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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended Commission file number
December 31, 1999 O-15204
National Bankshares, Incorporated
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(Exact name of Registrant as specified in its charter)
Virginia 54-1375874
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 Hubbard Street
Blacksburg, Virginia 24060
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (540) 552-2011
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $2.50 per Share
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(Title of Class)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
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The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 15, 2000 was $65,666,075. (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 15, 2000
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Common Stock, $2.50 Par Value 3,516,977
DOCUMENTS INCORPORATED BY REFERENCE
Selected information from the Registrants' Annual Report to Stockholders for the
year ended December 31, 1999, 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 11, 2000 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 42 pages.)
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(The Index of Exhibits are on pages 41-42.)
National Bankshares, Incorporated
Annual Report For 1999 on Form 10-K
Table of Contents
Page
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Part I
Item 1. Business 4
Item 2. Properties 30
Item 3. Legal Proceedings 30
Item 4. Submission of Matters to a Vote of
Security Holders 30
Executive Officers of the Registrant 31
Part II
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters 32
Item 6. Selected Financial Data 32
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 32
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 32
Item 8. Financial Statements and
Supplementary Data 36
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 36
Part III
Item 10. Directors and Executive Officers of
the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain
Beneficial Owners and Management 36
Item 13. Certain Relationships and Related
Transactions 37
Part IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 37
Signatures 40
Index to Exhibits 41
Part I
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Item 1. Business.
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History and Business
National Bankshares, Inc. (Bankshares) is a bank holding company organized
under the laws of Virginia in 1986 and registered under the Bank Holding Company
Act (BHCA). 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".
On June 1, 1996, Bankshares issued 1,888,209 shares of its common stock in a
one-for-one exchange for all the outstanding common stock of Bank of Tazewell
County, Tazewell, Virginia. This business combination has been accounted for as
a pooling-of-interests and, accordingly, the consolidated financial statements
for the periods prior to the combination have been restated to include the
accounts and results of operations of Bank of Tazewell County. There were no
adjustments of a material amount resulting from Bank of Tazewell County's
adoption of Bankshares' accounting policies.
In May 1996, Bankshares declared a stock split of .11129 per share effected
in the form of a stock dividend to the holders of Bankshares common stock just
prior to the merger effective date to facilitate the one-for-one common stock
exchange ratio. All stockholders' equity accounts, share and per share data
have been adjusted retroactively to reflect the stock split.
The National Bank of Blacksburg
The National Bank of Blacksburg was originally chartered as the Bank of
Blacksburg in 1891. Its state charter was converted to a national charter in
1922 and it became The National Bank of Blacksburg. NBB operates a full-service
banking business from its headquarters in Blacksburg, Virginia, and its nine
area branch offices. NBB offers general retail and commercial banking services
to individuals, businesses, local government units and institutional customers.
These products and services include accepting deposits in the form of checking
accounts, money market deposit accounts, interest-bearing demand deposit
accounts, savings accounts and time deposits; making real estate, commercial,
revolving, consumer and agricultural loans; offering letters of credit;
providing other consumer financial services, such as automatic funds transfer,
collections, night depository, safe deposit, travelers checks, savings bond
sales and utility payment services; and providing other miscellaneous services
normally offered by commercial banks. NBB also conducts a general trust
business in Blacksburg near its headquarters location. Through its trust
operation, NBB offers a variety of personal and corporate trust services.
NBB makes loans in all major loan categories, including commercial,
commercial and residential real estate, construction and consumer loans.
At December 31, 1999, NBB had total assets of $278,016. Total deposits at
this date were $233,245. NBB's net income for 1999 was $4,873 which produced a
return on average assets of 1.79% and a return on average stockholders' equity
of 17.32%. Refer to footnote 11 of the Company's 1999 Annual Report to
Stockholders for NBB's risk-based capital ratios.
-3-
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 service normally offered by
commercial banks. BTC also conducts a general trust business.
At December 31, 1999 BTC had total assets of $198,735. Total deposits at
this same date were $173,963. BTC's net income for 1999 was $2,215 which
produced a return on average assets of 1.21% and a return on average
stockholders' equity of 8.67%. Refer to footnote 11 of the Company's 1999
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. Business loans made on a
secured basis may be secured by a security interest in marketable equipment,
accounts receivable, business equipment and/or general intangibles of the
business. In addition, or in the alternative, the loan may be secured by a deed
of trust lien on business real estate.
The risks associated with commercial loans are related to the strength of the
individual business, the value of loan collateral and the general health of the
economy.
Residential Real Estate Loans
Loans secured by residential real estate are originated by both bank
subsidiaries. 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 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 participates in insured loan programs sponsored by the Department of
Housing and Urban Development, the Veterans Administration and the Virginia
Housing Development Authority.
Residential real estate loans carry risk associated with the continued
credit-worthiness of the borrower and changes in the value of the collateral.
-4-
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. NBB also originates a small number of
student loans that are sold to the Student Loan Marketing Association.
Negative changes in a customer's financial circumstances due to a large
number of factors, such as illness or loss of employment, can place the
repayment of a consumer loan at risk. In addition, deterioration in collateral
value can add risk to consumer loans.
