National Bankshares, Inc. — Q1 2015 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 as a community bank through 25 offices in southwest Virginia. The company provides retail and commercial banking, lending, trust, investment and insurance services. Results cover the three months ended March 31, 2015; interim financial statements are unaudited. The comparable period is the three months ended March 31, 2014, unless otherwise noted.
Key financial metrics
| Metric | Q1 2015 | Comparable / prior period |
|---|---|---|
| Total assets | $1.165 billion | $1.155 billion at Dec. 31, 2014; up 0.88% |
| Loans, net | $613.9 million | $597.2 million at Dec. 31, 2014; up 2.80% |
| Total deposits | $985.0 million | $982.4 million at Dec. 31, 2014; up 0.26% |
| Revenue proxy: total interest income | $10.8 million | $11.2 million; down 2.9% |
| Net interest income | $9.7 million | $9.8 million; down 0.9% |
| Noninterest income | $2.2 million | $2.2 million; up 1.8% |
| Net income | $4.0 million | $4.4 million; down 9.9% |
| Basic and diluted EPS | $0.57 | $0.63; down 9.5% |
| Net interest margin | 3.95% tax-equivalent | 4.12% in Q1 2014; down 17 basis points |
| Return on average assets | 1.40% annualized | 1.51% for full-year 2014 |
| Return on average equity | 9.50% annualized | 10.72% for full-year 2014 |
| Operating cash flow | $6.0 million | $6.5 million; down 8.5% |
| Capital | $172.7 million of equity | $166.3 million at Dec. 31, 2014 |
Material changes versus comparable periods
- Net income decreased $438,000, primarily reflecting lower net interest income, a higher loan-loss provision and higher noninterest expense.
- The provision for loan losses increased to $201,000 from $103,000. Net charge-offs were $207,000, compared with $33,000 in Q1 2014, based on annualized ratios of 0.14% and 0.02%, respectively.
- Total noninterest expense increased 8.5% to $6.7 million. Net costs of other real estate owned increased to $471,000 from $77,000, including higher property write-downs; data processing, credit-card processing, salaries and franchise taxes also increased.
- Credit-card fee income increased 12.3% to $895,000, partly due to a vendor change and higher transaction volumes. Deposit service-charge income declined 9.6%.
- Loans increased $16.7 million from year-end, led by commercial real estate growth of $11.1 million and public-sector and IDA loans growth of $12.1 million. Real estate construction loans declined $3.9 million.
- Securities increased $10.4 million from year-end, while interest-bearing deposits declined $14.9 million. Time deposits declined $4.0 million as customers favored more liquid deposit products in the low-rate environment.
- The securities portfolio generated $2.5 million of after-tax other comprehensive income, reducing accumulated other comprehensive loss to $3.2 million from $5.7 million.
Credit quality, liquidity, capital and debt
- Nonperforming loans were $9.2 million, compared with $6.1 million at March 31, 2014 and $9.3 million at Dec. 31, 2014. Nonperforming assets were $13.8 million, or 2.20% of loans plus other real estate owned.
- Total troubled debt restructurings increased to $12.1 million from $11.3 million at year-end; $6.1 million were nonaccrual. One loan with a post-modification balance of $907,000 was restructured during the quarter.
- Other real estate owned declined to $4.6 million from $4.7 million at year-end. Approximately $589,000 of residential properties were in foreclosure and could affect future other real estate owned balances.
- The allowance for loan losses was $8.3 million, or 1.33% of loans, versus 1.36% at year-end and 1.41% at March 31, 2014. Coverage of nonperforming loans was 89.51%.
- Liquidity was described as sufficient under tested scenarios. The bank had no purchased deposits, discount-window borrowings, short-term borrowings or Federal Home Loan Bank advances at March 31, 2015. The loan-to-deposit ratio was 63.17%, below the company’s internal 65%–75% policy range.
- The company reported no long-term debt, capital leases or material purchase obligations. Operating lease obligations were not material.
- Regulatory capital remained well above minimums: Common Equity Tier 1 and Tier 1 ratios were 25.08%, total capital was 26.29% and leverage was 14.88%.
Guidance, outlook, risks and unusual items
The filing provides no formal earnings or financial guidance. Management expects results to remain sensitive to interest rates, economic conditions, deposit flows, loan demand, competition, regulatory changes and the quality of the loan and investment portfolios.
- Management reported that the local and national recovery remained slow. Unemployment and real estate conditions had improved from recessionary levels but remained higher than pre-recession levels; vacancy and business-bankruptcy indicators had worsened modestly.
- Low interest rates and competition continued to pressure asset yields. The yield on loans declined 31 basis points year over year, while the cost of interest-bearing liabilities declined 12 basis points.
- Credit risk remains concentrated in commercial real estate, which represented approximately $321.8 million of the $623.0 million gross loan portfolio. Future losses may be affected by local real estate values, unemployment, bankruptcies and borrower cash flows.
- Unrealized losses on temporarily impaired securities totaled $2.1 million across 154 securities. Management concluded the losses were not other-than-temporary and stated it did not intend, and was not likely, to sell the securities before recovery or maturity.
- The filing identifies allowance estimates, collateral values, discount rates, loss rates and economic assumptions as significant areas of management judgment. Actual losses could differ materially from estimates.
- Management stated that disclosure controls were effective and that no material changes occurred in internal control over financial reporting. No material legal proceedings were reported.
Important facts for investors to verify
- Whether the increase in nonperforming loans and troubled debt restructurings stabilizes or leads to additional provisions, charge-offs or other real estate owned.
- Whether commercial real estate and public-sector loan growth is sustainable and remains consistent with underwriting and concentration limits.
- Whether net interest margin continues to contract as loans and securities reprice at lower yields.
- The magnitude and duration of other real estate owned write-downs and the disposition of properties in foreclosure.
- Whether deposit mix changes, particularly the migration from time deposits, affect funding costs and liquidity.
- The potential effect of future interest-rate changes, local economic weakness and regulatory developments on earnings, capital and fair values.
- The filing’s statement that quarterly results are not necessarily indicative of full-year results, particularly given the unusual increase in other real estate owned costs.