What changed in this filing

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Item 1. Business

2022-03-11 compared with 2021-03-18 · 67 added, 218 removed, 269 unchanged (51% of the section changed)

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or “NBI”) is a financial holding company that was organized in 1986 under the laws of Virginia and is registered under the Bank Holding Company Act of 1956.

It conducts most of its operations through its wholly-owned community bank subsidiary, the National Bank of Blacksburg (the “Bank”

National Bankshares, Inc.

common stock is listed on the Nasdaq Capital Market and is traded under the symbol “NKSH.”

 It conducts most of its operations through its wholly-owned community bank subsidiary, the National Bank of Blacksburg (the “Bank”

or “NBB”).

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The National Bank of Blacksburg, which does business as National Bank, was originally chartered in 1891 as the Bank of Blacksburg.

Its state charter was converted to a national charter in 1922 and it became the National Bank of Blacksburg.

In 2004, NBB purchased Community National Bank of Pulaski, Virginia.

In 2006, Bank of Tazewell County, a Virginia bank which since 1996 was a wholly-owned subsidiary of NBI, was merged with and into NBB.

NBB is community-oriented and offers a full range of retail and commercial banking services to individuals, businesses, non-profits and local governments from its headquarters in Blacksburg, Virginia and its 24 branch offices throughout southwest Virginia and one loan production office in Roanoke Virginia.

NBB has telephone, mobile and internet banking and it operates 24 automated teller machines ("ATMs") in its service area.

The Bank’s primary source of revenue stems from lending activities.

In May, 2006, Bank of Tazewell County, a Virginia bank which since 1996 was a wholly-owned subsidiary of NBI, was merged with and into NBB.

NBB is community-oriented and offers a full range of retail and commercial banking services to individuals, businesses, non-profits and local governments from its headquarters in Blacksburg, Virginia, 23 branch offices throughout southwest Virginia and one loan production office in Roanoke, Virginia.

NBB offers telephone, mobile and internet banking and it operates 22 automated teller machines (“ATMs”) in its service area.

The Bank’s primary source of revenue stems from lending activities. 

The Bank focuses lending on small and mid-sized businesses and individuals.

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Underwriting and documentation requirements are tailored to the unique characteristics and inherent risks of each loan category.

The Bank’s loan policy is updated and approved by the Board of Directors annually and disseminated to lending and loan portfolio management personnel to ensure consistent lending practices.

The policy communicates the Company’s risk tolerance by prescribing underwriting guidelines and procedures, including approval limits and hierarchy, documentation standards, requirements for collateral and loan-to-value limits, debt coverage, overall creditworthiness and guarantor support.

Of primary consideration is the repayment ability of the borrowers and (if secured) the collateral value in relation to the principal balance.

Collateral lowers risk and may be used as a secondary source of repayment.

The credit decision must be supported by documentation appropriate to the type of loan, including current financial information, income verification or cash flow analysis, tax returns, credit reports, collateral information, guarantor verification, title reports, appraisals (where appropriate) and other documents.

A discussion of underwriting policies and procedures specific to the major loan products follows.

Commercial  Non Real Estate Loans .

Commercial and agricultural loans primarily finance equipment acquisition, expansion, working capital, and other general business purposes.

Because these loans have a higher degree of risk, the Bank generally obtains collateral such as inventory, accounts receivables or equipment and personal guarantees from the borrowing entity’s principal owners.

The Bank’s policy limits lending up to 60% of the appraised value for inventory, up to 90% of the lower of cost of market value of equipment and up to 70% for accounts receivables less than 90 days old.

Credit decisions are based upon an assessment of the financial capacity of the applicant, including the primary borrower’s ability to repay within proposed terms, a risk assessment, financial strength of guarantors and adequacy of collateral.

Credit agency reports of individual owners’

credit history supplement the analysis.

Commercial Real Estate Loans.

Commercial mortgages and construction loans are offered to investors, developers and builders primarily within the Bank’s market area in southwest Virginia.

These loans generally are secured by first mortgages on real estate.

The loan amount is generally limited to 80% of the lower of cost or appraised value and is individually determined based on the property type, quality, location and financial strength of any guarantors.

