Item 1. Business. - -----------------
History and Business
National Bankshares, Inc. (Bankshares) is a bank holding company organized under the laws of Virginia in 1986 and registered under the Bank Holding Company Act (BHCA). Except for a separate investment portfolio, Bankshares conducts all of its business operations through its two wholly-owned subsidiaries, The National Bank of Blacksburg (NBB) and Bank of Tazewell County (BTC), collectively referred to as "the Company". There are future plans to enter the insurance and investments sales business through a separate subsidiary.
The National Bank of Blacksburg
The National Bank of Blacksburg was originally chartered as the Bank of Blacksburg in 1891. Its state charter was converted to a national charter in 1922 and it became The National Bank of Blacksburg. NBB operates a full-service banking business from its headquarters in Blacksburg, Virginia, and its twelve area branch offices. NBB offers general retail and commercial banking services to individuals, businesses, local government units and institutional customers. These products and services include accepting deposits in the form of checking accounts, money market deposit accounts, interest-bearing demand deposit accounts, savings accounts and time deposits; making real estate, commercial, revolving, consumer and agricultural loans; offering letters of credit; providing other consumer financial services, such as automatic funds transfer, collections, night depository, safe deposit, travelers checks, savings bond sales and utility payment services; and providing other miscellaneous services normally offered by commercial banks. NBB also conducts a general trust business. Through its trust operation, NBB offers a variety of personal and corporate trust services.
NBB makes loans in all major loan categories, including commercial, commercial and residential real estate, construction and consumer loans.
At December 31, 2000, NBB had total assets of $339,357. Total deposits at this date were $306,827. NBB's net income for 2000 was $4,562 which produced a return on average assets of 1.55% and a return on average stockholders' equity of 16.02%. Refer to footnote 11 of the Company's 2000 Annual Report to Stockholders for NBB's risk-based capital ratios.
Bank of Tazewell County
The antecedents of BTC are in a charter issued on September 28, 1889 for Clinch Valley Bank. On December 22, 1893, a second charter was issued in substantially the same form for Bank of Clinch Valley. In 1929, Bank of Clinch Valley merged with Farmers Bank under the charter of the former, and the name of the new institution became Farmers Bank of Clinch Valley. Bank of Tazewell County resulted from the 1964 merger of Bank of Graham, Bluefield, Virginia with Farmers Bank of Clinch Valley. BTC provides general retail and commercial banking services to individuals, businesses and local government units. These services include commercial, real estate and consumer loans. Deposit accounts offered include demand deposit accounts, interest-bearing demand deposit accounts, money market deposit accounts, savings accounts and certificates of deposit. Other services include automatic funds transfer, collections, night depository, safe deposit, travelers checks, savings bond sales and utility payment services; and providing other miscellaneous services normally offered by commercial banks. BTC also conducts a general trust business.
At December 31, 2000 BTC had total assets of $251,786. Total deposits at this same date were $223,911. BTC's net income for 2000 was $2,721 which produced a return on average assets of 1.32% and a return on average stockholders' equity of 10.92%. Refer to footnote 11 of the Company's 2000 Annual Report to Stockholders for BTC's risk-based capital ratios.
Commercial Loans
NBB and BTC make both secured and unsecured loans to businesses and to individuals for business purposes. Loan requests are granted based upon several factors including credit history, past and present relationships with the bank and marketability of collateral. Unsecured commercial loans must be supported by a satisfactory balance sheet and income statement. Collateralized business loans may be secured by a security interest in marketable equipment, accounts receivable, business equipment and/or general intangibles of the business. In addition, or as an alternative, the loan may be secured by a deed of trust lien on business real estate.
The risks associated with commercial loans are related to the strength of the individual business, the value of loan collateral and the general health of the economy.
Residential Real Estate Loans
Loans secured by residential real estate are originated by both bank subsidiaries. NBB sells a substantial percentage of the residential real estate loans it originates in the secondary market on a servicing released basis. There are occasions when a borrower or the real estate do not qualify under secondary market criteria, but the loan request represents a reasonable credit risk. Also, an otherwise qualified borrower may choose not to have their mortgage loan sold. On these occasions, if the loan meets NBB's internal underwriting criteria, the loan will be closed and placed in NBB's portfolio. Some residential loans originated by BTC are held in the bank's loan portfolio and others are sold in the secondary market. In their secondary market operations, NBB and BTC participate in insured loan programs sponsored by the Department of Housing and Urban Development, the Veterans Administration and the Virginia Housing Development Authority.
Residential real estate loans carry risk associated with the continued credit-worthiness of the borrower and changes in the value of the collateral.
Construction Loans
NBB makes loans for the purpose of financing the construction of business and residential structures to financially responsibly business entities and individuals. These loans are subject to the same credit criteria as commercial and residential real estate loans. Although BTC offers construction loans, its involvement in this area of lending is more limited than NBB's due to the nature of its market area.
In addition to the risks associated with all real estate loans, construction loans bear the risks that the project will not be finished according to schedule, the project will not be finished according to budget and the value of the collateral may at any point in time be less than the principal amount of the loan. Construction loans also bear the risk that the general contractor, who may or may not be the bank's loan customer, is unable to finish the construction project as planned because of financial pressures unrelated to the project. Loans to customers that are made as permanent financing of construction loans may likewise under certain circumstances be affected by external financial pressures.
Consumer Loans
NBB and BTC routinely make consumer loans, both secured and unsecured. The credit history and character of individual borrowers is evaluated as a part of the credit decision. Loans used to purchase vehicles or other specific personal property and loans associated with real estate are usually secured with a lien on the subject vehicle or property.
Negative changes in a customer's financial circumstances due to a large number of factors, such as illness or loss of employment, can place the repayment of a consumer loan at risk. In addition, deterioration in collateral value can add risk to consumer loans.
Sales and Purchases of Loans
NBB and BTC will occasionally buy or sell all or a portion of a loan. These purchases and sales are in addition to the secondary market residential mortgage loans regularly sold by NBB. Because the demand for loans, particularly for commercial loans, is greater in NBB's market area than in BTC's market area, NBB regularly sells loans and participations in loans to BTC.
Both banks will consider selling a loan or a participation in a loan, if: (i) the full amount of the loan will exceed the bank's legal lending limit to a single borrower; (ii) the full amount of the loan, when combined with a borrower's previously outstanding loans, will exceed the bank's legal lending limit to a single borrower; (iii) the Board of Directors or an internal Loan Committee believes that a particular borrower has a sufficient level of debt with the bank; (iv) the borrower requests the sale; (v) the loan to deposit ratio is at or above the optimal level as determined by bank management; and/or (vi) the loan may create too great a concentration of loans in one particular location or in one particular type of loan.
The banks will consider purchasing a loan, or a participation in a loan, from another financial institution (including from another subsidiary of the Company) if the loan meets all applicable credit quality standards and (i) the bank's loan to deposit ratio is at a level where additional loans would be desirable; and/or (ii) a common customer requests the purchase.
The following table sets forth, for the three fiscal years ended December 31, 2000, 1999 and 1998 the percentage of total operating revenue contributed by each class of similar services which contributed 15% or more of total operating revenues of the Company during such periods.
Percentage of Period Class of Service Total Revenues - ------ ---------------- -------------- December 31, 2000 Interest and Fees on Loans 66.74% Interest on Investments 21.22% December 31, 1999 Interest and Fees on Loans 64.95% Interest on Investments 24.41% December 31, 1998 Interest and Fees on Loans 61.97% Interest on Investments 25.99%
Market Area
The National Bank of Blacksburg Market Area
NBB's primary market area consists of the northern portion of Montgomery County, all of Giles County, all of Pulaski County, the City of Radford, the City of Galax and adjacent portions of Carroll and Grayson Counties, Virginia. This area includes the towns of Blacksburg and Christiansburg in Montgomery County, the towns of Pearisburg, Pembroke and Rich Creek, in Giles County, and the towns of Dublin and Pulaski in Pulaski County. The local economy is diverse and is oriented toward higher education, retail and service, light manufacturing and agriculture.
