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, 1995 O-15204 NATIONAL BANKSHARES, INCORPORATED - ------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Virginia 54-1375874 - ------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 100 South Main Street Blacksburg, Virginia 24060 - ---------------------------------------- -------------------- (Address of principal executive offices) Zip Code Registrant's telephone number, including area code (540) 552-2011 -------------------- 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 - ------------------------------------------------------------------------------- (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 ----- ----- 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 ------- The aggregate market value of voting stock held by nonaffiliates of the Registrant as of March 20, 1996 was $42,732,548. 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 20, 1996 - ------------------------------ ------------------------------- COMMON STOCK, $2.50 PAR VALUE 1,714,152 DOCUMENTS INCORPORATED BY REFERENCE Selected information from the Registrants' Annual Report to Stockholders for the year ended December 31, 1995, 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 9, 1996 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 88 pages.) -- (The Index of Exhibits are on pages 39-40.)
NATIONAL BANKSHARES, INCORPORATED ANNUAL REPORT FOR 1995 ON FORM 10-K TABLE OF CONTENTS PAGE ---- PART I Item 1. Business 4-31 Item 2. Properties 31 Item 3. Legal Proceedings 31 Item 4. Submission of Matters to a Vote of Security Holders 31 Executive Officers of the Registrant 32 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 33 Item 6. Selected Financial Data 33 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 33 Item 8. Financial Statements and Supplementary Data 33 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 34 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 35-37 -3-
PART I ------ Item 1. Business of Bankshares. - -------------------------------- 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 sole wholly owned subsidiary, The National Bank of Blacksburg (NBB), which was originally chartered in 1891. NBB operates a full-service banking business from its headquarters in Blacksburg, Virginia, and its six 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, collection, night depository, safe deposit, money orders, 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 fiduciary, personal and corporate trust services. NBB makes loans in all major loan categories, including commercial, commercial and residential real estate, construction and consumer loans. Commercial Loans Loans are made to businesses and individuals for business purposes on both secured and unsecured bases. NBB's loan policies normally require commercial loan requests to be accompanied by complete documentation of income, by income tax returns and by a full credit history. Unsecured commercial loans must be supported by a satisfactory balance sheet and income statement. The source of repayment and applicable secondary repayment sources are identified in evaluating the loan request and must be clear before the loan is closed. Short-term unsecured loans are usually for a term of ninety-days or less and are repayable from a definite source. Other unsecured commercial loans may be placed on a demand basis if the source of repayment is known but the timing is unknown. Commercial lines of credit may be secured or unsecured. They are generally granted with the requirements of an annual review and the further requirement that they be fully paid for a continuous thirty-day period during the twelve- month term of the line of credit. 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. Secured commercial loans made for the purpose of financing working capital needs or for equipment typically carry terms of from five to seven years. Deed of trust loans may extend up to thirty years, although twenty years or less is a more preferred -4-
term. Prior to committing to make any such loan, the request is evaluated based on the cash flow of the business entity involved. Commercial loans which are secured by real estate are controlled by a specific NBB loan policy which states that the cash flow coverage ratio from the project should be no less than 1.1 to 1.0. If the ratio is not achieved but the borrower has a well- documented secondary source of repayment, the loan may still be considered. Regardless of the value of collateral or the strength of any guarantors, it is NBB's policy to require the business to exhibit sufficient cash flow to service the debt. Liquidation of collateral or the strength of a guarantor serves as a secondary source of repayment. Commercial real estate loans in excess of $50,000 require a market appraisal from an independent appraiser, unless the requirement is formally waived by NBB's Board of Directors or its internal Loan Committee. Other standard underwriting criteria include property surveys, title search and proper title insurance and hazard insurance which insures NBB's interest in the real estate. The loan to value ratio may vary, but it generally does not exceed 80% without approval by the internal Loan Committee. In some instances, when small business loans do not meet NBB's normal underwriting criteria, NBB will work with the borrower and the Small Business Administration ("SBA") to obtain a SBA guarantee of all or a portion of the loan amount so that credit can be granted. 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 which are secured by residential real estate generally are subject to the same underwriting criteria as commercial real estate loans. However, if a residential mortgage loan exceeds 80% of the appraised value of the property, private mortgage insurance is generally required. The creditworthiness of the borrower, his or her total outstanding indebtedness, sources of income and the value and marketability of the real estate are all factors which are evaluated. Standard underwriting ratios of 28% mortgage debt to gross income and 36% total debt to gross income are applied. Senior lending officers may approve exceptions to these ratios if other factors are present. Residential real estate loans may have a term of up to thirty years. NBB participates in insured loan programs sponsored by the Department of Housing and Urban Development, the Veterans Administration and the Virginia Housing Development Authority. Each of these programs contains specific requirements and restrictions, in addition to NBB's general loan application and underwriting requirements. It is NBB's policy to attempt to sell all residential real estate loans 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 not want to have their real estate loan sold. When those occasions arise, if the loans meet NBB's internal underwriting criteria, the loan will be closed and placed in NBB's portfolio. Residential real estate loans carry risks associated with the continued creditworthiness of the borrower and the value of the collateral. -5-
