National Bankshares(NKSH) - 2019 Q4 - Annual Report

Part I Business National Bankshares, Inc, a financial holding company, operates a community bank in southwest Virginia, deriving primary revenue from loan interest and fees - National Bankshares, Inc is a financial holding company whose main operation is its wholly-owned community bank subsidiary, the National Bank of Blacksburg (NBB), originally chartered in 1891[10][11] - NBB is a community-oriented bank offering a full range of retail and commercial banking services through twenty-four branch offices in southwest Virginia and one loan production office in Roanoke, Virginia[12] Operating Revenue Composition (2017-2019) | Class of Service | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Interest and Fees on Loans | 62.79% | 61.49% | 61.22% | | Interest on Investments | 18.09% | 22.02% | 21.55% | | Noninterest Income | 16.30% | 15.17% | 15.62% | - The company's market area in southwest Virginia has a diverse economic base including education (Virginia Tech, Radford University), manufacturing, agriculture, tourism, and healthcare[32][33] - The company has experienced two cybersecurity incidents and has implemented measures to mitigate risk, including limiting certain online transactions and requiring assurances from key vendors[37] - As a result of the EGRRCPA in 2018, the company, with consolidated assets under $3 billion, qualifies as a small bank holding company and is no longer subject to regulatory capital requirements on a consolidated basis since August 2018[45][51] Risk Factors The company faces significant risks from economic downturns, interest rate fluctuations, cybersecurity threats, competition, and regulatory changes - Economic downturns could lead to higher loan delinquencies and defaults, negatively impacting financial results, and a decline in the local real estate market would also deteriorate the value of loan collateral[80][82] - The company's information systems are vulnerable to security breaches, having experienced two cyber-intrusions in May 2016 and January 2017 where customer information was compromised[95][97] - The company has incurred costs for forensic investigations, legal expenses, and system upgrades following past cyber-attacks and anticipates that future attacks are probable, which could result in additional costs[100] - The upcoming Current Expected Credit Losses (CECL) accounting standard, effective January 1, 2023 for the company, is expected to significantly impact required credit reserves and will incur costs for implementation[106] - The recent coronavirus outbreak is identified as a risk that could negatively impact employees and customers, potentially leading to increased loan delinquencies, defaults, and disruptions to operations[112][113] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[115] Properties The company's banking subsidiary owns its headquarters and seventeen branch offices, while leasing six branches and one loan production office - NBB owns its headquarters, main office, and 17 branch offices, while leasing 6 branch locations and a loan production office[116] Legal Proceedings The company and its subsidiaries are not currently involved in any material pending legal proceedings - The company is not involved in any material pending legal proceedings[117] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[118] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq under "NKSH" with an active share repurchase program, and its five-year return outperformed the Nasdaq Bank Index - The company's common stock is traded on the Nasdaq Capital Market under the symbol "NKSH"[119] - A share repurchase program authorized the buyback of up to 1,000,000 shares, valid from June 1, 2019, to May 31, 2020; in 2019, the company repurchased 468,400 shares[121][123] Stock Performance Comparison (2014-2019) | Index | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | NATIONAL BANKSHARES, INC. | $100 | $121 | $153 | $165 | $136 | $173 | | NASDAQ COMPOSITE INDEX | $100 | $107 | $117 | $151 | $147 | $201 | | NASDAQ BANK INDEX | $100 | $108 | $150 | $158 | $133 | $167 | Selected Financial Data The company's five-year financial data shows total assets reaching $1.32 billion and net income of $17.5 million for the year ended December 31, 2019 Selected Financial Data (2015-2019) | ($ in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net income | $17,466 | $16,151 | $14,092 | $14,942 | $15,833 | | Diluted net income per share | $2.65 | $2.32 | $2.03 | $2.15 | $2.28 | | Cash dividends declared per share | $1.39 | $1.21 | $1.17 | $1.16 | $1.14 | | Total assets | $1,321,837 | $1,256,032 | $1,256,757 | $1,233,942 | $1,203,519 | | Total deposits | $1,119,753 | $1,051,942 | $1,059,734 | $1,043,442 | $1,018,859 | | Stockholders' equity | $183,726 | $190,238 | $184,896 | $178,263 | $172,114 | | Return on average assets | 1.39% | 1.29% | 1.14% | 1.24% | 1.37% | | Return on average equity | 9.87% | 8.65% | 7.64% | 8.30% | 9.22% | Management's Discussion and Analysis of Financial Condition and Results of Operations Net income rose to $17.5 million in 2019, driven by higher noninterest