Montgomery County's largest employer is Virginia Polytechnic Institute and State University (VPI & SU) located in Blacksburg. VPI & SU is the Commonwealth's land grant college and also its largest university. Employment at VPI & SU has remained stable over the past three years, and it is not expected to change materially in the next few years. A second state supported university, Radford University, is located in NBB's service area. It too has provided stable employment opportunities in the region.
Giles County's primary employer is the Celanese Corp. plant, a manufacturer of the material from which cigarette filters are made. In late 1997 temporary employee furloughs were announced, and a small number of these temporary layoffs have become permanent.
Pulaski County's major employer is the Volvo Heavy Trucks production facility. During 2000, the Volvo company laid off a significant number of workers, and the trend is likely to continue in the near term as the demand for heavy trucks nationwide is very low. The county also has several large furniture plants, most notably Pulaski Furniture and Ethan Allen. Pulaski Furniture recently announced a small work force reduction.
The City of Galax is located in the Virginia-North Carolina furniture-manufacturing region. Three furniture companies, Vaughan Bassett Furniture Company, Vaughan Furniture Company, Inc. and Webb Furniture Company together employ the largest percentage of the area's work force. The Galax economy is stable, but furniture manufacturing is often affected early in an economic downturn.
Several other small manufacturing concerns are located in Montgomery, Giles and Pulaski Counties and in the City of Galax. These concerns manufacture diverse products and are not dependent on one sector of the economy. Agriculture and tourism are also important to the region, especially in Giles County and in the area near Galax.
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 constructed additional facilities attracting health care providers to Montgomery County, making it a center for basic health care services. VPI & SU's Corporate Research Center has brought several small high tech companies to Blacksburg, and further expansion is planned.
Montgomery County, with an approximate population of 77,000, has experienced moderate population growth and this trend is predicted to continue. Neighboring Giles County is more rural, with a total population of approximately 16,500. The population of Giles County is expected to slowly decline over the next few years. It is not anticipated that this decline will materially impact NBB's business in Giles County. Pulaski County has a total population of 34,000 and is relatively stable. The City of Galax has a population of approximately 7,000, and the neighboring, mostly rural, counties of Carroll and Grayson have a total of approximately 50,000 inhabitants. The area's population is stable, and no dramatic changes are predicted.
NBB's primary market area offers the advantages of a good quality of life, scenic beauty, moderate climate and the cultural attractions of two major universities. The region has marketed itself as a retirement destination, and it has had some recent success attracting retirees, particularly from the Northeast and urban Northern Virginia. These marketing efforts are expected to continue.
Bank of Tazewell County Market Area
Most of BTC's business originates from Tazewell County, Virginia and Mercer County, West Virginia. This includes the towns of Tazewell, Richlands and Bluefield, Virginia and Bluefield, West Virginia. BTC also has also recently added offices located in the Towns of Wytheville, Marion and Abingdon located in Wythe, Smyth and Washington Counties, Virginia, respectively. BTC's primary market area has largely depended on the coal mining industry and farming for its economic base. In recent years, coal companies have mechanized reducing the number of individuals required for the production of coal. However, there are still a number of support industries for the coal mining business that continue to provide employment in the area. Additionally, several new businesses have been established in the area, and Bluefield, West Virginia has begun to emerge as a regional medical center. Unemployment has stabilized, and real estate values remain stable and comparable to other areas in southwest Virginia. BTC's expanded market areas in Wythe, Smyth and Washington Counties have a diverse economic base, with manufacturing, agriculture, education and service industries all represented.
Competition
The banking and financial service business in Virginia, generally, and in NBB's and BTC's market areas specifically, is highly competitive. The increasingly competitive environment is a result of changes in regulation, changes in technology and product delivery systems and new competition from non-traditional financial services. The Company's bank subsidiaries compete for loans and deposits with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, money market funds, credit unions and other nonbank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than NBB and BTC. In order to compete with these other financial service providers, NBB and BTC rely upon service-based business philosophies, personal relationships with customers, specialized services tailored to meet customers' needs and the convenience of office locations. In addition, the banks are generally competitive with other financial institutions in their market areas with respect to interest rates paid on deposit accounts, interest rates charged on loans and other service charges on loans and deposit accounts.
Registrant's Organization and Employment
Bankshares, NBB and BTC are organized in a holding company/subsidiary bank structure. Bankshares has no employees, except for officers, and conducts substantially all of its operations through its subsidiaries. All compensation paid to officers and employees is paid by NBB, except for fees paid by Bankshares to President and Chief Executive Officer James G. Rakes for his service as a director of the Company.
At December 31, 2000, NBB employed 138 full time equivalent employees at its main office, operations center and branch offices. BTC at December 31, 2000 employed 81 full time equivalent employees in its various offices and operational areas.
Certain Regulatory Considerations
Bankshares, NBB and BTC are subject to various state and federal banking laws and regulations which impose specific requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of operations. As a result of the substantial regulatory burdens on banking, financial institutions, including Bankshares, NBB and BTC, are disadvantaged relative to other competitors who are not as highly regulated, and their costs of doing business are much higher. The following is a brief summary of the material provisions of certain statutes, rules and regulations which affect Bankshares, NBB and/or BTC. This summary is qualified in its entirety by reference to the particular statutory and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations which are applicable to the businesses of Bankshares, NBB and/or BTC. Any change in applicable laws or regulations may have a material adverse effect on the business and prospects of Bankshares, NBB and/or BTC.
National Bankshares, Inc.
Bankshares is a bank holding company within the meaning of the BHCA and Chapter 13 of the Virginia Banking Act, as amended (the Virginia Banking Act). The activities of Bankshares also are governed by the Gramm-Leach-Bliley Act of 1999.
The Bank Holding Company Act. The BHCA is administered by the Federal Reserve Board, and Bankshares is required to file with the Federal Reserve Board an annual report and any additional information the Federal Reserve Board may require under the BHCA. The Federal Reserve Board also is authorized to examine Bankshares and its subsidiaries. The BHCA requires every bank holding company to obtain the approval of the Federal Reserve Board before (i) it or any of its subsidiaries (other than a bank) acquires substantially all the assets of any bank; (ii) it acquires ownership or control of any voting shares of any bank if after the acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of the bank; or (iii) it merges or consolidates with any other bank holding company.
The BHCA and the Change in Bank Control Act, together with regulations promulgated by the Federal Reserve Board, require that, depending on the particular circumstances, either Federal Reserve Board approval must be obtained or notice must be furnished to the Federal Reserve Board and not disapproved prior to any person or company acquiring "control" of a bank holding company, such as Bankshares, subject to certain exemptions. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of Bankshares. Control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities of Bankshares. The regulations provide a procedure for challenging the rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in nonbanking activities, unless the Federal Reserve Board, by order or regulation, has found those activities to be so closely related to banking or managing or controlling banks as to be incident to banking. Under recent amendments to the BHCA, included in the Gramm-Leach-Bliley Act of 1999 (see below), any bank holding company, all the depository institution subsidiaries of which are well-capitalized, well managed (as those terms are defined in the BHCA) and have a satisfactory or better rating under the Community Reinvestment Act as of their last examination, may file an election with the Federal Reserve Board to become a Financial Holding Company. A Financial Holding Company may engage in any activity that is (i) financial in nature (ii) incidental to a financial activity or (iii) complementary to a financial activity. The BHCA provides a long list of "financial activities", including: insurance underwriting; securities dealing and underwriting; providing financial, investment or economic arising services; and merchant banking activities. Financial Holding Companies may also engage in other activities that the Federal Reserve Board has determined are permissible under the BHCA, by regulation or order.