Construction Loans Construction loans are made to financially responsible individuals or businesses who have contracted for construction of structures. The loans are secured by a first lien on the real estate improvements. NBB's loan policy is that the loan to value ratio is not to exceed 80% of the lower of the cost or appraisal value. In addition, a firm commitment for permanent financing or a satisfactory prequalification for a permanent loan must be in place. Construction loans are subject to the same general underwriting criteria as commercial and residential real estate loans. All construction loans also are made with the requirement that title insurance provides affirmative lien waiver coverage. Construction draws are made in accordance with NBB's inspection schedule or, for larger commercial projects, after architects's certification. The normal loan term for residential projects is six to twelve months, and most commercial projects do not exceed eighteen months. 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 at any point in time may be less than the principal amount of the loan. In order to reduce risks associated with this type of loan, NBB does not allow development costs, such as surveys and architect's fees, to be made a part of the loan amount. Loans for commercial office or multi-unit residential properties (eight units or more) will not usually be considered until 50% of the space is pre-leased. Finally, NBB deals only with experienced contractors who are known to NBB and who have sufficient financial strength to complete the construction project. Consumer Loans NBB places emphasis on loans to consumers. A completed loan application, a credit report and, if the principal amount is above $5,000, a recent personal financial statement are required for each loan. Loan officers also evaluate the character of the individual borrower. In considering a consumer loan request, NBB has established the criteria that the borrower's total monthly debt payments, including the loan for which application is being made should not exceed 36% of gross monthly income or 50% of net monthly income. Although exceptions may be approved by senior lenders or the internal Loan Committee, the maximum term for different types of loans include: vehicles - five years; mobile homes - twelve years; second mortgage - fifteen years; equity line - ten year and property improvement -five years. 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. Consumer loans may also be granted on an unsecured basis, if the customer's income and credit history are deemed to support the extension of credit. Most consumer loans are monthly payment loans, although a single payment loan may be made when there is an identified definite source of repayment. 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. -6-
NBB also originates a small number of student loans which are sold to the Student Loan Marketing Association ("SLMA") when the individual student is no longer enrolled as a full-time student at a qualifying college or university. Apart from selling residential mortgage loans in the secondary market and selling student loans to SLMA, NBB will occasionally buy or sell all or a portion of a loan for various other reasons. NBB will consider selling a loan, or a participation in a loan, if: (i) the full amount of the loan would exceed NBB's legal lending limit to a single borrower; (ii) the full amount of the loan, when combined with a borrower's previously outstanding loans, would exceed NBB's legal lending limit to a single borrower; (iii) the Board of Directors or the internal Loan Committee believes that a particular borrower has a sufficient level of debt at NBB; (iv) the borrower requests the sale; (v) NBB's loan to deposit ratio is close to the upper limit set forth by NBB policy; and/or (vi) the loan may create too great a concentration of NBB's loans in one particular location or in one particular type of loan. NBB will consider purchasing a loan, or a participation in a loan, from another financial institution if the loan meets all applicable credit quality standards and (i) the loan to deposit ratio is at a level where additional loans would be desirable; and (ii) a common customer requests the purchase. The following table sets forth, for the three fiscal years ended December 31, 1995, 1994 and 1993 the percentage of total operating revenue contributed by each class of similar services which contributed 15% or more of total operating revenues of NBB during such periods. Percentage of Period Class of Service Total Revenues ------ ---------------- -------------- December 31, 1995 Interest and Fees on Loans 66.3% Interest on Securities 22.4% December 31, 1994 Interest and Fees on Loans 63.1% Interest on Securities 26.0% December 31, 1993 Interest and Fees on Loans 64.3% Interest on Securities 25.3% Bankshares believes that there is no single loan account, group of related loan accounts, single deposit account, or group of related deposit accounts, the withdrawal of which would have a material adverse effect on NBB's business. On December 31, 1995, Bankshares had total consolidated assets of approximately $203 million and trust assets with a market value of approximately $64 million under management or administration. As of that date, Bankshares had approximately $123 million in consolidated net loans, approximately $180 million in consolidated deposits and approximately $23 million in consolidated stockholders' equity. Bankshares management will consider strategic acquisition opportunities in businesses which complement or expand Bankshares' current operations. Bankshares currently has no specific acquisition plans, other than the affiliation with the Bank of Tazewell County (BTC), and there can be no assurance that any acquisitions will be made or what the terms of such acquisitions, if any, may be. -7-
Market Area NBB's primary service 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 1995, 1994 and 1993 the unemployment rate in Montgomery County was 3.0%, 3.20% and 4.85%, respectively, and the rate in Giles County during those years was 8.40%, 7.40% and 10.41%, respectively. In 1995, the rate for Montgomery County dropped to 3.0% and the Giles County unemployment rate increased to 8.4%. 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 on the western edge of the Bankshares' service area. It too has provided stable employment opportunities in the region. One of the area's major employers, the Radford Army Ammunition Plant (the "RAAP"), has experienced significant layoffs since the early 1990s, with employment there dropping from a high of approximately 3,800 to approximately 1,200 employees. These layoffs have had no significant impact on NBI's business, although they did contribute to the area's relatively high unemployment rate in the early 1990s. It is possible that employment levels at the RAAP will continue to decline, but the local area has already absorbed the major impact of layoffs at that facility. 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 Bankshares' business in Giles County. -8-