Commercial properties financed include retail centers, office space, hotels and motels, apartments, and industrial properties.

Underwriting decisions are based upon an analysis of the economic viability of the collateral and creditworthiness of the borrower.

The Bank obtains appraisals from qualified certified independent appraisers to establish the value of collateral properties.

The property’s projected net cash flows compared to the debt service requirement (often referred to as the “debt service coverage ratio”) is required to be 115% or greater and is computed after deduction for a vacancy factor and property expenses, as appropriate.

Borrower cash flow may be supplemented by a personal guarantee from the principal(s) of the borrower and guarantees from other parties.

The Bank requires title insurance, fire, extended coverage casualty insurance and flood insurance, if appropriate, in order to protect the security interest in the underlying property.

In addition, the Bank may employ stress testing techniques on higher balance loans to determine repayment ability in a changing rate environment before granting loan approval.

Public Sector and Industrial Development Loans.

The Bank provides both long and short term loans to municipalities and other governmental entities within its geographical footprint.

Borrowers include general taxing authorities such as a city or county, industrial/economic development authorities or utility authorities.

Repayment sources are derived from taxation, such as property taxes and sales taxes, or revenue from the project financed with the loan.

The Company’s underwriting considers local economic and population trends, reserves and liabilities, including pension liabilities.

Real Estate Construction Loans.

Construction loans are underwritten against projected cash flows from rental income, business and/or personal income from an owner-occupant or the sale of the property to an end-user.

Associated risks may be mitigated by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements.

Consumer Real Estate Loans .

The Bank offers a variety of first mortgage and junior lien loans secured by primary residences to individuals within our markets.

Credit decisions are primarily based on loan-to-value (“LTV”) ratios, debt-to-income (“DTI”) ratios, liquidity and net worth.

Income and financial information is obtained from personal tax returns, personal financial statements and employment documentation.

A maximum LTV ratio of 80% is generally required, although higher levels are permitted.

The DTI ratio is limited to 43% of gross income.

Consumer real estate mortgages may have fixed interest rates for the entire term of the loan or variable interest rates subject to change after the first, third, or fifth year.

Variable rates are based on the weekly average yield of United States Treasury Securities and are underwritten at fully-indexed rates.

We do not offer certain high risk loan products such as interest-only consumer mortgage loans, hybrid loans, payment option adjustable rate mortgages (“ARMs”), reverse mortgage loans, loans with initial teaser rates or any product with negative amortization.

Hybrid loans are loans that start out as a fixed rate mortgage, but after a set number of years they automatically adjust to an ARM.

Payment option ARMs usually have adjustable rates, for which borrowers choose their monthly payment of either a full payment, interest only, or a minimum payment which may be lower than the payment required to reduce the balance of the loan in accordance with the originally underwritten amortization.     

Home equity loans are secured primarily by second mortgages on residential property.

The underwriting policy for home equity loans generally permits aggregate (the total of all liens secured by the collateral property) borrowing availability up to 80% of the appraised value of the collateral.

We offer both fixed rate and variable rate home equity loans, with variable rate loans underwritten at fully-indexed rates.

Decisions are primarily based on LTV ratios, DTI ratios, liquidity and credit history.

We do not offer home equity loan products with reduced documentation.

Consumer Non Real Estate Loans .

Consumer loans include loans secured by automobiles, loans to consumers secured by other non-real estate collateral and loans to consumers that are unsecured.

Automobile loans include loans secured by new or used automobiles.

We originate automobile loans on a direct basis.

During 2018 and years prior, automobile loans were also originated on an indirect basis through selected dealerships.

This program was discontinued in 2019.

We require borrowers to maintain collision insurance on automobiles securing consumer loans.

Our procedures for underwriting consumer loans include an assessment of an applicant’s overall financial capacity, including credit history and the ability to meet existing obligations and payments on the proposed loan.

An applicant’s creditworthiness is the primary consideration, and if the loan is secured by an automobile or other collateral, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount.

SBA Paycheck Protection Program.

 In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. 

