National Bankshares(NKSH) - 2021 Q2 - Quarterly Report

Part I – Financial Information Financial Statements Unaudited consolidated financial statements for National Bankshares, Inc. as of June 30, 2021, and for the three and six-month periods then ended are presented Consolidated Balance Sheets Total assets increased to $1.66 billion from $1.52 billion at year-end 2020, with deposits rising to $1.45 billion and equity decreasing to $191.2 million Consolidated Balance Sheets (in thousands) | (in thousands) | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $1,661,652 | $1,519,673 | | Cash and interest-bearing deposits | $164,521 | $133,872 | | Securities available for sale | $617,756 | $546,742 | | Loans, net | $797,117 | $760,318 | | Total Liabilities | $1,470,417 | $1,319,066 | | Total deposits | $1,449,624 | $1,297,143 | | Total Stockholders' Equity | $191,235 | $200,607 | Consolidated Statements of Income Net income increased significantly in Q2 2021 to $4.6 million and for the six-month period to $9.4 million, driven by reduced loan loss provisions and higher net interest income Consolidated Statements of Income (Three Months Ended June 30) | (in thousands, except per share data) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net interest income | $10,063 | $9,152 | | Provision for loan losses | $4 | $1,352 | | Noninterest income | $1,941 | $1,745 | | Noninterest expense | $6,447 | $6,077 | | Net Income | $4,613 | $2,982 | | Fully diluted EPS | $0.74 | $0.46 | Consolidated Statements of Income (Six Months Ended June 30) | (in thousands, except per share data) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net interest income | $20,090 | $18,744 | | Provision for loan losses | $54 | $1,831 | | Noninterest income | $4,275 | $3,880 | | Noninterest expense | $12,983 | $12,544 | | Net Income | $9,379 | $6,961 | | Fully diluted EPS | $1.49 | $1.07 | Consolidated Statements of Cash Flows Net cash provided by operating activities was $11.2 million, while investing activities used $149.4 million, and financing activities provided $138.8 million, primarily from deposit growth Consolidated Statements of Cash Flows (Six Months Ended June 30) | (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,209 | $6,422 | | Net cash used in investing activities | ($149,351) | ($98,904) | | Net cash provided by financing activities | $138,808 | $95,507 | | Net change in cash and due from banks | $666 | $3,025 | Notes to Consolidated Financial Statements Detailed notes cover accounting policies, COVID-19 impacts on lending, PPP loans, loan portfolio breakdowns, allowance for loan losses, securities, and fair value measurements - The company participated in the Paycheck Protection Program (PPP), providing 1,259 loans totaling $83.0 million since April 2020. As of June 30, 2021, $29.9 million in PPP loans remained outstanding[39] - The company is preparing for the adoption of ASU 2016-13 (CECL) for credit losses, effective for fiscal years beginning after December 15, 2022, with management refining assumptions using multiple models[50] Loan Portfolio (in thousands) | Loan Portfolio (in thousands) | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Real estate construction | $48,569 | $42,266 | | Consumer real estate | $196,214 | $181,782 | | Commercial real estate | $404,636 | $393,115 | | Commercial non real estate | $73,522 | $78,771 | | Total Loans, net | $805,194 | $768,799 | Nonperforming Assets (in thousands) | Nonperforming Assets (in thousands) | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Nonperforming loans | $3,822 | $3,685 | | Other real estate owned, net | $1,007 | $1,553 | | Total nonperforming assets | $4,829 | $5,238 | | Ratio of nonperforming assets to loans + OREO | 0.60% | 0.68% | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses improved financial performance in H1 2021, driven by higher net interest income and lower loan loss provisions, alongside stable asset quality, strengthened liquidity, and robust capital levels Performance Summary Key performance metrics improved in H1 2021, with ROA increasing to 1.18%, ROE to 9.63%, and the efficiency ratio improving to 53.26%, despite net interest margin compression to 2.80% Performance Ratios | Performance Ratios | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Return on average assets | 1.18% | 1.01% | | Return on average equity | 9.63% | 7.15% | | Basic and fully diluted EPS | $1.49 | $1.07 | | Net interest margin | 2.80% | 3.05% | | Efficiency ratio | 53.26% | 55.24% | Asset Quality Asset quality remained strong with nonperforming assets decreasing to 0.60%, and the provision for loan losses significantly lower at $54 thousand for H1 2021, reflecting improved portfolio performance Asset Quality Indicators | Asset Quality Indicators | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Nonperforming