Bankshares' primary service 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. Competition The commercial banking industry is extremely competitive. Many other commercial banks are headquartered or have offices in NBB's service area, some of which do business at several locations. Regional financial institutions that headquarter elsewhere compete in NBB's service area and have substantially greater resources than NBB. Although NBB's main competition is from other commercial banks, there is also competition from credit unions, savings banks, savings and loan institutions, consumer finance companies and commercial finance and leasing companies doing business in the service area. The principal methods of competition in the banking industry are rates offered on loans and deposits, service and convenience of location. NBB is generally competitive with other financial institutions in its service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. Management believes that NBB is able to compete successfully in this environment because of its service-based business philosophy, well trained and customer oriented staff, and the convenience of its office locations. The business of NBB and its competition with other banks and other types of financial institutions will continue to be affected by legislative and regulatory developments. Virginia's "opt in" to the Interstate Act will allow financial institutions with much greater resources than those in NBB's service area to establish business operations that will compete directly with NBB. Registrant's Organization and Employment Bankshares and NBB 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 NBB. 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, 1995 NBB employed 98 full time equivalent employees at its main office, operations center and branch offices. Regulation and Supervision Bankshares and NBB 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 and NBB 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 and NBB. 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 -9-
are applicable to the businesses of Bankshares and NBB. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of Bankshares and NBB. Bankshares 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 BHCA. 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 for certain transactions. 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. These requirements are described below under "-Capital Requirement." Subject to its capital requirements and certain other restrictions, Bankshares can borrow money to make a capital contribution to NBB and such loans may be repaid from dividends paid from NBB to Bankshares (although the ability of NBB to pay dividends is subject to regulatory restrictions as described below in "-NBB-Limits on Dividends and -10-
Other Payments"). Bankshares can raise capital for contribution to NBB 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 Commission under the Virginia Banking Act. A registered bank holding company must provide the Virginia Commission with information with respect to the financial condition, operations, management and intercompany relationships of the holding company and its subsidiaries. The Virginia 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 Virginia 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 also is 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. NBI does not presently engage in securities-related activities in any material respect. NBB General. NBB, Bankshares' sole operating subsidiary, 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. -11-
Community Reinvestment Act. NBB is 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 overhauled the implementing CRA regulations. Under the new regulations, banks will have the option of being assessed for CRA compliance under one of several methods. Small banks will be 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 will 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. At its last examination, NBB received the highest CRA rating that can be given. 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, Bankshares will be able to acquire existing banking operations in Virginia. Bankshares currently has no plans or agreements whereby Bankshares would acquire other banks or thrifts other than the Bank of Tazewell County. 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. See "-NBI-The Virginia Banking Act." 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 Commission, establish and maintain a de novo branch or acquire one or more branches in a -12-
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 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 NBB may increase as a result of the Interstate Act and the Virginia interstate banking statutes. Deposit Insurance. NBB is subject to FDIC deposit insurance assessments. See "--Legislative Developments--Deposit Insurance." Government Policies. The operations of NBB is 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. At December 31, 1995 retained net profits available for NBB dividends were approximately $4,256,000. -13-
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. 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. See "--Capital Requirements" below. Capital Requirements. The Federal Reserve Board has adopted risk-based capital guidelines in final form which are applicable to Bankshares. 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. 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. The Tier 1 and total risk-based capital ratios of Bankshares as of December 31, 1995 were 15.01% and 16.27%, respectively. NBB's Tier 1 and total risk-based capital ratios as of December 31, 1995 were 14.96% and 16.21%, respectively. 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. 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 rating. All other banks will be required to maintain a leverage ratio of 4.0% or greater, based upon their particular circumstances and risk profiles. Bankshares' and NBB's leverage ratios, as of December 31, 1995 were 10.31% and 10.27%, respectively. 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 and NBB are unable to predict whether higher capital ratios would be imposed and, if so, at what levels and on what schedule. -14-