The Federal Reserve Board imposes certain capital requirements on Bankshares under the BHCA, including a minimum leverage ratio and a minimum ratio of "qualifying" capital to risk-weighted assets. Subject to its capital requirements and certain other restrictions, Bankshares can borrow money to make a capital contribution to NBB or BTC, and these loans may be repaid from dividends paid from NBB or BTC to Bankshares (although the ability of NBB or BTC to pay dividends are subject to regulatory restrictions). Bankshares can raise capital for contribution to NBB and BTC by issuing securities without having to receive regulatory approval, subject to compliance with federal and state securities laws.
The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (the GLBA), enacted on November 12, 1999, was a broad rewrite of financial services legislation. The GLBA permits significant combinations among different sectors of the financial services industry; allows for significant expansion of financial service activities by Bank holding companies and provides for a regulatory framework by various governmental authorities responsible for different financial activities; and offers certain financial privacy protections to consumers. The GLBA repealed affiliation and management interlock prohibitions of the Depression-era Glass-Steagall Act and, by amending the Bank Holding Companies, the GLBA added new substantive provisions to the non-banking activities permitted under the BHCA with the creation of the financial holding company. The GLBA preempts most state laws that prohibit financial holding companies from engaging in insurance activities. The GLBA permits affiliations between banks and securities firms within the same holding company structure, and the Act permits financial holding companies to directly engage in a broad range of securities and merchant banking activities.
The Gramm-Leach-Bliley Act will lead to important changes in the manner in which financial services are delivered in the United States. Bank holding companies and their subsidiary banks will be able to offer a much broader array of financial services; however, there will be greater competition in all sectors of the financial services market.
The Virginia Banking Act. All Virginia bank holding companies must register with the Virginia State Corporation Commission (the Commission) under the Virginia Banking Act. A registered bank holding company must provide the Commission with information with respect to the financial condition, operations, management and intercompany relationships of the holding company and its subsidiaries. The Commission also may require such other information as is necessary to keep itself informed about whether the provisions of Virginia law and the regulations and orders issued under Virginia law by the Commission have been complied with, and may make examinations of any bank holding company and its subsidiaries. The Virginia Banking Act allows 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. The Virginia Banking Act permits bank holding companies from throughout the United States to enter the Virginia market, subject to federal and state approval.
NBB and BTC
General. NBB is a national banking association incorporated under the laws of the United States and is subject to examination by the Office of the Comptroller of the Currency (the OCC). Deposits in NBB are insured by the FDIC up to a maximum amount (generally $100,000 per depositor, subject to aggregation rules). The OCC and the FDIC regulate or monitor all areas of NBB's operations, including security devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings, deposits, mergers, issuances of securities, payment of dividends, interest rates payable on deposits, interest rates or fees chargeable on loans, establishment of branches, corporate reorganizations and maintenance of books and records. The OCC requires NBB to maintain certain capital ratios. NBB is required by the OCC to prepare quarterly reports on NBB's financial condition and to conduct an annual audit of its financial affairs in compliance with minimum standards and procedures prescribed by the OCC. NBB also is required by the OCC to adopt internal control structures and procedures in order to safeguard assets and monitor and reduce risk exposure. While appropriate for safety and soundness of banks, these requirements impact banking overhead costs.
BTC is organized as a Virginia-chartered banking corporation and is regulated and supervised by the Bureau of Financial Institutions (BFI) of the Virginia State Corporation Commission. In addition, as a federally insured bank, BTC is regulated and supervised by the Federal Reserve Board, which serves as its primary federal regulator and is subject to certain regulations promulgated by the FDIC. Under the provisions of federal law, federally insured banks are subject, with certain exceptions, to certain restrictions on extensions of credit to their affiliates, on investments in the stock or other securities of affiliates and on the taking of such stock or securities as collateral from any borrower. In addition, these banks are prohibited from engaging in certain tie-in-arrangements in connection with any extension of credit or the providing of any property of service.
The Virginia State Corporation Commission and the Federal Reserve Board conduct regular examinations of BTC reviewing the adequacy of the loan loss reserves, quality of the loans and investments, propriety of management practices, compliance with laws and regulations and other aspects of the bank's operations. In addition to these regular examinations, Virginia chartered banks must furnish to the Federal Reserve Board quarterly reports containing detailed financial statements and schedules.
Community Reinvestment Act. NBB and BTC are subject to the provisions of the Community Reinvestment Act of 1977 (the CRA), which requires the appropriate federal bank regulatory agency, in connection with its regular examination of a bank, to assess the bank's record in meeting the credit needs of the community served by the bank, including low and moderate-income neighborhoods. Under the implementing CRA regulations, banks have the option of being assessed for CRA compliance under one of several methods. Small banks are evaluated differently than larger banks and technically are not subject to some data collection requirements. The focus of the regulations is on the volume and distribution of a bank's loans, with particular emphasis on lending activity in low and moderate-income areas and to low and moderate-income persons. The regulations place substantial importance on a bank's product delivery system, particularly branch locations. The regulations require banks, other than small banks, to comply with significant data collection requirements. The regulatory agency's assessment of the bank's record is made available to the public. Further, this assessment is required for any bank which has applied to, among other things, establish a new branch office that will accept deposits, relocate an existing office, or merge, consolidate with or acquire the assets or assume the liabilities of a federally regulated financial institution. It is likely that banks' compliance with the CRA, as well as other so-called fair lending laws, will face ongoing government scrutiny and that costs associated with compliance will continue to increase.
NBB has received a CRA rating of "Outstanding" in its last examination by federal bank regulators. BTC was rated as "Satisfactory".
Federal Deposit Insurance Corporation Improvement Act of 1991. The difficulties encountered nationwide by financial institutions during 1990 and 1991 prompted federal legislation designed to reform the banking industry and to promote the viability of the industry and of the deposit insurance system. FDICIA, which became effective on December 19, 1991, bolsters the deposit insurance fund, tightens bank regulation and trims the scope of federal deposit insurance.
The legislation bolsters the bank deposit insurance fund with $70 billion in borrowing authority and increases to $30 billion from $5 billion the amount the FDIC can borrow from the U.S. Treasury to cover the cost of bank failures. The loans, plus interest, would be repaid by premiums that banks pay on domestic deposits over the next fifteen years.
Among other things, FDICIA requires the federal banking agencies to take "prompt corrective action" in respect to banks that do not meet minimum capital requirements. FDICIA establishes five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized."
If a depository institution's principal federal regulator determines that an otherwise adequately capitalized institution is in an unsafe or unsound condition or is engaging in an unsafe or unsound practice, it may require the institution to submit a corrective action plan, restrict its asset growth and prohibit branching, new acquisitions and new lines of business. An institution's principal federal regulator may deem the institution to be engaging in an unsafe or unsound practice if it receives a less than satisfactory rating for asset quality, management, earnings or liquidity in its most recent examination.
Among other possible sanctions, an undercapitalized depository institution may not pay dividends and is required to submit a capital restoration plan to its principal federal regulator. In addition, its holding company may be required to guarantee compliance with the capital restoration plan under certain circumstances. If an undercapitalized depository institution fails to submit or implement an acceptable capital restoration plan, it can be subject to more severe sanctions, including an order to sell sufficient voting stock to become adequately capitalized. More severe sanctions and remedial actions can be mandated by the regulators if an institution is considered significantly or critically undercapitalized.
In addition, FDICIA requires regulators to draft a new set of non-capital measures of bank safety, such as loan underwriting standards and minimum earnings levels. The legislation also requires regulators to perform annual on-site bank examinations, places limits on real estate lending by banks and tightens auditing requirements. In April 1995, the regulators adopted safety and soundness standards as required by FDICIA in the following areas: (i) operational and managerial; (ii) asset quality earnings and stock valuation; and (iii) employee compensation.