Sales and Purchases of Loans
NBB and BTC will occasionally buy or sell all or a portion of a loan. These
purchases and sales are in addition to the secondary market mortgage loans and
student loans regularly sold by NBB. Because the demand for loans, particularly
for commercial loans, is greater in NBB's market area than in BTC's market area,
NBB regularly sells loans and participations in loans to BTC.
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.
-5-
The following table sets forth, for the three fiscal years ended December 31,
1999, 1998 and 1997 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
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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%
December 31, 1997 Interest and Fees on Loans 59.92%
Interest on Investments 29.31%
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, 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 and the towns of Pearisburg, Pembroke and
Rich Creek, in Giles County. The local economy is diverse and is oriented
toward higher education, retail and service, light manufacturing and
agriculture. For the years 1999 and 1998 the unemployment rate in Montgomery
County was 1.9% and 2.6% in 1997, and the rate in Giles County during those
years was 6.2% in 1999, 5.8% in 1998 and 6.7% in 1997. The City of Galax had an
unemployment rate of 4.3% in 1999, 3.9% in 1998 and 2.6% in 1997.
Montgomery County's largest employer is Virginia Polytechnic Institute and
State University (VPI & SU) located in Blacksburg. VPI & SU is the
Commonwealth's land grant college and also its largest university. Employment
at VPI & SU has remained stable over the past three years, and it is not
expected to change materially in the next few years. A second state supported
university, Radford University, is located in the western edge of NBB's service
area. It too has provided stable employment opportunities in the region.
Giles County's primary employer is the Celanese Corp. plant, a manufacturer
of the material from which cigarette filters are made. In 1995 and 1996
employment at that plant was stable, however, in late 1997 temporary employee
furloughs were announced, and a small number of these temporary layoffs have
become permanent.
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.
Several other small manufacturing concerns are located in Montgomery and
Giles 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.
-6-
Since 1988, Montgomery County has developed into a regional retail center,
with the construction of two large shopping areas. Two area hospitals, each of
which are affiliated with different large health care systems, have in the past
several years constructed additional facilities and have attracted additional
health care providers to Montgomery County, making it a center for basic health
care services. VPI & SU's Corporate Research Center has brought several small
high tech companies to Blacksburg, and further expansion is planned.
Montgomery County, 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. 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 in habitants. 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 and Bluefield,
Virginia and Bluefield, West Virginia. BTC's primary market area has largely
depended on the coal mining industry and farming for its economic base. In
recent years, coal companies have mechanized and this has reduced the number of
individuals required for the production of coal. There are still a number of
support industries for the coal mining business that continue to provide
employment in the area. Additionally, several new businesses have been
established in the area, and Bluefield, West Virginia has begun to emerge as a
regional medical center. Unemployment has stabilized, and real estate values
also remain stable and comparable to other areas in southwest Virginia.
For 1999 and 1998 the unemployment rate for Tazewell County was 7.0% and in
1997 9.5%. In the same years, Mercer County, West Virginia's unemployment rate
was 4.7%, 4.2% and 5.3%, respectively.
Competition
The banking and financial service business in Virginia generally, and in
NBB's and BTC's market areas specifically, is highly competitive. The
increasingly competitive environment is a result of changes in regulation,
changes in technology and product delivery systems and new competition from non-
traditional financial services provides the accelerating pace of consolidation
among financial service providers. The Company's bank subsidiaries compete for
loans and deposits with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, money market funds,
credit unions and other nonbank financial service providers. Many of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader array of financial services than
NBB and BTC. In order to compete with these other financial service providers,
NBB and BTC rely upon service-based business philosophies, personal
-7-
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, 1999, NBB employed 117 full time equivalent employees at its
main office, operations center and branch offices. BTC at December 31, 1999
employed 68 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
-8-
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 securities and merchant banking activities.
-9-
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.
-10-
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
-11-
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 Federal Reserve Board, the Virginia Commission, the OCC
and the FDIC, NBB will be able to acquire existing banking operations in
Virginia.
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
-12-
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 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.
-13-
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.
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
-14-
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
-15-
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.
-16-
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 1999 1998 1997
---- ---- ----
Cash and due from banks $ 12,820 10,281 9,954
Interest bearing deposits 5,263 12,889 4,165
Federal funds sold 2,926 6,389 8,181
Securities available for sale:
Taxable 95,979 94,247 54,213
Nontaxable 29,286 29,284 6,312
Securities held to maturity:
Taxable 8,940 9,972 67,046
Nontaxable 17,219 18,929 29,608
Mortgage loans held for sale 709 1,017 413
Loans, net 266,431 225,613 204,540
Other assets 14,616 12,367 11,500
-------- ------- -------
Total assets $454,189 420,988 395,932
======== ======= =======
Liabilities and Stockholders' Equity
Noninterest-bearing demand
deposits $ 55,700 49,552 44,193
Interest-bearing demand deposits 85,284 77,842 75,519
Savings deposits 46,792 47,475 47,781
Time deposits 203,807 185,101 171,946
-------- ------- -------
Total deposits 391,583 359,970 339,439
Short-term borrowings 4,228 216 319
Other liabilities 2,182 2,520 2,462
-------- ------- -------
Total liabilities 397,993 362,706 342,220
Stockholders' equity 56,196 58,282 53,712
------- ------- -------
Total liabilities and
stockholders' equity $454,189 420,988 395,932
======== ======= =======
-17-
B. Analysis of Net Interest Earnings
The following table shows the major categories of interest-earning assets and interest-bearing
liabilities, the interest earned or paid, the average yield or rate on the daily average balance
outstanding, net interest income and net yield on average interest-earning assets for the years
indicated.