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 of banks that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." The following table sets forth the minimum capital ratios that a bank must satisfy in order to be considered well capitalized or adequately capitalized under Federal Reserve Board regulations. Adequately Well Capitalized Capitalized ----------- ----------- Tier 1 Risk-Based Capital Ratio 4% 6% Total Risk-Based Ratio 8% 10% Leverage Ratio 4% 5% 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. -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. The FDIC establishes rates for the payment of premiums by federally insured banks for deposit insurance. 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 pay for deposit insurance under a risk-based premium system. Under this system, a depository institution pays to the BIF from $.23 to $.31 per $100 of insured deposits depending on its capital levels and risk profile, as determined by its primary federal regulator on a semi- annual basis. The FDIC, effective September 15, 1995, lowered assessments from their current rates of $.23 to $.31 per $100 of insured deposits to rates of $.04 to $.31, depending on the health of the bank, as a result of the recapitalization of the BIF. The FDIC has voted to drop its premiums for well capitalized banks to $2,000 per year effective January 1, 1996. NBB has qualified for the minimum annual premium rate of $2,000 in 1996. Congress also is expected to act soon on provisions to strengthen the Savings Association Insurance Fund (the "SAIF") and to repay outstanding bonds that were issued to recapitalize the SAIF's successor as a result of payments made due to the insolvency of savings and loan associations and other federally insured savings institutions in the late 1980's and early 1990's. Costs for these measures could be passed along, in part, to the banking industry. Many of the provisions of FDICIA did not become effective until December 1993. In addition, many of the provisions will be implemented through the adoption of regulations by the various federal banking agencies. The precise effect of the legislation on Bankshares and NBB cannot be assessed at this time, and there can be no assurance that such regulations will not materially affect operating results, financial condition or liquidity of Bankshares and/or NBB. Other legislative and regulatory proposals regarding changes in banking and the regulation of banks, thrifts and other financial institutions are being considered by the executive branch of the federal government, Congress and various state governments, including Virginia. Certain of these proposals, if adopted, could significantly change the regulation of banks and the financial services industry. It cannot be predicted whether any of these proposals will be adopted or, if adopted, how these proposals will affect Bankshares and/or NBB. -16-
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 loan demand. Variable rate loans in NBB's portfolio are also affected by increased interest rates in that borrowers may not have sufficient income to support the increased debt service payments required. Approximately 62% of NBB's loan portfolio as of December 31, 1995, consisted of commercial real estate, real estate mortgage and construction loans. A significant contraction in the local real estate market could have an adverse effect on NBB's loan generation ability and its earnings. The banking industry is also impacted by general economic conditions. In times of recession or economic contraction, borrowers may be more prone to default on loan obligations, and demand for new loans may be reduced, thereby reducing or eliminating a bank's profits. Bankshares' market area relies heavily on three major employers, Virginia Polytechnic Institute and State University, the Radford Army Ammunition Plant, located in Montgomery and Pulaski Counties, Virginia, and the Hoescht-Celanese Plant, located in neighboring Giles County, Virginia. Large workforce reductions by these employers, without a corresponding increase in jobs by other employers, could create economic hardship in Bankshares' trading market and could result in reduced corporate profits. Over the past several years, the impact of reductions in the workforce at the Radford Army Ammunition Plant and the Hoescht-Celanese Plant and limited duration hiring freezes at Virginia Polytechnic Institute and State University has been offset by job growth in other sections, particularly in retail and service jobs. Future changes in employment patterns are not expected to have a material adverse effect on Bankshares' financial position. Bankshares' business is dependent upon the business of NBB, its wholly owned subsidiary. Therefore, all risks attendant to NBB and the banking business in general will directly affect Bankshares. Other than NBB, Bankshares owns no material assets and does not separately conduct material operations or business. -17-
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 1995 1994 1993 ------ ------ ------ ------ Cash and due from banks $ 4,873 4,837 4,019 Federal funds sold 4,258 3,828 3,848 Securities available for sale: Taxable 12,675 14,967 --- Nontaxable 853 --- --- Securities held to maturity: Taxable 26,011 30,403 40,925 Nontaxable 26,215 23,890 18,794 Mortgage loans held for sale 723 995 1,253 Loans, net 118,760 111,708 107,583 Other assets 7,538 6,553 6,077 -------- ------- ------- Total assets $201,906 197,181 182,499 ======== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Noninterest-bearing demand deposits 22,230 20,167 16,929 Interest-bearing demand deposits 57,562 63,710 63,598 Savings deposits 16,393 20,650 21,412 Time deposits 82,956 71,886 62,463 -------- ------- ------- Total deposits 179,141 176,413 164,402 Short-term borrowings 46 374 9 Other liabilities 1,136 803 604 Long-term debt --- --- 25 -------- ------- ------- Total liabilities 180,323 177,590 165,040 Stockholders' equity 21,583 19,591 17,459 -------- ------- ------- Total liabilities and stockholders' equity $201,906 197,181 182,499 ======== ======= ======= -18-
<TABLE> B. ANALYSIS OF NET INTEREST EARNINGS The following table shows the major categories of interest-earning assets and interest-bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net yield on average interest-earning assets for the years indicated. <CAPTION> December 31, 1995 December 31, 1994 December 31, 1993 Average Average Average Average Yield/ Average Yield/ Average Yield/ ($ in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- ------- -------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans, net (1)(2)(3) $118,760 11,953 10.06% 111,708 10,300 9.22% 107,583 10,379 9.65% Taxable securities 38,686 2,656 6.87% 45,370 2,961 6.53% 40,925 2,930 7.16% Nontaxable securities (1) 27,068 2,021 7.47% 23,890 1,877 7.86% 18,794 1,683 8.95% Federal funds sold 4,258 250 5.87% 3,828 155 4.05% 3,848 122 3.17% -------- ------ ----- ------- ------ ----- ------- ------ ----- Total interest- earning assets $188,772 16,880 8.94% 184,796 15,293 8.28% 171,150 15,114 8.83% ======== ====== ===== ======= ====== ===== ======= ====== ===== Interest-bearing liabilities: Interest-bearing demand deposits $ 57,562 1,772 3.08% 63,710 1,759 2.76% 63,598 1,908 3.00% Savings deposits 16,393 445 2.71% 20,650 559 2.71% 21,412 636 2.97% Time deposits 82,956 4,476 5.40% 71,886 3,321 4.62% 62,463 3,277 5.25% Short-term borrowings 46 3 6.52% 374 16 4.28% 9 --- 3.33% Long-term debt --- --- --- --- --- --- 25 2 8.00% -------- ------ ----- ------- ------ ----- ------- ------ ----- Total interest- bearing liabilities $156,957 6,696 4.27% 156,620 5,655 3.61% 147,507 5,823 3.95% ======== ====== ===== ======= ====== ===== ======= ====== ===== Net interest income and interest rate spread 10,184 4.67% 9,638 4.67% 9,291 4.88% ====== ===== ====== ===== ====== ===== Net yield on average interest-earning assets 5.39% 5.22% 5.43% ===== ===== ===== (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 $249 in 1995, $193 in 1994 and $593 in 1993 are included in total interest income. (3) Nonaccrual loans are included in average balances for yield computations. </TABLE> -19-
