National Bankshares(NKSH) - 2019 Q3 - Quarterly Report

Part I – Financial Information Financial Statements This section presents the unaudited consolidated financial statements for National Bankshares, Inc. as of and for the periods ended September 30, 2019, including balance sheets, statements of income, comprehensive income, changes in stockholders' equity, and cash flows, along with accompanying notes Consolidated Balance Sheets As of September 30, 2019, total assets were $1.27 billion, a slight increase from $1.26 billion at December 31, 2018, driven by interest-bearing deposits and loans, offset by a decrease in securities available for sale | (in thousands) | (Unaudited) Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $1,272,721 | $1,256,032 | | Loans, net | $715,025 | $702,409 | | Securities available for sale, at fair value | $334,150 | $425,010 | | Interest-bearing deposits | $135,490 | $43,491 | | Total Liabilities | $1,084,733 | $1,065,794 | | Total deposits | $1,068,027 | $1,051,942 | | Total Stockholders' Equity | $187,988 | $190,238 | Consolidated Statements of Income For Q3 2019, net income was $4.25 million, nearly flat year-over-year, while nine-month net income increased to $12.69 million from $11.59 million, driven by lower noninterest expenses | (in thousands, except per share data) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net interest income | $9,423 | $9,700 | | Provision for loan losses | $95 | $223 | | Noninterest income | $2,098 | $1,914 | | Noninterest expense | $6,386 | $6,463 | | Net Income | $4,252 | $4,251 | | Fully diluted net income per common share | $0.65 | $0.61 | | (in thousands, except per share data) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- |\ | Net interest income | $28,147 | $28,684 | | Provision for loan losses | $350 | $93 | | Noninterest income | $6,443 | $5,805 | | Noninterest expense | $19,304 | $21,051 | | Net Income | $12,689 | $11,588 | | Fully diluted net income per common share | $1.92 | $1.67 | Consolidated Statements of Cash Flows For the nine months ended September 30, 2019, net cash provided by operating activities was $12.4 million, with net cash used in investing activities of $4.2 million and financing activities of $6.8 million, primarily due to common stock repurchases and dividends | (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $12,361 | $14,245 | | Net cash used in investing activities | ($4,238) | ($9,044) | | Net cash used in financing activities | ($6,799) | ($6,594) | | Net change in cash and due from banks | $1,324 | ($1,393) | Notes to Consolidated Financial Statements The notes provide detailed information on accounting policies and financial statement line items, including the adoption of new accounting standards for leases, loan portfolio analysis, and fair value measurements - The company adopted ASU No. 2016-02, "Leases (Topic 842)" on January 1, 2019, using a prospective approach, resulting in the recognition of a right-of-use asset and a lease liability for leases with terms greater than 12 months, with no cumulative effect adjustment to retained earnings[36][38] - The loan portfolio grew to $722.3 million as of September 30, 2019, from $709.8 million at year-end 2018, with commercial real estate representing the largest segment at $360.5 million[41] - Total troubled debt restructurings (TDRs) decreased to $5.26 million at September 30, 2019, from $5.66 million at December 31, 2018[95] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and results of operations, highlighting key performance metrics, asset quality, balance sheet changes, and income statement trends, with nine-month net income rising to $12.69 million from $11.59 million year-over-year Performance Summary For the nine months ended September 30, 2019, the company's performance improved year-over-year, with Return on Average Assets increasing to 1.34% and Return on Average Equity rising to 9.13%, despite a slight compression in net interest margin to 3.31% | Performance Ratios | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Return on average assets | 1.34% | 1.28% | | Return on average equity | 9.13% | 8.61% | | Net interest margin | 3.31% | 3.37% | | Noninterest margin | 1.45% | 1.41% | Asset Quality Asset quality remained stable as of September 30, 2019, with nonperforming loans increasing to $4.1 million from $3.4 million at year-end 2018, and the allowance for loan losses to total loans decreasing slightly to 1.01% | Asset Quality Indicators | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Nonperforming loans | $4,076 | $3,420 | | Other real estate owned | $1,470 | $2,052 | | Allowance for loan losses to loans | 1.01% | 1.04% | | Ratio of nonperforming assets to loans + OREO | 0.77% | 0.77% | | Ratio of allowance for loan losses to nonperforming loans | 178.16% | 216.08% | - The allowance for loan losses decreased to $7.26 million (1.01% of loans) at Sep 30, 2019, from $7.39 million (1.04% of loans) at Dec 31, 2018, influenced by improvements in certain loan ratings despite slight worsening in some economic indicators[239][250] Net Interest Income For the nine months ended September 30, 2019, tax-equivalent net interest income was $29.2 million, a decrease from $29.9 million in the prior-year period, with the net interest margin compressing by 6 basis points to 3.31% due to higher deposit costs | (Nine Months Ended) | Sep 30, 2019 | Sep 30, 2018 | | :--- | :--- | :--- | | Average Yield on Earning Assets | 3.95% | 3.76% | | Average Rate on Interest-Bearing Liabilities | 0.87% | 0.54% | | Interest Rate Spread | 3.08% | 3.22% | | Net Interest Margin | 3.31% | 3.37% | - The cost of time deposits saw the most significant increase, rising 103 basis points to 1.46% for the nine months ended Sep 30, 2019, compared to the same period in 2018[272][277] Noninterest Income and Expense For the nine months ended September 30, 2019, total noninterest income increased by 11.0% to $6.4 million, while total noninterest expense decreased by 8.3% to $19.3 million, primarily due to a prior-year write-down of an insurance receivable - Other income for the nine months ended Sep 30, 2019, increased by $0.57 million, or 70.8%, primarily due to a $0.54 million recovery on a previously recognized insurance loss[279][283] - Total noninterest expense for the nine months ended Sep 30, 2019, decreased by $1.75 million, largely because the comparable 2018 period included a $2.01 million write-down of an insurance receivable related to a cybersecurity breach[285][292] - FDIC assessment expense decreased significantly due to the application of small bank assessment credits in Q3 2019[288] Balance Sheet, Liquidity and Capital Resources Total assets grew 1.3% to $1.27 billion from year-end 2018, with loans increasing 1.8% to $715 million and deposits up 1.5% to $1.07 billion, while stockholders' equity decreased to $188.0 million due to share repurchases - Loans, net of unearned income, increased by 1.76% to $722.3 million at Sep 30, 2019, from Dec 31, 2018, with growth in real estate construction and consumer/commercial real estate loans[302] - Total deposits increased by 1.53% to $1.07 billion, driven by growth in noninterest-bearing demand, savings, and time deposits, which offset a decrease in interest-bearing demand deposits[303] - The Company repurchased 468,400 shares during the first nine months of 2019, reducing stockholders' equity by $18.5 million, while the subsidiary bank's capital ratios remain well above regulatory minimums[310][312] Quantitative and Qualitative Disclosures About Market Risk The company identifies interest rate risk as its most significant market risk and employs systems to measure exposure, with no significant changes to its market risk profile since the 2018 Form 10-K disclosures - The Company's primary market risk is interest rate risk, and there have been no significant changes to its risk exposure or management systems since the 2018 Form 10-K[321] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal control over financial reporting during the third quarter - The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective as of September 30, 2019[322] - No material changes were made to the company's internal control over financial reporting during the third quarter of 2019[323] Part II – Other Information Legal Proceedings The company reports that there are no pending or threatened legal proceedings expected to have a material impact on its financial condition - There are no pending or threatened legal proceedings that management believes may materially impact the company's financial condition[327] Unregistered Sales of Equity Securities and Use of Proceeds During the nine months ended September 30, 2019, the company repurchased a total of 468,400 shares at an average price of $39.55 per share under its publicly announced repurchase program, which was renewed in May 2019 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | March 2019 | 452,400 | $39.78 | | August 2019 | 16,000 | $33.00 | | Total YTD 2019 | 468,400 | $39.55 | Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO and XBRL data files - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, and financial statements formatted in XBRL[334][336]