December 31, 1999 December 31, 1998 December 31, 1997
Average Average Average
Average Yield/ Average Yield/ Average Yield/
($ in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
Interest-earning assets:
Loans, net (1)(2)(3) $267,140 24,244 9.08% 226,630 21,726 9.59% $204,953 19,667 9.60%
Taxable securities 104,919 6,820 6.50% 104,219 7,201 6.91% 121,259 7,776 6.41%
Nontaxable securities
(1) 46,505 3,414 7.34% 48,213 2,899 6.01% 35,920 2,708 7.54%
Federal funds sold 2,926 170 5.81% 6,389 345 5.40% 8,181 470 5.75%
Interest bearing deposits 5,263 269 5.11% 12,889 696 5.40% 4,165 230 5.52%
-------- ------- ------- ------- -------- -------
Total interest-earning
assets $426,753 34,917 8.18% 398,340 32,867 8.25% $374,478 30,851 8.24%
======== ======= ======= ======= ======== =======
Interest-bearing
liabilities:
Interest-bearing
demand deposits $ 85,284 2,129 2.50% 77,842 2,203 2.83% $ 75,519 2,161 2.86%
Savings deposits 46,792 1,212 2.59% 47,475 1,511 3.18% 47,781 1,571 3.29%
Time deposits 203,807 10,630 5.22% 185,101 10,203 5.51% 171,946 9,357 5.44%
Short-term borrowings 4,228 232 5.49% 216 11 5.09% 319 17 5.33%
Long-term debt --- --- --- --- --- --- --- --- ---
-------- ------- ------- ------- -------- -------
Total interest-
bearing liabilities $340,111 14,203 4.18% 310,634 13,928 4.48% 295,565 13,106 4.43%
======== ======= ======= ======= ======== =======
Net interest income and
interest rate spread 20,714 4.00% 18,939 3.77% 17,745 3.81%
Net yield on average
interest-earning assets 4.85% 4.75% 4.74%
(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 $680 in 1999, $414 in 1998 and $339 in 1997 are included in total interest income.
(3) Nonaccrual loans are included in average balances for yield computations.
-18-
C. Analysis of Changes in Interest Income and Interest Expense
The Company's primary source of revenue is net interest income, which is the difference between the
interest and fees earned on loans and investments and the interest paid on deposits and other funds.
The Company's net interest income is affected by changes in the amount and mix of interest-earning
assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets
and rates paid on interest-bearing liabilities. The following table sets forth, for the years
indicated, a summary of the changes in interest income and interest expense resulting from changes
in average asset and liability balances (volume) and changes in average interest rates (rate).
1999 Over 1998 1998 Over 1997
------------------------------ -------------------------------
Changes Due To Changes Due To
-------------- --------------
Net Dollar Net Dollar
($ in thousands) Rates(2) Volume(2) Change Rates(2) Volume(2) Change
-------- --------- ---------- -------- --------- ----------
Interest income:(1)
Loans $(1,206) 3,724 2,518 (19) 2,078 2,059
Taxable securities (429) 48 (381) 572 (1,147) (575)
Nontaxable securities 621 (106) 515 (618) 809 191
Federal funds sold 24 (199) (175) (98) (27) (125)
Interest bearing deposits (35) (392) (427) 471 (5) 466
------- ------ ------ ------ ------ ------
Increase(decrease) in income on
interest-earning assets $(1,025) 3,075 2,050 308 1,708 2,016
------- ------ ------ ------ ------ ------
Interest expense:
Interest-bearing demand deposits $ (273) 199 (74) 66 (24) 42
Savings deposits (278) (21) (299) (50) (10) (60)
Time deposits (568) 995 427 724 122 846
Short-term borrowings 1 220 221 (1) (5) (6)
------- ------ ------ ------ ------ ------
Increase(decrease) in expense
of interest-bearing liabilities $(1,118) 1,393 275 739 83 822
-------- ------ ------ ------ ------ ------
Increase (decrease) in net interest
income $ 93 1,682 1,775 (431) 1,625 1,194
======= ====== ====== ====== ====== ======
(1) Taxable equivalent basis using a Federal income tax rate of 34%.
(2) Variances caused by the change in rate times the change in volume have been allocated to rate and
volume changes proportional to the relationship of the absolute dollar amounts of the change in
each.