<TABLE> C. ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE Bankshares' primary source of revenue is net income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and other funds. Bankshares' net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities. The following table sets forth, for the years indicated, a summary of the changes in interest income and interest expense resulting from changes in average asset and liability balances (volume) and changes in average interest rates (rate). <CAPTION> 1995 Over 1994 1994 Over 1993 -------------- -------------- Changes Due To Changes Due To Net Dollar Net Dollar Rates(2) Volume(2) Change Rates(2) Volume(2) Change ($ in thousands) -------- --------- ---------- -------- --------- ---------- <S> <C> <C> <C> <C> <C> <C> Interest income:(1) Loans $ 978 675 1,653 (470) 391 (79) Taxable securities 148 (453) (305) (273) 304 31 Nontaxable securities (97) 241 144 (234) 428 194 Federal funds sold 76 19 95 34 (1) 33 ------ ----- ----- ----- ----- ----- Increase(decrease) in income on interest-earning assets $1,105 482 1,587 (943) 1,122 179 ------ ----- ----- ----- ----- ----- Interest expense: Interest-bearing demand deposits $ 192 (179) 13 (153) 4 (149) Savings deposits 2 (116) (114) (55) (22) (77) Time deposits 603 552 1,155 (423) 467 44 Short-term borrowings 6 (19) (13) 2 14 16 Long-term debt --- --- --- (1) (1) (2) ------ ----- ----- ----- ----- ----- Increase(decrease) in expense of interest-bearing liabilities $ 803 238 1,041 (630) 462 (168) ------ ----- ----- ----- ----- ----- Increase (decrease) in net interest income $ 302 244 546 (313) 660 347 ====== ===== ===== ===== ===== ===== (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. </TABLE> -20-
Analysis of Interest Rate Sensitivity The table below sets forth, as of December 31, 1995, the distribution of repricing opportunities of Bankshares' 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. Bankshares has a formal asset/liability management program. The primary goal of the program is to provide management with information related to the rate sensitivity of certain assets and liabilities and the effect of changing rates on profitability and capital accounts. While this planning process is designed to protect NBB over the long-term, it does not provide near-term protection from "interest rate shocks," as interest rate sensitive assets and liabilities do not, by their nature, move up or down in tandem in response to changes in the overall rate environment. Therefore, Bankshares' profitability in the near-term may temporarily be affected, either positively by a falling interest rate scenario, or negatively by a period of rising rates. 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. Bankshares' 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 would 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, Bankshares' cumulative interest-sensitivity position reflects an asset sensitive position. This would mean Bankshares 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. -21-
<TABLE> 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. <CAPTION> INTEREST RATE December 31, 1995 SENSITIVITY TABLE (1) Interest-sensitive (days) 1-5 >5 ($ in thousands) 1-90 91-180 181-365 Years Years Total ------ ------ ------- ----- ----- ----- <S> <C> <C> <C> <C> <C> <C> Interest-earning assets: Commercial and industrial loans $10,100 766 794 1,118 617 13,395 Real estate mortgage loans 3,909 8,196 17,500 21,892 7,443 58,940 Real estate construction loans 5,055 736 216 --- --- 6,007 Loans to individuals 20,668 2,410 4,368 17,691 1,154 46,291 ------- ------- ------- ------ ------ ------- Total loans, net of unearned income (2) 39,732 12,108 22,878 40,701 9,214 124,633 ------- ------- ------- ------ ------ ------- Federal funds sold --- --- --- --- --- --- Securities available for sale 1,250 2,260 4,531 6,658 11,872 26,571 Securities held to maturity 1,621 1,853 2,403 17,881 16,408 40,166 Mortgage loans held for sale 880 --- --- --- --- 880 ------- ------- ------- ------ ------ ------- Total interest-earning assets $43,483 16,221 29,812 65,240 37,494 192,250 ======= ======= ======= ------ ------ ------- Interest-bearing liabilities: Interest-bearing demand deposits $54,143 --- --- --- --- 54,143 Savings deposits 15,153 --- --- --- --- 15,153 Time deposits 15,098 12,932 22,717 36,578 191 87,516 ------- ------- ------- ------ ------ ------- Total interest-bearing liabilities $84,394 12,932 22,717 36,578 191 156,812 ======= ======= ======= ====== ====== ======= Cumulative ratio of interest-sensitive assets to interest-sensitive liabilities 0.52 0.61 0.75 0.99 1.23 1.23 ======= ======= ======= ====== ====== ======= Cumulative interest-sensitivity gap (40,911) (37,622) (30,527) (1,865) 35,438 35,438 ======= ======= ======= ====== ====== ======= (1) Bankshares is sensitive to interest rate changes, as liabilities generally reprice or mature before interest-earning assets. The above gap table reflects Bankshares' rate-sensitive position at December 31, 1995, and is not necessarily reflective of its position throughout the year. The carrying amounts of interest-rate sensitive assets and liabilities are presented in the periods in which they reprice to market rates or mature and are summed to show the interest-rate sensitivity gap. (2) Excludes nonaccrual loans. </TABLE> -22-
II. INVESTMENT PORTFOLIO A. BOOK VALUE OF INVESTMENTS All securities held in 1993 were classified as held to maturity. The amortized costs and fair values of securities available for sale as of December 31, 1995 and 1994 were as follows: December 31, 1995 1994 AMORTIZED FAIR AMORTIZED FAIR ($ in thousands) COSTS VALUES COSTS VALUES --------- ------ --------- ------ Securities available for sale: U.S. Treasury $ 4,002 3,997 3,516 3,456 U.S. Government agencies and corporations (1) 11,175 11,383 7,197 7,121 States and political subdivisions 6,384 6,340 --- --- Other securities 4,836 4,851 1,592 1,537 ------- ------ ------ ------ Total securities available for sale $26,397 26,571 12,305 12,114 ======= ====== ====== ====== The amortized costs of securities held to maturity as of December 31, 1995, 1994 and 1993 were as follows: December 31, ($ in thousands) 1995 1994 1993 ------ ------ ------ Securities held to maturity: U.S. Treasury $ 2,755 9,722 12,319 U.S. Government agencies and corporations (1) 5,643 15,220 22,318 States and political subdivisions 26,660 