The CARES Act created the Small Business Administration ("SBA") Paycheck Protection Program ("PPP"). 

Under the PPP, money was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities and interest on other debt. 

The Company assisted customers in obtaining the loans during the application window between April and August 2020.

As of December 31, 2020, the Company held $35,992 in PPP loans, net of deferred fees and costs.

The Company is currently participating in the SBA lending window that opened in January 2021.

Other Products and Services .

Deposit products offered by the Bank include interest-bearing and non-interest bearing demand deposit accounts, money market deposit accounts, savings accounts, certificates of deposit, health savings accounts and individual retirement accounts.

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NBB offers other miscellaneous services normally provided by commercial banks, such as letters of credit, night depository, safe deposit boxes, utility payment services and automatic funds transfer.

NBB conducts a general trust business that has wealth management, trust and estate services for individual and business customers.

The COVID-19 pandemic continues to present significant challenges and uncertainty. 

In May of 2021, the Bank reopened branch lobbies after serving customers through drive-through and online channels for over a year. 

Federal aid has benefitted the Bank’s depositors and has increased deposit balances, while programs benefitting borrowers provided the Bank with increased loan income.

The Company continues to carefully monitor COVID-19 pandemic related developments.

At December 31, 2021, NBB had total assets of $1,699,084 and total deposits of $1,497,336.

NBB’s net income for 2021 was $20,708, which produced a return on average assets of 1.29% and a return on average equity of 11.35%.

Refer to Note 11 of the Notes to Consolidated Financial Statements for NBB’s risk-based capital ratios.

Refer to Note 11 of Notes to Consolidated Financial Statements for NBB’s risk-based capital ratios.

National Bankshares Financial Services, Inc.

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Operating Revenue

The following table displays components that contributed 15% or more of the Company’s total operating revenue for the years ended December 31, 2020, 2019 and 2018.

Class of Service

Percentage of

Total Revenues

December 31, 2020

Interest and Fees on Loans

Interest on Investments

Noninterest Income

December 31, 2019

Interest and Fees on Loans

Interest on Investments

Noninterest Income

December 31, 2018

The following table displays components that contributed 15% or more of the Company’s total operating revenue.

Percentage of Total Operating Revenue For the Year Ended December 31,

Revenue Component

Interest and Fees on Loans

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Noninterest Income

The Company’s market area in southwest Virginia is made up of the counties of Montgomery, Roanoke, Giles, Pulaski, Tazewell, Wythe, Smyth and Washington.

It includes the independent cities of Roanoke, Radford and Galax, and the portions of Carroll and Grayson Counties that are adjacent to Galax.

The Company also serves those portions of Mercer County and McDowell County, West Virginia that are contiguous with Tazewell County, Virginia and portions of Monroe County, West Virginia that are contiguous with Giles County, Virginia.

Although largely rural, the market area is home to two major universities, Virginia Polytechnic Institute and State University (“Virginia Tech”) and Radford University, and to three community colleges.

The Company serves customers through its offices in southwest Virginia, including the counties of Montgomery, Giles, Tazewell, Washington, Wythe, Roanoke and Pulaski, as well as the cities of Galax, Radford and Roanoke. 

The Company’s market area also includes neighboring counties and cities, including the Virginia counties of Carroll, Grayson, Smyth, Botetourt, Craig, Russell and Bland, and cities of Salem and Bristol, the southernmost tip of West Virginia including the counties of Mercer, Monroe and McDowell, the North Carolina counties of Surry and Alleghany and the Tennessee city of Bristol and counties of Washington and Sullivan.

Although largely rural, the market area is home to two major state-supported universities, Virginia Polytechnic Institute and State University (“Virginia Tech”) and Radford University, two smaller colleges and four community colleges.

Virginia Tech, located in Blacksburg, Virginia, is the area’s largest employer and is Virginia’s second largest university.

A second state supported university, Radford University, is located nearby.

In recent years, Virginia Tech’s Corporate Research Center has brought a number of technology-related companies to Montgomery County.

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Tazewell County is largely dependent on the coal mining industry and on agriculture for its economic base.

Coal production has declined significantly in recent years and suffered from increased regulations.

