street, Blacksburg, Virginia. In addition to the Main Office
location, NBB owns seven branch offices: two in the Town of Blacksburg; one
in the Town of Christiansburg; one in Montgomery County; and three in the
County of Giles. NBB leases office space near the Main Office which is
occupied by NBB's trust, marketing, audit, compliance and credit review
departments. An additional property was acquired in 1996 to provide for
additional office space. Construction of an office building on this site is
expected to begin in 1998, reducing the future need for leased properties.
Bank of Tazewell County owns the land and building of six of its seven
offices. The bank leases the land and building for its seventh office. The
Main Office is located at Main Street, Tazewell, Virginia. Three additional
branches are located in Tazewell, one in North Tazewell and two are located
in Bluefield, Virginia. Management believes that its existing facilities are
adequate to meet present needs and any anticipated growth.
NBB owns all its computer and data processing hardware and is a licensee of
the software it utilizes. BTC at present owns all of its computer and data
processing hardware and is a licensee of the software it utilizes. During
1997, the Company implemented a major hardware and software upgrade at NBB.
It is management's plan in 1998 to consolidate BTC's data processing using
NBB's recently upgraded system.
Item 3. Legal Proceedings
- --------------------------
Bankshares, NBB nor BTC are not currently involved in any material pending
legal proceedings, other than routine litigation incidental to NBB's and
BTC's banking business.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
There were no matters submitted to a vote of security holders during the
fourth quarter of the year ended December 31, 1997.
-29-
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on April 14, 1998.
The following is a list of names and ages of all executive officers of
Bankshares; their terms of office as officers; the positions and offices
within Bankshares held by each officer; and each person's principal
occupation or employment during the past five years.
YEAR ELECTED AN
NAME AGE OFFICES AND POSITIONS HELD OFFICER/DIRECTOR
---- --- -------------------------- ----------------
James G. Rakes 53 President and Chief 1986
Executive Officer, National
Bankshares, Inc.; and
President and Chief
Executive Officer of The
National Bank of Blacksburg
since 1983.
J. Robert Buchanan 46 Treasurer, National 1998
Bankshares, Inc.; Senior
Vice President/Chief
Financial Officer of The
National Bank of Blacksburg,
since January 1, 1998; and
Senior Vice President,
Treasurer and Chief
Financial Officer, Premier
Bankshares Corporate since
1991.
Marilyn B. Buhyoff 49 Secretary & Counsel, 1989
National Bankshares, Inc.;
and Senior Vice President/
Administration since 1992,
of The National Bank of
Blacksburg.
F. Brad Denardo 45 Corporate Officer, National 1989
Bankshares, Inc.; and
Executive Vice President/
Loans since 1989 of The
National Bank of Blacksburg.
Joan C. Nelson 47 Corporate Officer, National 1993
Bankshares, Inc.; Treasurer,
National Bankshares Inc.,
from 1993 to 1998; Cashier
since 1993 and Senior Vice
President/Operations since
1989 of The National Bank of
Blacksburg.
Except for J. Robert Buchanan and Joan C. Nelson, each of the executive
officers listed above have served Bankshares and/or its subsidiaries in the
aforementioned executive capacity for the past five years.
-30-
PART II
-------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
- ----------------------------------------------------------
There is no established trading market for the stock of National
Bankshares, Inc. As of March 18, 1998, the total number of holders of the
Registrant's common stock was 1,151.
Information concerning Market Price and Dividend Data is set forth under
"Common Stock Information and Dividends" on page 14 of Bankshares' 1997
Annual Report to Stockholders and is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The table entitled "Selected Consolidated Financial Data" on page 5 of
Bankshares' 1997 Annual Report to Stockholders is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------------
The information contained under "Management's Discussion and Analysis" on
pages 6 through 14 of Bankshares' 1997 Annual Report to Stockholders is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
See "Analysis of Interest Rate Sensitivity" set forth below. Additional
information is set forth under the section "Interest Rate Senstitity" on page
6 and the section "Derivatives and Market Risk Exposure" on pages 11 and 12
of Bankshares' 1997 Annual Report to Stockholders and is incorporated herein
by reference.