26,073 20,698 Other securities 5,108 6,374 7,183 ------- ------ ------ Total securities held to maturity $40,166 57,389 62,518 ======= ====== ====== (1) Mortgage-backed securities are included in the totals for U.S. Government agencies and corporations. The majority of Mortgage- backed Securities and Collateralized Mortgage Obligations held at December 31, 1995 were backed by U.S. agencies. These holdings are "grandfathered" under existing rules and are not required to be periodically subjected to the Financial Institution Examination Council's (FFIEC) high risk mortgage security test. These tests address possible fluctuations in the average life and price sensitivity which are the primary risks associated with this type of security. Such tests are usually subject to regulatory review. It is managements' judgement, however, that these tests are a prudent measure and accordingly the bank voluntarily conducts these tests on a periodic basis. Except for U.S. Government securities, Bankshares has no securities with any issuer that exceeds 10% of its stockholders' equity. -23-
<TABLE> B. MATURITIES AND ASSOCIATED YIELDS The following table presents the maturities for those securities available for sale and held to maturity as of December 31, 1995 and weighted average yield for each range of maturities. <CAPTION> Securities Available For Sale (1) ($ in thousands except for Within One One to Five to After Ten % data) Year Five Year Ten Year Year No Maturity Total ---------- --------- -------- --------- ----------- ------- <S> <C> <C> <C> <C> <C> <C> U.S. Treasury $3,997 --- --- --- --- 3,997 5.01% --- --- --- --- 5.01% U.S.Government agencies 3,551 4,097 3,157 578 --- 11,383 and corporations 7.10% 6.88% 7.46% 7.34% --- 7.13% States and political --- 353 2,903 3,084 --- 6,340 subdivisions --- 5.66% 6.95% 7.01% --- 6.91% Other securities 493 2,208 1,520 500 130 4,851 4.79% 5.72% 6.78% 7.00% 6.00% 6.10% ------ ------ ------ ------ ------ ------ 8,041 6,658 7,580 4,162 130 26,571 Total 5.92% 6.43% 7.13% 7.05% 6.00% 6.57% ====== ====== ====== ====== ====== ====== Securities Held to Maturity (1) U.S. Treasury 1,250 1,505 --- --- --- 2,755 6.80% 7.04% --- --- --- 6.93% U.S. Government agencies 402 3,336 1,781 124 --- 5,643 and corporations 7.96% 7.29% 7.71% 8.29% --- 7.49% States and political 2,923 9,747 11,718 2,272 --- 26,660 subdivisions 8.00% 7.55% 7.39% 8.24% --- 7.59% Other securities 1,302 3,293 513 --- --- 5,108 8.13% 6.54% 6.66% --- --- 6.95% ------ ------ ------ ------ ------ ------ 5,877 17,881 14,012 2,396 --- 40,166 Total 7.77% 7.27% 7.40% 8.24% --- 7.45% ====== ====== ====== ====== ====== ====== Total portfolio 13,918 24,539 21,592 6,558 130 66,737 6.20% 7.04% 7.31% 7.49% 6.00% 7.10% ====== ====== ====== ====== ====== ====== (1) Rates shown represent weighted average yield on a fully taxable basis. Mortgage-backed securities are included in the totals for U.S. Government agencies and corporation and are allocated based upon estimated cash flow at December 31, 1995. </TABLE> -24-
III. LOAN PORTFOLIO -------------- Bankshares concentrates its lending activities in commercial and industrial loans, real estate mortgage loans both residential and business, and loans to individuals. The following tables set forth (i) a comparison of Bankshares' loan portfolio by major category of loans as of the dates indicated and (ii) the maturities and interest rate sensitivity of the loan portfolio at December 31, 1995. A. TYPES OF LOANS December 31, ($ in thousands) 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ Commercial and industrial loans $ 40,749 35,984 45,618 44,403 46,612 Real estate mortgage loans 31,798 30,212 26,638 28,719 28,320 Real estate construction loans 6,007 5,543 3,946 3,975 6,163 Loans to individuals 48,132 45,767 37,245 31,209 35,717 -------- ------- ------- ------- ------- Total loans 126,686 117,506 113,447 108,306 116,812 Less unearned income (1,633) (1,782) (1,192) (484) (721) -------- ------- ------- ------- ------- Total loans, net of unearned income 125,053 115,724 112,255 107,822 116,091 Less allowance for loans losses (2,080) (2,006) (2,038) (1,782) (1,665) -------- ------- ------- ------- ------- Total loans, net $122,973 113,718 110,217 106,040 114,426 ======== ======= ======= ======= ======= B. MATURITIES AND INTEREST RATE SENSITIVITIES December 31, 1995 After ($ in thousands) <1 Year 1-5 Years 5 Years Total ------- --------- ------- ----- Commercial and industrial $23,237 11,850 5,662 40,749 Real estate construction 6,007 --- --- 6,007 Less loans with pre- determined interest rates (6,358) (3,768) (5,662) (15,788) ------- ------- ------ ------- Loans with adjustable rates $22,886 8,082 --- $30,968 ======= ======= ====== ======= -25-
C. RISK ELEMENTS 1. Nonaccrual, Past Due and Restructured Loans The following table presents aggregate loan amounts for nonaccrual loans and accruing loans which are con-tractually past due ninety days or more as to interest or principal payments, restructured loans and other real estate owned, net. December 31, ($ in thousands) 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ Nonaccrual loans: Commercial and industrial $ --- --- 710 483 196 Real estate mortgage 390 390 1,123 884 434 Real estate construction --- --- --- --- --- Loans to individuals 30 30 31 23 47 ------ ------ ------ ------ ----- 420 420 1,864 1,390 677 ------ ------ ------ ------ ----- Restructured loans: Commercial and industrial --- 229 598 --- --- ------ ------ ------ ------ ----- Total nonperforming loans 420 649 2,462 1,390 677 Other real estate owned, net 739 1,083 225 837 875 ------ ------ ------ ------ ----- Total nonperforming assets $1,159 1,732 2,687 2,227 1,552 ====== ====== ====== ====== ===== Accruing loans past due 90 days or more: Commercial and industrial $ 6 3 44 131 13 Real estate mortgage 60 45 --- 323 --- Real estate construction --- 87 243 237 235 Loans to individuals 144 84 39 65 172 ------ ------ ------ ------ ----- $ 210 219 326 756 420 ====== ====== ====== ====== ===== The effect of nonaccrual and restructured loans on interest income is presented below: December 31, ($ in thousands) 1995 ------------ Interest that would have been recorded in accordance with original terms $ 42 Interest recorded in income 5 ----- Net impact on interest income $ 37 ===== -26-
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 Effective January 1, 1995, Bankshares adopted the provisions of SFAS No. 114, as amended by SFAS No. 118. At December 31, 1995, the recorded investment in loans which have been identified as impaired loans, in accordance with SFAS No. 114, totaled $539,000. Of this amount, $90,000 related to loans with no valuation allowance and $449,000 related to loans with a corresponding valuation allowance of $319,000. For the year ended December 31, 1995, the average recorded investment in impaired loans was approximately $757,000, 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 to SFAS No. 114 did not require an increase to Bankshares' allowance for loan losses. The impact of SFAS No. 114, as amended by SFAS No. 118, was immaterial to Bankshares' consolidated financial statements as of and for the year ended December 31, 1995. 3. Foreign Outstandings At December 31, 1995, 1994 and 1993, there were no foreign outstandings. 4. Loan Concentrations At December 31, 1995, there were no other concentrations of loans exceeding 10% of total loans which are not otherwise disclosed as a category of loans, except for loans secured by vehicles which approximated $22 million. -27-