income and lower expenses, despite a slight compression in net interest margin Key Performance Ratios (2018-2019) | Ratio | 2019 | 2018 | | :--- | :--- | :--- | | Return on average assets | 1.39% | 1.29% | | Return on average equity | 9.87% | 8.65% | | Basic net earnings per common share | $2.65 | $2.32 | | Net interest margin (Non-GAAP) | 3.29% | 3.36% | - Total assets grew by $65.8 million (5.24%) to $1.32 billion at year-end 2019, while deposits increased by $67.8 million (6.45%)[168][240] Asset Quality Indicators (as of Dec 31) | ($ in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Nonperforming loans | $3,375 | $3,420 | | Other real estate owned | $1,612 | $2,052 | | Allowance for loan losses to loans | 0.94% | 1.04% | | Net charge-off ratio | 0.09% | 0.07% | - Net interest income decreased slightly to $37.8 million in 2019 from $38.2 million in 2018, with the net interest margin compressing from 3.36% to 3.29%[172][176] - Noninterest income increased to $8.8 million in 2019 from $7.7 million in 2018, largely due to a $0.5 million insurance recovery and $0.6 million in realized securities gains[199][204][205] - Noninterest expense decreased to $25.8 million in 2019 from $27.3 million in 2018, as the prior year included a $2.0 million write-down related to cybersecurity breaches[208][216] - The company experienced two cybersecurity intrusions in May 2016 and January 2017, resulting in total fund thefts of $2.4 million, partially offset by insurance recoveries[219][220] Quantitative and Qualitative Disclosures About Market Risk This section refers to the Management's Discussion and Analysis for information regarding market risk - Information regarding market risk is provided in the "Interest Rate Sensitivity" and "Derivatives and Market Risk Exposure" sections of the MD&A[316] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements, notes, and the independent auditor's unqualified opinion Consolidated Balance Sheet Highlights (as of Dec 31) | ($ in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Total Assets | $1,321,837 | $1,256,032 | | Loans, net | $726,588 | $702,409 | | Total Deposits | $1,119,753 | $1,051,942 | | Total Liabilities | $1,138,111 | $1,065,794 | | Total Stockholders' Equity | $183,726 | $190,238 | Consolidated Income Statement Highlights (Year Ended Dec 31) | ($ in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Interest Income | $37,767 | $38,177 | $37,135 | | Provision for (recovery of) loan losses | $126 | $(81) | $157 | | Noninterest Income | $8,790 | $7,729 | $7,636 | | Noninterest Expense | $25,754 | $27,276 | $24,229 | | Net Income | $17,466 | $16,151 | $14,092 | - The independent auditor, Yount, Hyde & Barbour, P.C., issued an unqualified opinion on the consolidated financial statements and on the effectiveness of the company's internal control over financial reporting as of December 31, 2019[562][568] Changes In and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None reported[575] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - The company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of December 31, 2019[575] - Management's assessment concluded that the company maintained effective internal control over financial reporting as of December 31, 2019, based on the COSO 2013 framework[580] Other Information There is no other information to report in this section - None[582] Part III Directors, Executive Officers and Corporate Governance Information regarding directors and corporate governance is incorporated by reference from the 2020 Proxy Statement, while executive officer information is in Part I - Required information is incorporated by reference to the Company's definitive Proxy Statement for the 2020 Annual Meeting of Stockholders[583] - Information about executive officers is included in Part I, Item 1 of this Form 10-K[583] Executive Compensation Required information on executive compensation is incorporated by reference from the company's 2020 Proxy Statement - Required information is incorporated by reference to the Company's Proxy Statement[587] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2020 Proxy Statement, and the company has no equity compensation plans - Required information is incorporated by reference to the Company's Proxy Statement[588] - As of December 31, 2019, the Company does not have any equity compensation plans in effect[588] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference to the Company's Proxy Statement[589] Principal Accounting Fees and Services Information regarding fees paid to the principal accountant is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference to the Company's Proxy Statement[590] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed with the Form 10-K, including corporate governance and material contract documents - This item lists the consolidated financial statements included in Item 8 of the report[592] - A detailed list of exhibits filed with the Form 10-K is provided, including articles of incorporation, bylaws, and various management compensation agreements[593] Form 10-K Summary This section is not applicable - Not applicable[595]