ANALYSIS OF INTEREST RATE SENSITIVITY
The table below sets forth, as of December 31, 1997, the distribution of
repricing opportunities of the Company's interest-earning assets and
interest-bearing liabilities, the interest rate sensitivity gap (i.e.,
interest rate sensitive assets less interest rate sensitive liabilities), the
cumulative interest rate sensitivity gap ratio (i.e., interest rate
sensitivity gap divided by total interest-earning assets) and the cumulative
interest rate sensitivity gap ratio. The table sets forth the time periods
during which interest-earning assets and interest-bearing liabilities will
mature or may reprice in accordance with their contracted terms.
-31-
Certain shortcomings are inherent in the method of analysis presented in the
following table. For example, although certain assets and liabilities may
have similar maturities or periods of repricing, they may react in different
degrees and at different times to changes in market interest rates. Also,
loan prepayments and early withdrawals of certificates of deposit could cause
the interest sensitivities to vary from those which appear on the table.
An interest rate sensitivity gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would generally tend
to affect adversely net interest income while a positive gap would generally
tend to result in an increase in net interest income. During a period of
declining interest rates, a negative gap would generally tend to result in
increased net interest income, while a positive gap would generally tend to
affect adversely net interest income. The Company's future earnings may be
adversely affected by a sharp upturn in interest rates as the Company is
liability sensitive for a period extending beyond one year. In a falling
rate environment, earnings might benefit to a certain degree from this
position, because assets at higher rate levels would reprice downward at a
slower rate than interest sensitive liabilities. Over the one to five year
period, the Company's cumulative interest-sensitivity position reflects an
asset sensitive position. This would mean the Company would benefit
initially from falling rates but would be adversely affected by rising rates.
This would depend, however, on the length of time rates were rising or
falling and the length of time rates remained stable at the level ultimately
reached.
-32-
An interest-sensitivity table showing all major interest sensitive asset and liability categories for the
time intervals indicated and cumulative "gaps" for each interval is set forth on the following table.
INTEREST RATE December 31, 1997
------------------------------------------------------
SENSITIVITY TABLE (1) Interest-sensitive (days)
-------------------------- 1-5 >5
($ in thousands) 1-90 91-180 181-365 Years Years Total
---- ------ ------- ----- ----- -----
Interest-earning assets:
Commercial and industrial loans $ 27,324 5,399 17,207 36,936 14,460 101,326
Real estate mortgage loans 1,514 4,100 10,045 14,843 12,239 42,741
Real estate construction loans 5,773 1,833 885 --- --- 8,491
Loans to individuals 22,545 2,949 5,967 29,983 2,901 64,345
-------- ------- ------- ------ ------ -------
Total loans, net of unearned income (2) $ 57,156 14,281 34,104 81,762 29,600 216,903
Federal funds sold 4,300 --- --- --- --- 4,300
Interest bearing deposits 9,728 --- --- --- --- 9,728
Securities available for sale 10,168 3,661 10,097 29,164 12,492 65,582
Securities held to maturity 15,758 10,056 9,334 28,593 20,651 84,392
Mortgage loans held for sale 405 --- --- --- --- 405
-------- ------- ------- ------ ------ -------
Total interest-earning assets $ 97,515 27,998 53,535 139,519 62,743 381,310
======== ======= ======= ======= ====== =======
Interest-bearing liabilities:
Interest-bearing demand deposits $ 77,863 --- --- --- --- 77,863
Savings deposits 46,773 --- --- --- --- 46,773
Time deposits 45,021 30,768 53,531 45,320 498 175,138
Other borrowings 485 --- --- --- --- 485
-------- ------- ------- ------ ------ -------
Total interest-bearing liabilities $170,142 30,768 53,531 45,320 498 300,259
======== ======= ======= ====== ====== =======
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities .57 .62 .70 1.06 1.27 1.27
======== ======= ======= ====== ====== =======
Cumulative interest-sensitivity gap $(72,627) (75,397) (75,393) 18,806 81,051 81,051
======== ======= ======= ====== ====== =======
(1) The Company is sensitive to interest rate changes, as liabilities generally reprice or mature
before interest-earning assets. The above gap table reflects the Company's rate-sensitive
position at December 31, 1997, and is not necessarily reflective of its position throughout the
year. The carrying amounts of interest-rate sensitive assets and liabilities are presented in
the periods in which they reprice to market rates or mature and are summed to show the
interest-rate sensitivity gap.
