National Bankshares, Inc. — FY2019 Form 10-K Summary
Business context and reporting period
National Bankshares, Inc. (Nasdaq: NKSH) is a Virginia financial holding company operating primarily through National Bank of Blacksburg, a community bank serving southwest Virginia. The filing covers the fiscal year ended December 31, 2019; the filing was dated March 11, 2020. NBB operates 24 branches and one loan production office, with lending to individuals, small and mid-sized businesses, municipalities and real estate customers as its principal business.
Financial performance and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net income | $17.466 million | $16.151 million | Up 8.1% |
| Basic and diluted EPS | $2.65 | $2.32 | Up 14.2% |
| Net interest income | $37.767 million | $38.177 million | Down 1.1% |
| Noninterest income | $8.790 million | $7.729 million | Up 13.7% |
| Noninterest expense | $25.754 million | $27.276 million | Down 5.6% |
| Total assets | $1.322 billion | $1.256 billion | Up 5.2% |
| Net loans | $726.588 million | $702.409 million | Up 3.4% |
| Total deposits | $1.120 billion | $1.052 billion | Up 6.5% |
| Stockholders’ equity | $183.726 million | $190.238 million | Down 3.4% |
- Return on average assets increased to 1.39% from 1.29%; return on average equity increased to 9.87% from 8.65%.
- Tax-equivalent net interest margin declined to 3.29% from 3.36%, as higher asset yields were more than offset by increased deposit funding costs.
- The efficiency ratio was 55.10%, compared with 53.22% in 2018, on the Company’s adjusted non-GAAP basis.
- Net cash provided by operating activities was $18.832 million. Investing activities used $61.678 million, largely reflecting securities purchases and loan growth; financing activities provided $40.254 million from deposit growth, partly offset by dividends and share repurchases.
- The Company had no short-term borrowings, discount-window borrowings or FHLB advances at year-end and reported no material long-term debt commitments.
- The loan-to-deposit ratio was 65.50%, within management’s stated policy range of 65% to 75%. Management reported adequate liquidity under stress testing.
- Cash dividends declared were $1.39 per share, totaling $9.032 million. The Company repurchased 468,400 shares for $18.525 million during 2019.
Material changes versus the prior comparable period
- Net income benefited from lower noninterest expense, higher noninterest income and the absence of the $2.010 million insurance-receivable write-down recorded in 2018 in connection with prior cybersecurity incidents.
- Noninterest income included $566,000 of realized securities gains, compared with $17,000 in 2018, as management restructured the securities portfolio to manage interest-rate risk.
- Interest expense rose to $7.380 million from $5.047 million, primarily because deposit rates increased. The higher funding cost more than offset loan growth and improved loan yields, reducing net interest income.
- Deposits grew materially, led by interest-bearing demand deposits and time deposits. Securities increased 2.4% to $435.263 million, while average securities balances declined as the portfolio was repositioned.
- Asset quality remained generally stable: nonperforming loans declined slightly to $3.375 million, nonperforming assets declined to $4.987 million, and other real estate owned declined to $1.612 million. However, loans 90 days or more past due and still accruing increased to $231,000 from $35,000.
- The allowance for loan losses declined to $6.863 million, or 0.94% of loans, from $7.390 million, or 1.04%. Net charge-offs increased to $653,000 from $454,000, and the provision changed from an $81,000 recovery to a $126,000 provision.
- Stockholders’ equity declined primarily because $17.939 million of retained earnings was used for share repurchases and $9.032 million was paid in dividends. Accumulated other comprehensive loss improved to $8.506 million from $12.085 million, principally because of higher available-for-sale securities values.
- The Company adopted the new lease standard prospectively in 2019, recognizing a $2.286 million lease liability and a $2.277 million right-of-use asset at year-end. The adoption had no cumulative-effect adjustment.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings, revenue or balance-sheet guidance. Management described liquidity and capital as adequate and expected loan growth and other operations to remain supported by deposits and other available funding sources. Management also stated that any further allowance increase was expected to result from refinement of loss estimates and not dramatically affect net income, but emphasized that actual results may differ.
- NBB was well capitalized at December 31, 2019, with a CET1 ratio of 22.283%, total capital ratio of 23.128% and leverage ratio of 14.175%, all substantially above regulatory minimums.
- The Company is concentrated in its southwest Virginia market. Commercial real estate represented approximately 50% of the loan portfolio, and college housing and professional office loans represented approximately 25%.
- Principal risks include recession, local employment and university funding trends, real estate values, borrower defaults, interest-rate changes, deposit pricing pressure, competition and the adequacy of the allowance for loan losses.
- The Company experienced cybersecurity intrusions in May 2016 and January 2017. Customer funds were restored, but related thefts totaled $570,000 and $1.838 million, respectively. The Company incurred investigation, remediation and legal costs and settled litigation with its insurer in the first quarter of 2019. Cybersecurity insurance may not fully cover future losses.
- The Company identified the coronavirus outbreak as a potential risk to employees, customers, local economies, loan performance, deposits, loan demand and operations. The filing does not quantify any financial effect from the outbreak.
- CECL adoption was delayed for the Company until January 1, 2023. Management was developing models and data processes, but the filing does not provide a quantified estimate of the future reserve or capital impact.
- There were no material pending legal proceedings, no unresolved SEC staff comments and no reported material weaknesses in internal control over financial reporting. The independent auditor issued unqualified opinions.
Important facts for investors to verify
- Reconcile the reported consolidated deposits and assets with the separate NBB figures presented in the Business section, which differ slightly from the consolidated amounts.
- Review the sustainability of net interest margin as deposit repricing costs, Federal Reserve policy and loan yields change.
- Evaluate commercial real estate and college-housing exposure, including collateral values, nonperforming loans, TDRs and the allowance methodology.
- Assess the effect of future CECL implementation on reserves, earnings, regulatory capital and dividend capacity.
- Monitor liquidity and capital after the substantial 2019 share repurchases and in any period of accelerated loan growth or deposit outflows.
- Review cybersecurity remediation, insurance recoveries, potential litigation and continuing technology expenditures.
- Confirm dividend capacity because NBI depends substantially on dividends from NBB, which are subject to regulatory restrictions.