FDICIA reduces the scope of federal deposit insurance. The most significant change ended the "too big to fail" doctrine, under which the government protects all deposits in most banks, including those exceeding the $100,000 insurance limit. The FDIC's ability to reimburse uninsured deposits--those over $100,000 and foreign deposits--has been sharply limited. Since December 1993, the Federal Reserve Board's ability to finance undercapitalized banks with extended loans from its discount window has been restricted. In addition, only the best capitalized banks will be able to offer insured brokered deposits without FDIC permission or to insure accounts established under employee pension plans.
Branching. In 1986, the Virginia Banking Act was amended to remove the geographic restrictions governing the establishment of branch banking offices. Subject to the approval of the appropriate federal and state bank regulatory authorities, BTC as a state bank, may establish a branch office anywhere in Virginia.
National banks, like NBB, are required by the National Bank Act to adhere to branch banking laws applicable to state banks in the states in which they are located. Under current Virginia law, NBB may open branch offices throughout Virginia with the prior approval of the OCC. In addition, with prior approval of one or more of the OCC, NBB will be able to acquire existing banking operations in Virginia. As a state bank, BTC is subject to Virginia state branching laws with BFI and Federal Reserve Bank approval, BTC is able to acquire existing banking operations in the state.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Interstate Act) allows bank holding companies to acquire banks in any state, without regard to state law, except that if the state has a minimum requirement for the amount of time a bank must be in existence, that law must be preserved. Under the Virginia Banking Act, a Virginia bank or all of the subsidiaries of Virginia holding companies sought to be acquired must have been in continuous operation for more than two years before the date of such proposed acquisition. The Interstate Act also permits banks to acquire out-of-state branches through interstate mergers, if the state has not opted out of interstate branching. De novo branching, where an out-of-state bank holding company sets up a new branch in another state, requires a state's specific approval. An acquisition or merger is not permitted under the Interstate Act if the bank, including its insured depository affiliates, will control more than 10% of the total amount of deposits of insured depository institutions in the United States, or will control 30% or more of the total amount of deposits of insured depository institutions in any state.
Virginia has, by statute, elected to opt-in fully to interstate branching under the Interstate Act. Under the Virginia statute, Virginia state banks may, with the approval of the Virginia State Corporation Commission, establish and maintain a de novo branch or acquire one or more branches in a state other than Virginia, either separately or as part of a merger. Procedures also are established to allow out-of-state domiciled banks to establish or acquire branches in Virginia, provided the "home" state of the bank permits Virginia banks to establish or acquire branches within its borders. The activities of these branches are subject to the same laws as Virginia domiciled banks, unless such activities are prohibited by the law of the state where the bank is organized. The Virginia State Corporation Commission has the authority to examine and supervise out-of-state state banks to ensure that the branch is operating in a safe and sound manner and in compliance with the laws of Virginia. The Virginia statute authorizes the Bureau of Financial Institutions to enter into cooperative agreements with other state and federal regulators for the examination and supervision of out-of-state banks with Virginia operations, or Virginia domiciled banks with operations in other states. Likewise, national banks, with the approval of the OCC, may branch into and out of the state of Virginia. Any Virginia branch of an out-of-state national bank is subject to Virginia law (enforced by the OCC) with respect to intrastate branching, consumer protection, fair lending and community reinvestment as if it were a branch of a Virginia bank, unless preempted by federal law.
The Interstate Act permits banks and bank holding companies from throughout the United States to enter Virginia markets through the acquisition of Virginia institutions and makes it easier for Virginia bank holding companies and Virginia state and national banks to acquire institutions and to establish branches in other states. Competition in market areas served by the Company has increased as a result of the Interstate Act and the Virginia interstate banking statutes.
Deposit Insurance. The FDIC establishes rates for the payment of premiums by federally insured financial institutions. A Bank Insurance Fund (the BIF) is maintained for commercial banks, with insurance premiums from the industry used to offset losses from insurance payouts when banks fail. Beginning in 1993, insured depository institutions like NBB and BTC paid for deposit insurance under a risk-based premium system. Beginning in 1997, all banks, including NBB and BTC, were subject to an additional FDIC assessment which funds interest payments for bank issues to resolve problems associated with the savings and loan industry. This assessment will continue until 2018-2019. The assessment will vary over the period from 1.29 cents to 2.43 cents per $100 of deposits.
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999 (the GLBA) allows national banks, with OCC approval, to acquire financial subsidiaries to engage in any activity that is financial in nature or incidental to a financial activity, as defined in the Bank Holding Act, except (i) insurance underwriting, (ii) merchant or insurance portfolio investments, and (iii) real estate development or investment. Well-capitalized national banks are also given the authority to engage in municipal bond underwriting.
To establish or acquire a financial subsidiary, a national bank must be well-managed, and the consolidated assets of its financial subsidiary must not exceed the lesser of 45% of the consolidated total assets of the bank or $50 billion. The relationship between a national bank and a financial subsidiary are subject to a variety of supervisory enhancements from regulators. The GLBA also provides that state banks that establish or acquire financial subsidiaries are required to comply with the same safeguards imposed on the financial subsidiaries of national banks.
Government Policies. The operations of NBB and BTC are affected not only by general economic conditions, but also by the policies of various regulatory authorities. In particular, the Federal Reserve Board regulates money and credit and interest rates in order to influence general economic conditions. These policies have a significant influence on overall growth and distribution of loans, investments and deposits and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future.
Limits on Dividends and Other Payments. As a national bank, NBB, may not pay dividends from its capital; all dividends must be paid out of net profits then on hand, after deducting expenses, losses, bad debts, accrued dividends on preferred stock, if any, and taxes. In addition, a national bank is prohibited from declaring a dividend on its shares of common stock until its surplus equals its stated capital, unless there has been transferred to surplus no less than one-tenth of the bank's net profits of (i) the preceding two consecutive half-year periods (in the case of an annual dividend) or (ii) the preceding half-year period (in the case of a quarterly or semi-annual dividend). The approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits for that year combined with its retained net profits for the preceding two years, less any required transfers to surplus or to fund the retirement of preferred stock.
The OCC has promulgated regulations that became effective on December 13, 1990, which significantly affect the level of allowable dividend payments for national banks. The effect is to make the calculation of national banks' dividend-paying capacity consistent with generally accepted accounting principles. The allowance for loan and lease losses will not be considered an element of "undivided profits then on hand" and provisions to the allowance are treated as expenses and therefore not part of "net profits." Accordingly, a national bank with an allowance greater than its statutory bad debts may not include the excess in calculating undivided profits for dividend purposes. Further, a national bank may be able to use a portion of its earned capital surplus account as "undivided profits then on hand," depending on the composition of that account.
As a state member bank subject to the regulations of the Federal Reserve Board, BTC must obtain the approval of the Federal Reserve Board for any dividend if the total of all dividends declared in any calendar year would exceed the total of its net profits, as defined by the Federal Reserve Board, for that year, combined with its retained net profits for the preceding two years. In addition, a state member bank may not pay a dividend in an amount greater than its undivided profits then on hand after deducting its losses and bad debts. For this purpose, bad debts are generally defined to include the
principal amount of loans which are in arrears with respect to interest by six months or more, unless such loans are fully secured and in the process of collection. Moreover, for purposes of this limitation, a state member bank is not permitted to add the balance in its allowance for loan losses account to its undivided profits then on hand; however, it may net the sum of its bad debts as so defined against the balance in its allowance for loan losses account and deduct from undivided profits only bad debts as so defined in excess of that account.
In addition, the Federal Reserve Board is authorized to determine, under certain circumstances relating to the financial condition of a state member bank, that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The payment of dividends that depletes a bank's capital base could be deemed to constitute such an unsafe or unsound practice. The Federal Reserve Board has indicated that banking organizations should generally pay dividends only out of current operating earnings.