Montgomery County, Bluefield in Tazewell County and Abingdon in Washington County are regional retail centers and have facilities to provide basic health care for the region.

NBI’s market area offers the advantages of a good quality of life, scenic beauty, moderate climate and historical and cultural attractions.

The region has had some recent success attracting retirees, particularly from the Northeast and urban northern Virginia.

Because NBI’s market area is economically diverse and includes large public employers, it has historically avoided the most extreme effects of past economic downturns.

If the economy wavers or experiences recession, it is likely that unemployment will rise and that other economic indicators will negatively impact the Company's market.

Effect of COVID-19 Pandemic

 During March 2020, the global COVID-19 pandemic began to severely impact the economy.

In response to substantial public health concern, the federal and state governments, individual companies and countries around the world implemented methods to slow the pandemic’s spread, including social distancing, stay-at-home orders and a vast number of cancellations of previously scheduled economic activity.

One of the Company’s top priorities is the health and safety of our customers and employees and to that end, the Company implemented certain protective measures. 

Where possible the Company allowed certain employees to work remotely and rearranged work environments for other employees to promote appropriate social distancing.

On March 20, 2020, the Company shifted to serving customers primarily through digital channels, drive-thrus and ATMs and closed the lobbies of the Company’s 25 branches.

We continue to serve customers in person by appointment and continue to monitor the situation to determine when we may safely reopen our lobbies.

Current analysis of transactions has not shown a decline compared with pre-pandemic operations. 

Controls over cash and physical assets have remained in place and internal controls over financial reporting and disclosure have been appropriately maintained. 

The Company also considered the impact of the pandemic on critical estimates, including the allowance for loan losses, valuation of goodwill, valuation of other real estate owned (“OREO”), other-than-temporary impairment of securities and pension obligations, as well as lease right of use assets.

The impact to the allowance for loan losses is discussed under the “Asset Quality”

section. 

Analysis as of December 31, 2020 did not indicate declines in the valuation of OREO, other-than-temporary impairment of securities, pension obligations or lease right-of-use assets. 

The Company will continue to monitor the values as the effects of the pandemic unfold. 

The COVID-19 pandemic has caused significant stock market volatility which adversely impacted the Company’s stock price.

As a result of this volatility and impact on the market, management determined that a triggering event occurred.

Management performed an interim quantitative goodwill impairment analysis as of March 31, 2020 and June 30, 2020 and contracted a third party expert to perform a quantitative goodwill impairment analysis as of September 30, 2020 during the fourth quarter 2020.

The analysis did not find impairment of goodwill.

The Company is also monitoring increased threats of fraud, including schemes against employees new to remote working arrangements, fraud related to state unemployment insurance and COVID-19 related scams against customers.

The Company’s business relies on positive relationships with customers.

At this time, we feel our customer relationships remain strong and our team remains ready to provide banking services. 

The Company has a robust business continuity plan, and partners with vendors whom we believe also have robust business continuity plans. 

In implementing its business continuity plan to address the COVID-19 pandemic, the Company has not incurred material expenditures and does not anticipate material expenditures. 

In the event that we experience high infection rates within our staff, our ability to serve our customers would be adversely impacted for a certain period. 

We have implemented many measures to protect the health of our employees and continue to monitor the situation closely. 

Further, all critical functions are cross-trained as part of our business continuity preparedness.

The region has had success attracting retirees, particularly from the Northeast and urban northern Virginia. Because NBI’s market area is economically diverse and includes large public employers, it has historically avoided the most extreme effects of past economic downturns.

Future economic challenges may impact unemployment and other economic indicators that could negatively affect the Company’s market.

The banking and financial services industry is highly competitive.

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In addition, the Bank is generally competitive with other financial institutions in its market area with respect to interest rates paid on deposit accounts, interest rates charged on loans and other service charges on loans and deposit accounts.

Cybersecurity

As a financial institution, NBI is subject to cybersecurity risks. 

Cybersecurity risks have expanded with the pandemic as fraudsters seek to take advantage of customer concerns and changes to work environment. 

The Company has not suffered any losses or breaches due to the pandemic. 

