National Bankshares, Inc. 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 26 offices in southwest Virginia. The company provides retail and commercial banking, lending, trust, investment and insurance services. Results are for the three and six months ended June 30, 2015; interim financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|---|---|
| Total interest income | $10,797 | $11,054 | $21,630 | $22,207 |
| Net interest income | $9,746 | $9,759 | $19,492 | $19,597 |
| Provision for loan losses | $355 | $701 | $556 | $804 |
| Noninterest income | $2,419 | $2,344 | $4,659 | $4,544 |
| Noninterest expense | $6,390 | $6,060 | $13,098 | $12,242 |
| Net income | $4,110 | $4,109 | $8,076 | $8,513 |
| Diluted EPS | $0.59 | $0.59 | $1.16 | $1.22 |
| Dividends declared per share | $0.53 | $0.55 | $0.53 | $0.55 |
For the six months, annualized return on average assets was 1.41%, return on average equity was 9.55%, net interest margin was 3.92%, and noninterest margin was 1.48%. The reported net interest margin declined from 4.01% for 2014 as a whole.
- Total assets were $1.148 billion at June 30, 2015, compared with $1.155 billion at December 31, 2014.
- Loans, net of unearned income and deferred fees, were $626.9 million, up 3.55% from year-end 2014. Commercial real estate and public sector loans were the principal growth drivers.
- Total deposits were $974.2 million, down 0.84% from year-end. Time deposits declined 6.31%, reflecting customer migration away from low-rate certificates of deposit.
- Stockholders’ equity was $167.6 million, up 0.76% from year-end, despite a $3.2 million after-tax decline in accumulated other comprehensive income.
- Net cash provided by operating activities was $8.9 million. Investing activities provided $1.4 million, while financing activities used $11.9 million, including $3.7 million of cash dividends. Cash and due from banks ended at $11.4 million.
- The company reported no long-term debt, purchased deposits, short-term borrowings, discount-window borrowings or Federal Home Loan Bank advances at June 30, 2015.
- The loan-to-deposit ratio was 64.36%, below the company’s internal policy range of 65% to 75%. Management stated that liquidity was sufficient under tested scenarios.
- Regulatory capital remained strong: Common Equity Tier 1 capital ratio 23.59%, Tier 1 capital ratio 23.59%, total capital ratio 24.71% and leverage ratio 14.91%.
Material Changes Versus Comparable Periods
- Second-quarter net income was essentially unchanged year over year, while six-month net income declined 5.1% to $8.1 million and diluted EPS declined from $1.22 to $1.16.
- Six-month net interest income decreased 0.5%, primarily because loan and securities yields declined. The yield on loans decreased 33 basis points and the yield on taxable securities decreased 28 basis points.
- Six-month provision expense declined $248,000, or approximately 31%, to $556,000.
- Six-month noninterest income increased 2.5%, helped by higher credit card fees and other income, including a vendor signing incentive. Service charges on deposits and trust income declined.
- Six-month noninterest expense increased 7.0% to $13.1 million. The principal increases were salaries and benefits, data processing, and costs and write-downs associated with other real estate owned.
- Other real estate owned expense increased substantially, and net OREO costs rose to $517,000 from $161,000. OREO balances nevertheless declined to $4.4 million from $4.7 million at year-end 2014.
- Available-for-sale securities declined to $218.5 million from $222.8 million at year-end, while after-tax unrealized losses reduced accumulated other comprehensive income to negative $8.9 million from negative $5.7 million.
- Nonperforming loans increased to $8.9 million from $5.0 million at June 30, 2014, but declined from $9.3 million at December 31, 2014. The nonperforming-assets ratio was 2.11%, compared with 1.72% at June 30, 2014 and 2.30% at year-end.
Outlook, Risks, Contingencies and Unusual Items
- The filing provides no quantitative earnings or revenue guidance.
- Management identified interest rates, economic conditions, unemployment, real estate markets, deposit flows, competition, regulation, monetary policy, technology initiatives and accounting standards as significant forward-looking risks.
- Management stated that the slow economic recovery and the importance of state-funded universities to the company’s market area could affect employment, loan delinquencies, foreclosures and demand for financial services.
- Asset-quality trends were mixed. Net charge-offs improved, and loans 90 days past due and still accruing declined, but criticized loans increased to 5.22% of total loans from 5.01% at year-end, while loans 30–89 days past due increased to 0.58% from 0.40%.
- The allowance for loan losses was $8.1 million, or 1.30% of loans, compared with 1.36% at year-end. Management stated that the allowance appeared reasonable but acknowledged that actual losses could differ materially from estimates.
- Total troubled debt restructurings were $12.0 million, including $6.0 million classified as nonaccrual. One loan with a post-modification balance of $907,000 was restructured during the first six months.
- The company held $212.2 million of temporarily impaired securities with aggregate unrealized losses of $10.9 million. Management stated it did not intend, and was not expected, to sell the securities before recovery or maturity.
- Off-balance-sheet exposure primarily consists of unfunded loan commitments and standby letters of credit. Management stated that historical draws were limited and that the related recourse reserve was not material.
- No material legal proceedings were pending or threatened, and management reported effective disclosure controls with no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether declining earning-asset yields and the 3.92% net interest margin continue to pressure profitability.
- Whether loan growth, particularly in commercial real estate and public-sector lending, produces higher criticized, impaired or nonperforming balances.
- The adequacy of the $8.1 million allowance relative to nonperforming loans, criticized loans, collateral values and local economic conditions.
- The duration and market sensitivity of the securities portfolio, including the $10.9 million of unrealized losses and their effect on tangible capital and comprehensive income.
- Whether OREO write-downs and other real-estate-related expenses remain elevated.
- The stability of deposits as time deposits mature and migrate to lower-cost or more liquid account types.
- The sustainability of the $0.53 per-share dividend relative to earnings, cash generation and capital requirements.
- The company’s continued access to contingent liquidity sources and compliance with capital conservation buffer requirements beginning in 2016.