<TABLE> IV. SUMMARY OF LOAN LOSS EXPERIENCE A. ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES The following tabulation shows average loan balances at the end of each period; changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category; and additions to the allowance which have been charged to operating expense: <CAPTION> December 31, ($ in thousands) 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ <S> <C> <C> <C> <C> <C> Average loans outstanding $118,760 111,708 107,583 109,780 116,735 ======== ======= ======= ======= ======= Balance at beginning of year $ 2,006 2,038 1,782 1,665 1,662 Charge-offs: Commercial and industrial loans 22 72 231 438 374 Real estate mortgage loans --- 192 282 177 46 Real estate construction loans --- 53 --- --- --- Loans to individuals 247 307 221 370 262 -------- ------- ------- ------- ------- Total loans charged off 269 624 734 985 682 -------- ------- ------- ------- ------- Recoveries: Commercial and industrial loans 9 7 10 16 2 Real estate mortgage loans 7 4 5 --- 2 Real estate construction loans --- --- --- --- --- Loans to individuals 52 41 45 26 66 -------- ------- ------- ------- ------- Total recoveries 68 52 60 42 70 Net loans charged off 201 572 674 943 612 Additions charged to operations 275 540 930 1,060 615 Balance at end of year $ 2,080 2,006 2,038 1,782 1,665 ======== ======= ======= ======= ======= Net charge-offs to average loans outstanding .17% .51% .63% .86% .52% ======== ======= ======= ======= ======= 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. </TABLE> -28-
<TABLE> 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: <CAPTION> December 31, 1995 1994 1993 1992 1991 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 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial and industrial loans $ 381 32.16% 624 30.62% 810 40.21% 823 41.00% 790 39.90% Real estate mortgage loans 155 25.10% 164 25.71% 163 23.48% 206 26.52% 250 24.24% Real estate construction loans 100 4.74% 36 4.72% 54 3.48% 50 3.67% 75 5.28% Loans to individuals 197 38.00% 500 38.95% 615 32.83% 497 28.81% 350 30.58% Unallocated 1,247 --- 682 --- 396 --- 206 --- 200 --- ------ ------ ----- ------ ----- ------ ----- ------ ----- ------ $2,080 100.00% 2,006 100.00% 2,038 100.00% 1,782 100.00% 1,665 100.00% ====== ====== ===== ====== ===== ====== ===== ====== ===== ====== </TABLE> -29-
V. DEPOSITS A. AVERAGE AMOUNTS OF DEPOSITS AND AVERAGE RATES PAID Average amounts and average rates paid on deposit categories in excess of 10% of average total deposits are presented below: December 31, 1995 1994 1993 Average Average Average Average Rates Average Rates Average Rates ($ in thousands) Amounts Paid Amounts Paid Amounts Paid ------- ------- ------- ------- ------- ------- Noninterest-bearing demand deposits $ 22,230 --- 20,167 --- 16,929 --- Interest-bearing demand deposits 57,562 3.08% 63,710 2.76% 63,598 3.00% Savings deposits 16,393 2.71% 20,650 2.71% 21,412 2.97% Time deposits 82,956 5.40% 71,886 4.62% 62,463 5.25% -------- ------- ------- Average total deposits $179,141 176,413 164,402 ======== ======= ======= B. TIME DEPOSITS OF $100,000 OR MORE The following table sets forth time certificates of deposit and other time deposits of $100,000 or more: DECEMBER 31, 1995 Over 3 Over 6 3 Months Months Months Through 6 Through 12 Over 12 ($ in thousands) or Less Months Months Months Total ------- --------- ---------- ------- ----- Certificates of deposit $ 2,099 1,367 4,504 2,230 10,200 Other time deposits 356 104 110 2,588 3,158 ------- ------ ------ ------ ------ Total time deposits of $100,000 or more $ 2,455 1,471 4,614 4,818 13,358 ======= ====== ====== ====== ====== -30-
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, 1995 1994 1993 ------ ------ ------ Return on average assets 1.62% 1.51% 1.45% Return on average equity 15.09% 15.19% 15.43% Dividend payout ratio 33.17% 34.05% 32.00% Average equity to average assets 10.59% 9.94% 9.38% 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. NBB leases office space near the Main Office which is occupied by NBB's trust, marketing, audit, compliance and credit review departments. NBB owns all its computer and data processing hardware and is a licensee of the software it utilizes, which enables NBB to perform all its data processing functions in-house. NBB views its modern data processing equipment and present customer service facilities as being adequate to support future growth expectations. Management anticipates, however, that with the constantly changing technological environment that significant capital expenditures will be necessary to remain current. Item 3. Legal Proceedings. - --------------------------- Neither Bankshares nor NBB is currently involved in any material pending legal proceedings, other than routine litigation incidental to NBB's 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, 1995. -31-
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 9, 1996. 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 51 President and Chief Executive 1986 Officer, National Bankshares, Inc.; and President and Chief Executive Officer of The National Bank of Blacksburg since 1983. F. Brad Denardo 43 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 47 Secretary, National Bankshares, 1989 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 45 Treasurer, National Bankshares, 1993 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 subsidiary in the aforementioned executive capacity for the past five years. -32-
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 20, 1996, the total number of holders of the Registrant's common stock was 684. Information concerning Market Price and Dividend Data is set forth under "Common Stock Information and Dividends" on page 13 of Bankshares' 1995 Annual Report to Stockholders and is incorporated herein by reference. Item 6. Selected Financial Data - -------------------------------- The table entitled "Selected Consolidated Financial Data" on page 4 of Bankshares' 1995 Annual Report to Stockholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - -------------------------------------------------------------------------------- The information contained under "Management's Discussion and Analysis" on pages 5 through 13 of Bankshares' 1995 Annual Report to Stockholders is incorporated herein by reference. Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------- The following consolidated financial statements of the Registrant and the Independent Auditors' Report set forth on pages 16 through 41 of Bankshares' 1995 Annual Report to Stockholders are incorporated herein by reference: 1. Independent Auditors' Report 2. Consolidated Balance Sheets - December 31, 1995 and 1994 3. Consolidated Statements of Income - Years Ended December 31, 1995, 1994 and 1993 4. Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 1995, 1994 and 1993 5. Consolidated Statements of Cash Flows - Years Ended December 31, 1995, 1994 and 1993 6. Notes to Consolidated Financial Statements - December 31, 1995, 1994 and 1993 -33-