In prior years, the Company suffered two cybersecurity incidents. 

To manage and mitigate cybersecurity risk, the Company limits certain transactions and interactions with customers. 

The Company does not offer online account openings or loan originations, limits the dollar amount of online banking transfers to other banks, does not permit customers to submit address changes or wire requests through online banking, requires a special vetting process for commercial customers who wish to originate ACH transfers, and limits certain functionalities of mobile banking. 

The Company also requires assurances from key vendors regarding their cybersecurity. 

While these measures reduce the likelihood and scope of the risk of further cybersecurity breaches, in light of the evolving sophistication of system intruders, the risk of such breaches continues to exist. 

We maintain insurance for these risks but insurance policies are subject to exceptions, exclusions and terms whose applications have not been widely interpreted in litigation. 

Accordingly, insurance can provide less than complete protection against the losses that result from cybersecurity breaches and pursuing recovery from insurers can result in significant expense. 

In addition, some risks such as reputational damage and loss of customer goodwill, which can result from cybersecurity breaches cannot be insured against.

Organization and Employment

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As a result of substantial regulatory burdens on banking, financial institutions like NBI and NBB are at a disadvantage to other competitors who are not as highly regulated, and NBI and NBB’s costs of doing business are accordingly higher.

Legislative efforts to prevent a repeat of the 2008 financial crisis culminated in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”).

This legislation, together with existing and planned regulations, dramatically increased the regulatory burden on commercial banks.

The burden falls disproportionately on community banks like NBB, which must devote a higher proportion of their human and other resources to compliance than do their larger competitors.

The financial crisis also heightened the examination focus by banking regulators, particularly on Bank Secrecy Act, real estate-related assets and commercial loans.

However, with the passage of the Economic Growth, Regulatory Reform and Consumer Protection Act (“EGRRCPA”) in 2018, a number of regulatory requirements for smaller financial institutions like the Company were reduced or eliminated (see below).

The following is a brief summary of certain laws, rules and regulations that affect NBI and NBB.

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NBI is required to report to the Commission with respect to its financial condition, operations and management.

The Commission may also make examinations of any bank holding company and its subsidiaries and must approve the acquisition of ownership or control of more than 5% of the voting shares of any Virginia bank or bank holding company.

The Commission may also make examinations of any bank holding company and its subsidiaries and must approve the acquisition by a Virginia bank holding company of ownership or control of more than 5% of the voting shares of any Virginia bank or bank holding company.

The Gramm-Leach-Bliley Act.

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Capital and Related Requirements.

In August, 2018, the Federal Reserve updated the Small Bank Holding Company Policy Statement (the “Statement”), in compliance with the EGRRCPA.

The Statement, among other things, exempts bank holding companies that fall below a certain asset threshold from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements.

The interim final rule expands the exemption to bank holding companies with consolidated total assets of less than $3 billion.

Prior to August 2018, the statement exempted bank holding companies with consolidated total assets of less than $1 billion.

As a result of the interim final rule, the Company qualifies as of August, 2018 as a small bank holding company and is no longer subject to regulatory capital requirements on a consolidated basis.

In August, 2018, the Federal Reserve updated the Small Bank Holding Company Policy Statement (the “Statement”), in compliance with the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”). 

The Statement, among other things, exempts qualified bank holding companies that have consolidated total assets of less than $3 billion from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements. 

The Company qualifies as a small bank holding company and is no longer subject to regulatory capital requirements on a consolidated basis.

The Bank continues to be subject to various capital requirements administered by banking agencies as described below.

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The Dodd-Frank Act also contains provisions that affect corporate governance and executive compensation.

The Dodd-Frank Act provisions are extensive and have required the Company and the Bank to deploy resources to comply with them.

Several federal agencies, including the Federal Reserve, the CFPB and the Securities and Exchange Commission, have been in the process of issuing final regulations implementing major portions of the legislation, and this process will be affected by the EGRRCPA, which rolls back many provisions of the Dodd-Frank Act (see below).

The Dodd-Frank Act provisions are extensive and have required the Company and the Bank to deploy resources to comply with them. 