-19-
II. Investment Portfolio
A. Book Value of Investments
The amortized costs and fair values of securities available for sale as of December 31, 1999,
1998 and 1997 were as follows:
December 31,
1999 1998 1997
---- ---- ----
Amortized Fair Amortized Fair Amortized Fair
($ in thousands) Costs Values Costs Values Costs Values
--------- ------ --------- ------ --------- ------
Available for sale:
U.S. Treasury $ 6,244 6,164 9,253 9,671 6,742 6,862
U.S. Government agencies and corporations 50,373 47,498 59,365 59,595 36,252 36,276
States and political subdivisions 32,903 31,617 32,183 32,865 9,540 9,639
Mortgage-backed securities (1) 13,464 13,176 17,282 17,200 4,172 4,119
Corporate debt securities 14,349 13,646 14,528 14,824 7,780 7,824
Federal Home Loan Bank stock 1,329 1,329 1,214 1,214 537 537
Federal Reserve Bank stock 247 247 247 247 247 247
Other securities 168 168 462 462 18 78
-------- ------- ------- ------- ------- -------
Total securities available for sale $119,077 113,845 134,534 136,078 65,288 65,582
======== ======= ======= ======= ======= =======
The amortized costs of securities held to maturity as of December 31, 1999, 1998 and 1997 were
as follows:
December 31,
($ in thousands) 1999 1998 1997
---- ---- ----
Held to maturity:
U.S. Treasury $ 500 1,006 7,527
U.S. Government agencies and corporations 5,500 7,497 36,853
States and political subdivisions 17,283 21,160 32,949
Mortgage-backed securities (1) 364 513 630
Corporate --- 500 6,433
------- ------- -------
Total securities held to maturity $23,647 30,676 84,392
======= ======= =======
(1) The majority of mortgage-backed securities and collateralized mortgage obligations held at
December 31, 1999 were backed by U.S. agencies. Certain holdings are required to be
periodically subjected to the Financial Institution Examination Council's (FFIEC) high risk
mortgage security test. These tests address possible fluctuations in the average life and
price sensitivity which are the primary risks associated with this type of security. Such
tests are usually subject to regulatory review.
Except for U.S. Government securities, the Company has no securities with any issuer that exceeds
10% of stockholders' equity.
-20-
B. Maturities and Associated Yields
The following table presents the maturities for those securities available for sale and held to
maturity as of December 31, 1999 and weighted average yield for each range of maturities.
Maturities and Yields
December 31, 1999
($ in thousands except for % data) < 1 Year 1-5 Years 5-10 Years > 10 Years None Total
-------- --------- ---------- ---------- ---- -------
Available for Sale
------------------
U.S. Treasury $ --- 5,203 961 --- --- $ 6,164
---% 6.03% 5.67% ---% ---% 5.97%
U.S. Government agencies 4,001 5,854 23,188 14,455 --- 47,498
5.95% 6.20% 6.53% 6.67% ---% 6.48%
Mortgage-backed securities --- --- 2,142 11,035 --- 13,177
---% ---% 5.97% 7.16% ---% 6.95%
States and Political --- 1,701 494 1,287 --- 3,482
Subdivision - taxable ---% 7.24% 7.40% 7.77% ---% 6.73%
States and Political Subdivision --- 5,710 8,436 13,990 --- 28,136
- nontaxable(1) ---% 7.20% 7.36% 7.03% ---% 7.16%
Corporate --- 992 6,299 6,354 --- 13,645
---% 6.23% 6.75% 6.79% ---% 6.73%
Federal Home Loan Bank stock --- --- --- --- 1,329 1,329
---% ---% ---% ---% 7.75% 7.75%
Federal Reserve Bank stock --- --- --- --- 247 247
---% ---% ---% ---% 6.00% 6.00%
Other securities 167 --- --- --- --- 167
5.67% ---% ---% ---% ---% 5.67%
----- ------ ------ ------ ------ -------
Total 4,168 19,460 41,520 47,121 1,576 113,845
5.94% 6.54% 6.69% 6.94% 7.52% 6.75%
Held to Maturity
----------------
U.S. Treasury 500 --- --- --- --- 500
5.09% ---% ---% ---% ---% 5.09%
U.S. Government agencies --- 4,500 1,000 --- --- 5,500
---% 5.66% 3.96% ---% ---% 5.35%
Mortgage-backed securities --- 14 102 247 --- 363
---% 9.00% 7.67% 7.26% ---% 7.44%
States and Political 400 1,072 358 200 --- 2,030
Subdivision - taxable 6.40% 6.98% 7.03% 9.00% ---% 7.07%
States and Political 1,701 10,283 2,416 854 --- 15,254
Subdivision - nontaxable 6.86% 7.32% 7.62% 7.09% ---% 7.30%
Corporate --- --- --- --- --- ---
---% ---% ---% ---% ---% ---%
Other securities --- --- --- --- --- ---
---% ---% ---% ---% ---% ---%
----- ------ ------ ------ ------ ------
Total 2,601 15,869 3,876 1,301 --- 23,647
6.45% 6.83% 6.62% 7.42% ---% 6.78%
(1) Rates shown represent weighted average yield on a fully taxable basis.
-21-
III. Loan Portfolio
--------------
The Company concentrates its lending activities in commercial and
industrial loans, real estate mortgage loans both residential and
business, and loans to individuals. The following tables set forth (i)
a comparison of the Company's loan portfolio by major category of loans
as of the dates indicated and (ii) the maturities and interest rate
sensitivity of the loan portfolio at December 31, 1999.
