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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, 2000 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) 951-6300
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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
The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 7, 2001 was $63,550,526. (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 7, 2001
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Common Stock, $2.50 Par Value 3,511,377
DOCUMENTS INCORPORATED BY REFERENCE
Selected information from the Registrants' Annual Report to Stockholders for the
year ended December 31, 2000, is incorporated by reference into Parts I and II
of this report.
Selected information from the Registrant's Proxy Statement for the Annual
Meeting to be held March 14, 2001 and filed with the Securities and Exchange
Commission pursuant to Regulation 14A, is incorporated by reference into Part
III of this report.
(This report contains 43 pages.)
(The Index of Exhibits are on pages 42 & 43.)
Table of Contents
Page
Part I
Item 1. Business 3
Item 2. Properties 31
Item 3. Legal Proceedings 31
Item 4. Submission of Matters to a Vote of
Security Holders 31
Executive Officers of the Registrant 32
Part II
Item 5. Market for Registrant's Common
Equity and Related Stockholder
Matters 33
Item 6. Selected Financial Data 33
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 33
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 33
Item 8. Financial Statements and
Supplementary Data 36
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 36
Part III
Item 10. Directors and Executive Officers of
the Registrant 36
Item 11. Executive Compensation 36
Item 12. Security Ownership of Certain
Beneficial Owners and Management 37
Item 13. Certain Relationships and Related
Transactions 37
Part IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 37
Signatures 41
Index to Exhibits 42-43
2
Part I
($ In Thousands Except Per Share Data)
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". There are future plans to enter the
insurance and investments sales business through a separate subsidiary.
The National Bank of Blacksburg
The National Bank of Blacksburg was originally chartered as the Bank of
Blacksburg in 1891. Its state charter was converted to a national charter in
1922 and it became The National Bank of Blacksburg. NBB operates a full-service
banking business from its headquarters in Blacksburg, Virginia, and its twelve
area branch offices. NBB offers general retail and commercial banking services
to individuals, businesses, local government units and institutional customers.
These products and services include accepting deposits in the form of checking
accounts, money market deposit accounts, interest-bearing demand deposit
accounts, savings accounts and time deposits; making real estate, commercial,
revolving, consumer and agricultural loans; offering letters of credit;
providing other consumer financial services, such as automatic funds transfer,
collections, night depository, safe deposit, travelers checks, savings bond
sales and utility payment services; and providing other miscellaneous services
normally offered by commercial banks. NBB also conducts a general trust
business. Through its trust operation, NBB offers a variety of personal and
corporate trust services.
NBB makes loans in all major loan categories, including commercial, commercial
and residential real estate, construction and consumer loans.
At December 31, 2000, NBB had total assets of $339,357. Total deposits at this
date were $306,827. NBB's net income for 2000 was $4,562 which produced a return
on average assets of 1.55% and a return on average stockholders' equity of
16.02%. Refer to footnote 11 of the Company's 2000 Annual Report to Stockholders
for NBB's risk-based capital ratios.
Bank of Tazewell County
The antecedents of BTC are in a charter issued on September 28, 1889 for
Clinch Valley Bank. On December 22, 1893, a second charter was issued in
substantially the same form for Bank of Clinch Valley. In 1929, Bank of Clinch
Valley merged with Farmers Bank under the charter of the former, and the name of
the new institution became Farmers Bank of Clinch Valley. Bank of Tazewell
County resulted from the 1964 merger of Bank of Graham, Bluefield, Virginia with
Farmers Bank of Clinch Valley. BTC provides general retail and commercial
banking services to individuals, businesses and local government units. These
services include commercial, real estate and consumer loans. Deposit accounts
offered include demand deposit accounts, interest-bearing demand deposit
accounts, money market deposit accounts, savings accounts and certificates of
deposit. Other services include automatic funds transfer, collections, night
depository, safe deposit, travelers checks, savings bond sales and utility
payment services; and providing other miscellaneous services normally offered by
commercial banks. BTC also conducts a general trust business.
3
At December 31, 2000 BTC had total assets of $251,786. Total deposits at this
same date were $223,911. BTC's net income for 2000 was $2,721 which produced a
return on average assets of 1.32% and a return on average stockholders' equity
of 10.92%. Refer to footnote 11 of the Company's 2000 Annual Report to
Stockholders for BTC's risk-based capital ratios.
Commercial Loans
NBB and BTC make both secured and unsecured loans to businesses and to
individuals for business purposes. Loan requests are granted based upon several
factors including credit history, past and present relationships with the bank
and marketability of collateral. Unsecured commercial loans must be supported by
a satisfactory balance sheet and income statement. Collateralized business loans
may be secured by a security interest in marketable equipment, accounts
receivable, business equipment and/or general intangibles of the business. In
addition, or as an alternative, the loan may be secured by a deed of trust lien
on business real estate.
The risks associated with commercial loans are related to the strength of the
individual business, the value of loan collateral and the general health of the
economy.
Residential Real Estate Loans
Loans secured by residential real estate are originated by both bank
subsidiaries. NBB sells a substantial percentage of the residential real estate
loans it originates in the secondary market on a servicing released basis. There
are occasions when a borrower or the real estate do not qualify under secondary
market criteria, but the loan request represents a reasonable credit risk. Also,
an otherwise qualified borrower may choose not to have their mortgage loan sold.
On these occasions, if the loan meets NBB's internal underwriting criteria, the
loan will be closed and placed in NBB's portfolio. Some residential loans
originated by BTC are held in the bank's loan portfolio and others are sold in
the secondary market. In their secondary market operations, NBB and BTC
participate in insured loan programs sponsored by the Department of Housing and
Urban Development, the Veterans Administration and the Virginia Housing
Development Authority.
Residential real estate loans carry risk associated with the continued
credit-worthiness of the borrower and changes in the value of the collateral.
Construction Loans
NBB makes loans for the purpose of financing the construction of business and
residential structures to financially responsibly business entities and
individuals. These loans are subject to the same credit criteria as commercial
and residential real estate loans. Although BTC offers construction loans, its
involvement in this area of lending is more limited than NBB's due to the nature
of its market area.
4
In addition to the risks associated with all real estate loans, construction
loans bear the risks that the project will not be finished according to
schedule, the project will not be finished according to budget and the value of
the collateral may at any point in time be less than the principal amount of the
loan. Construction loans also bear the risk that the general contractor, who may
or may not be the bank's loan customer, is unable to finish the construction
project as planned because of financial pressures unrelated to the project.
Loans to customers that are made as permanent financing of construction loans
may likewise under certain circumstances be affected by external financial
pressures.
Consumer Loans
NBB and BTC routinely make consumer loans, both secured and unsecured. The
credit history and character of individual borrowers is evaluated as a part of
the credit decision. Loans used to purchase vehicles or other specific personal
property and loans associated with real estate are usually secured with a lien
on the subject vehicle or property.
Negative changes in a customer's financial circumstances due to a large number
of factors, such as illness or loss of employment, can place the repayment of a
consumer loan at risk. In addition, deterioration in collateral value can add
risk to consumer loans.
Sales and Purchases of Loans
NBB and BTC will occasionally buy or sell all or a portion of a loan. These
purchases and sales are in addition to the secondary market residential mortgage
loans regularly sold by NBB. Because the demand for loans, particularly for
commercial loans, is greater in NBB's market area than in BTC's market area, NBB
regularly sells loans and participations in loans to BTC.
Both banks will consider selling a loan or a participation in a loan, if: (i)
the full amount of the loan will exceed the bank's legal lending limit to a
single borrower; (ii) the full amount of the loan, when combined with a
borrower's previously outstanding loans, will exceed the bank's legal lending
limit to a single borrower; (iii) the Board of Directors or an internal Loan
Committee believes that a particular borrower has a sufficient level of debt
with the bank; (iv) the borrower requests the sale; (v) the loan to deposit
ratio is at or above the optimal level as determined by bank management; and/or
(vi) the loan may create too great a concentration of loans in one particular
location or in one particular type of loan.
The banks will consider purchasing a loan, or a participation in a loan, from
another financial institution (including from another subsidiary of the Company)
if the loan meets all applicable credit quality standards and (i) the bank's
loan to deposit ratio is at a level where additional loans would be desirable;
and/or (ii) a common customer requests the purchase.
5
The following table sets forth, for the three fiscal years ended December 31,
2000, 1999 and 1998 the percentage of total operating revenue contributed by
each class of similar services which contributed 15% or more of total operating
revenues of the Company during such periods.
Percentage of
Period Class of Service Total Revenues
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December 31, 2000 Interest and Fees on Loans 66.74%
Interest on Investments 21.22%
December 31, 1999 Interest and Fees on Loans 64.95%
Interest on Investments 24.41%
December 31, 1998 Interest and Fees on Loans 61.97%
Interest on Investments 25.99%
Market Area
The National Bank of Blacksburg Market Area
NBB's primary market area consists of the northern portion of Montgomery
County, all of Giles County, all of Pulaski County, the City of Radford, the
City of Galax and adjacent portions of Carroll and Grayson Counties, Virginia.
This area includes the towns of Blacksburg and Christiansburg in Montgomery
County, the towns of Pearisburg, Pembroke and Rich Creek, in Giles County, and
the towns of Dublin and Pulaski in Pulaski County. The local economy is diverse
and is oriented toward higher education, retail and service, light manufacturing
and agriculture.
Montgomery County's largest employer is Virginia Polytechnic Institute and
State University (VPI & SU) located in Blacksburg. VPI & SU is the
Commonwealth's land grant college and also its largest university. Employment at
VPI & SU has remained stable over the past three years, and it is not expected
to change materially in the next few years. A second state supported university,
Radford University, is located in NBB's service area. It too has provided stable
employment opportunities in the region.
Giles County's primary employer is the Celanese Corp. plant, a manufacturer of
the material from which cigarette filters are made. In late 1997 temporary
employee furloughs were announced, and a small number of these temporary layoffs
have become permanent.
