National Bankshares, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014; filed August 6, 2014. Financial statements are unaudited. National Bankshares is a Virginia financial holding company whose principal subsidiary, The National Bank of Blacksburg, operates 25 offices in southwest Virginia.
Financial performance and condition
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total interest income | $11.1 million | $11.6 million | $22.2 million | $23.1 million |
| Net interest income | $9.8 million | $10.0 million | $19.6 million | $19.9 million |
| Provision for loan losses | $0.7 million | $0.4 million | $0.8 million | $1.0 million |
| Noninterest income | $2.3 million | $2.2 million | $4.5 million | $4.4 million |
| Noninterest expense | $6.1 million | $6.1 million | $12.2 million | $12.1 million |
| Net income | $4.1 million | $4.4 million | $8.5 million | $8.7 million |
| Basic diluted EPS | $0.59 | $0.64 | $1.23 / $1.22 | $1.25 / $1.24 |
- Annualized return on average assets was 1.54% for the first six months, compared with 1.63% for 2013; annualized return on average equity was 11.22%, compared with 11.90%.
- Annualized net interest margin was 4.07%, down from 4.25% for 2013 and 4.26% for the first six months of 2013. Management attributed the decline primarily to lower yields on loans and securities, partly offset by lower funding costs.
- Noninterest income increased 3.4% year over year for the first six months, led by a $165 thousand, or 10.4%, increase in credit card fees and a $25 thousand increase in trust income.
- Total assets were $1.128 billion at June 30, 2014, up 1.6% from December 31, 2013. Net loans were $585.4 million, down 0.35%, while deposits were $967.5 million, up 0.77%.
- Stockholders’ equity was $156.8 million, up 7.5% from year-end, primarily reflecting net income and a $6.2 million improvement in accumulated other comprehensive income. The quarterly dividend increased to $0.55 per share from $0.54.
- The company reported no long-term debt, capital lease obligations, purchased deposits, short-term borrowings, discount-window borrowings, or Federal Home Loan Bank advances at June 30, 2014.
- Six-month operating cash flow was $9.3 million, compared with $12.0 million in the prior-year period. Investing activities used $10.3 million, while financing activities provided $3.6 million. Cash and due from banks increased to $15.9 million.
Material changes versus comparable periods
- Second-quarter net income declined 7.4%; six-month net income declined 1.6%. The primary pressures were lower interest income and net interest income, partially offset by lower interest expense and a reduction in the six-month loan-loss provision.
- Second-quarter provision expense increased to $701 thousand from $355 thousand, although the six-month provision declined to $804 thousand from $1.026 million.
- Net loans were essentially stable year to date. Commercial real estate loans declined $5.8 million, offset partly by growth in public-sector, commercial non-real-estate, and consumer non-real-estate loans.
- Deposit mix continued to shift away from time deposits: time deposits declined $10.5 million from year-end, while other deposits increased $18.0 million.
- Nonperforming loans improved to $5.0 million from $6.6 million at December 31, 2013 and $12.0 million at June 30, 2013. However, other real estate owned increased to $5.3 million from $4.7 million at year-end and $1.0 million a year earlier.
- The allowance for loan losses declined to $8.0 million, or 1.34% of loans, from 1.38% at year-end. Annualized net charge-offs were 0.36% of average loans, compared with 0.49% in the prior-year period.
Liquidity, capital, outlook, and risks
- Management stated that liquidity was sufficient under projected trends and stress scenarios. The loan-to-deposit ratio was 61.34%, below the company’s internal target range of 65% to 75%. The company was considered well capitalized; Tier 1 and total risk-based capital ratios were 23.22% and 24.38%, respectively.
- Management described the local economic recovery as mixed, with some improvement in real estate values, unemployment, and residential vacancy rates but continued risks from elevated unemployment, personal bankruptcies, housing inventory, and dependence on state-funded colleges and universities.
- Credit risk remains concentrated in commercial real estate. Total troubled debt restructurings were $8.9 million, including $2.7 million in nonaccrual TDRs. Two loans totaling $2.7 million were restructured during the first six months.
- Properties totaling approximately $1.2 million were in various stages of foreclosure and could increase other real estate owned in future periods.
- The securities portfolio included $16.3 million of unrealized losses considered temporary; management stated it did not intend, and was not likely, to sell the affected securities before recovery or maturity.
- Key forward-looking risks include interest-rate movements, economic and real-estate conditions, deposit flows, loan demand and quality, regulatory changes, competition, technology-based fraud, key-person risk, securities-market conditions, and accounting changes. The filing provides no quantitative earnings or revenue guidance.
- The company concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting. Management reported no material pending legal proceedings.
Important facts for investors to verify
- Confirm the reported net-loan figure in the MD&A. One sentence states $539.4 million, while the balance sheet and related tables consistently report $593.4 million before the allowance and $585.4 million net; the filing text appears internally inconsistent.
- Monitor whether the improvement in nonperforming loans is offset by higher other real estate owned, commercial-real-estate exposure, or additional foreclosure activity.
- Assess sensitivity of net interest margin and earnings to prolonged low rates, loan repricing, securities reinvestment yields, and deposit-rate competition.
- Review the valuation and duration risk of securities with long-standing unrealized losses, including the assumptions supporting temporary-impairment conclusions.
- Track TDR balances, impaired-loan collateral values, allowance coverage, charge-offs, and the effect of changing local economic conditions.
- Consider the sustainability of the $0.55 quarterly dividend relative to earnings, capital requirements, and future credit losses.