Source of Strength.

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The Economic Growth, Regulatory Reform and Consumer Protection Act of 2018.

In May 2018 the EGRRCPA amended provisions of the Dodd-Frank Act and other statutes administered by banking regulators.

In May 2018 the EGRRCPA amended provisions of the Dodd-Frank Act and other statutes administered by banking regulators.

Among these amendments are provisions to tailor applicability of certain of the enhanced prudential standards for Systemically Important Financial Institutions (“SIFI’s”) and to increase the $50 billion asset threshold in two stages to $250 billion to which these enhanced standards apply.

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rating in its last CRA examination by the OCC.

On June 5, 2020, the OCC published a final rule, effective October 1, 2020, to modernize the agency’s regulations under the CRA.

The rule (i) clarifies which activities qualify for CRA credit and (ii) requires banks to identify an additional assessment area based on where they receive a significant portion of their domestic retail products, thus creating two assessment areas:

a deposit-based assessment area and a facility-based assessment area.

Further, on November 24, 2020, the OCC issued a proposed rule to establish the agency’s proposed approach to determine the CRA evaluation measure benchmarks, retail lending distribution test thresholds, and community development minimums under the general performance standards set forth in the June, 2020 final rule. 

The Company is evaluating what impact this new rule will have on its operations.

Privacy Legislation .

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The FDIC may adjust assessments if the insured institution’s risk profile changes or if the size of the DIF declines in relation to the total amount of insured deposits.

Beginning April 1, 2011, an institution’s assessment base became consolidated total assets less its average tangible equity as defined by the FDIC.

The FDIC has authority to impose (and has imposed as a result of the 2008 financial crisis) special measures to boost the deposit insurance fund such as prepayments of assessments and additional special assessments.

An institution’s assessment base is consolidated total assets less its average tangible equity as defined by the FDIC.

The FDIC has authority to impose special measures to boost the deposit insurance fund such as prepayments of assessments and additional special assessments.

After giving primary regulators an opportunity to first take action, the FDIC may initiate an enforcement action against any depository institution it determines is engaging in unsafe or unsound actions or which is in an unsound condition, and the FDIC may terminate that institution’s deposit insurance.

NBB has no knowledge of any matter that would threaten its FDIC insurance coverage.

Capital Requirements.

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designed to absorb losses during periods of economic stress.

The implementation period for the capital conservation buffer began in 2016 and it was fully phased in on January 1, 2019.

The following table presents the required minimum ratios along with the required minimum ratios including the capital conservation buffer:

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NBB is also subject to the “prompt corrective action”

regulations pursuant to Section 38 of the Federal Deposit Insurance Act of 1950, which were revised, effective as of January 1, 2015, to incorporate a CET1 ratio and to increase certain other capital ratios.

To be classified as well capitalized under the revised regulations, NBB must have the following minimum capital ratios:

regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as amended, which incorporates a CET1 ratio and increases certain other capital ratios.

To be classified as well capitalized under the regulations, NBB must have the following minimum capital ratios:

(i) a CET1 ratio of at least 6.5%;

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NBB exceeded the thresholds to be considered well capitalized as of December 31, 2021.

Pursuant to the EGRRCPA, regulators have provided for an optional, simplified measure of capital adequacy, the CBLR framework, for qualifying community banking organizations with consolidated assets of less than $10 billion. 

Banks that qualify, including NBB, may opt in to the CBLR framework beginning January 1, 2020 or any time thereafter. 

The CBLR framework eliminates the requirement to comply with capital ratios disclosed above and, instead, requires the disclosure of a single leverage ratio, with a minimum requirement of 9%. 

These CBLR rules were modified in response to the COVID-19 pandemic. 

See “Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act, 2021”

The Bank has not opted in to the CBLR framework at this time.

Pursuant to the EGRRCPA, regulators have provided for an optional, simplified measure of capital adequacy, the CBLR framework, for qualifying community banking organizations with consolidated assets of less than $10 billion.

Banks that qualify, including NBB, may opt in to the CBLR framework.