Virginia law also imposes restrictions on the ability of BTC to pay dividends. A Virginia state bank is permitted to declare a dividend out of its "net undivided profits", after providing for all expenses, losses, interest and taxes accrued or due by the bank. In addition, a deficit in capital originally paid in must be restored to its initial level, and no dividend can be paid which could impair the bank's paid in capital. The Bureau of Financial Institutions further has authority to limit the payment of dividends by a Virginia bank if it determines the limitation is in the public interest and is necessary to ensure the bank's financial soundness.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) provides that no insured depository institution may make any capital distribution (which would include a cash dividend) if, after making the distribution, the institution would not satisfy one or more of its minimum capital requirements.
Capital Requirements. The Federal Reserve Board has adopted risk-based capital guidelines which are applicable to Bankshares and BTC. The Federal Reserve Board guidelines redefine the components of capital, categorize assets into different risk classes and include certain off-balance sheet items in the calculation of risk-weighted assets. The minimum ratio of qualified total capital to risk-weighted assets (including certain off-balance sheet items, such as standby letters of credit) is 8.0%. At least half of the total capital must be comprised of Tier 1 capital for a minimum ratio of Tier 1 Capital to risk-weighted assets of 4.0%. The remainder may consist of a limited amount of subordinated debt, other preferred stock, certain other instruments and a limited amount of loan and lease loss reserves. The OCC has adopted similar regulations applicable to NBB.
In addition, the Federal Reserve Board has established minimum leverage ratio (Tier 1 capital to total assets less intangibles) guidelines that are applicable to Bankshares and BTC. The OCC has adopted similar regulations applicable to NBB. These guidelines provide for a minimum ratio of 4.0% for banks that meet certain specified criteria, including that they have the highest regulatory CAMELS rating and are not anticipating or experiencing significant growth and have well-diversified risk. All other banks will be required to maintain an additional cushion of at least 100 to 200 basis points, based upon their particular circumstances and risk profiles. The guidelines also provide that banks experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
Bank regulators from time to time have indicated a desire to raise capital requirements applicable to banking organizations beyond current levels. In addition, the number of risks which may be included in risk-based capital restrictions, as well as the measurement of these risks, is likely to change, resulting in increased capital requirements for banks. Bankshares, NBB and BTC are unable to predict whether higher capital ratios would be imposed and, if so, at what levels and on what schedule.
Other Legislative and Regulatory Concerns
Other legislative and regulatory proposals regarding changes in banking and the regulation of banks, thrifts and other financial institutions are periodically considered by the executive branch of the federal government, Congress and various state governments, including Virginia. New proposals could significantly change the regulation of banks and the financial services industry. It cannot be predicted what might be proposed or adopted or how these proposals would affect the Company.
Other Business Concerns
The banking industry is particularly sensitive to interest rate fluctuations, as the spread between the rates which must be paid on deposits and those which may be charged on loans is an important component of profit. In addition, the interest which can be earned on a bank's invested funds has a significant effect on profits. Rising interest rates typically reduce the demand for new loans, particularly the real estate loans which represent a significant portion of NBB's and BTC's loan demand, as well as certain NBB loans in which BTC participates.
Statistical Disclosure by National Bankshares, Inc. and Subsidiaries (The Company)
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest Rates and Interest Differential ------------------------------------------------------------------------
A. Average Balance Sheets
The following table presents, for the years indicated, condensed daily average balance sheet information.
($ in thousands) =============================================================================== December 31, ------------------------------------------ Assets 2000 1999 1998 =============================================================================== Cash and due from banks $11,355 12,820 10,281 Interest bearing deposits 10,683 5,263 12,889 Federal funds sold 6,149 2,926 6,389 Securities available for sale: Taxable 87,813 95,979 94,247 Nontaxable 31,302 29,286 29,284 Securities held to maturity: Taxable 9,029 8,940 9,972 Nontaxable 14,542 17,219 18,929 Mortgage loans held for sale 519 709 1,017 Loans, net 310,624 266,431 225,613 Other assets 18,365 14,616 12,367 ------------------------------------------ Total assets $500,381 454,189 420,988 =============================================================================== - -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity =============================================================================== - ------------------------------------------------------------------------------- Noninterest-bearing demand Deposits $56,709 55,700 49,552 Interest-bearing demand deposits 85,713 85,284 77,842 Savings deposits 43,138 46,792 47,475 Time deposits 248,113 203,807 185,101 ------------------------------------------ Total deposits 433,673 391,583 359,970 Short-term borrowings 1,727 4,228 216 Long-term borrowings 7,284 --- --- ------------------------------------------ Other liabilities 2,015 2,182 2,520 ------------------------------------------ Total liabilities 444,699 397,993 362,706 Stockholders' equity 55,682 56,196 58,282 ------------------------------------------ Total liabilities and Stockholders' equity $500,381 454,189 420,988 ===============================================================================
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.
(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 $381 in 2000, $680 in 1999 and $414 in 1998 are included in total interest income. (3) Nonaccrual loans are included in average balances for yield computations.
C. Analysis of Changes in Interest Income and Interest Expense
The Company's primary source of revenue is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and other funds. The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities. The following table sets forth, for the years indicated, a summary of the changes in interest income and interest expense resulting from changes in average asset and liability balances (volume) and changes in average interest rates (rate).
(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.
II. Investment Portfolio
A. Book Value of Investments The amortized costs and fair values of securities available for sale as of December 31, 2000, 1999 and 1998 were as follows:
The amortized costs of securities held to maturity as of December 31, 2000, 1999 and 1998 were as follows:
(1) The majority of mortgage-backed securities and collateralized mortgage obligations held at December 31, 2000 were backed by U.S. agencies. Certain holdings are required to be periodically subjected to the Financial Institution Examination Council's (FFIEC) high risk mortgage security test. These tests address possible fluctuations in the average life and price sensitivity which are the primary risks associated with this type of security. Such tests are usually subject to regulatory review.
Except for U.S. Government securities, the Company has no securities with any issuer that exceeds 10% of stockholders' equity.
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, 2000 and weighted average yield for each range of maturities.
(1) Rates shown represent weighted average yield on a fully taxable basis.
III. Loan Portfolio
The Company concentrates its lending activities in commercial and industrial loans, real estate mortgage loans both residential and business, and loans to individuals. The following tables set forth (i) a comparison of the Company's loan portfolio by major category of loans as of the dates indicated and (ii) the maturities and interest rate sensitivity of the loan portfolio at December 31, 2000.
A. Types of Loans
===================================================== December 31, ----------------------------------------------------- ($ in thousands) 2000 1999 1998 1997 1996 ================================================================================ Commercial and industrial
loans $163,929 149,386 110,509 101,379 87,519
Real estate mortgage
loans 71,163 58,829 48,724 42,969 43,917
Real estate construction
loans 16,726 14,669 12,827 8,510 6,295
Loans to individuals 110,176 73,825 69,493 66,635 60,991 ----------------------------------------------------- Total loans 361,994 296,709 241,553 219,493 198,722
Less unearned income and
deferred fees (2,313) (1,916) (2,296) (2,503) (2,549) ----------------------------------------------------- Total loans, net of
unearned income 359,681 294,793 239,257 216,990 196,173
Less allowance for loans
losses (3,886) (3,231) (2,679) (2,438) (2,575) ----------------------------------------------------- Total loans, net $355,795 291,562 236,578 214,552 193,598 ================================================================================
B. Maturities and Interest Rate Sensitivities
====================================================== December 31, 2000 ------------ --------------- ------------ ------------ After ($ in thousands) <1 Year 1-5 Years 5 Years Total ========================= ============ =============== ============ ============ Commercial and industrial $47,264 66,183 50,482 163,929 Real estate construction 16,726 --- --- 16,726 Less loans with predetermined interest 23,208 38,144 50,007 111,359 rates ------------ --------------- ------------ ------------ Loans with adjustable rates $40,782 28,039 475 69,296 ========================= ============ =============== ============ ============
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans The following table presents aggregate amounts for nonaccrual loans, restructured loans, other real estate owned, net and accruing loans which are contractually past due ninety days or more as to interest or principal payments.