A. Types of Loans
December 31,
($ in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Commercial and industrial
loans $149,386 110,509 101,379 87,519 59,609
Real estate mortgage
loans 58,829 48,724 42,969 43,917 45,589
Real estate construction
loans 14,669 12,827 8,510 6,295 6,007
Loans to individuals 73,825 69,493 66,635 60,991 56,920
-------- ------- ------- ------- -------
Total loans 296,709 241,553 219,493 198,722 168,125
Less unearned income and
deferred fees (1,916) (2,296) (2,503) (2,549) (2,307)
-------- ------- ------- ------- -------
Total loans, net of
unearned income 294,793 239,257 216,990 196,173 165,818
Less allowance for loans
losses (3,231) (2,679) (2,438) (2,575) (2,625)
-------- ------- ------- ------- -------
Total loans, net $291,562 236,578 214,552 193,598 163,193
======== ======= ======= ======= =======
B. Maturities and Interest Rate Sensitivities
December 31, 1999
After
($ in thousands) <1 Year 1-5 Years 5 Years Total
------- --------- ------- -----
Commercial and
industrial $52,277 61,749 35,360 149,386
Real estate
construction 14,669 --- --- 14,669
Less loans with
predetermined interest
rates 31,052 26,567 34,878 92,497
------- ------ ------ -------
Loans with adjustable
rates $35,894 35,182 482 71,558
======= ====== ====== =======
-22-
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans
The following table presents aggregate amounts for nonaccrual
loans, restructured loans, other real estate owned, net and
accruing loans which are contractually past due ninety days or more
as to interest or principal payments.
December 31,
($ in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Nonaccrual loans:
Commercial and industrial $ 65 --- 55 121 270
Real estate mortgage 33 28 32 495 418
Real estate construction --- --- --- --- ---
Loans to individuals 53 --- --- --- 30
------ ----- ----- ------ -----
$ 151 28 87 616 718
Restructured loans:
Commercial and industrial 40 --- --- --- ---
------ ----- ----- ------ -----
Total nonperforming loans $ 191 28 87 616 718
Other real estate owned, net 447 628 421 474 762
------ ----- ----- ------ -----
Total nonperforming assets $ 638 656 508 1,090 1,480
====== ===== ===== ====== =====
Accruing loans past due 90
days or more:
Commercial and industrial $ 99 186 82 14 11
Real estate mortgage 704 160 358 252 250
Real estate construction --- --- --- --- ---
Loans to individuals 274 204 232 192 313
------ ----- ----- ------ -----
$1,077 550 672 458 574
====== ===== ===== ====== =====
The effect of nonaccrual and restructured loans on interest income
is presented below:
($ in thousands) 1999 1998 1997
---- ---- ----
Scheduled interest:
Nonaccrual loans $ 13 4 8
Restructured loans --- --- ---
----- ----- -----
Total scheduled interest $ 13 4 8
===== ===== =====
Recorded interest:
Nonaccrual loans $ --- --- 1
Restructured loans --- --- ---
----- ----- -----
Total recorded interest $ --- --- 1
===== ===== =====
-23-
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, 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.
At December 31, 1998, the recorded investment in loans which have
been identified as impaired loans totaled $373,000. Of this
amount, $228,000 related to loans with no valuation allowance and
$145,000 related to loans with a corresponding valuation allowance
of $145,000. For the year ended December 31, 1998, the average
recorded investment in impaired loans was approximately $387,000,
and the total interest income recognized on impaired loans was
$32,000 of which $0 was recognized on a cash basis.
3. Foreign Outstandings
At December 31, 1999, 1998 and 1997, 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.
-24-
At December 31, 1999 and 1998, approximately $130 million and $94
million, respectively, of the loan portfolio were concentrated in
commercial real estate. This represents approximately 44% and 39%
of the loan portfolio at December 31, 1999 and 1998, respectively.
Included in commercial real estate at December 31, 1999 and 1998
was approximately $85 million and $64 million, respectively, in
loans for college housing and professional office buildings. Loans
secured by residential real estate were approximately $74 million
and $67 million at December 31, 1999 and 1998, respectively. This
represents approximately 25% and 28% of the loan portfolio at
December 31, 1999 and 1998, respectively. Loans secured by
automobiles were approximately $33 million and $32 million at
December 31, 1999 and 1998, respectively. This represents
approximately 11% of the loan portfolio at December 31, 1999 and
13% at December 31, 1998.
The Company has established operating policies relating to the
credit process and collateral in loan originations. Loans to
purchase real and personal property are generally collateralized by
the related property and with loan amounts established based on
certain percentage limitations of the property's total stated or
appraised value. Credit approval is primarily a function of
collateral and the evaluation of the creditworthiness of the
individual borrower or project based on available financial
information.
-25-
IV. Summary of Loan Loss Experience
-------------------------------
A. Analysis of the Allowance for Loan Losses
The following tabulation shows average loan balances at the end of each period; changes in the
allowance for loan losses arising from loans charged off and recoveries on loans previously charged
off by loan category; and additions to the allowance which have been charged to operating expense:
December 31,
($ in thousands) 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Average loans outstanding $266,431 225,613 204,540 177,419 160,643
======== ======= ======= ======= =======
Balance at beginning of year 2,679 2,438 2,575 2,625 2,551
Charge-offs:
Commercial and industrial loans 185 32 257 95 23
Real estate mortgage loans 33 80 --- 11 9
Real estate construction loans --- --- --- --- ---
Loans to individuals 760 526 422 400 259
-------- ------- ------- ------- -------
Total loans charged off 978 638 679 506 291
-------- ------- ------- ------- -------
Recoveries:
Commercial and industrial loans 51 --- 70 4 10
Real estate mortgage loans 1 2 --- 64 16
Real estate construction loans --- 190 --- --- ---
Loans to individuals 78 63 37 57 57
-------- ------- ------- ------- -------
Total recoveries 130 255 107 125 83
-------- ------- ------- ------- -------
Net loans charged off 848 383 572 381 208
Additions charged to operations 1,400 624 435 331 282
-------- ------- ------- ------- -------
Balance at end of year $ 3,231 2,679 2,438 2,575 2,625
======== ======= ======= ======= =======
Net charge-offs to average net loans
outstanding 0.32% 0.17% 0.28% 0.21% 0.13%
Factors influencing management's judgment in determining the amount of the loan loss provision
charged to operating expense include the quality of the loan portfolio as determined by
management, the historical loan loss experience, diversification as to type of loans in the
portfolio, the amount of secured as compared with unsecured loans and the value of underlying
collateral, banking industry standards and averages, and general economic conditions.