The CBLR framework eliminates the requirement to comply with capital ratios disclosed above and, instead, requires the disclosure of a single leverage ratio, with a minimum requirement of 9%. The Bank has not opted in to the CBLR framework at this time.

In December 2017, the Basel Committee on Banking Supervision published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”).

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such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital.

Under the proposed framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing-in through January 1, 2027.

Under the current capital rules, operational risk capital requirements and a capital floor apply only to “advanced approaches”

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The Dodd-Frank Act permits the OCC to approve applications by national banks like NBB to establish de novo branches in any state in which a bank located in that state is permitted to establish a branch.

Ability-to-Repay and Qualified Mortgage Rule.

Pursuant to the Dodd-Frank Act, the CFPB amended Regulation Z as implemented by the Truth in Lending Act, requiring mortgage lenders to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms.

Mortgage lenders are required to determine consumers’

ability to repay in one of two ways.

The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision:

(i) current or reasonably expected income or assets;

(ii) current employment status;

(iii) the monthly payment on the covered transaction;

(iv) the monthly payment on any simultaneous loan;

(v) the monthly payment for mortgage-related obligations;

(vi) current debt obligations, alimony, and child support;

(vii) the monthly debt-to-income ratio or residual income;

and (viii) credit history.

Alternatively, the mortgage lender can originate “qualified mortgages,”

which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements.

In general, a “qualified mortgage”

is a mortgage loan without negative amortization, interest-only payments, balloon payments or terms exceeding 30 years.

In addition, to be a qualified mortgage the points and fees paid by a consumer cannot exceed 3% of the total loan amount.

Qualified mortgages that are “higher-priced”

subprime loans) create a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced”

prime loans) are given a safe harbor of compliance.

The Company is predominantly an originator of compliant qualified mortgages.

Mortgage Banking Regulation. 

NBB is subject to rules and regulations that, among other things, establish standards for mortgage loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level.

NBB is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers. 

NBB’s mortgage origination activities are subject to the Federal Reserve’s Regulation Z, which implements the Truth in Lending Act.

Certain provisions of Regulation Z require creditors to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms.

Anti-Money Laundering Laws and Regulations.

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If the Company fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.

In December 2020, the federal banking agencies issued a notice of proposed rulemaking that would require banking organizations to notify their primary regulator within 36 hours of becoming aware of a “computer-security incident”

or a “notification incident.”

The proposed rule also would require specific and immediate notifications by bank service providers that become aware of similar incidents.

On November 18, 2021, the federal bank regulatory agencies issued a final rule, effective April 1, 2022, imposing new notification requirements for cybersecurity incidents. 

The rule requires financial institutions to notify their primary federal regulator as soon as possible and no later than 36 hours after the institution determines that a cybersecurity incident has occurred that has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the institution’s:

(i) ability to carry out banking operations, activities, or processes, or deliver banking products and services to a material portion of its customer base, in the ordinary course of business, (ii) business line(s), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value, or (iii) operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the United States.

The Company’s systems and those of its customers and third-party service providers are under constant threat.

Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers.

Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act, 2021.

In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020 and the Consolidated Appropriations Act, 2021 (“Appropriations Act”) was signed into law on December 27, 2020. 

Among other things, the CARES Act and Appropriations Act include the following provisions impacting financial institutions:

Community Bank Leverage Ratio .  The CARES Act directed federal banking agencies to adopt interim final rules to lower the threshold under the CBLR from 9% to 8% and to provide a reasonable grace period for a community bank that falls below the threshold to regain compliance, in each case until the earlier of the termination date of the national emergency or December 31, 2020.  In April 2020, the federal bank regulatory agencies issued two interim final rules implementing this directive.  One interim final rule provides that, as of the second quarter 2020, banking organizations with leverage ratios of 8% or greater (and that meet the other existing qualifying criteria) may elect to use the CBLR framework.  It also establishes a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall below the 8% CBLR requirement, so long as the banking organization maintains a leverage ratio of 7% or greater.  The second interim final rule provides a transition from the temporary 8% CBLR requirement to a 9% CBLR requirement.  It establishes a minimum CBLR of 8% for the second through fourth quarters of 2020, 8.5% for 2021, and 9% thereafter, and maintains a two-quarter grace period for qualifying community banking organizations whose leverage ratios fall no more than 100 basis points below the applicable CBLR requirement.