Pulaski County's major employer is the Volvo Heavy Trucks production facility.
During 2000, the Volvo company laid off a significant number of workers, and the
trend is likely to continue in the near term as the demand for heavy trucks
nationwide is very low. The county also has several large furniture plants, most
notably Pulaski Furniture and Ethan Allen. Pulaski Furniture recently announced
a small work force reduction.
The City of Galax is located in the Virginia-North Carolina
furniture-manufacturing region. Three furniture companies, Vaughan Bassett
Furniture Company, Vaughan Furniture Company, Inc. and Webb Furniture Company
together employ the largest percentage of the area's work force. The Galax
economy is stable, but furniture manufacturing is often affected early in an
economic downturn.
6
Several other small manufacturing concerns are located in Montgomery, Giles
and Pulaski Counties and in the City of Galax. These concerns manufacture
diverse products and are not dependent on one sector of the economy. Agriculture
and tourism are also important to the region, especially in Giles County and in
the area near Galax.
Since 1988, Montgomery County has developed into a regional retail center,
with the construction of two large shopping areas. Two area hospitals, each of
which are affiliated with different large health care systems, have constructed
additional facilities attracting health care providers to Montgomery County,
making it a center for basic health care services. VPI & SU's Corporate Research
Center has brought several small high tech companies to Blacksburg, and further
expansion is planned.
Montgomery County, with an approximate population of 77,000, has experienced
moderate population growth and this trend is predicted to continue. Neighboring
Giles County is more rural, with a total population of approximately 16,500. The
population of Giles County is expected to slowly decline over the next few
years. It is not anticipated that this decline will materially impact NBB's
business in Giles County. Pulaski County has a total population of 34,000 and is
relatively stable. The City of Galax has a population of approximately 7,000,
and the neighboring, mostly rural, counties of Carroll and Grayson have a total
of approximately 50,000 inhabitants. The area's population is stable, and no
dramatic changes are predicted.
NBB's primary market area offers the advantages of a good quality of life,
scenic beauty, moderate climate and the cultural attractions of two major
universities. The region has marketed itself as a retirement destination, and it
has had some recent success attracting retirees, particularly from the Northeast
and urban Northern Virginia. These marketing efforts are expected to continue.
Bank of Tazewell County Market Area
Most of BTC's business originates from Tazewell County, Virginia and Mercer
County, West Virginia. This includes the towns of Tazewell, Richlands and
Bluefield, Virginia and Bluefield, West Virginia. BTC also has also recently
added offices located in the Towns of Wytheville, Marion and Abingdon located in
Wythe, Smyth and Washington Counties, Virginia, respectively. BTC's primary
market area has largely depended on the coal mining industry and farming for its
economic base. In recent years, coal companies have mechanized reducing the
number of individuals required for the production of coal. However, there are
still a number of support industries for the coal mining business that continue
to provide employment in the area. Additionally, several new businesses have
been established in the area, and Bluefield, West Virginia has begun to emerge
as a regional medical center. Unemployment has stabilized, and real estate
values remain stable and comparable to other areas in southwest Virginia. BTC's
expanded market areas in Wythe, Smyth and Washington Counties have a diverse
economic base, with manufacturing, agriculture, education and service industries
all represented.
7
Competition
The banking and financial service business in Virginia, generally, and in
NBB's and BTC's market areas specifically, is highly competitive. The
increasingly competitive environment is a result of changes in regulation,
changes in technology and product delivery systems and new competition from
non-traditional financial services. The Company's bank subsidiaries compete for
loans and deposits with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, money market funds,
credit unions and other nonbank financial service providers. Many of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader array of financial services than
NBB and BTC. In order to compete with these other financial service providers,
NBB and BTC rely upon service-based business philosophies, personal
relationships with customers, specialized services tailored to meet customers'
needs and the convenience of office locations. In addition, the banks are
generally competitive with other financial institutions in their market areas
with respect to interest rates paid on deposit accounts, interest rates charged
on loans and other service charges on loans and deposit accounts.
Registrant's Organization and Employment
Bankshares, NBB and BTC are organized in a holding company/subsidiary bank
structure. Bankshares has no employees, except for officers, and conducts
substantially all of its operations through its subsidiaries. All compensation
paid to officers and employees is paid by NBB, except for fees paid by
Bankshares to President and Chief Executive Officer James G. Rakes for his
service as a director of the Company.
At December 31, 2000, NBB employed 138 full time equivalent employees at its
main office, operations center and branch offices. BTC at December 31, 2000
employed 81 full time equivalent employees in its various offices and
operational areas.
Certain Regulatory Considerations
Bankshares, NBB and BTC are subject to various state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. As a result of the substantial regulatory burdens on banking,
financial institutions, including Bankshares, NBB and BTC, are disadvantaged
relative to other competitors who are not as highly regulated, and their costs
of doing business are much higher. The following is a brief summary of the
material provisions of certain statutes, rules and regulations which affect
Bankshares, NBB and/or BTC. This summary is qualified in its entirety by
reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of the statutes or
regulations which are applicable to the businesses of Bankshares, NBB and/or
BTC. Any change in applicable laws or regulations may have a material adverse
effect on the business and prospects of Bankshares, NBB and/or BTC.
8
National Bankshares, Inc.
Bankshares is a bank holding company within the meaning of the BHCA and
Chapter 13 of the Virginia Banking Act, as amended (the Virginia Banking Act).
The activities of Bankshares also are governed by the Gramm-Leach-Bliley Act of
1999.
The Bank Holding Company Act. The BHCA is administered by the Federal Reserve
Board, and Bankshares is required to file with the Federal Reserve Board an
annual report and any additional information the Federal Reserve Board may
require under the BHCA. The Federal Reserve Board also is authorized to examine
Bankshares and its subsidiaries. The BHCA requires every bank holding company to
obtain the approval of the Federal Reserve Board before (i) it or any of its
subsidiaries (other than a bank) acquires substantially all the assets of any
bank; (ii) it acquires ownership or control of any voting shares of any bank if
after the acquisition it would own or control, directly or indirectly, more than
5% of the voting shares of the bank; or (iii) it merges or consolidates with any
other bank holding company.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve Board, require that, depending on the
particular circumstances, either Federal Reserve Board approval must be obtained
or notice must be furnished to the Federal Reserve Board and not disapproved
prior to any person or company acquiring "control" of a bank holding company,
such as Bankshares, subject to certain exemptions. Control is conclusively
presumed to exist if an individual or company acquires 25% or more of any class
of voting securities of Bankshares. Control is rebuttably presumed to exist if a
person acquires 10% or more, but less than 25%, of any class of voting
securities of Bankshares. The regulations provide a procedure for challenging
the rebuttable control presumption.
Under the BHCA, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares
of any company engaged in nonbanking activities, unless the Federal Reserve
Board, by order or regulation, has found those activities to be so closely
related to banking or managing or controlling banks as to be incident to
banking. Under recent amendments to the BHCA, included in the Gramm-Leach-Bliley
Act of 1999 (see below), any bank holding company, all the depository
institution subsidiaries of which are well-capitalized, well managed (as those
terms are defined in the BHCA) and have a satisfactory or better rating under
the Community Reinvestment Act as of their last examination, may file an
election with the Federal Reserve Board to become a Financial Holding Company. A
Financial Holding Company may engage in any activity that is (i) financial in
nature (ii) incidental to a financial activity or (iii) complementary to a
financial activity. The BHCA provides a long list of "financial activities",
including: insurance underwriting; securities dealing and underwriting;
providing financial, investment or economic arising services; and merchant
banking activities. Financial Holding Companies may also engage in other
activities that the Federal Reserve Board has determined are permissible under
the BHCA, by regulation or order.
9
The Federal Reserve Board imposes certain capital requirements on Bankshares
under the BHCA, including a minimum leverage ratio and a minimum ratio of
"qualifying" capital to risk-weighted assets. Subject to its capital
requirements and certain other restrictions, Bankshares can borrow money to make
a capital contribution to NBB or BTC, and these loans may be repaid from
dividends paid from NBB or BTC to Bankshares (although the ability of NBB or BTC
to pay dividends are subject to regulatory restrictions). Bankshares can raise
capital for contribution to NBB and BTC by issuing securities without having to
receive regulatory approval, subject to compliance with federal and state
securities laws.
The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (the GLBA), enacted on
November 12, 1999, was a broad rewrite of financial services legislation. The
GLBA permits significant combinations among different sectors of the financial
services industry; allows for significant expansion of financial service
activities by Bank holding companies and provides for a regulatory framework by
various governmental authorities responsible for different financial activities;
and offers certain financial privacy protections to consumers. The GLBA repealed
affiliation and management interlock prohibitions of the Depression-era
Glass-Steagall Act and, by amending the Bank Holding Companies, the GLBA added
new substantive provisions to the non-banking activities permitted under the
BHCA with the creation of the financial holding company. The GLBA preempts most
state laws that prohibit financial holding companies from engaging in insurance
activities. The GLBA permits affiliations between banks and securities firms
within the same holding company structure, and the Act permits financial holding
companies to directly engage in a broad range of securities and merchant banking
activities.
The Gramm-Leach-Bliley Act will lead to important changes in the manner in
which financial services are delivered in the United States. Bank holding
companies and their subsidiary banks will be able to offer a much broader array
of financial services; however, there will be greater competition in all sectors
of the financial services market.
The Virginia Banking Act. All Virginia bank holding companies must register
with the Virginia State Corporation Commission (the Commission) under the
Virginia Banking Act. A registered bank holding company must provide the
Commission with information with respect to the financial condition, operations,
management and intercompany relationships of the holding company and its
subsidiaries. The Commission also may require such other information as is
necessary to keep itself informed about whether the provisions of Virginia law
and the regulations and orders issued under Virginia law by the Commission have
been complied with, and may make examinations of any bank holding company and
its subsidiaries. The Virginia Banking Act allows bank holding companies located
in any state to acquire a Virginia bank or bank holding company if the Virginia
bank or bank holding company could acquire a bank holding company in their state
and the Virginia bank or bank holding company to be acquired has been in
existence and continuously operated for more than two years. The Virginia
Banking Act permits bank holding companies from throughout the United States to
enter the Virginia market, subject to federal and state approval.