======================================= December 31, --------------------------------------- ($ in thousands) 2000 1999 1998 1997 1996 - -------------------------------------------------------------------------------- Nonaccrual loans: Commercial and industrial $ 65 65 --- 55 121 Real estate mortgage 5 33 28 32 495 Real estate construction --- --- --- --- --- Loans to individuals 18 53 --- --- --- - -------------------------------------------------------------------------------- $ 88 151 28 87 616 - -------------------------------------------------------------------------------- Restructured loans: Commercial and industrial --- 40 --- --- --- - -------------------------------------------------------------------------------- Total nonperforming loans 191 28 87 616 Other real estate owned, net 540 447 628 421 474 - -------------------------------------------------------------------------------- Total nonperforming assets 628 638 656 508 1,090 ======================================= - -------------------------------------------------------------------------------- Accruing loans past due 90 days or more: Commercial and industrial Real estate mortgage $ 242 99 186 82 14 Real estate construction 664 704 160 358 252 Loans to individuals --- --- --- --- --- 415 274 204 232 192 - -------------------------------------------------------------------------------- $1,321 1,077 550 672 458 ================================================================================
The effect of nonaccrual and restructured loans on interest income is presented below:
======================================= ($ in thousands) 2000 1999 1998 ============================================================================= Scheduled interest: Nonaccrual loans $11 13 4 Restructured loans --- --- --- --------------------------------------- Total scheduled interest $11 13 4 --------------------------------------- Recorded interest: Nonaccrual loans --- --- --- Restructured loans --- --- --- --------------------------------------- Total recorded interest --- --- --- =============================================================================
Interest is recognized on the cash basis for all loans carried in nonaccrual status. Loans generally are placed in nonaccrual status when the collection of principal or interest is ninety days or more past due, unless the obligation is both well-secured and in the process of collection.
2. Potential Problem Loans
At December 31, 2000, the recorded investment in loans which have been identified as impaired loans totaled $456. Of this amount, $321 related to loans with no valuation allowance and $135 related to loans with a corresponding valuation allowance of $135. For the year-ended December 31, 2000, the average recorded investment in impaired loans was approximately $657 and the total interest income recognized on impaired loans was $43 of $0 which was recognized on a cash basis.
At December 31, 1999, the recorded investment in loans which have been identified as impaired loans totaled $317,000. Of this amount, $95,000 related to loans with no valuation allowance and $222,000 related to loans with a corresponding valuation allowance of $154,000. For the year ended December 31, 1999, the average recorded investment in impaired loans was approximately $292,000, and the total interest income recognized on impaired loans was $13,000 of which $0 was recognized on a cash basis.
3. Foreign Outstandings
At December 31, 2000, 1999 and 1998, there were no foreign outstandings.
4. Loan Concentrations
The Company does a general banking business, serving the commercial, agricultural and personal banking needs of its customers. NBB's trade territory, consists of Montgomery and Giles Counties, and the City of Galax, Virginia and portions of adjacent counties. NBB's operating results are closely correlated with the economic trends within this area which are, in turn, influenced by the area's three largest employers, Virginia Polytechnic Institute and State University, Montgomery County Schools and Celco. Other industries include a wide variety of manufacturing, retail and service concerns. Most of BTC's business originates from the communities of Tazewell and Bluefield and other communities in Tazewell County, Virginia and in Mercer County, West Virginia. BTC's service area has largely depended on the coal mining industry and farming for its economic base. In recent years, coal companies have mechanized and reduced the number of persons engaged in the production of coal. There are still a number of support industries for the coal mining business that continue to provide employment in the area. Additionally, several new businesses have been established in the area and Bluefield, West Virginia has begun to emerge as a regional medical
center. The ultimate collectibility of the loan portfolios and the recovery of the carrying amounts of repossessed property are susceptible to changes in the market conditions of these areas.
At December 31, 2000 and 1999, approximately $151 million and $130 million, respectively, of the loan portfolio were concentrated in commercial real estate. This represents approximately 42% and 44% of the loan portfolio at December 31, 2000 and 1999, respectively. Included in commercial real estate at December 31, 2000 and 1999 was approximately $84 million and $85 million, respectively, in loans for college housing and professional office buildings. Loans secured by residential real estate were approximately $110 million and $74 million at December 31, 2000 and 1999, respectively. This represents approximately 31% and 25% of the loan portfolio at December 31, 2000 and 1999, respectively. Loans secured by automobiles were approximately $36 million and $33 million at December 31, 2000 and 1999, respectively. This represents approximately 10% of the loan portfolio at December 31, 2000 and 11% at December 31, 1999.
The Company has established operating policies relating to the credit process and collateral requirements in loan originations. Loans to purchase real and personal property are generally collateralized by the related property and with loan amounts established based on certain percentage limitations of the property's total stated or appraised value. Credit approval is primarily a function of collateral and the evaluation of the creditworthiness of the individual borrower or project based on available financial information.
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:
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.
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:
Loan Loss Allowance
The adequacy of the allowance for loan losses is based on management's judgement and analysis of current and historical loss experience, risk characteristics of the loan portfolio, concentrations of credit as well as other internal and external factors such as general economic conditions.
The evaluation of the allowance for loan losses is performed by the internal credit review department.
Guidance for the evaluations performed are established by the regulatory authorities who periodically review the results for compliance.
As a part of this process, loans are grouped into principally two classes. The first involves loans that are individually reviewed and direct allocations made based on collateral values, financial statements of the borrower and other documentation. In addition, an estimate is made for losses inherent to this portfolio.
The second class includes pools of loans. Allocations from this analysis are derived and based on historical loss averages.
The unallocated portion of the allowance for loan losses is the residual amount after allocation to the above classes.
As previously stated, adequacy of the allowance for loan losses is subject to periodic regulatory review. These reviews cover the allocation process and overall adequacy of the allowance for loan losses. Regulatory authorities at their discretion may set minimum levels for the allowance and/or require the charge-off of loans as a result of their examination. This independent grading process by regulators serves as a standard to gage the effectiveness of the internal credit review.
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, ---------------------------------------------------------- 2000 1999 1998 ---------------------------------------------------------- Average Average Average Average Rates Average Rates Average Rates ($ in thousands) Amounts Paid Amounts Paid Amounts Paid - -------------------------------------------------------------------------------- Noninterest-bearing demand deposits $ 56,709 --- 55,700 --- 49,552 ---
Interest-bearing demand deposits 85,713 2.62% 85,284 2.50% 77,842 2.83%
Savings deposits 43,138 2.63% 46,792 2.59% 47,475 3.18%
Time deposits 248,113 5.71% 203,807 5.22% 185,101 5.51%
- -------------------------------------------------------------------------------- Average total deposits $433,673 4.64% 391,583 4.16% 359,970 4.48% ================================================================================
B. Time Deposits of $100,000 or More
The following table sets forth time certificates of deposit and other time deposits of $100,000 or more:
=========================================================== December 31, 2000 =========================================================== Over 3 Months Over 6 Months 3 Months Through 6 Through 12 Over 12 ($ in thousands) or Less Months Months Months Total ================================================================================ Certificates of deposit $68,699 45,294 101,249 111,424 326,666 - -------------------------------------------------------------------------------- Other time deposits 48,526 35,941 78,595 91,297 254,359 - -------------------------------------------------------------------------------- Total time deposits of $100,000 or more $20,173 9,353 22,654 20,127 72,307 ================================================================================
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, ---------------------------------------- 2000 1999 1998 ============================================================================== Return on average assets 1.46% 1.56% 1.61% - ------------------------------------------------------------------------------ Return on average equity(1) 13.13% 12.61% 11.66% - ------------------------------------------------------------------------------ Dividend payout ratio 40.87% 39.70% 41.29% - ------------------------------------------------------------------------------ Average equity to average assets(1) 11.13% 12.37% 13.84% ==============================================================================
(1) Includes amount related to common stock subject to ESOP put option excluded from stockholders' equity on the Consolidated Balance Sheets for 1999.
