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