10
NBB and BTC
General. NBB is a national banking association incorporated under the laws of
the United States and is subject to examination by the Office of the Comptroller
of the Currency (the OCC). Deposits in NBB are insured by the FDIC up to a
maximum amount (generally $100,000 per depositor, subject to aggregation rules).
The OCC and the FDIC regulate or monitor all areas of NBB's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations and maintenance of books and records. The OCC requires NBB to
maintain certain capital ratios. NBB is required by the OCC to prepare quarterly
reports on NBB's financial condition and to conduct an annual audit of its
financial affairs in compliance with minimum standards and procedures prescribed
by the OCC. NBB also is required by the OCC to adopt internal control structures
and procedures in order to safeguard assets and monitor and reduce risk
exposure. While appropriate for safety and soundness of banks, these
requirements impact banking overhead costs.
BTC is organized as a Virginia-chartered banking corporation and is regulated
and supervised by the Bureau of Financial Institutions (BFI) of the Virginia
State Corporation Commission. In addition, as a federally insured bank, BTC is
regulated and supervised by the Federal Reserve Board, which serves as its
primary federal regulator and is subject to certain regulations promulgated by
the FDIC. Under the provisions of federal law, federally insured banks are
subject, with certain exceptions, to certain restrictions on extensions of
credit to their affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, these banks are prohibited from engaging in certain
tie-in-arrangements in connection with any extension of credit or the providing
of any property of service.
The Virginia State Corporation Commission and the Federal Reserve Board
conduct regular examinations of BTC reviewing the adequacy of the loan loss
reserves, quality of the loans and investments, propriety of management
practices, compliance with laws and regulations and other aspects of the bank's
operations. In addition to these regular examinations, Virginia chartered banks
must furnish to the Federal Reserve Board quarterly reports containing detailed
financial statements and schedules.
Community Reinvestment Act. NBB and BTC are subject to the provisions of the
Community Reinvestment Act of 1977 (the CRA), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of a
bank, to assess the bank's record in meeting the credit needs of the community
served by the bank, including low and moderate-income neighborhoods. Under the
implementing CRA regulations, banks have the option of being assessed for CRA
compliance under one of several methods. Small banks are evaluated differently
than larger banks and technically are not subject to some data collection
requirements. The focus of the regulations is on the volume and distribution of
a bank's loans, with particular emphasis on lending activity in low and
moderate-income areas and to low and moderate-income persons. The regulations
place substantial importance on a bank's product delivery system, particularly
branch locations. The regulations require banks, other than small banks, to
comply with significant data collection requirements. The regulatory agency's
assessment of the bank's record is made available to the public. Further, this
assessment is required for any bank which has applied to, among other things,
establish a new branch office that will accept deposits, relocate an existing
office, or merge, consolidate with or acquire the assets or assume the
liabilities of a federally regulated financial institution. It is likely that
banks' compliance with the CRA, as well as other so-called fair lending laws,
will face ongoing government scrutiny and that costs associated with compliance
will continue to increase.
11
NBB has received a CRA rating of "Outstanding" in its last examination by
federal bank regulators. BTC was rated as "Satisfactory".
Federal Deposit Insurance Corporation Improvement Act of 1991. The
difficulties encountered nationwide by financial institutions during 1990 and
1991 prompted federal legislation designed to reform the banking industry and to
promote the viability of the industry and of the deposit insurance system.
FDICIA, which became effective on December 19, 1991, bolsters the deposit
insurance fund, tightens bank regulation and trims the scope of federal deposit
insurance.
The legislation bolsters the bank deposit insurance fund with $70 billion in
borrowing authority and increases to $30 billion from $5 billion the amount the
FDIC can borrow from the U.S. Treasury to cover the cost of bank failures. The
loans, plus interest, would be repaid by premiums that banks pay on domestic
deposits over the next fifteen years.
Among other things, FDICIA requires the federal banking agencies to take
"prompt corrective action" in respect to banks that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized."
If a depository institution's principal federal regulator determines that an
otherwise adequately capitalized institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, it may require the
institution to submit a corrective action plan, restrict its asset growth and
prohibit branching, new acquisitions and new lines of business. An institution's
principal federal regulator may deem the institution to be engaging in an unsafe
or unsound practice if it receives a less than satisfactory rating for asset
quality, management, earnings or liquidity in its most recent examination.
Among other possible sanctions, an undercapitalized depository institution may
not pay dividends and is required to submit a capital restoration plan to its
principal federal regulator. In addition, its holding company may be required to
guarantee compliance with the capital restoration plan under certain
circumstances. If an undercapitalized depository institution fails to submit or
implement an acceptable capital restoration plan, it can be subject to more
severe sanctions, including an order to sell sufficient voting stock to become
adequately capitalized. More severe sanctions and remedial actions can be
mandated by the regulators if an institution is considered significantly or
critically undercapitalized.
12
In addition, FDICIA requires regulators to draft a new set of non-capital
measures of bank safety, such as loan underwriting standards and minimum
earnings levels. The legislation also requires regulators to perform annual
on-site bank examinations, places limits on real estate lending by banks and
tightens auditing requirements. In April 1995, the regulators adopted safety and
soundness standards as required by FDICIA in the following areas: (i)
operational and managerial; (ii) asset quality earnings and stock valuation; and
(iii) employee compensation.
FDICIA reduces the scope of federal deposit insurance. The most significant
change ended the "too big to fail" doctrine, under which the government protects
all deposits in most banks, including those exceeding the $100,000 insurance
limit. The FDIC's ability to reimburse uninsured deposits--those over $100,000
and foreign deposits--has been sharply limited. Since December 1993, the Federal
Reserve Board's ability to finance undercapitalized banks with extended loans
from its discount window has been restricted. In addition, only the best
capitalized banks will be able to offer insured brokered deposits without FDIC
permission or to insure accounts established under employee pension plans.
Branching. In 1986, the Virginia Banking Act was amended to remove the
geographic restrictions governing the establishment of branch banking offices.
Subject to the approval of the appropriate federal and state bank regulatory
authorities, BTC as a state bank, may establish a branch office anywhere in
Virginia.
National banks, like NBB, are required by the National Bank Act to adhere to
branch banking laws applicable to state banks in the states in which they are
located. Under current Virginia law, NBB may open branch offices throughout
Virginia with the prior approval of the OCC. In addition, with prior approval of
one or more of the OCC, NBB will be able to acquire existing banking operations
in Virginia. As a state bank, BTC is subject to Virginia state branching laws
with BFI and Federal Reserve Bank approval, BTC is able to acquire existing
banking operations in the state.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
Interstate Act) allows bank holding companies to acquire banks in any state,
without regard to state law, except that if the state has a minimum requirement
for the amount of time a bank must be in existence, that law must be preserved.
Under the Virginia Banking Act, a Virginia bank or all of the subsidiaries of
Virginia holding companies sought to be acquired must have been in continuous
operation for more than two years before the date of such proposed acquisition.
The Interstate Act also permits banks to acquire out-of-state branches through
interstate mergers, if the state has not opted out of interstate branching. De
novo branching, where an out-of-state bank holding company sets up a new branch
in another state, requires a state's specific approval. An acquisition or merger
is not permitted under the Interstate Act if the bank, including its insured
depository affiliates, will control more than 10% of the total amount of
deposits of insured depository institutions in the United States, or will
control 30% or more of the total amount of deposits of insured depository
institutions in any state.
13
Virginia has, by statute, elected to opt-in fully to interstate branching
under the Interstate Act. Under the Virginia statute, Virginia state banks may,
with the approval of the Virginia State Corporation Commission, establish and
maintain a de novo branch or acquire one or more branches in a state other than
Virginia, either separately or as part of a merger. Procedures also are
established to allow out-of-state domiciled banks to establish or acquire
branches in Virginia, provided the "home" state of the bank permits Virginia
banks to establish or acquire branches within its borders. The activities of
these branches are subject to the same laws as Virginia domiciled banks, unless
such activities are prohibited by the law of the state where the bank is
organized. The Virginia State Corporation Commission has the authority to
examine and supervise out-of-state state banks to ensure that the branch is
operating in a safe and sound manner and in compliance with the laws of
Virginia. The Virginia statute authorizes the Bureau of Financial Institutions
to enter into cooperative agreements with other state and federal regulators for
the examination and supervision of out-of-state banks with Virginia operations,
or Virginia domiciled banks with operations in other states. Likewise, national
banks, with the approval of the OCC, may branch into and out of the state of
Virginia. Any Virginia branch of an out-of-state national bank is subject to
Virginia law (enforced by the OCC) with respect to intrastate branching,
consumer protection, fair lending and community reinvestment as if it were a
branch of a Virginia bank, unless preempted by federal law.
The Interstate Act permits banks and bank holding companies from throughout
the United States to enter Virginia markets through the acquisition of Virginia
institutions and makes it easier for Virginia bank holding companies and
Virginia state and national banks to acquire institutions and to establish
branches in other states. Competition in market areas served by the Company has
increased as a result of the Interstate Act and the Virginia interstate banking
statutes.
Deposit Insurance. The FDIC establishes rates for the payment of premiums by
federally insured financial institutions. A Bank Insurance Fund (the BIF) is
maintained for commercial banks, with insurance premiums from the industry used
to offset losses from insurance payouts when banks fail. Beginning in 1993,
insured depository institutions like NBB and BTC paid for deposit insurance
under a risk-based premium system. Beginning in 1997, all banks, including NBB
and BTC, were subject to an additional FDIC assessment which funds interest
payments for bank issues to resolve problems associated with the savings and
loan industry. This assessment will continue until 2018-2019. The assessment
will vary over the period from 1.29 cents to 2.43 cents per $100 of deposits.
Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999 (the GLBA) allows
national banks, with OCC approval, to acquire financial subsidiaries to engage
in any activity that is financial in nature or incidental to a financial
activity, as defined in the Bank Holding Act, except (i) insurance underwriting,
(ii) merchant or insurance portfolio investments, and (iii) real estate
development or investment. Well-capitalized national banks are also given the
authority to engage in municipal bond underwriting.
14
To establish or acquire a financial subsidiary, a national bank must be
well-managed, and the consolidated assets of its financial subsidiary must not
exceed the lesser of 45% of the consolidated total assets of the bank or $50
billion. The relationship between a national bank and a financial subsidiary are
subject to a variety of supervisory enhancements from regulators. The GLBA also
provides that state banks that establish or acquire financial subsidiaries are
required to comply with the same safeguards imposed on the financial
subsidiaries of national banks.
Government Policies. The operations of NBB and BTC are affected not only by
general economic conditions, but also by the policies of various regulatory
authorities. In particular, the Federal Reserve Board regulates money and credit
and interest rates in order to influence general economic conditions. These
policies have a significant influence on overall growth and distribution of
loans, investments and deposits and affect interest rates charged on loans or
paid for time and savings deposits. Federal Reserve Board monetary policies have
had a significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future.
Limits on Dividends and Other Payments. As a national bank, NBB, may not pay
dividends from its capital; all dividends must be paid out of net profits then
on hand, after deducting expenses, losses, bad debts, accrued dividends on
preferred stock, if any, and taxes. In addition, a national bank is prohibited
from declaring a dividend on its shares of common stock until its surplus equals
its stated capital, unless there has been transferred to surplus no less than
one-tenth of the bank's net profits of (i) the preceding two consecutive
half-year periods (in the case of an annual dividend) or (ii) the preceding
half-year period (in the case of a quarterly or semi-annual dividend). The
approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its net profits for that
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus or to fund the retirement of preferred stock.
The OCC has promulgated regulations that became effective on December 13,
1990, which significantly affect the level of allowable dividend payments for
national banks. The effect is to make the calculation of national banks'
dividend-paying capacity consistent with generally accepted accounting
principles. The allowance for loan and lease losses will not be considered an
element of "undivided profits then on hand" and provisions to the allowance are
treated as expenses and therefore not part of "net profits." Accordingly, a
national bank with an allowance greater than its statutory bad debts may not
include the excess in calculating undivided profits for dividend purposes.
Further, a national bank may be able to use a portion of its earned capital
surplus account as "undivided profits then on hand," depending on the
composition of that account.
As a state member bank subject to the regulations of the Federal Reserve
Board, BTC must obtain the approval of the Federal Reserve Board for any
dividend if the total of all dividends declared in any calendar year would
exceed the total of its net profits, as defined by the Federal Reserve Board,
for that year, combined with its retained net profits for the preceding two
years. In addition, a state member bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and
bad debts. For this purpose, bad debts are generally defined to include the
15
principal amount of loans which are in arrears with respect to interest by six
months or more, unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, a state member bank is
not permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand; however, it may net the sum of its bad debts as
so defined against the balance in its allowance for loan losses account and
deduct from undivided profits only bad debts as so defined in excess of that
account.
In addition, the Federal Reserve Board is authorized to determine, under
certain circumstances relating to the financial condition of a state member
bank, that the payment of dividends would be an unsafe or unsound practice and
to prohibit payment thereof. The payment of dividends that depletes a bank's
capital base could be deemed to constitute such an unsafe or unsound practice.
The Federal Reserve Board has indicated that banking organizations should
generally pay dividends only out of current operating earnings.
Virginia law also imposes restrictions on the ability of BTC to pay dividends.
A Virginia state bank is permitted to declare a dividend out of its "net
undivided profits", after providing for all expenses, losses, interest and taxes
accrued or due by the bank. In addition, a deficit in capital originally paid in
must be restored to its initial level, and no dividend can be paid which could
impair the bank's paid in capital. The Bureau of Financial Institutions further
has authority to limit the payment of dividends by a Virginia bank if it
determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
provides that no insured depository institution may make any capital
distribution (which would include a cash dividend) if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements.
Capital Requirements. The Federal Reserve Board has adopted risk-based capital
guidelines which are applicable to Bankshares and BTC. The Federal Reserve Board
guidelines redefine the components of capital, categorize assets into different
risk classes and include certain off-balance sheet items in the calculation of
risk-weighted assets. The minimum ratio of qualified total capital to
risk-weighted assets (including certain off-balance sheet items, such as standby
letters of credit) is 8.0%. At least half of the total capital must be comprised
of Tier 1 capital for a minimum ratio of Tier 1 Capital to risk-weighted assets
of 4.0%. The remainder may consist of a limited amount of subordinated debt,
other preferred stock, certain other instruments and a limited amount of loan
and lease loss reserves. The OCC has adopted similar regulations applicable to
NBB.
In addition, the Federal Reserve Board has established minimum leverage ratio
(Tier 1 capital to total assets less intangibles) guidelines that are applicable
to Bankshares and BTC. The OCC has adopted similar regulations applicable to
NBB. These guidelines provide for a minimum ratio of 4.0% for banks that meet
certain specified criteria, including that they have the highest regulatory
CAMELS rating and are not anticipating or experiencing significant growth and
have well-diversified risk. All other banks will be required to maintain an
additional cushion of at least 100 to 200 basis points, based upon their
particular circumstances and risk profiles. The guidelines also provide that
banks experiencing internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets.
16
Bank regulators from time to time have indicated a desire to raise capital
requirements applicable to banking organizations beyond current levels. In
addition, the number of risks which may be included in risk-based capital
restrictions, as well as the measurement of these risks, is likely to change,
resulting in increased capital requirements for banks. Bankshares, NBB and BTC
are unable to predict whether higher capital ratios would be imposed and, if so,
at what levels and on what schedule.
Other Legislative and Regulatory Concerns
Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks, thrifts and other financial institutions are
periodically considered by the executive branch of the federal government,
Congress and various state governments, including Virginia. New proposals could
significantly change the regulation of banks and the financial services
industry. It cannot be predicted what might be proposed or adopted or how these
proposals would affect the Company.
Other Business Concerns
The banking industry is particularly sensitive to interest rate fluctuations,
as the spread between the rates which must be paid on deposits and those which
may be charged on loans is an important component of profit. In addition, the
interest which can be earned on a bank's invested funds has a significant effect
on profits. Rising interest rates typically reduce the demand for new loans,
particularly the real estate loans which represent a significant portion of
NBB's and BTC's loan demand, as well as certain NBB loans in which BTC
participates.
17
Statistical Disclosure by National Bankshares, Inc.
and Subsidiaries (The Company)
I. Distribution of Assets, Liabilities and Stockholders' Equity; Interest
Rates and Interest Differential
------------------------------------------------------------------------
A. Average Balance Sheets
The following table presents, for the years indicated, condensed
daily average balance sheet information.
($ in thousands)
===============================================================================
December 31,
------------------------------------------
Assets 2000 1999 1998
===============================================================================
Cash and due from banks $11,355 12,820 10,281
Interest bearing deposits 10,683 5,263 12,889
Federal funds sold 6,149 2,926 6,389
Securities available for sale:
Taxable 87,813 95,979 94,247
Nontaxable 31,302 29,286 29,284
Securities held to maturity:
Taxable 9,029 8,940 9,972
Nontaxable 14,542 17,219 18,929
Mortgage loans held for sale 519 709 1,017
Loans, net 310,624 266,431 225,613
Other assets 18,365 14,616 12,367
------------------------------------------
Total assets $500,381 454,189 420,988
===============================================================================
- -------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
===============================================================================
- -------------------------------------------------------------------------------
Noninterest-bearing demand
Deposits $56,709 55,700 49,552
Interest-bearing demand deposits 85,713 85,284 77,842
Savings deposits 43,138 46,792 47,475
Time deposits 248,113 203,807 185,101
------------------------------------------
Total deposits 433,673 391,583 359,970
Short-term borrowings 1,727 4,228 216
Long-term borrowings 7,284 --- ---
------------------------------------------
Other liabilities 2,015 2,182 2,520
------------------------------------------
Total liabilities 444,699 397,993 362,706
Stockholders' equity 55,682 56,196 58,282
------------------------------------------
Total liabilities and
Stockholders' equity $500,381 454,189 420,988
===============================================================================
18
B. Analysis of Net Interest Earnings
The following table shows the major categories of interest-earning
assets and interest-bearing liabilities, the interest earned or paid,
the average yield or rate on the daily average balance outstanding, net
interest income and net yield on average interest-earning assets for
the years indicated.
---------------------------------------------------------------------------------------------------------------
December 31, 2000 December 31, 1999 December 31, 1998
---------------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
($ in thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
Interest-earning
Assets:
Loans, net (1)(2)(3) $314,685 28,454 9.04% 267,140 24,244 9.08% 226,630 21,726 9.59%
Taxable securities 96,842 6,760 6.98% 104,919 6,820 6.50% 104,219 7,201 6.91%
Nontaxable
Securities (1) 45,844 3,420 7.46% 46,505 3,414 7.34% 48,213 2,899 6.01%
Federal funds sold 6,149 338 5.50% 2,926 170 5.81% 6,389 345 5.40%
Interest bearing
Deposits 10,683 689 6.45% 5,263 269 5.11% 12,889 696 5.40%
---------------------------------------------------------------------------------------------------------------
Total interest-
Earning assets 474,203 39,661 8.36% 426,753 34,917 8.18% 398,340 32,867 8.25%
===============================================================================================================
Interest-bearing
Liabilities:
Interest-bearing
Demand deposits $85,713 2,243 2.62% 85,284 2,129 2.50% 77,842 2,203 2.83%
Savings deposits 43,138 1,135 2.63% 46,792 1,212 2.59% 47,475 1,511 3.18%
Time deposits 248,113 14,157 5.71% 203,807 10,630 5.22% 185,101 10,203 5.51%
Short-term
Borrowings 1,727 118 6.83% 4,228 232 5.49% 216 11 5.09%
Long-term debt 7,284 510 7.00% --- --- --- --- --- ---
---------------------------------------------------------------------------------------------------------------
Total interest-
Bearing liabilities $385,975 18,163 4.71% 340,111 14,203 4.18% 310,634 13,928 4.48%
===============================================================================================================
Net interest income
and interest rate
spread 21,498 3.65% 20,714 4.00% 18,939 3.77%
===============================================================================================================
Net yield on average
Interest-earning
Assets 4.53% 4.85% 4.75%
===============================================================================================================
(1) Interest on nontaxable loans and securities is computed on a fully taxable
equivalent basis using a Federal income tax rate of 34%.