(2) Excludes nonaccrual loans.
-33-
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
The following consolidated financial statements of the Registrant and the
Independent Auditors' Report set forth on pages 15 through 41 of Bankshares'
1997 Annual Report to Stockholders are incorporated herein by reference:
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 1997 and 1996
3. Consolidated Statements of Income - Years Ended December 31, 1997, 1996
and 1995
4. Consolidated Statements of Changes in Stockholders' Equity - Years Ended
December 31, 1997, 1996 and 1995
5. Consolidated Statements of Cash Flows - Years Ended December 31, 1997,
1996 and 1995
6. Notes to Consolidated Financial Statements - December 31, 1997, 1996 and
1995
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
- -----------------------------------------------------------------------------
None.
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Executive Officers of Bankshares as of December 31, 1997 are listed on page 30
herein.
Information with respect to the directors of Bankshares is set out under the
caption "Election of Directors" on pages 2 through 4 of Bankshares' Proxy
Statement dated March 18, 1998, which information is incorporated herein by
reference.
Item 11. Executive Compensation
- --------------------------------
The information set forth under "Executive Compensation" on pages 5 through 9
of Bankshares' Proxy Statement dated March 18, 1998 is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information set forth under "Voting Securities and Stock Ownership" on
page 1 and under "Election of Directors" on pages 2 through 4 of Bankshares'
Proxy Statement dated March 18, 1998 is incorporated herein by reference.
-34-
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under "Certain Transactions With Officers and
Directors" on page 11 of Bankshares' Proxy Statement dated March 18, 1998 is
incorporated herein by reference.
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1997 Annual Report
To Stockholders Page(s)*
------------------------
1. Financial Statements:
--------------------
Independent Auditors' Report 15
Consolidated Balance Sheets -
December 31, 1997 and 1996 16
Consolidated Statements of
Income - Years ended December
31, 1997, 1996 and 1995 17
Consolidated Statements of Changes
in Stockholders' Equity - Years
ended December 31, 1997, 1996 and
1995 18
Consolidated Statements of Cash
Flows - Years ended December 31,
1997, 1996 and 1995 19
Notes to Consolidated
Financial Statements - December
31, 1997, 1996 and 1995 20-41
2. Financial Statement Schedules:
-----------------------------
Independent Auditor's Report of
Cook & Associates, LLP covering
the financial statements of Bank
of Tazewell County as of and for
the years ended December 31, 1995
and 1994, is filed as an Exhibit
and is incorporated by reference
herein. Exhibit 99
* Incorporated by reference from the indicated pages of the 1997 Annual Report
to Stockholders.
-35-
3. Exhibits:
--------
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
3(i) Articles of Incorporation, as (incorporated
amended, of National herein by
Bankshares, Inc. reference to
Exhibit 3(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
3(ii) Bylaws, as amended, of National
Bankshares, Inc.
4(i) Specimen copy of certificate (incorporated
for National Bankshares, Inc. herein by
common stock, $2.50 par value reference to
Exhibit 4(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Article Four of the Articles of (incorporated
Incorporation of National herein by
Bankshares, Inc. included in reference to
Exhibit No. 3(a)) Exhibit 4(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
10(ii)(B) Computer software license (incorporated
agreement dated June 18, 1990, herein by
by and between Information reference to
Technology, Inc. and The Exhibit 10(e) of
National Bank of Blacksburg the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employment Agreement dated (incorporated
January 1, 1992, by and between herein by
National Bankshares, Inc. and reference to
James G. Rakes Exhibit 10(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Capital Accumulation Plan (incorporated
(included in Exhibit No. 10(a)) herein by
reference to
Exhibit 10(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
-36-
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
*10(iii)(A) Employee Lease Agreement dated (incorporated
May 7, 1992, by and between herein by
National Bankshares, Inc. and reference to
The National Bank of Blacksburg Exhibit 10(c) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
13(i) 1997 Annual Report to
Stockholders (such Report,
except to the extent
incorporated herein by
reference, is being furnished
for the information of the
Commission only and is not
deemed to be filed as part of
this Report on Form 10-K)
21(i) Subsidiaries of National
Bankshares, Inc.