loans (in thousands) | $3,822 | $3,685 | | Allowance for loan losses to loans | 1.00% | 1.10% | | Allowance for loan losses to loans (ex-PPP) | 1.04% | 1.16% | | Ratio of nonperforming assets to loans + OREO | 0.60% | 0.68% | - The provision for loan losses was only $54 thousand for the first six months of 2021, a steep decline from $1.83 million in the first half of 2020, which was elevated due to the initial economic impact of the COVID-19 pandemic[239][290] Net Interest Income Net interest income increased to $20.6 million for H1 2021, but the net interest margin compressed to 2.80% due to loan refinancing and lower yields, partially offset by PPP loan income - The net interest margin declined to 2.80% for the first six months of 2021 from 3.05% in 2020, primarily due to loan refinancing and lower yields on securities in the low interest rate environment[288] - PPP loans contributed positively, adding $198 thousand in interest and $894 thousand in fee recognition during the first six months of 2021; excluding PPP loans, the net interest margin would have been lower at 2.66%[289] Noninterest Income and Expense Noninterest income increased to $4.3 million driven by card fees, while noninterest expense rose to $13.0 million due to higher salaries, pension costs, and FDIC assessments - Credit and debit card fees (net) increased 31.9% to $913 thousand for the six months ended June 30, 2021, compared to the same period in 2020[291][293] - Salaries and employee benefits expense increased by 6.6% for the six-month period, largely due to a $248 thousand increase in the service component of net periodic pension cost[298][299] - FDIC assessment expense increased significantly to $176 thousand for the first half of 2021 from $40 thousand in 2020, as small bank assessment credits were fully utilized[301] Liquidity and Capital Resources Liquidity remained strong with 11.76% deposit growth, while total stockholders' equity decreased to $191.2 million due to $9.4 million in share repurchases and $4.3 million in dividends, though regulatory capital ratios remain robust - Total deposits grew by $152.5 million (11.76%) since December 31, 2020, largely due to government stimulus funds, strengthening the company's liquidity position[309] - The company repurchased 261,962 shares for $9.4 million in the first six months of 2021, with a new 1,000,000 share repurchase program authorized effective June 1, 2021[317] NBB Regulatory Capital Ratios | NBB Regulatory Capital Ratios | June 30, 2021 | Minimum with Buffer | | :--- | :--- | :--- | | Common Equity Tier I Capital Ratio | 18.69% | 7.00% | | Tier I Capital Ratio | 18.69% | 8.50% | | Total Capital Ratio | 19.54% | 10.50% | | Leverage Ratio | 11.54% | 4.00% | Quantitative and Qualitative Disclosures About Market Risk Interest rate risk remains the company's primary market risk, with no significant changes reported since the 2020 Form 10-K disclosures - The company's primary market risk is interest rate risk, and there have been no significant changes to this risk exposure since the disclosures in the 2020 Form 10-K[326] Controls and Procedures Disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during Q2 2021 - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[327] - No material changes to the company's internal control over financial reporting occurred during the three months ended June 30, 2021[328] Part II – Other Information Legal Proceedings No pending or threatened legal proceedings are expected to materially impact the company's financial condition - There are no pending or threatened legal proceedings that management believes may materially impact the company's financial condition[331] Risk Factors For information on risk factors, the company refers to its previously filed 2020 Annual Report on Form 10-K - For information on risk factors, the company refers to its previously filed 2020 Annual Report on Form 10-K[332] Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2021, the company repurchased 150,130 shares at an average price of $35.48, and authorized a new 1,000,000 share repurchase program Common Stock Repurchases (Q2 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2021 | 88,530 | $35.81 | | May 2021 | 61,600 | $35.61 | | June 2021 | - | - | | Total Q2 2021 | 150,130 | $35.48 | - A new 1,000,000 share repurchase program was authorized by the Board of Directors, effective from June 1, 2021, to May 31, 2022[334] Defaults Upon Senior Securities The company reported no defaults upon senior securities - None[335] Mine Safety Disclosures This item is not applicable to the company - Not applicable[336] Other Information The company reported no other information for this item - None[337] Exhibits This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and iXBRL financial data