(2) Loan fees of $381 in 2000, $680 in 1999 and $414 in 1998 are included in
total interest income.
(3) Nonaccrual loans are included in average balances for yield computations.
19
C. Analysis of Changes in Interest Income and Interest Expense
The Company's primary source of revenue is net interest income, which
is the difference between the interest and fees earned on loans and
investments and the interest paid on deposits and other funds. The
Company's net interest income is affected by changes in the amount and
mix of interest-earning assets and interest-bearing liabilities and by
changes in yields earned on interest-earning assets and rates paid on
interest-bearing liabilities. The following table sets forth, for the
years indicated, a summary of the changes in interest income and
interest expense resulting from changes in average asset and liability
balances (volume) and changes in average interest rates (rate).
==============================================================================================
2000 Over 1999 1999 Over 1998
----------------------------------------------------------------------------------------------
Changes Due To Changes Due To
------------------------------- -------------------------------
Net Dollar Net Dollar
($ in thousands) Rates(2) Volume(2) Change Rates(2) Volume(2) Change
=============================================================================================================================
Interest income:(1)
Loans $ (89) 4,299 4,210 (1,206) 3,724 2,518
Taxable securities 485 (545) (60) (429) 48 (381)
Nontaxable securities 55 (49) 6 621 (106) 515
Federal funds sold (10) 178 168 24 (199) (175)
Interest bearing deposits 85 335 420 (35) (392) (427)
- -------------------------------------------------------------------------------------------------------------------------
Increase(decrease) in
income on interest-
earning assets 526 4,218 4,744 (1,025) 3,075 2,050
- -------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest-bearing demand
deposits $ 103 11 114 (273) 199 (74)
Savings deposits 19 (96) (77) (278) (21) (299)
Time deposits 1,065 2,462 3,527 (568) 995 427
Short-term borrowings 47 (161) (114) 1 220 221
Long-Term Borrowings --- 510 510 --- --- ---
- -------------------------------------------------------------------------------------------------------------------------
Increase(decrease) in
expense of interest-
bearing liabilities $1,234 2,726 3,960 (1,118) 1,393 275
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
interest income $ (708) 1,492 784 93 1,682 1,775
=========================================================================================================================
(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.
20
II. Investment Portfolio
A. Book Value of Investments
The amortized costs and fair values of securities available for
sale as of December 31, 2000, 1999 and 1998 were as follows:
==============================================================================
December 31,
------------------------------------------------------------------------------
------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
($ in thousands) Costs Values Costs Values Costs Values
============================================================================================================================
Available for sale:
U.S. Treasury $ 6,246 6,331 6,244 6,164 9,253 9,671
U.S. Government agencies and
corporations 54,815 54,034 50,373 47,498 59,365 59,595
States and political subdivisions 35,456 35,606 32,903 31,617 32,183 32,865
Mortgage-backed securities (1) 11,818 11,776 13,464 13,176 17,282 17,200
Corporate debt securities 14,341 14,058 14,349 13,646 14,528 14,824
Federal Home Loan Bank stock 1,329 1,329 1,329 1,329 1,214 1,214
Federal Reserve Bank stock 209 209 247 247 247 247
Other securities 442 442 168 168 462 462
---------------------------------------------------------------------------
Total securities available for sale $124,656 123,785 119,077 113,845 134,534 136,078
=========================================================================================================================
The amortized costs of securities held to maturity as of
December 31, 2000, 1999 and 1998 were as follows:
=========================================================
December 31,
---------------------------------------------------------
---------------------------------------------------------
($ in thousands) 2000 1999 1998
======================================================================================================================
Held to maturity:
U.S. Treasury $ --- 500 1,006
U.S. Government agencies and corporations 8,500 5,500 7,497
States and political subdivisions 17,288 17,283 21,160
Mortgage-backed securities (1) 288 364 513
Corporate 6,483 --- 500
---------------------------------------------------------
Total securities held to maturity $ 32,559 23,647 30,676
======================================================================================================================
(1) The majority of mortgage-backed securities and collateralized mortgage
obligations held at December 31, 2000 were backed by U.S. agencies. Certain
holdings are required to be periodically subjected to the Financial
Institution Examination Council's (FFIEC) high risk mortgage security test.
These tests address possible fluctuations in the average life and price
sensitivity which are the primary risks associated with this type of
security. Such tests are usually subject to regulatory review.
Except for U.S. Government securities, the Company has no securities with
any issuer that exceeds 10% of stockholders' equity.
21
B. Maturities and Associated Yields
The following table presents the maturities for those securities
available for sale and held to maturity as of December 31, 2000 and
weighted average yield for each range of maturities.
=======================================================================================
Maturities and Yields
December 31, 2000
---------------------------------------------------------------------------------------
($ in thousands except for % data) < 1 Year 1-5 Years 5-10 Years > 10 Years None Total
================================================================================================================================
Available for Sale $ --- 5,312 1,018 --- --- 6,330
- ------------------
U.S. Treasury --- 6.02% 5.66% --- --- 5.96%
- ----------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies --- 14,496 24,199 15,338 --- 54,033
--- 6.56% 6.76% 6.67% --- 6.68%
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities --- --- 2,155 9,621 --- 11,776
--- --- 6.32% 7.39% --- 7.20%
- ----------------------------------------------------------------------------------------------------------------------------
States and Political --- 1,150 510 1,309 --- 2,969
Subdivision - taxable --- 7.06% 7.40% 7.80% --- 7.44%
- ----------------------------------------------------------------------------------------------------------------------------
States and Political Subdivision 211 7,175 10,745 14,507 --- 32,638
- nontaxable(1) 7.59% 6.89% 6.75% 6.60% --- 6.72%
- ----------------------------------------------------------------------------------------------------------------------------
Corporate 987 3,498 4,440 5,133 --- 14,058
5.57% 6.98% 6.64% 6.85% --- 6.73%
- ----------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock --- --- --- --- 1,329 1,329
--- --- --- --- 7.75 7.75%
- ----------------------------------------------------------------------------------------------------------------------------
Federal Reserve Bank stock --- --- --- --- 209 209
--- --- --- --- 6.00 6.00%
- ----------------------------------------------------------------------------------------------------------------------------
Other securities 3 --- --- --- 440 443
6.51% --- --- --- 7.75% 7.74%
- ----------------------------------------------------------------------------------------------------------------------------
Total 1,201 31,631 43,067 45,908 1,978 123,785
5.93% 6.61% 6.71% 6.85% 7.57% 6.74%
- ----------------------------------------------------------------------------------------------------------------------------
Held to Maturity --- --- --- --- --- ---
- ----------------
U.S. Treasury --- --- --- --- --- ---
- ----------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies 2,500 5,000 1,000 --- --- 8,500
6.01% 5.37% 7.38% --- --- 5.79%
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities --- 35 61 192 --- 288
--- 7.79% 7.84% 7.88% --- 7.86%
- ----------------------------------------------------------------------------------------------------------------------------
States and Political 205 1,224 --- 200 --- 1,629
Subdivision - taxable 6.65% 7.03% --- 9.00% --- 7.23%
- ----------------------------------------------------------------------------------------------------------------------------
States and Political 4,009 7,737 2,194 1,720 --- 15,660
Subdivision - nontaxable 6.76% 7.00% 7.00% 6.91% --- 6.93%
- ----------------------------------------------------------------------------------------------------------------------------
Corporate 3,746 2,736 --- --- --- 6,482
7.01% 7.04% --- --- --- 7.02%
- ----------------------------------------------------------------------------------------------------------------------------
Other securities --- --- --- --- --- ---
--- --- --- --- --- ---
- ----------------------------------------------------------------------------------------------------------------------------
Total $10,460 16,732 3,255 2,112 --- 32,559
6.67% 6.52% 7.13% 7.20% --- 6.67%
============================================================================================================================
(1) Rates shown represent weighted average yield on a fully taxable basis.
22
III. Loan Portfolio
The Company concentrates its lending activities in commercial and
industrial loans, real estate mortgage loans both residential and
business, and loans to individuals. The following tables set forth (i) a
comparison of the Company's loan portfolio by major category of loans as
of the dates indicated and (ii) the maturities and interest rate
sensitivity of the loan portfolio at December 31, 2000.