-26-
B. Allocation of the Allowance for Loan Losses
The allowance for loan losses has been allocated according to the amount deemed necessary to provide
for anticipated losses within the categories of loans for the years indicated as follows:
December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Percent Percent Percent Percent Percent
of of of of of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
($ in Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- --------- --------- -------- --------- -------- --------- -------- --------- --------
Commercial
and
industrial
loans $ 555 50.35% 222 45.75% 213 46.18% 403 44.04% 411 35.46%
Real estate
mortgage
loans 119 19.83% 73 20.17% 67 19.58% 305 22.10% 363 27.12%
Real estate
construction
loans --- 4.94% --- 5.31% --- 3.88% 51 3.17% 100 3.57%
Loans to
individuals 978 24.88% 497 28.77% 416 30.36% 504 30.69% 271 33.85%
Unallocated 1,579 1,887 1,742 1,312 1,480
------ ------ ------ ------ ------
$3,231 100.00% 2,679 100.00% 2,438 100.00% 2,575 100.00% 2,625 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
-27-
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.
-28-
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,
1999 1998 1997
---- ---- ----
Average Average Average
Average Rates Average Rates Average Rates
($ in thousands) Amounts Paid Amounts Paid Amounts Paid
------- ------- ------- ------- ------- -------
Noninterest-bearing
demand deposits $ 55,700 --- 49,552 --- 44,193 ---
Interest-bearing
demand deposits 85,284 2.50% 77,842 2.83% 75,519 2.86%
Savings deposits 46,792 2.59% 47,475 3.18% 47,781 3.29%
Time deposits 203,807 5.22% 185,101 5.51% 171,946 5.44%
-------- ------- -------
Average total
deposits $391,583 4.16% 359,970 4.48% 339,439 4.43%
======== ======= =======
B. Time Deposits of $100,000 or More
The following table sets forth time certificates of deposit and other
time deposits of $100,000 or more:
December 31, 1999
Over 3 Over 6
3 Months Months
Months Through 6 Through 12 Over 12
($ in thousands) or Less Months Months Months Total
------- --------- ---------- ------- -----
Certificates of
deposit $46,801 34,200 71,164 67,055 219,220
Other time deposits 35,590 27,526 54,381 55,551 173,048
------- ------ ------ ------ -------
Total time
deposits of
$100,000 or more $11,211 6,674 16,783 11,504 46,172
======= ====== ====== ====== =======
-29-
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,
1999 1998 1997
---- ---- ----
Return on average assets 1.56% 1.61% 1.66%
Return on average equity(1) 12.61% 11.66% 12.21%
Dividend payout ratio 39.70% 41.29% 39.31%
Average equity to average assets(1) 12.37% 13.84% 13.57%
(1) Includes amount related to common stock subject to ESOP put option
excluded from stockholders' equity on the Consolidated Balance
Sheets for 1998 and 1997.
Item 2. Properties
- -------------------
Bankshares' headquarters, including the Main Office of NBB, are located at
100 South Main Street, Blacksburg, Virginia. In addition to the Bank's Main
Office location, NBB owns nine 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 and one in the City of Galax. An additional tract of land has
been acquired for the construction of a tenth branch.
Bank of Tazewell County owns the land and building of six of its seven
offices. The bank leases the land and building for its seventh office. The
Main Office is located at Main Street, Tazewell, Virginia. Three additional
branches are located in Tazewell, one in North Tazewell and two are located in
Bluefield, Virginia. Management believes that its existing facilities are
adequate to meet present needs and any anticipated growth.
NBB owns all its computer and data processing hardware and is a licensee of
the software it utilizes. BTC utilizes this same system for data processing.
Item 3. Legal Proceedings
- --------------------------
Bankshares, NBB nor BTC are not currently involved in any material pending
legal proceedings, other than routine litigation incidental to NBB's and BTC's
banking business.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
-30-
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 11, 2000.
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 55 Chairman, President and 1986
Chief Executive Officer,
National Bankshares, Inc.;
and President and Chief
Executive Officer of The
National Bank of Blacksburg
since 1983.
J. Robert Buchanan 48 Treasurer, National 1998
Bankshares, Inc.; 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 Corporate
since 1991.
Marilyn B. Buhyoff 51 Secretary & Counsel, 1989
National Bankshares, Inc.;
and Senior Vice President/
Administration since 1992,
of The National Bank of
Blacksburg.
