National Bankshares, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
National Bankshares, Inc. is a Virginia bank holding company whose primary subsidiary, National Bank of Blacksburg, operates 25 branches and a loan production office in southwest Virginia. The unaudited filing covers the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. Results were materially affected by the COVID-19 pandemic, related economic disruption, borrower accommodations, lower interest rates, and participation in the SBA Paycheck Protection Program.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total interest income | $10.750 million | $11.293 million | $22.138 million | $22.431 million |
| Net interest income | $9.152 million | $9.379 million | $18.744 million | $18.724 million |
| Provision for loan losses | $1.352 million | $0.055 million | $1.831 million | $0.255 million |
| Noninterest income | $1.745 million | $1.856 million | $3.880 million | $4.345 million |
| Noninterest expense | $6.077 million | $6.453 million | $12.544 million | $12.918 million |
| Net income | $2.982 million | $3.994 million | $6.961 million | $8.437 million |
| Diluted EPS | $0.46 | $0.61 | $1.07 | $1.27 |
| Net interest margin | 2.90% | 3.30% | 3.05% | 3.32% |
Net income declined approximately 25% year over year in both the quarter and first half. Q2 return on average assets was 0.85% versus 1.27%, and return on average equity was 6.13% versus 8.79%. The filing does not present a conventional GAAP net margin.
- Total assets were $1.434 billion at June 30, 2020, up 8.47% from December 31, 2019.
- Loans, net of unearned income and deferred fees, were $791.002 million, up 7.85% from year-end; commercial non-real-estate loans increased primarily because of PPP lending.
- Total deposits were $1.220 billion, up 8.92%, driven by demand and savings deposits; the company reported no brokered deposits.
- Available-for-sale securities were $489.926 million, up from $435.263 million at year-end, with $12.048 million of net unrealized gains.
- Stockholders’ equity was $195.781 million, up 6.56% from year-end. The company declared a $0.67 per-share dividend in each reported quarter and made no share repurchases during the first half.
- Cash flow from operating activities was $6.422 million. Investing activities used $98.904 million, largely reflecting purchases of securities and net loan originations, while financing activities provided $95.507 million, primarily from deposit growth. Cash and due from banks ended at $13.315 million.
- The company had no long-term debt, FHLB advances, discount-window borrowings, or short-term borrowings at June 30, 2020.
Material changes versus prior comparable periods
- Q2 net interest income decreased 2.4%, while first-half net interest income increased 0.1%; lower asset yields and borrower payment accommodations more than offset loan growth and lower deposit costs.
- The tax-equivalent net interest margin fell 40 basis points in Q2 and 27 basis points for the first half, reflecting lower earning-asset yields despite lower funding costs.
- The provision for loan losses rose sharply to $1.352 million in Q2 and $1.831 million for the first half, versus $55 thousand and $255 thousand, respectively, in 2019.
- Q2 noninterest income declined 6.0%, primarily because of lower deposit service charges and other fees. First-half noninterest income declined 10.7%, partly because the prior-year period included a $538 thousand insurance recovery.
- Noninterest expense decreased 5.8% in Q2 and 2.9% for the first half, helped by lower other operating expenses, FDIC assessments, and occupancy costs.
- The allowance for loan losses increased to $8.308 million, or 1.05% of loans, from $6.863 million, or 0.94%, at December 31, 2019. Excluding government-guaranteed PPP loans, the ratio was 1.13%.
- Nonperforming loans increased to $3.830 million from $3.375 million at year-end but remained below $4.262 million at June 30, 2019. Nonperforming assets were $5.383 million, or 0.68% of loans plus OREO.
Guidance, outlook, risks, contingencies, and unusual items
- Management provided no quantitative earnings or revenue guidance. It expects fee income and interest income to remain under pressure while the pandemic affects customer activity and repayment capacity.
- As of June 30, 2020, the company had provided COVID-19-related payment extensions, interest-only periods, or rate reductions on 297 loans totaling $119.711 million. These accommodations were not classified as TDRs under applicable relief guidance, but management is monitoring them for later deterioration, nonaccrual status, or TDR treatment.
- The company held $55.819 million of PPP loans, net of deferred fees and costs, generally earning 1% interest. Management believed the loans were fully guaranteed by the U.S. government; any change in that assessment could require additional provision expense.
- Management expects the pandemic may cause additional credit losses, higher allowance requirements, reduced fee income, lower interest income, increased foreclosures, and declines in collateral values. Payment relief may delay identification of asset-quality deterioration.
- Liquidity was described as sufficient. The loan-to-deposit ratio was 64.86%, below the company’s stated policy range of 65% to 75%. The Bank was well capitalized, with a common equity tier 1 ratio of 20.58%, total capital ratio of 21.51%, and leverage ratio of 13.42%.
- Goodwill of $5.848 million was not impaired as of June 30, 2020, although a sustained stock-price decline or other triggering event could require a future impairment test and noncash charge.
- Available-for-sale securities had $852 thousand of gross unrealized losses. Management concluded the securities were temporarily impaired and did not record an other-than-temporary impairment charge.
- The company disclosed two historical cybersecurity intrusions, occurring in 2016 and 2017. Related litigation was settled in 2019, and no related litigation against the company was pending as of the filing.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting. No material pending legal proceedings were disclosed.
Most important facts for investors to verify
- Whether COVID-19 loan accommodations convert into higher delinquencies, nonaccrual loans, TDRs, charge-offs, or additional allowance requirements after relief periods expire.
- The collectability and government-guarantee status of the $55.819 million PPP loan balance, including the timing and amount of fee recognition.
- Whether the 2.90% Q2 net interest margin stabilizes or declines further as rates remain low and borrowers receive payment relief.
- Future trends in deposit balances, liquidity, loan demand, and the loan-to-deposit ratio as government payments and pandemic conditions change.
- Potential valuation declines in real estate collateral, OREO, and securities, and any resulting impairment or credit-loss charges.
- Whether the $0.67 per-share dividend remains sustainable if earnings or capital are adversely affected.
- The company’s transition to the expected credit loss standard, including the eventual effect of CECL on reserves and equity; the filing text does not provide a clear quantified impact.