A. Types of Loans
=====================================================
December 31,
-----------------------------------------------------
($ in thousands) 2000 1999 1998 1997 1996
================================================================================
Commercial and industrial
loans $163,929 149,386 110,509 101,379 87,519
Real estate mortgage
loans 71,163 58,829 48,724 42,969 43,917
Real estate construction
loans 16,726 14,669 12,827 8,510 6,295
Loans to individuals 110,176 73,825 69,493 66,635 60,991
-----------------------------------------------------
Total loans 361,994 296,709 241,553 219,493 198,722
Less unearned income and
deferred fees (2,313) (1,916) (2,296) (2,503) (2,549)
-----------------------------------------------------
Total loans, net of
unearned income 359,681 294,793 239,257 216,990 196,173
Less allowance for loans
losses (3,886) (3,231) (2,679) (2,438) (2,575)
-----------------------------------------------------
Total loans, net $355,795 291,562 236,578 214,552 193,598
================================================================================
B. Maturities and Interest Rate Sensitivities
======================================================
December 31, 2000
------------ --------------- ------------ ------------
After
($ in thousands) <1 Year 1-5 Years 5 Years Total
========================= ============ =============== ============ ============
Commercial and
industrial $47,264 66,183 50,482 163,929
Real estate
construction 16,726 --- --- 16,726
Less loans with
predetermined interest 23,208 38,144 50,007 111,359
rates
------------ --------------- ------------ ------------
Loans with adjustable
rates $40,782 28,039 475 69,296
========================= ============ =============== ============ ============
23
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans The following
table presents aggregate amounts for nonaccrual loans,
restructured loans, other real estate owned, net and
accruing loans which are contractually past due ninety days
or more as to interest or principal payments.
=======================================
December 31,
---------------------------------------
($ in thousands) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------
Nonaccrual loans:
Commercial and industrial $ 65 65 --- 55 121
Real estate mortgage 5 33 28 32 495
Real estate construction --- --- --- --- ---
Loans to individuals 18 53 --- --- ---
- --------------------------------------------------------------------------------
$ 88 151 28 87 616
- --------------------------------------------------------------------------------
Restructured loans:
Commercial and industrial --- 40 --- --- ---
- --------------------------------------------------------------------------------
Total nonperforming loans 191 28 87 616
Other real estate owned, net 540 447 628 421 474
- --------------------------------------------------------------------------------
Total nonperforming assets 628 638 656 508 1,090
=======================================
- --------------------------------------------------------------------------------
Accruing loans past due 90 days or more:
Commercial and industrial
Real estate mortgage $ 242 99 186 82 14
Real estate construction 664 704 160 358 252
Loans to individuals --- --- --- --- ---
415 274 204 232 192
- --------------------------------------------------------------------------------
$1,321 1,077 550 672 458
================================================================================
The effect of nonaccrual and restructured loans on interest
income is presented below:
=======================================
($ in thousands) 2000 1999 1998
=============================================================================
Scheduled interest:
Nonaccrual loans $11 13 4
Restructured loans --- --- ---
---------------------------------------
Total scheduled interest $11 13 4
---------------------------------------
Recorded interest:
Nonaccrual loans --- --- ---
Restructured loans --- --- ---
---------------------------------------
Total recorded interest --- --- ---
=============================================================================
Interest is recognized on the cash basis for all loans
carried in nonaccrual status. Loans generally are placed in
nonaccrual status when the collection of principal or
interest is ninety days or more past due, unless the
obligation is both well-secured and in the process of
collection.
24
2. Potential Problem Loans
At December 31, 2000, the recorded investment in loans which
have been identified as impaired loans totaled $456. Of this
amount, $321 related to loans with no valuation allowance
and $135 related to loans with a corresponding valuation
allowance of $135. For the year-ended December 31, 2000, the
average recorded investment in impaired loans was
approximately $657 and the total interest income recognized
on impaired loans was $43 of $0 which was recognized on a
cash basis.
At December 31, 1999, the recorded investment in loans which
have been identified as impaired loans totaled $317,000. Of
this amount, $95,000 related to loans with no valuation
allowance and $222,000 related to loans with a corresponding
valuation allowance of $154,000. For the year ended December
31, 1999, the average recorded investment in impaired loans
was approximately $292,000, and the total interest income
recognized on impaired loans was $13,000 of which $0 was
recognized on a cash basis.
3. Foreign Outstandings
At December 31, 2000, 1999 and 1998, there were no foreign
outstandings.
4. Loan Concentrations
The Company does a general banking business, serving the
commercial, agricultural and personal banking needs of its
customers. NBB's trade territory, consists of Montgomery and
Giles Counties, and the City of Galax, Virginia and portions
of adjacent counties. NBB's operating results are closely
correlated with the economic trends within this area which
are, in turn, influenced by the area's three largest
employers, Virginia Polytechnic Institute and State
University, Montgomery County Schools and Celco. Other
industries include a wide variety of manufacturing, retail
and service concerns. Most of BTC's business originates from
the communities of Tazewell and Bluefield and other
communities in Tazewell County, Virginia and in Mercer
County, West Virginia. BTC's service area has largely
depended on the coal mining industry and farming for its
economic base. In recent years, coal companies have
mechanized and reduced the number of persons engaged in the
production of coal. There are still a number of support
industries for the coal mining business that continue to
provide employment in the area. Additionally, several new
businesses have been established in the area and Bluefield,
West Virginia has begun to emerge as a regional medical
25
center. The ultimate collectibility of the loan portfolios
and the recovery of the carrying amounts of repossessed
property are susceptible to changes in the market conditions
of these areas.
At December 31, 2000 and 1999, approximately $151 million
and $130 million, respectively, of the loan portfolio were
concentrated in commercial real estate. This represents
approximately 42% and 44% of the loan portfolio at December
31, 2000 and 1999, respectively. Included in commercial real
estate at December 31, 2000 and 1999 was approximately $84
million and $85 million, respectively, in loans for college
housing and professional office buildings. Loans secured by
residential real estate were approximately $110 million and
$74 million at December 31, 2000 and 1999, respectively.
This represents approximately 31% and 25% of the loan
portfolio at December 31, 2000 and 1999, respectively. Loans
secured by automobiles were approximately $36 million and
$33 million at December 31, 2000 and 1999, respectively.
This represents approximately 10% of the loan portfolio at
December 31, 2000 and 11% at December 31, 1999.
The Company has established operating policies relating to
the credit process and collateral requirements in loan
originations. Loans to purchase real and personal property
are generally collateralized by the related property and
with loan amounts established based on certain percentage
limitations of the property's total stated or appraised
value. Credit approval is primarily a function of collateral
and the evaluation of the creditworthiness of the individual
borrower or project based on available financial
information.
26
IV. Summary of Loan Loss Experience
A. Analysis of the Allowance for Loan Losses The following
tabulation shows average loan balances at the end of each period;
changes in the allowance for loan losses arising from loans
charged off and recoveries on loans previously charged off by
loan category; and additions to the allowance which have been
charged to operating expense:
============================================================================
December 31,
----------------------------------------------------------------------------
($ in thousands) 2000 1999 1998 1997 1996
==============================================================================================================================
Average loans outstanding $310,624 266,431 225,613 204,540 177,419
============================================================================
- ------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year 3,231 2,679 2,438 2,575 2,625
Charge-offs:
Commercial and industrial loans 55 185 32 257 95
Real estate mortgage loans --- 33 80 --- 11
Real estate construction loans --- --- --- --- ---
Loans to individuals 715 760 526 422 400
----------------------------------------------------------------------------
Total loans charged off 770 978 638 679 506
----------------------------------------------------------------------------
Recoveries:
Commercial and industrial loans 3 51 --- 70 4
Real estate mortgage loans --- 1 2 --- 64
Real estate construction loans --- --- 190 --- ---
Loans to individuals 93 78 63 37 57
----------------------------------------------------------------------------
Total recoveries 96 130 255 107 125
----------------------------------------------------------------------------
Net loans charged off 674 848 383 572 381
----------------------------------------------------------------------------
Additions charged to operations 1,329 1,400 624 435 331
----------------------------------------------------------------------------
Balance at end of year $ 3,886 3,231 2,679 2,438 2,575
============================================================================
- ------------------------------------------------------------------------------------------------------------------------------
Net charge-offs to average net loans
Outstanding 0.21% 0.32% 0.17% 0.28% 0.21%
==============================================================================================================================
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.
27
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,
-----------------------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------
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
($ in Allowance Category to Allowance Category to Allowance Category to Allowance Category to Allowance Category to
thousands) Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
====================================================================================================================================
Commercial
and
industrial
loans $ 255 45.29% 555 50.35% 222 45.75% 213 46.18% 403 44.04%
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate
mortgage
loans 120 19.66% 119 19.83% 73 20.17% 67 19.58% 305 22.10%
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate
construction
loans --- 4.62% --- 4.94% --- 5.31% --- 3.88% 51 3.17%
- ------------------------------------------------------------------------------------------------------------------------------------
Loans to
individuals 1,709 30.43% 978 24.88% 497 28.77% 416 30.36% 504 30.69%
- ------------------------------------------------------------------------------------------------------------------------------------
Unallocated 1,802 1,579 1,887 1,742 1,312
- ------------------------------------------------------------------------------------------------------------------------------------
$3,886 100.00% 3,231 100.00% 2,679 100.00% 2,438 100.00% 2,575 100.00%
=======================================================================================================================
28
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.