F. Brad Denardo 47 Corporate Officer, National 1989
Bankshares, 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.
-31-
Part II
-------
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 March 15, 2000, there were 1,103 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 1999 and 1998. 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' 1999 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' 1999 Annual Report to Stockholders is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The information contained under "Management's Discussion and Analysis" on
pages 5 through 11 of Bankshares' 1999 Annual Report to Stockholders is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
See "Analysis of Interest Rate Sensitivity" set forth below. Additional
information is set forth under the section "Interest Rate Sensitivity" on page 5
and the section "Derivatives and Market Risk Exposure" on page 9 of Bankshares'
1999 Annual Report to Stockholders and is incorporated herein by reference.
-32-
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, 1999, 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 beyond 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, 1999,
this portfolio contained a substantial amount of longer term securities with
call features. Due to overall increase 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.
-33-
An interest-sensitivity table showing all major interest sensitive asset and liability categories for the
time intervals indicated and cumulative "gaps" for each interval is set forth on the following table.
Interest Rate December 31, 1999
Sensitivity Table (1) Interest-sensitive (days)
1-5 >5
($ in thousands) 1-90 91-180 181-365 Years Years Total
---- ------ ------- ----- ----- -----
Interest-earning assets:
Commercial and industrial loans $ 31,713 6,345 7,416 64,641 39,206 149,321
Real estate mortgage loans 8,953 1,030 2,546 29,562 16,705 58,796
Real estate construction loans 11,484 655 2,530 --- --- 14,669
Loans to individuals 11,556 5,251 8,689 37,144 9,216 71,856
--------- -------- -------- ------- ------- -------
Total loans, net of unearned income (2) $ 63,706 13,281 21,181 131,347 65,127 294,642
--------- -------- -------- ------- ------- -------
Federal funds sold 2,800 --- --- --- --- 2,800
Interest bearing deposits 9,219 --- --- --- --- 9,219
Securities available for sale (3) 2,407 407 1,318 28,263 81,450 113,845
Securities held to maturity (3) 1,818 710 1,399 16,375 3,345 23,647
Mortgage loans held for sale 229 --- --- --- --- 229
--------- -------- -------- ------- ------- -------
Total interest-earning assets $ 80,179 14,398 23,898 175,985 149,922 444,382
========= ======== ======== ======= ======= =======
Interest-bearing liabilities:
Interest-bearing demand deposits $ 88,385 --- --- --- --- 88,385
Savings deposits 44,834 --- --- --- --- 44,834
Time deposits 46,801 34,200 71,164 67,055 --- 219,220
Other borrowings 10,460 --- --- --- --- 10,460
--------- -------- -------- ------- ------- -------
Total interest-bearing liabilities $ 190,480 34,200 71,164 67,055 --- 362,899
========= ======== ======== ======= ======= =======
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities .42 .42 .40 .81 1.22 1.22
Cumulative interest-sensitivity gap $(110,301) (130,103) (177,369) (68,439) 81,483 81,483
========= ======== ======== ======= ======= =======
(1) The Company is sensitive to interest rate changes, as liabilities generally reprice or
mature before interest-earning assets. The above gap table reflects the Company's
rate-sensitive position at December 31, 1999, and is not necessarily reflective of its
position throughout the year. The carrying amounts of interest-rate sensitive assets and
liabilities are presented in the periods in which they reprice to market rates or mature and
are summed to show the interest-rate sensitivity gap.
(2) Excludes nonaccrual loans.
(3) Call features on certain securities, if exercised, could have the effect of materially shortening
the average life of the investment portfolio. The exercise of a call feature is dependent upon the
rate environment. The call decision is at the issuers discretion and ultimate benefit.
-34-
The Company also uses simulation analysis to forecast its balance sheet and
monitor interest rate sensitivity. One test used by NBI is shock analysis which
measures the effect of a hypothetical, immediate and parallel shift in interest
rates. The following table shows the results of a rate shock of 100, 200, and
300 basis points and the effects on net income and return on average assets and
return on average equity at December 31, 1999.
($ in thousands, except for percent data)
Rate Net Return on Return on
Shift Income Average Equity Average Assets
----- ------ -------------- --------------
300 $ 5,773 10.40% 1.24%
200 6,614 11.83% 1.42%
100 7,449 13.23% 1.60%
(-)100 9,103 15.94% 1.95%
(-)200 9,921 17.26% 2.12%
(-)300 10,331 17.91% 2.21%
Simulation analysis allows the Company to test asset and liability management
strategies under rising and falling rate conditions. As a part of simulation
process, certain estimates and assumptions must be made dealing with but, not
limited to, asset growth, the mix of assets and liabilities, rate environment,
local and national economic conditions. Asset growth and the mix of assets can
to a degree be influenced by management. Other areas such as the rate
environment and economic factors cannot be controlled. For this reason actual
results may vary materially from any particular forecast or shock analysis.
This shortcoming is offset to a degree by the periodic re-forecasting of the
balance sheet to reflect current trends and economic conditions. Shock analysis
must also be updated periodically as a part of the asset and liability
management process.