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, 1995 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 3 through 4 of Bankshares' Proxy Statement dated March 20, 1996, which information is incorporated herein by reference. Item 11. Executive Compensation - -------------------------------- The information set forth under "Executive Compensation" on pages 6 through 10 of Bankshares' Proxy Statement dated March 20, 1996 is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The information set forth under "Voting Securities and Principal Holders of Securities" on page 1 and under "Election of Directors" on pages 2 through 3 of Bankshares' Proxy Statement dated March 20, 1996 is incorporated herein by reference. 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 20, 1996 is incorporated herein by reference. -34-
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: 1995 Annual Report To Stockholders Page(s)* ------------------------ 1. Financial Statements: -------------------- Independent Auditors' Report 16 Consolidated Balance Sheets - December 31, 1995 and 1994 17 Consolidated Statements of Income - Years ended December 31, 1995, 1994 and 1993 19 Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 1995, 1994 and 1993 21 Consolidated Statements of Cash Flows - Years ended December 31, 1995, 1994 and 1993 22 Notes to Consolidated Financial Statements - December 31, 1995, 1994 and 1993 24 2. Financial Statement Schedules: ----------------------------- All schedules are omitted as the required information is inapplicable or the informa- tion is presented in the Consolidated Financial State- ments or related notes. * Incorporated by reference from the indicated pages of the 1995 Annual Report to Stockholders. -35-
3. Exhibits: -------- PAGE NO. IN EXHIBIT NO. DESCRIPTION SEQUENTIAL SYSTEM ----------- ----------- ----------------- 3(i) Articles of Incorporation, (incorporated as 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 of National (incorporated Bankshares, Inc. herein by reference to Exhibit 3(b) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 4(i) Specimen copy of certifi- (incorporated cate for National Bank- herein by shares, Inc. common stock, reference to $2.50 par value Exhibit 4(a) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 4(i) Article Four of the (incorporated Articles of Incorporation herein by of National Bankshares, reference to Inc. included in Exhibit Exhibit 4(b) of No. 3(a)) the Annual Report on Form 10K for fiscal year ended December 31, 1993) 10(ii)(B) Computer software license (incorporated agreement dated June 18, herein by 1990, by and between reference to Information Technology, Exhibit 10(e) of Inc. and The National Bank the Annual Report of Blacksburg on Form 10K for fiscal year ended December 31, 1992) *10(iii)(A) Employment Agreement dated (incorporated January 1, 1992, by and herein by between National Bankshares, reference to Inc. and James G. Rakes Exhibit 10(a) 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) Capital Accumulation Plan (incorporated (included in Exhibit No. herein by 10(a)) 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 (incorporated dated May 7, 1992, by and herein by between National Bank- reference to shares, Inc. and The Exhibit 10(c) of National Bank of Blacksburg the Annual Report on Form 10K for fiscal year ended December 31, 1992) 13(i) 1995 Annual Report to Stockholders (such Report, except to the extent incorporated herein by reference, is being furnished for the informa- tion of the Commission only and is not deemed to be filed as part of this Report on Form 10-K) 41 21(i) Subsidiaries of National (incorporated Bankshares, Inc. herein by reference to Exhibit 22 of the Annual Report on Form 10K for fiscal year ended December 31, 1992) * 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 26, 1996 ---------------------------------- BY: /s/ Joan C. Nelson ---------------------------------- Joan C. Nelson Treasurer DATE: March 26, 1996 ---------------------------------- 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 26, 1996 Director and Vice Chairman of -------------------------- -------------- the Board C. L. BOATWRIGHT /s/ L. A. Bowman March 25, 1996 Director -------------------------- -------------- L. A. BOWMAN /s/ R. E. Christopher, Jr. March 22, 1996 Director and Chairman of the -------------------------- -------------- Board R. E. CHRISTOPHER, JR. Director -------------------------- -------------- P. A. DUNCAN /s/ J. G. Rakes March 26, 1996 President and Chief Executive -------------------------- -------------- Officer - National J. G. RAKES Bankshares, Inc. /s/ J. M. Shuler March 25, 1996 Director -------------------------- -------------- J. M. SHULER /s/ J. R. Stewart March 22, 1996 Director -------------------------- -------------- J. R. STEWART Director -------------------------- -------------- J. L. WEBB, JR. Director -------------------------- -------------- P. P. WISMAN -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 of National Bankshares, (incorporated Inc. herein by reference to Exhibit 3(b) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 4(i) Specimen copy of certificate for (incorporated National Bankshares, Inc. common herein by stock, $2.50 par value reference to Exhibit 4(a) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 4(i) Article Fourth of the Articles (incorporated of Incorporation of National herein by Bankshares, Inc. included in reference to Exhibit No. 3(a)) Exhibit 4(b) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 10(ii)(B) Computer software license (incorporated agreement dated June 18, 1990, herein by by and between Information reference to Technology, Inc. and The Exhibit 10(e) of National Bank of Blacksburg the Annual Report on Form 10K for fiscal year ended December 31, 1992) *10(iii)(A) Employment Agreement dated (incorporated January 1, 1992, by and between herein by National Bankshares, Inc. and reference to James G. Rakes Exhibit 10(a) of the Annual Report on Form 10K for fiscal year ended December 31, 1992) -39-
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) 1995 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) 41 21(i) Subsidiaries of National (incorporated Bankshares, Inc. herein by reference to Exhibit 22 of the Annual Report on Form 10K for fiscal year ended December 31, 1992) * Indicates a management contract or compensatory plan required to be filed herein. -40-