29
V. Deposits
A. Average Amounts of Deposits and Average Rates Paid
Average amounts and average rates paid on deposit categories in
excess of 10% of average total deposits are presented below:
==========================================================
December 31,
----------------------------------------------------------
2000 1999 1998
----------------------------------------------------------
Average Average Average
Average Rates Average Rates Average Rates
($ in thousands) Amounts Paid Amounts Paid Amounts Paid
- --------------------------------------------------------------------------------
Noninterest-bearing
demand deposits $ 56,709 --- 55,700 --- 49,552 ---
Interest-bearing
demand deposits 85,713 2.62% 85,284 2.50% 77,842 2.83%
Savings deposits 43,138 2.63% 46,792 2.59% 47,475 3.18%
Time deposits 248,113 5.71% 203,807 5.22% 185,101 5.51%
- --------------------------------------------------------------------------------
Average total
deposits $433,673 4.64% 391,583 4.16% 359,970 4.48%
================================================================================
B. Time Deposits of $100,000 or More
The following table sets forth time certificates of deposit and
other time deposits of $100,000 or more:
===========================================================
December 31, 2000
===========================================================
Over 3 Months Over 6 Months
3 Months Through 6 Through 12 Over 12
($ in thousands) or Less Months Months Months Total
================================================================================
Certificates of
deposit $68,699 45,294 101,249 111,424 326,666
- --------------------------------------------------------------------------------
Other time deposits 48,526 35,941 78,595 91,297 254,359
- --------------------------------------------------------------------------------
Total time
deposits of
$100,000 or more $20,173 9,353 22,654 20,127 72,307
================================================================================
30
VI. Return on Equity and Assets
The ratio of net income to average stockholders' equity and to average
total assets, and certain other ratios are presented below:
========================================
December 31,
----------------------------------------
2000 1999 1998
==============================================================================
Return on average assets 1.46% 1.56% 1.61%
- ------------------------------------------------------------------------------
Return on average equity(1) 13.13% 12.61% 11.66%
- ------------------------------------------------------------------------------
Dividend payout ratio 40.87% 39.70% 41.29%
- ------------------------------------------------------------------------------
Average equity to average assets(1) 11.13% 12.37% 13.84%
==============================================================================
(1) Includes amount related to common stock subject to ESOP put
option excluded from stockholders' equity on the Consolidated
Balance Sheets for 1999.
Item 2. Properties
Bankshares' headquarters and one branch office of NBB is located at 101
Hubbard Street, Blacksburg, Virginia. NBB's Main Office is at 100 South Main
Street, Blacksburg, Virginia. In addition to the Bank's Main Office location and
the Hubbard Street branch office, NBB owns eleven branch offices: three in the
Town of Blacksburg; one in the Town of Christiansburg; one in Montgomery County;
and three in the County of Giles, two in Pulaski County, one in the City of
Radford and one in the City of Galax. An additional tract of land has been
acquired for the construction of a fourteenth branch.
Bank of Tazewell County owns the land and building of eight of its ten
offices. The bank leases the land and building for two offices. The Main Office
is located at Main Street, Tazewell, Virginia. Three additional branches are
located in Tazewell, one is located in Richlands, two are located in Bluefield,
Virginia, one is in Wytheville, Virginia, one in Marion, Virginia, and one in
Abingdon, Virginia. Management believes that its existing facilities are
adequate to meet present needs and any anticipated growth.
NBB owns all its computer and data processing hardware and is a licensee of
the software it utilizes. BTC utilizes this same system for data processing.
Item 3. 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
31
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on.
The following is a list of names and ages of all executive officers of
Bankshares; their terms of office as officers; the positions and offices within
Bankshares held by each officer; and each person's principal occupation or
employment during the past five years.
================================================================================
Year Elected an
Name Age Offices and Positions Held Officer/Director
================================================================================
James G. Rakes 56 Chairman, President and Chief Executive 1986
Officer, National Bankshares, Inc.; and
President and Chief Executive Officer of
The National Bank of Blacksburg since
1983.
- --------------------------------------------------------------------------------
J. Robert Buchanan 49 Treasurer, National Bankshares, Inc.; 1998
Senior Vice President/Chief Financial
Officer of The National Bank of
Blacksburg, since January 1, 1998; prior
thereto Senior Vice President, Treasurer
and Chief Financial Officer, Premier
Bankshares Corporation since 1991.
- --------------------------------------------------------------------------------
Marilyn B. Buhyoff 52 Secretary & Counsel, National 1989
Bankshares, Inc.; and Senior Vice
President/ Administration since 1992,
of The National Bank of Blacksburg.
- --------------------------------------------------------------------------------
F. Brad Denardo 48 Corporate Officer, National Bankshares, 1989
Inc.; and Executive Vice President/
Loans since 1989 of The National Bank of
Blacksburg.
================================================================================
Except for J. Robert Buchanan, each of the executive officers listed above have
served Bankshares and/or its subsidiaries in the aforementioned executive
capacity for the past five years.
32
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 December 31, 2000 there were 1,076 stockholders of Bankshares
common stock. The following is a summary of the market price per share and cash
dividend per share of the common stock of National Bankshares, Inc. for 2000 and
1999. Prices prior to December 1, 1999 do not necessarily reflect the prices
which would have prevailed had there been an active trading market, nor do they
reflect unreported trades, which may have been at lower or higher prices.
Information concerning Market Price and Dividend Data is set forth under
"Common Stock Information and Dividends" on page 11 of Bankshares' 2000 Annual
Report to Stockholders and is incorporated herein by reference.
Item 6. Selected Financial Data
- --------------------------------
The table entitled "Selected Consolidated Financial Data" on page 4 of
Bankshares' 2000 Annual Report to Stockholders is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The information contained under "Management's Discussion and Analysis" on
pages 5 through 11 of Bankshares' 2000 Annual Report to Stockholders is
incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
See "Analysis of Interest Rate Sensitivity" set forth below. Additional
information is set forth under the section "Interest Rate Sensitivity" on page 6
and the section "Derivatives and Market Risk Exposure" on page 10 of Bankshares'
2000 Annual Report to Stockholders and is incorporated herein by reference.
33
Analysis of Interest Rate Sensitivity
The following discussion of interest rate sensitivity contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company's actual results
could differ materially from those set forth in the forward-looking statements.
The table below sets forth, as of December 31, 2000, the distribution of
repricing opportunities of the Company's interest-earning assets and
interest-bearing liabilities, the interest rate sensitivity gap (i.e., interest
rate sensitive assets less interest rate sensitive liabilities), and the
cumulative interest rate sensitivity gap ratio. The table sets forth the time
periods during which interest-earning assets and interest-bearing liabilities
will mature or may reprice in accordance with their contracted terms.
Certain shortcomings are inherent in the method of analysis presented in the
following table. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
and at different times to changes in market interest rates. Also, loan
prepayments and early withdrawals of certificates of deposit could cause the
interest sensitivities to vary from those which appear in the table.
An interest rate sensitivity gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would generally tend to
affect adversely net interest income while a positive gap would generally tend
to result in an increase in net interest income. During a period of declining
interest rates, a negative gap would generally tend to result in increased net
interest income, while a positive gap would generally tend to affect adversely
net interest income. The Company's future earnings may be adversely affected by
a sharp upturn in interest rates as the Company is liability sensitive for a
period extending through five years. In a falling rate environment, earnings
might benefit to a certain degree from this position, because assets at higher
rate levels would reprice downward at a slower rate than interest sensitive
liabilities.
In prior years, the Company has used its securities available for sale as a
primary means to counter movements in interest rates. At December 31, 2000, this
portfolio contained a substantial amount of longer term securities with call
features. Due to overall increases in interest rate levels these securities have
not been called as originally anticipated. The rising interest rate levels also
resulted in a substantial increase in net unrealized losses making the sale of
these securities impractical. At present and for an indeterminate amount of time
in the future, the Company will not be able to use the securities available for
sale portfolio to respond to interest rate movements to the extent possible in
recent years. This risk can be mitigated, however, by funds management,
specifically through use of credit instruments offered by the Federal Home Loan
Bank. Accordingly, the Company's vulnerability to upward movements of interest
rates has increased.
34
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, 2000
-----------------------------------------------------------------------------------
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 $ 23,206 5,191 8,542 74,384 52,541 163,864
Real estate mortgage loans 11,486 1,399 3,128 37,519 17,329 70,861
Real estate construction loans 13,534 106 1,566 622 883 16,711
Loans to individuals 22,390 6,262 11,095 51,325 17,085 108,157
-----------------------------------------------------------------------------------
Total loans, net of unearned income (2) 70,616 12,958 24,331 163,850 87,838 359,593
-----------------------------------------------------------------------------------
Federal funds sold 29,090 --- --- --- --- 29,090
Interest bearing deposits 13,579 --- --- --- --- 13,579
Securities available for sale (3) 9,475 1,958 11,202 42,128 59,892 124,655
Securities held to maturity (3) 6,141 1,348 4,767 17,149 3,154 32,559
Mortgage loans held for sale --- --- --- --- --- ---
-----------------------------------------------------------------------------------
Total interest-earning assets 128,910 16,264 40,300 223,127 150,884 559,486
====================================================================================================================================
====================================================================================================================================
Interest-bearing liabilities:
Interest-bearing demand deposits 101,257 --- --- --- --- 101,257
Savings deposits 42,560 --- --- --- --- 42,560
Time deposits 67,577 45,294 101,250 111,833 712 326,666
Other borrowings 270 --- --- --- --- 270
-----------------------------------------------------------------------------------
Total interest-bearing liabilities 211,664 45,294 101,250 111,833 712 470,753
- -------------------------------------------------===================================================================================
Cumulative ratio of interest-
sensitive assets to interest-
sensitive liabilities .61 .56 .52 .87 1.19 1.19
- -------------------------------------------------===================================================================================
Cumulative interest-sensitivity gap $(82,762) (111,792) (172,742) (61,448) 88,724 88,724
====================================================================================================================================
(1) The Company is sensitive to interest rate changes, as liabilities generally
reprice or mature before interest-earning assets. The above gap table
reflects the Company's rate-sensitive position at December 31, 2000, and is
not necessarily reflective of its position throughout the year. The
carrying amounts of interest-rate sensitive assets and liabilities are
presented in the periods in which they reprice to market rates or mature
and are summed to show the interest-rate sensitivity gap.
(2) Excludes nonaccrual loans. Each category is shown net of unearned income
and deferred fees.
(3) Call features on certain securities, if exercised, could have the effect of
materially shortening the average life of the investment portfolio. The
exercise of a call feature is dependent upon the rate environment. The call
decision is at the issuers discretion and ultimate benefit.
(4) Available for sale securities and scheduled using amortized cost.