Item 2.
Item 2. Properties
Bankshares' headquarters and one branch office of NBB is located at 101 Hubbard Street, Blacksburg, Virginia. NBB's Main Office is at 100 South Main Street, Blacksburg, Virginia. In addition to the Bank's Main Office location and the Hubbard Street branch office, NBB owns eleven branch offices: three in the Town of Blacksburg; one in the Town of Christiansburg; one in Montgomery County; and three in the County of Giles, two in Pulaski County, one in the City of Radford and one in the City of Galax. An additional tract of land has been acquired for the construction of a fourteenth branch.
Bank of Tazewell County owns the land and building of eight of its ten offices. The bank leases the land and building for two offices. The Main Office is located at Main Street, Tazewell, Virginia. Three additional branches are located in Tazewell, one is located in Richlands, two are located in Bluefield, Virginia, one is in Wytheville, Virginia, one in Marion, Virginia, and one in Abingdon, Virginia. Management believes that its existing facilities are adequate to meet present needs and any anticipated growth.
NBB owns all its computer and data processing hardware and is a licensee of the software it utilizes. BTC utilizes this same system for data processing.
Item 3.
Item 3. Legal Proceedings - --------------------------
Bankshares, NBB nor BTC are not currently involved in any material pending legal proceedings, other than routine litigation incidental to NBB's and BTC's banking business.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------
None
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.
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 56 Chairman, President and Chief Executive 1986 Officer, National Bankshares, Inc.; and President and Chief Executive Officer of The National Bank of Blacksburg since 1983. - -------------------------------------------------------------------------------- J. Robert Buchanan 49 Treasurer, National Bankshares, Inc.; 1998 Senior Vice President/Chief Financial Officer of The National Bank of Blacksburg, since January 1, 1998; prior thereto Senior Vice President, Treasurer and Chief Financial Officer, Premier Bankshares Corporation since 1991. - -------------------------------------------------------------------------------- Marilyn B. Buhyoff 52 Secretary & Counsel, National 1989 Bankshares, Inc.; and Senior Vice President/ Administration since 1992, of The National Bank of Blacksburg. - -------------------------------------------------------------------------------- F. Brad Denardo 48 Corporate Officer, National Bankshares, 1989 Inc.; and Executive Vice President/ Loans since 1989 of The National Bank of Blacksburg. ================================================================================
Except for J. Robert Buchanan, each of the executive officers listed above have served Bankshares and/or its subsidiaries in the aforementioned executive capacity for the past five years.
Part II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ----------------------------------------------------------
Effective December 1, 1999, National Bankshares, Inc.'s common stock began trading on the Nasdaq SmallCap Market under the symbol "NKSH". Prior to December 1, 1999, National Bankshares, Inc.'s common stock was traded on a limited basis in the over-the-counter market and was not listed on any exchange or quoted on Nasdaq. As of December 31, 2000 there were 1,076 stockholders of Bankshares common stock. The following is a summary of the market price per share and cash dividend per share of the common stock of National Bankshares, Inc. for 2000 and 1999. Prices prior to December 1, 1999 do not necessarily reflect the prices which would have prevailed had there been an active trading market, nor do they reflect unreported trades, which may have been at lower or higher prices.
Information concerning Market Price and Dividend Data is set forth under "Common Stock Information and Dividends" on page 11 of Bankshares' 2000 Annual Report to Stockholders and is incorporated herein by reference.
Item 6.
Item 6. Selected Financial Data - --------------------------------
The table entitled "Selected Consolidated Financial Data" on page 4 of Bankshares' 2000 Annual Report to Stockholders is incorporated herein by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - --------------------------------------------------------------------------------
The information contained under "Management's Discussion and Analysis" on pages 5 through 11 of Bankshares' 2000 Annual Report to Stockholders is incorporated herein by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------
See "Analysis of Interest Rate Sensitivity" set forth below. Additional information is set forth under the section "Interest Rate Sensitivity" on page 6 and the section "Derivatives and Market Risk Exposure" on page 10 of Bankshares' 2000 Annual Report to Stockholders and is incorporated herein by reference.
Analysis of Interest Rate Sensitivity
The following discussion of interest rate sensitivity contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in the forward-looking statements.
The table below sets forth, as of December 31, 2000, the distribution of repricing opportunities of the Company's interest-earning assets and interest-bearing liabilities, the interest rate sensitivity gap (i.e., interest rate sensitive assets less interest rate sensitive liabilities), and the cumulative interest rate sensitivity gap ratio. The table sets forth the time periods during which interest-earning assets and interest-bearing liabilities will mature or may reprice in accordance with their contracted terms.
Certain shortcomings are inherent in the method of analysis presented in the following table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees and at different times to changes in market interest rates. Also, loan prepayments and early withdrawals of certificates of deposit could cause the interest sensitivities to vary from those which appear in the table.
An interest rate sensitivity gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would generally tend to affect adversely net interest income while a positive gap would generally tend to result in an increase in net interest income. During a period of declining interest rates, a negative gap would generally tend to result in increased net interest income, while a positive gap would generally tend to affect adversely net interest income. The Company's future earnings may be adversely affected by a sharp upturn in interest rates as the Company is liability sensitive for a period extending through five years. In a falling rate environment, earnings might benefit to a certain degree from this position, because assets at higher rate levels would reprice downward at a slower rate than interest sensitive liabilities.
In prior years, the Company has used its securities available for sale as a primary means to counter movements in interest rates. At December 31, 2000, this portfolio contained a substantial amount of longer term securities with call features. Due to overall increases in interest rate levels these securities have not been called as originally anticipated. The rising interest rate levels also resulted in a substantial increase in net unrealized losses making the sale of these securities impractical. At present and for an indeterminate amount of time in the future, the Company will not be able to use the securities available for sale portfolio to respond to interest rate movements to the extent possible in recent years. This risk can be mitigated, however, by funds management, specifically through use of credit instruments offered by the Federal Home Loan Bank. Accordingly, the Company's vulnerability to upward movements of interest rates has increased.
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.
(1) The Company is sensitive to interest rate changes, as liabilities generally reprice or mature before interest-earning assets. The above gap table reflects the Company's rate-sensitive position at December 31, 2000, 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. Each category is shown net of unearned income and deferred fees. (3) Call features on certain securities, if exercised, could have the effect of materially shortening the average life of the investment portfolio. The exercise of a call feature is dependent upon the rate environment. The call decision is at the issuers discretion and ultimate benefit. (4) Available for sale securities and scheduled using amortized cost.
Item 8.
Item 8. Financial Statements and Supplementary Data - ----------------------------------------------------
The following consolidated financial statements of the Registrant and the Independent Auditors' Report set forth on pages 12 through 35 of Bankshares' 2000 Annual Report to Stockholders are incorporated herein by reference:
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 2000 and 1999
3. Consolidated Statements of Income and Comprehensive Income - Years ended December 31, 2000, 1999 and 1998
4. Consolidated Statements of Changes in Stockholders' Equity - Years ended December 31, 2000, 1999 and 1998
5. Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998
6. Notes to Consolidated Financial Statements - December 31, 2000, 1999 and 1998
Item 9.
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure - --------------------------------------------------------------------------------
Changes in and disagreement with Accountants on Accounting and Financial Disclosure is set out under the caption "Change in Selection of Auditors" on page 13 of Bankshares's Proxy Statement dated March 14, 2001 which information is incorporated herein.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - ------------------------------------------------------------
Executive Officers of Bankshares as of December 31, 2000 are listed on page 32 herein.