Temporary Troubled Debt Restructurings Relief .  The CARES Act allowed banks to elect to suspend requirements under U.S.

generally accepted accounting principles (“GAAP”) for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a troubled debt restructuring (“TDR”), including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020.  Federal banking agencies are required to defer to the determination of the banks making such suspension.  The Appropriations Act extended this temporary relief until the earlier of 60 days after the termination date of the national emergency or January 1, 2022.

Small Business Administration Paycheck Protection Program .  The CARES Act created the SBA’s PPP and it was extended by the Appropriations Act.  Under the PPP, money was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt.  The loans are provided through participating financial institutions, such as the Bank, that process loan applications and service the loans.

Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act (the "CARES Act").

In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020 and the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law on December 27, 2020. 

Among other things, the CARES Act and CAA include provisions impacting financial institutions, such as temporarily modifying the CBLR framework, as well as the following:

Temporary Troubled Debt Restructurings Relief .

The CARES Act allowed banks to elect to suspend requirements under U.S.

Federal banking agencies were required to defer to the determination of the banks making such suspension. 

The CAA extended this temporary relief until the earlier of 60 days after the termination date of the national emergency or January 1, 2022.

Small Business Administration Paycheck Protection Program .

The CARES Act created, and the CAA extended, the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”). 

Under the PPP, money was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt. 

The loans were provided through participating financial institutions, such as the Bank, that processed loan applications and service the loans.

Monetary Policy

13 unchanged sentences

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are made available on its website as soon as is practical after the material is electronically filed with the Securities and Exchange Commission (“SEC”).

The Company’s proxy materials for the 2020 annual meeting of stockholders are also posted on a separate website at www.investorvote.com/NKSH. 

The Company’s proxy materials for the 2022 annual meeting of stockholders are also posted on a separate website at www.investorvote.com/NKSH .

Access through the Company’s websites to the Company’s filings is free of charge.

6 unchanged sentences

Offices and Positions Held

Year Elected an

Officer/Director

Year Elected an Officer/Director

National Bankshares, Inc.:

Chairman, President and Chief Executive Officer (“CEO”), May 2019 to Present;

President and CEO, September 2017 –

Executive Vice President, April 2008 –

President and CEO, September 2017 – May 2019;

Executive Vice President, April 2008 – August 2017.

The National Bank of Blacksburg:

1 unchanged sentence

President & CEO, July 2014 to Present;

Executive Vice President/Chief Operating Officer, October 2002 –

Executive Vice President/Chief Operating Officer, October 2002 – July 2014.

National Bankshares Financial Services, Inc.:

5 unchanged sentences

Senior Vice President/Operations & Risk Management & CFO, January 2009 to Present;

Senior Vice President/Operations & Risk Management, February 2008 –

January 2009;

Senior Vice President/Operations & Risk Management, February 2008 – January 2009;

Vice President/Operations & Risk Management, April 2004 - February 2008.

4 unchanged sentences

National Bankshares, Inc.:

Senior Vice President/Administration, June 2011 –

December 2017.

Senior Vice President/Administration, June 2011 – December 2017.

National Bankshares, Inc.:

Vice President/Human Resources, January 2001 –

Vice President/Human Resources, January 2001 – June 2011.

The National Bank of Blacksburg:

1 unchanged sentence

The National Bank of Blacksburg:

Senior Vice President/Chief Lending Officer, August 2016 –

November 2019.

The National Bank of Blacksburg:

Senior Vice President/Loans, August 2012—August 2016.

Senior Vice President/Chief Lending Officer, August 2016 – November 2019.

The National Bank of Blacksburg:

Senior Vice President/Chief Credit Officer, November 2018 to Present.

Skyline National Bank:

Chief Risk Officer, July 2016 –

November 2018.

Skyline National Bank:

Chief Credit Officer, June 2011 –

Senior Vice President/Loans, August 2012 – August 2016.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business