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'
2000 Annual Report to Stockholders are incorporated herein by reference:
1. Independent Auditors' Report
2. Consolidated Balance Sheets - December 31, 2000 and 1999
3. Consolidated Statements of Income and Comprehensive Income - Years
ended December 31, 2000, 1999 and 1998
4. Consolidated Statements of Changes in Stockholders' Equity - Years
ended December 31, 2000, 1999 and 1998
5. Consolidated Statements of Cash Flows - Years ended December 31, 2000,
1999 and 1998
6. Notes to Consolidated Financial Statements - December 31, 2000, 1999
and 1998
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
Changes in and disagreement with Accountants on Accounting and Financial
Disclosure is set out under the caption "Change in Selection of Auditors" on
page 13 of Bankshares's Proxy Statement dated March 14, 2001 which information
is incorporated herein.
Part III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
Executive Officers of Bankshares as of December 31, 2000 are listed on page 32
herein.
Information with respect to the directors of Bankshares is set out under the
caption "Election of Directors" on pages 2 through 4 of Bankshares' Proxy
Statement dated March 14, 2001 which information is incorporated herein by
reference.
Item 11. Executive Compensation
- --------------------------------
The information set forth under "Executive Compensation" on pages 5 through 6
of Bankshares' Proxy Statement dated March 14, 2001 is incorporated herein by
reference.
36
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------
The information set forth under "Voting Securities and Stock Ownership" on
page 1 and under "Stock Ownership of Certain Beneficial Owners" and "Stock
Ownership of Directors and Executive Officers" on pages 1 and 2 of Bankshares'
Proxy Statement dated March 14, 2001 is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under "Certain Transactions With Officers and
Directors" on page 13 of Bankshares' Proxy Statement dated March 14, 2001 is
incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as part of this report:
2000 Annual Report
To Stockholders Page(s)*
------------------------
1. Financial Statements:
--------------------
Independent Auditors' Report 12
Consolidated Balance Sheets - 13
December 31, 2000 and 1999
Consolidated Statements of 14
Income and Comprehensive
Income - Years ended December
31, 2000, 1999 and 1998
Consolidated Statements of Changes 15
in Stockholders' Equity - Years
ended December 31, 2000, 1999 and
1998
Consolidated Statements of Cash 16
Flows - Years ended December 31,
2000, 1999 and 1998
Notes to Consolidated 17-35
Financial Statements - December
31, 2000, 1999 and 1998
2. Financial Statement Schedules:
-----------------------------
None
*Incorporated by reference from the indicated pages of the 2000 Annual Report to
Stockholders.
37
3. Exhibits:
--------
Page No. in
Exhibit No. Description Sequential System
- ---------- ----------- -----------------
3(i) Articles of Incorporation, as amended, of (incorporated
National Bankshares, Inc. herein by
reference to
Exhibit 3(a) of
the Annual Report on
Form 10K for
Fiscal year ended
December 31, 1993)
4(i) Specimen copy of certificate for National (incorporated
Bankshares, Inc. common stock, $2.50 par herein by
value reference to
Exhibit 4(a) of
the Annual Report on
Form 10K for
Fiscal year ended
December 31, 1993)
4(i) Article Four of the Articles of (incorporated
Incorporation of National Bankshares, Inc. herein by
included in Exhibit No. 3(a)) reference to
Exhibit 4(b) of
the Annual Report on
Form 10K for
Fiscal year ended
December 31, 1993)
10(ii)(B) Computer software license agreement dated (incorporated
June 18, 1990, by and between Information herein by
Technology, Inc. and The National Bank of reference to
Blacksburg Exhibit 10(e) of
the Annual Report on
Form 10K for
Fiscal year ended
December 31, 1992)
*10(iii)(A) Employment Agreement dated January 1, 1992, (incorporated
by and between National Bankshares, Inc. and herein by
James G. Rakes reference to
Exhibit 10(a) of
the Annual Report on
Form 10K for
Fiscal year ended
December 31, 1992)
*10(iii)(A) Capital Accumulation Plan (included in (incorporated
Exhibit No. 10(a)) herein by
reference to
Exhibit 10(b) of
the Annual Report on
Form 10K for
Fiscal year ended
December 31, 1992)
*10(iii)(A) Employee Lease Agreement dated May 7, 1992, (incorporated
by and between National Bankshares, Inc. and herein by
38
The National Bank of Blacksburg reference to
Exhibit 10(c) of
the Annual Report on
Form 10K for
Fiscal year ended
December 31, 1992)
*10(iii)(A) National Bankshares, Inc. 1999 Stock Option (incorporated herein
Plan by reference to
Exhibit 4.3 of the
Form S-8, filed as
Registration No.
333-79979 with the
Commission on June
4, 1999)
13(i) 2000 Annual Report to Stockholders (such
Report, except to the extent incorporated
herein by reference, is being furnished
for the information of the Commission only
and is not deemed to be filed as part of
this Report on Form 10-K)
21(i) Subsidiaries of National Bankshares, Inc.
23 Consent of KPMG LLP to incorporation by
reference of independent auditors' report
included in this Form 10-K, into
registrant's registration statement
on Form S-8.
99 Independent Auditors' Report of KPMG LLP on
consolidated financial statements of
National Bankshares, Inc. and subsidiaries
as of December 31, 1999 and for the years
ended December 31, 1999 and 1998.
*Indicates a management contract or compensatory plan required to be filed
herein.
39
(b) Reports on Form 8-K filed during the last quarter of the period covered by
this report:
--------------------------------------------------------------------------
1. Form 8-K dated November 9, 2000 annoucing the acquistion of six
AmSouth of Birmingham, Alabama branches.
2. Form 8 K/A dated November 9, 2000 provides financial statements for
the Acquisition of six AmSouth of Birmingham branches.
(c) Exhibits required by Item 601 of Regulation S-K:
-----------------------------------------------
See Item 14(a)3 above.
(d) Financial Statement Schedules required by Regulation S-X:
--------------------------------------------------------
See Item 14(a)2 above.
40
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, National Bankshares, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
National Bankshares, Inc.
BY: /s/James G. Rakes
--------------------------------------
James G. Rakes, Chairman,
President and Chief Executive Officer
DATE: March 14, 2001
-------------------------------------
BY: /s/J. Robert Buchanan
-------------------------------------
J. Robert Buchanan
Treasurer (Principal Financial Officer)
DATE: March 14, 2001
-------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
Name Date Title
- ---- ---- -----
/s/C. L. Boatwright March 14, 2001 Director and Vice
- ------------------------ -------------- Chairman of the Board
C. L. Boatwright
/s/L.A. Bowman March 14, 2001 Director
- ----------------------- --------------
L. A. Bowman
/s/A. A. Crouse March 14, 2001 Director
- ----------------------- --------------
A. A. Crouse
/s/J. A. Deskins, Sr. March 14, 2001 Director
- ----------------------- --------------
J. A. Deskins, Sr.
Director
- ----------------------- --------------
P. A. Duncan
/s/C. L. Forrester March 14, 2001 Director
- ----------------------- --------------
C. L. Forrester
/s/W. T. Peery March 14, 2001 Director
- ----------------------- --------------
W. T. Peery
/s/J. G. Rakes March 14, 2001 Chairman of the Board
- ----------------------- -------------- President and Chief
J. G. Rakes Executive Officer -
National Bankshares,
Inc., Director
/s/J. R. Stewart March 14, 2001
- ----------------------- --------------
J. R. Stewart
41
Index to Exhibits
-----------------
Page No. in
Exhibit No. Description Sequential System
- ----------- ----------- -----------------
3(i) Articles of Incorporation, as amended, of (incorporated
National Bankshares, Inc. herein by
reference to
Exhibit 3(a) of
the Annual Report
on Form 10K for
fiscal year ended
December 31, 1993)
4(i) Specimen copy of certificate for National (incorporated
Bankshares, Inc. common stock, $2.50 par value herein by
reference to
Exhibit 4(a) of
the Annual Report
on Form 10K for
fiscal year ended
December 31, 1993)
4(i) Article Fourth of the Articles of (incorporated
Incorporation of National Bankshares, Inc. herein by
included in Exhibit No. 3(a)) reference to
Exhibit
4(b) of the
Annual
Report on
Form 10K
for fiscal
year ended
December
31, 1993)
10(ii)(B) Computer software license agreement dated (incorporated
June 18, 1990, by and between Information herein by
Technology, Inc. and The National Bank of reference to
Blacksburg Exhibit 10(e) of
the Annual Report
on Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) Employment Agreement dated January 1, 1992, (incorporated
by and between National Bankshares, Inc. and herein by
James G. Rakes reference to
Exhibit
10(a) of
the Annual
Report on
Form 10K
for fiscal
year ended
December
31, 1992)
*10(iii)(A) Capital Accumulation Plan (included in (incorporated
Exhibit No. 10(a)) herein by
reference to
Exhibit 10(b) of
the Annual Report
on Form 10K for
fiscal year ended
December 31, 1992)
42
*10(iii)(A) Employee Lease Agreement dated May 7, 1992, (incorporated
by and between National Bankshares, Inc. and herein by
The National Bank of Blacksburg reference to
Exhibit 10(c) of
the Annual Report
on Form 10K for
fiscal year ended
December 31, 1992)
*10(iii)(A) National Bankshares, Inc. 1999 Stock Option (incorporated herein
Plan by reference to
Exhibit 4.3 of
the Form S-8,
filed as
Registration No.
333-79979 with
the Commission
on June 4, 1999)
13(i) 2000 Annual Report to Stockholders (such
Report, except to the extent incorporated
herein by reference, is being furnished for
the information of the Commission only and
is not deemed to be filed as part of this
Report on Form 10-K)
21(i) Subsidiaries of National Bankshares, Inc.
23 Consent of KPMG LLP to incorporation by
reference of independent auditors' report
included in this Form 10-K, into
registrant's registration statement on
Form S-8.
99 Independent Auditors' Report of KPMG LLP on
consolidated financial statements of National
Bankshares, Inc. and subsidiaries as of
December 31, 1999, and for the years ended
1999 and 1998
* Indicates a management contract or compensatory plan required to be filed
herein.
43