27 Financial Data Schedule
99 Independent Auditor's Report of
Cook & Associates, LLP on
financial statements of Bank of
Tazewell County as of and for
the years ended December 31,
1995 and 1994
* Indicates a management contract or compensatory plan required to be filed
herein.
(b) Reports on Form 8-K filed during the last quarter of the period covered
by this report:
----------------------------------------------------------------------
None.
(c) Exhibits required by Item 601 of Regulation S-K:
-----------------------------------------------
See Item 14(a)3 above.
(d) Financial Statement Schedules required by Regulation S-X:
--------------------------------------------------------
See Item 14(a)2 above.
-37-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, National Bankshares, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
NATIONAL BANKSHARES, INC.
BY: /s/James G. Rakes
------------------------------
James G. Rakes, President
and Chief Executive Officer
DATE: March 20, 1998
------------------------------
BY: /s/J. Robert Buchanan
------------------------------
J. Robert Buchanan
Treasurer
DATE: March 27, 1998
------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
NAME DATE TITLE
---- ---- -----
/s/C. L. Boatwright March 23, 1998 Director and Vice
------------------------- -------------- Chairman of the Board
C. L. BOATWRIGHT
/s/T. C. Bowen, Jr. March 20, 1998 Director
------------------------- --------------
T. C. BOWEN, JR.
/s/A. A. Crouse March 20, 1998 Director
------------------------- --------------
A. A. CROUSE
/s/R. E. Christopher, Jr. March 23, 1998 Director and Chairman of
------------------------- -------------- the Board
R. E. CHRISTOPHER, JR.
Director
------------------------- --------------
R. E. DODSON
Director
------------------------- --------------
P. A. DUNCAN
/s/W. T. Peery March 20, 1998 Director
------------------------- --------------
W. T. PEERY
/s/J. G. Rakes March 20, 1998 President and Chief
------------------------- -------------- Executive Officer -
J. G. RAKES National Bankshares, Inc.
/s/J. R. Stewart March 23, 1998 Director
------------------------- --------------
J. R. STEWART
-38-
INDEX TO EXHIBITS
-----------------
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
3(i) Articles of Incorporation, as (incorporated
amended, of National Bankshares, herein by
Inc. reference to
Exhibit 3(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
3(ii) Bylaws, as amended of National
Bankshares, Inc.
4(i) Specimen copy of certificate for (incorporated
National Bankshares, Inc. common herein by
stock, $2.50 par value reference to
Exhibit 4(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Article Fourth of the Articles (incorporated
of Incorporation of National herein by
Bankshares, Inc. included in reference to
Exhibit No. 3(a)) Exhibit 4(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
10(ii)(B) Computer software license (incorporated
agreement dated June 18, 1990, herein by
by and between Information reference to
Technology, Inc. and The Exhibit 10(e) of
National Bank of Blacksburg the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employment Agreement dated (incorporated
January 1, 1992, by and between herein by
National Bankshares, Inc. and reference to
James G. Rakes Exhibit 10(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Capital Accumulation Plan (incorporated
(included in Exhibit No. 10(a)) herein by
reference to
Exhibit 10(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
-39-
PAGE NO. IN
EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM
----------- ----------- -----------------
*10(iii)(A) Employee Lease Agreement dated (incorporated
May 7, 1992, by and between herein by
National Bankshares, Inc. and reference to
The National Bank of Blacksburg Exhibit 10(c) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
13(i) 1997 Annual Report to
Stockholders (such Report,
except to the extent
incorporated herein by
reference, is being furnished
for the information of the
Commission only and is not
deemed to be filed as part of
this Report on Form 10-K)
21(i) Subsidiaries of National
Bankshares, Inc.
27 Financial Data Schedule
99 Independent Auditor's Report of
Cook & Associates, LLP on
financial statements of Bank of
Tazewell County as of and for
the years ended December 31,
1995 and 1994
* Indicates a management contract or compensatory plan required to be filed
herein.
-40-