Information with respect to the directors of Bankshares is set out under the caption "Election of Directors" on pages 2 through 4 of Bankshares' Proxy Statement dated March 14, 2001 which information is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation - --------------------------------
The information set forth under "Executive Compensation" on pages 5 through 6 of Bankshares' Proxy Statement dated March 14, 2001 is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - -----------------------------------------------------------------------
The information set forth under "Voting Securities and Stock Ownership" on page 1 and under "Stock Ownership of Certain Beneficial Owners" and "Stock Ownership of Directors and Executive Officers" on pages 1 and 2 of Bankshares' Proxy Statement dated March 14, 2001 is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions - --------------------------------------------------------
The information contained under "Certain Transactions With Officers and Directors" on page 13 of Bankshares' Proxy Statement dated March 14, 2001 is incorporated herein by reference.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
2000 Annual Report To Stockholders Page(s)* ------------------------ 1. Financial Statements: --------------------
Independent Auditors' Report 12 Consolidated Balance Sheets - 13 December 31, 2000 and 1999
Consolidated Statements of 14 Income and Comprehensive Income - Years ended December 31, 2000, 1999 and 1998
Consolidated Statements of Changes 15 in Stockholders' Equity - Years ended December 31, 2000, 1999 and
Consolidated Statements of Cash 16 Flows - Years ended December 31, 2000, 1999 and 1998
Notes to Consolidated 17-35 Financial Statements - December 31, 2000, 1999 and 1998
2. Financial Statement Schedules: -----------------------------
None
*Incorporated by reference from the indicated pages of the 2000 Annual Report to Stockholders.
3. Exhibits: -------- Page No. in Exhibit No. Description Sequential System - ---------- ----------- ----------------- 3(i) Articles of Incorporation, as amended, of (incorporated National Bankshares, Inc. herein by reference to Exhibit 3(a) of the Annual Report on Form 10K for Fiscal year ended December 31, 1993) 4(i) Specimen copy of certificate for National (incorporated Bankshares, Inc. common stock, $2.50 par herein by value reference to Exhibit 4(a) of the Annual Report on Form 10K for Fiscal year ended December 31, 1993) 4(i) Article Four of the Articles of (incorporated Incorporation of National Bankshares, Inc. herein by included in Exhibit No. 3(a)) reference to Exhibit 4(b) of the Annual Report on Form 10K for Fiscal year ended December 31, 1993) 10(ii)(B) Computer software license agreement dated (incorporated June 18, 1990, by and between Information herein by Technology, Inc. and The National Bank of reference to Blacksburg Exhibit 10(e) of the Annual Report on Form 10K for Fiscal year ended December 31, 1992) *10(iii)(A) Employment Agreement dated January 1, 1992, (incorporated by and between National Bankshares, Inc. and herein by James G. Rakes reference to Exhibit 10(a) of the Annual Report on Form 10K for Fiscal year ended December 31, 1992) *10(iii)(A) Capital Accumulation Plan (included in (incorporated 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 May 7, 1992, (incorporated by and between National Bankshares, Inc. and herein by
The National Bank of Blacksburg reference to Exhibit 10(c) of the Annual Report on Form 10K for Fiscal year ended December 31, 1992) *10(iii)(A) National Bankshares, Inc. 1999 Stock Option (incorporated herein Plan by reference to Exhibit 4.3 of the Form S-8, filed as Registration No. 333-79979 with the Commission on June 4, 1999) 13(i) 2000 Annual Report to Stockholders (such Report, except to the extent incorporated herein by reference, is being furnished for the information of the Commission only and is not deemed to be filed as part of this Report on Form 10-K) 21(i) Subsidiaries of National Bankshares, Inc. 23 Consent of KPMG LLP to incorporation by reference of independent auditors' report included in this Form 10-K, into registrant's registration statement on Form S-8. 99 Independent Auditors' Report of KPMG LLP on consolidated financial statements of National Bankshares, Inc. and subsidiaries as of December 31, 1999 and for the years ended December 31, 1999 and 1998.
*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: --------------------------------------------------------------------------
1. Form 8-K dated November 9, 2000 annoucing the acquistion of six AmSouth of Birmingham, Alabama branches. 2. Form 8 K/A dated November 9, 2000 provides financial statements for the Acquisition of six AmSouth of Birmingham branches.
(c) Exhibits required by Item 601 of Regulation S-K: -----------------------------------------------
See Item 14(a)3 above.
(d) Financial Statement Schedules required by Regulation S-X: --------------------------------------------------------
See Item 14(a)2 above.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, National Bankshares, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
National Bankshares, Inc.
BY: /s/James G. Rakes -------------------------------------- James G. Rakes, Chairman, President and Chief Executive Officer
DATE: March 14, 2001 -------------------------------------
BY: /s/J. Robert Buchanan ------------------------------------- J. Robert Buchanan Treasurer (Principal Financial Officer)
DATE: March 14, 2001 -------------------------------------
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 14, 2001 Director and Vice - ------------------------ -------------- Chairman of the Board C. L. Boatwright
/s/L.A. Bowman March 14, 2001 Director - ----------------------- -------------- L. A. Bowman
/s/A. A. Crouse March 14, 2001 Director - ----------------------- -------------- A. A. Crouse
/s/J. A. Deskins, Sr. March 14, 2001 Director - ----------------------- -------------- J. A. Deskins, Sr.
Director - ----------------------- -------------- P. A. Duncan
/s/C. L. Forrester March 14, 2001 Director - ----------------------- -------------- C. L. Forrester
/s/W. T. Peery March 14, 2001 Director - ----------------------- -------------- W. T. Peery
/s/J. G. Rakes March 14, 2001 Chairman of the Board - ----------------------- -------------- President and Chief J. G. Rakes Executive Officer - National Bankshares, Inc., Director /s/J. R. Stewart March 14, 2001 - ----------------------- -------------- J. R. Stewart
Index to Exhibits -----------------
Page No. in Exhibit No. Description Sequential System - ----------- ----------- ----------------- 3(i) Articles of Incorporation, as amended, of (incorporated National Bankshares, Inc. herein by reference to Exhibit 3(a) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 4(i) Specimen copy of certificate for National (incorporated Bankshares, Inc. common stock, $2.50 par value herein by 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 of (incorporated Incorporation of National Bankshares, Inc. herein by included in Exhibit No. 3(a)) reference to Exhibit 4(b) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 10(ii)(B) Computer software license agreement dated (incorporated June 18, 1990, by and between Information herein by Technology, Inc. and The National Bank of reference to Blacksburg Exhibit 10(e) of the Annual Report on Form 10K for fiscal year ended December 31, 1992) *10(iii)(A) Employment Agreement dated January 1, 1992, (incorporated by and between National Bankshares, Inc. and herein by James G. Rakes reference to Exhibit 10(a) of the Annual Report on Form 10K for fiscal year ended December 31, 1992) *10(iii)(A) Capital Accumulation Plan (included in (incorporated 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 May 7, 1992, (incorporated by and between National Bankshares, Inc. and herein by The National Bank of Blacksburg reference to Exhibit 10(c) of the Annual Report on Form 10K for fiscal year ended December 31, 1992) *10(iii)(A) National Bankshares, Inc. 1999 Stock Option (incorporated herein Plan by reference to Exhibit 4.3 of the Form S-8, filed as Registration No. 333-79979 with the Commission on June 4, 1999) 13(i) 2000 Annual Report to Stockholders (such Report, except to the extent incorporated herein by reference, is being furnished for the information of the Commission only and is not deemed to be filed as part of this Report on Form 10-K) 21(i) Subsidiaries of National Bankshares, Inc. 23 Consent of KPMG LLP to incorporation by reference of independent auditors' report included in this Form 10-K, into registrant's registration statement on Form S-8. 99 Independent Auditors' Report of KPMG LLP on consolidated financial statements of National Bankshares, Inc. and subsidiaries as of December 31, 1999, and for the years ended 1999 and 1998
* Indicates a management contract or compensatory plan required to be filed herein.