National Bankshares, Inc. 2019 Q2 Form 10-Q Summary
Business context and reporting period
National Bankshares, Inc. is a Virginia bank holding company whose primary operating subsidiary, The National Bank of Blacksburg, operates as a community bank serving southwest Virginia through 25 offices and a loan production office. The filing covers the unaudited three and six months ended June 30, 2019, compared primarily with the same periods in 2018 and December 31, 2018.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Six months ended June 30, 2019 |
|---|---|---|
| Total interest income | $11.293 million | $22.431 million |
| Net interest income | $9.379 million | $18.724 million |
| Provision for loan losses | $55 thousand | $255 thousand |
| Noninterest income | $1.856 million | $4.345 million |
| Noninterest expense | $6.453 million | $12.918 million |
| Net income | $3.994 million | $8.437 million |
| Diluted earnings per share | $0.61 | $1.27 |
| Net interest margin | 3.30% | 3.32% |
| Return on average assets | 1.27% | 1.32% |
| Return on average equity | 8.79% | 8.97% |
- Total assets were $1.270 billion at June 30, 2019, compared with $1.256 billion at December 31, 2018.
- Loans, net of unearned income and deferred fees, were $729.6 million, up 2.8% from year-end 2018. Commercial real estate loans were the largest category at $368.1 million.
- Total deposits were $1.070 billion, up 1.7% from year-end 2018. The filing states that the Company had no brokered deposits.
- Stockholders’ equity was $183.8 million, down from $190.2 million at year-end 2018, primarily reflecting the $18.0 million repurchase of 452,400 shares in March 2019.
- The allowance for loan losses was $7.3 million, or 1.00% of loans. Net charge-offs were $341 thousand for the first six months, representing an annualized 0.10% of average loans.
- Nonperforming assets were $6.3 million, or 0.86% of loans plus other real estate owned. Nonperforming loans were $4.3 million and other real estate owned was $2.0 million.
- Operating cash flow was $8.0 million for the first six months, compared with $9.3 million in the prior-year period. Net cash increased $4.3 million to $17.2 million.
- The Company had no long-term debt, finance lease obligations, short-term borrowings, discount-window borrowings, or Federal Home Loan Bank advances at June 30, 2019.
- The subsidiary bank was well capitalized, with a Common Equity Tier 1 ratio of 21.63%, total capital ratio of 22.53%, and leverage ratio of 14.26%.
- The loan-to-deposit ratio was 68.20%, within management’s stated policy range of 65% to 75%.
Material changes versus comparable periods
- Second-quarter net income declined 1.2% from $4.041 million in the second quarter of 2018, despite higher interest income. Six-month net income increased 15.0% from $7.337 million.
- Net interest income decreased 2.1% in the second quarter and 1.4% for the first six months. The net interest margin declined five basis points for the quarter and four basis points year to date, primarily because deposit funding costs increased faster than asset yields.
- Total interest expense increased to $1.914 million from $1.145 million in the second quarter and to $3.707 million from $2.226 million for the first six months. Time-deposit expense was particularly higher.
- Noninterest income was broadly stable in the second quarter but increased 11.7% for the first six months, largely because of a $538 thousand insurance recovery and higher other income. The filing also reports realized securities gains of $8 thousand for the quarter and $20 thousand year to date.
- Noninterest expense increased 0.5% in the second quarter but decreased 11.5% for the first six months. The year-to-date decline primarily reflects the absence of the $2.010 million insurance-receivable write-down recorded in 2018.
- Data processing and ATM costs increased because of infrastructure upgrades, while salaries and employee benefits also increased. Core intangible amortization was completed in 2018.
- Nonperforming loans increased from $3.4 million at December 31, 2018 and $2.7 million at June 30, 2018 to $4.3 million at June 30, 2019. The allowance coverage ratio declined to 171.37% from 216.08% at year-end 2018.
- Accumulated other comprehensive loss improved to $4.6 million from $12.1 million at year-end 2018, primarily because of gains in the available-for-sale securities portfolio.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide formal earnings or revenue guidance. Management states that interim results are not necessarily indicative of full-year results.
- Management believes liquidity is sufficient under tested scenarios. Available sources include deposits, loan repayments, securities sales and maturities, Federal Reserve facilities, short-term borrowings, and Federal Home Loan Bank advances.
- Management identifies interest rates, deposit pricing, economic conditions, unemployment, real estate markets, loan demand, competition, regulation, technology, cybersecurity, and accounting changes as significant risks.
- The Company experienced cybersecurity intrusions in May 2016 and January 2017. Litigation against its insurance carrier was settled in the first quarter of 2019. The Company recognized a $538 thousand insurance recovery in 2019; the settlement terms are subject to a nondisclosure agreement. Management states that no litigation against the Company related to the breaches was pending as of the filing.
- Cybersecurity costs were $182 thousand for the first six months of 2019, compared with $164 thousand in 2018. Management continues to limit certain online banking functionality and maintains cybersecurity insurance, although coverage may not fully protect against financial or reputational losses.
- At June 30, 2019, the Company had $721 thousand of residential real estate loans in various stages of foreclosure. Future OREO levels cannot be predicted because properties may be acquired by third parties or sold before foreclosure.
- Total troubled debt restructurings were $5.4 million, including $3.4 million in nonaccrual status. No loans were modified as TDRs during the first six months of 2019.
- The Company adopted the new lease standard prospectively on January 1, 2019, recognizing a $2.1 million operating lease right-of-use asset and $2.1 million lease liability at June 30, 2019. Adoption did not produce a cumulative-effect adjustment.
- The Company was preparing for adoption of the current expected credit loss standard, or CECL, then expected to apply for fiscal years and interim periods beginning after December 15, 2019. Management had begun developing and refining CECL models but had not quantified the expected impact.
- There were no pending or threatened legal proceedings that management believed would materially affect financial condition. Disclosure controls and procedures were deemed effective as of June 30, 2019.
Important facts for investors to verify
- Verify the sustainability of earnings growth after excluding the 2019 insurance recovery and 2018 insurance write-down comparison.
- Monitor deposit pricing and the effect of higher interest-bearing deposit costs on the 3.30% net interest margin.
- Review the increase in nonperforming loans, foreclosures, nonaccrual loans, and the decline in allowance coverage.
- Assess the effect of the March 2019 share repurchase on per-share results, capital, and future capital deployment.
- Evaluate commercial real estate and construction-loan concentration, local economic conditions, and collateral values.
- Confirm the eventual CECL adoption impact on the allowance, retained earnings, and regulatory capital.
- Review cybersecurity settlement terms, insurance recoveries, remaining exposure, and potential uninsured reputational or litigation costs.