-35-
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'
1999 Annual Report to Stockholders are incorporated herein by reference:
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 1999 and 1998
3. Consolidated Statements of Income and Comprehensive Income - Years ended
December 31, 1999, 1998 and 1997
4. Consolidated Statements of Changes in Stockholders' Equity - Years ended
December 31, 1999, 1998 and 1997
5. Consolidated Statements of Cash Flows - Years ended December 31, 1999,
1998 and 1997
6. Notes to Consolidated Financial Statements - December 31, 1999, 1998 and
1997
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, 1999 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 15, 2000, which information is incorporated herein by
reference.
Item 11. Executive Compensation
- --------------------------------
The information set forth under "Executive Compensation" on pages 5 through 6
of Bankshares' Proxy Statement dated March 15, 2000 is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information set forth under "Voting Securities and Stock Ownership" on
page 1 and under "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 15, 2000 is incorporated herein by reference.
-36-
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 15, 2000 is
incorporated herein by reference.
Part IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
1999 Annual Report
To Stockholders Page(s)*
------------------------
1. Financial Statements:
--------------------
Independent Auditors' Report 12
Consolidated Balance Sheets -
December 31, 1999 and 1998 13
Consolidated Statements of
Income and Comprehensive
Income - Years ended December
31, 1999, 1998 and 1997 14
Consolidated Statements of Changes
in Stockholders' Equity - Years
ended December 31, 1999, 1998 and
1997 15
Consolidated Statements of Cash
Flows - Years ended December 31,
1999, 1998 and 1997 16
Notes to Consolidated
Financial Statements - December
31, 1999, 1998 and 1997 17-35
2. Financial Statement Schedules:
-----------------------------
None
* Incorporated by reference from the indicated pages of the 1999 Annual Report
to Stockholders.
-37-
3. Exhibits:
--------
Page No. in
Exhibit No. Description Sequential System
----------- ----------- -----------------
3(i) Articles of Incorporation, as (incorporated
amended, of National herein by
Bankshares, Inc. reference to
Exhibit 3(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Specimen copy of certificate (incorporated
for National Bankshares, Inc. herein by
common stock, $2.50 par value reference to
Exhibit 4(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Article Four of the Articles (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 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)
*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)
-38-
Page No. in
Exhibit No. Description Sequential System
----------- ----------- -----------------
*10(iii)(A) Employee Lease Agreement dated (incorporated
May 7, 1992, by and between herein by
National Bankshares, Inc. and reference to
The National Bank of Exhibit 10(c) of
Blacksburg the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) National Bankshares, Inc. (incorporated herein
1999 Stock Option 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) 1999 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
incorporated by reference in
this Form 10-K, into
registrant's registration
statement on Form S-8.
27 Financial Data Schedule
* 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.
-39-
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 29, 2000
-------------------------------------
BY: /s/J. Robert Buchanan
-------------------------------------
J. Robert Buchanan
Treasurer (Principal Financial Officer)
DATE: March 29, 2000
-------------------------------------
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
---- ---- -----
Director and Vice
------------------------- -------------- Chairman of the Board
C. L. Boatwright
/s/L. A. Bowman March 29, 2000 Director
------------------------- --------------
L. A. Bowman
/s/A. A. Crouse March 29, 2000 Director
------------------------- --------------
A. A. Crouse
/s/J. A. Deskins, Sr. March 29, 2000 Director
------------------------- --------------
J. A. Deskins, Sr.
/s/P. A. Duncan March 29, 2000 Director
------------------------- --------------
P. A. Duncan
/s/C. L. Forrester March 29, 2000 Director
------------------------- --------------
C. L. Forrester
/s/W. T. Peery March 29, 2000 Director
------------------------- --------------
W. T. Peery
/s/J. G. Rakes March 29, 2000 Chairman of the Board
------------------------- -------------- President and Chief
J. G. Rakes Executive Officer -
National Bankshares, Inc.
/s/J. R. Stewart March 29, 2000 Director
------------------------- --------------
J. R. Stewart
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Index to Exhibits
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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)
4(i) Specimen copy of certificate for (incorporated
National Bankshares, Inc. common herein by
stock, $2.50 par value reference to
Exhibit 4(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
4(i) Article Fourth of the Articles (incorporated
of Incorporation of National herein by
Bankshares, Inc. included in reference to
Exhibit No. 3(a)) Exhibit 4(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1993)
10(ii)(B) Computer software license (incorporated
agreement dated June 18, 1990, herein by
by and between Information reference to
Technology, Inc. and The Exhibit 10(e) of
National Bank of Blacksburg the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employment Agreement dated (incorporated
January 1, 1992, by and between herein by
National Bankshares, Inc. and reference to
James G. Rakes Exhibit 10(a) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Capital Accumulation Plan (incorporated
(included in Exhibit No. 10(a)) herein by
reference to
Exhibit 10(b) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
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Page No. in
Exhibit No. Description Sequential System
----------- ----------- -----------------
*10(iii)(A) Employee Lease Agreement dated (incorporated
May 7, 1992, by and between herein by
National Bankshares, Inc. and reference to
The National Bank of Blacksburg Exhibit 10(c) of
the Annual Report on
Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) National Bankshares, Inc. 1999 (incorporated herein
Stock Option 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) 1999 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
incorporated by reference in
this Form 10-K, into
registrant's registration
statement on Form S-8.
27 Financial Data Schedule
* Indicates a management contract or compensatory plan required to be filed
herein.
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