National Bankshares, Inc. — Q1 2014 Form 10-Q Summary
Business context and reporting period
National Bankshares, Inc. is a Virginia financial holding company whose principal subsidiary, The National Bank of Blacksburg, operates 25 community-bank offices in southwest Virginia. The company provides retail and commercial banking, trust, credit-card, investment and insurance services. Results are primarily generated by the bank subsidiary. This unaudited report covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013 and December 31, 2013 balance-sheet amounts.
Financial performance and position
| Metric | Q1 2014 | Comparable period | Change |
|---|---|---|---|
| Total interest income | $11.153 million | $11.537 million | (3.3%) |
| Net interest income | $9.838 million | $9.858 million | (0.2%) |
| Provision for loan losses | $103 thousand | $671 thousand | (84.7%) |
| Noninterest income | $2.200 million | $2.155 million | 2.1% |
| Noninterest expense | $6.182 million | $5.964 million | 3.7% |
| Net income | $4.404 million | $4.216 million | 4.5% |
| Diluted earnings per share | $0.63 | $0.60 | Increase |
| Net interest margin | 4.12% | 4.27% | Down 15 basis points |
| Return on average assets | 1.61% | Not clearly provided for Q1 2013 | Down 2 basis points versus FY 2013 |
| Return on average equity | 11.92% | Not clearly provided for Q1 2013 | Up 2 basis points versus FY 2013 |
At March 31, 2014, total assets were $1.123 billion, up 1.1% from December 31, 2013. Net loans were $580.751 million, down 1.1%, while securities totaled $356.888 million, up 2.6%. Total deposits were $964.086 million, up 0.4%; non-time deposits increased while time deposits declined. Stockholders’ equity was $153.417 million, up 5.2%, primarily reflecting net income and a $3.121 million after-tax improvement in accumulated other comprehensive income.
Cash flow from operating activities was $6.526 million, compared with $8.631 million in Q1 2013. Investing activities used $9.136 million, principally from purchases of securities and changes in interest-bearing deposits. Financing activities provided $4.050 million, resulting in a $1.440 million increase in cash and due from banks to $14.723 million.
The company had no long-term debt, purchased deposits, discount-window borrowings, short-term borrowings or Federal Home Loan Bank advances at March 31, 2014. Management stated that liquidity was sufficient under tested scenarios. The loan-to-deposit ratio was 61.10%, below the company’s internal 65% to 75% policy range. Tier I and Tier II risk-based capital ratios were 23.30% and 24.51%, respectively, and the company was considered well capitalized.
Material changes versus prior periods
- Net income increased $188 thousand, or 4.5%, despite lower interest income and a 15-basis-point decline in the quarterly net interest margin.
- Lower funding costs partially offset declining loan and securities yields. Loan yield declined 33 basis points and taxable securities yield declined 28 basis points year over year.
- The provision for loan losses fell substantially to $103 thousand from $671 thousand, reflecting lower net charge-offs and improved credit trends.
- Annualized net charge-offs declined to 0.02% of average loans from 0.50% in Q1 2013 and 0.28% for full-year 2013.
- Nonperforming loans declined to $6.078 million from $12.425 million at March 31, 2013 and $6.584 million at December 31, 2013.
- Total nonperforming assets were $10.979 million, including $4.901 million of other real estate owned. Other real estate owned increased from $4.712 million at December 31, 2013 and $1.094 million at March 31, 2013.
- The allowance for loan losses increased modestly to $8.297 million, or 1.41% of loans, from $8.227 million at year-end 2013 and $8.291 million at March 31, 2013.
- Credit-card fees increased 7.7%, while noninterest expense rose 3.7%, driven primarily by higher other operating expenses, including a $94 thousand loss on disposal of fixed assets.
- One loan totaling $209 thousand was modified in a troubled debt restructuring during Q1 2014, compared with two loans totaling $3.739 million in Q1 2013.
Outlook, risks, contingencies and unusual items
Management described the economic recovery as mixed, with continued elevated unemployment and diminished real-estate values, although local real-estate values appeared to be stabilizing or improving. The company’s market benefits from exposure to public colleges and universities, but reductions in state university funding could adversely affect employment and credit quality.
Key risks include interest-rate movements, pressure on earning-asset yields, economic and real-estate conditions, unemployment and bankruptcy trends, regulatory and legislative changes, competition, deposit flows, technology-based fraud, securities-market volatility and changes in accounting requirements. Management noted that higher unemployment or a reversal in the recovery could increase delinquencies, foreclosures and loan losses.
Approximately $885 thousand of properties were in various stages of foreclosure at March 31, 2014 and could affect future other real estate owned balances. Management stated that future levels cannot be predicted accurately because properties may be acquired by third parties or sold by the bank.
The securities portfolio had $23.039 million of total unrealized losses at March 31, 2014, including $5.924 million on securities continuously impaired for at least 12 months. Management considered these losses temporary and stated that it did not intend, and was not expected, to sell the affected investments before recovery of amortized cost or maturity.
The company adopted an eight-quarter averaging approach for historical loan-loss rates beginning in Q1 2014; management stated that the revised method produces similar results to the prior methodology. Newly issued accounting standards concerning affordable-housing investments, foreclosures and discontinued operations were not expected to have a material impact, except that the company was still assessing two of the standards.
No material legal proceedings, material subsequent events, material changes in off-balance-sheet arrangements or material control deficiencies were reported. The filing states that disclosure controls were effective as of March 31, 2014.
Important facts for investors to verify
- Whether continued pressure on loan and securities yields further reduces net interest margin and earnings.
- Whether the improvement in nonperforming loans and net charge-offs is sustained, particularly amid elevated unemployment and bankruptcy rates.
- The level and resolution of other real estate owned, including properties in foreclosure and related valuation risk.
- Whether the $8.297 million allowance for loan losses remains adequate for commercial real estate and other concentrated credit exposures.
- The market-value sensitivity of the securities portfolio and the potential effect of interest-rate changes on accumulated other comprehensive income and capital.
- Whether loan growth remains below the company’s internal target range relative to deposits and how excess liquidity is deployed.
- The effect of rising operating expenses and the absence of dividends declared during the quarter.