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 in southwest Virginia. The unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared primarily with the corresponding 2015 periods and December 31, 2015 balance sheet amounts.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2016 | Year-over-Year Change | Nine Months Ended September 30, 2016 | Year-over-Year Change |
|---|---|---|---|---|
| Net interest income | $9.1 million | Down 6.3% | $27.8 million | Down 4.6% |
| Provision for loan losses | $0.3 million | Up 63.5% | $1.1 million | Up 56.5% |
| Noninterest income | $2.5 million | Up 8.5% | $7.4 million | Up 6.2% |
| Noninterest expense | $6.6 million | Up 4.8% | $19.5 million | Up 0.9% |
| Net income | $3.8 million | Down 8.8% | $11.5 million | Down 6.5% |
| Basic EPS | $0.55 | Down from $0.60 | $1.65 | Down from $1.77 |
| Net interest margin | 3.48% | Down 41 basis points | 3.55% | Down 35 basis points |
For the nine months, return on average assets was 1.28% versus 1.43% in 2015, and return on average equity was 8.55% versus 9.60%. Dividends declared were $0.55 per common share versus $0.53 in the prior-year period.
- Total assets were $1.203 billion at September 30, 2016, up 0.3% from year-end 2015.
- Loans, net of unearned income and deferred fees, were $636.2 million, up 2.8%, led by 5.1% growth in commercial real estate loans.
- Total deposits were $1.010 billion, down 0.9%; time deposits declined 8.6%, while noninterest-bearing demand and savings deposits increased.
- Stockholders’ equity was $184.1 million, up 7.0%, partly reflecting $4.4 million of after-tax accumulated other comprehensive income.
- The allowance for loan losses was $8.3 million, or 1.30% of loans. Net charge-offs were $1.1 million for the first nine months, representing an annualized ratio of 0.25%.
- Operating cash flow was $13.4 million for the first nine months, compared with $15.0 million in 2015. Investing activities used $1.5 million and financing activities used $12.7 million, including $3.8 million of dividends.
- The company had no long-term debt, purchased deposits, short-term borrowings, discount-window borrowings, or Federal Home Loan Bank advances at September 30, 2016.
Material Changes Versus Prior Comparable Period
- Net income declined as lower yields on loans and securities reduced net interest income and the provision for loan losses increased.
- The net interest margin contracted primarily because of lower earning-asset yields, including a 19-basis-point decline in loan yield for the third quarter and an 18-basis-point decline for the nine-month period.
- Noninterest income improved, supported by higher deposit service charges, trust income, other income, and realized securities gains. A new overdraft privilege program contributed to higher deposit service-charge income.
- Data processing and ATM expense increased substantially due to investments in technology and infrastructure. Salaries and employee benefits also increased, partly because of higher pension expense and staffing decisions.
- Intangible amortization decreased as certain acquired intangible assets became fully amortized. Nine-month other-real-estate-owned costs also declined because 2015 included a one-time write-down.
- Asset quality improved overall: nonperforming loans declined to $5.5 million from $6.7 million at year-end 2015 and $9.0 million at September 30, 2015; nonperforming assets declined to $8.7 million from $10.8 million at year-end 2015.
- Loan growth and improved asset quality were accompanied by higher provision expense. The allowance-to-loans ratio declined from 1.34% at year-end 2015 to 1.30%.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide specific earnings or revenue guidance. Management states that liquidity is sufficient under projected trends and tested stress scenarios, and that the company was well capitalized at September 30, 2016. The loan-to-deposit ratio was 62.99%, below the company’s stated internal policy range of 65% to 75%.
- Key risks include interest-rate changes, declining asset yields, economic weakness, unemployment, bankruptcy levels, real estate conditions, loan demand, deposit flows, competition, regulatory developments, technology initiatives, and changes in accounting standards.
- Because the company’s markets include state-funded universities, reductions in state funding could adversely affect employment, borrowers, loan performance, and foreclosures.
- Other real estate owned was $3.2 million, with approximately $0.7 million of residential properties in various foreclosure stages. Future OREO levels cannot be predicted precisely.
- Total troubled debt restructurings were $8.6 million, including $3.9 million in nonaccrual status and $4.7 million accruing. Four loans were modified as TDRs during the first nine months of 2016.
- Available-for-sale securities increased to $291.3 million from $236.1 million at year-end 2015. Unrealized gains improved accumulated other comprehensive loss, while securities remain exposed to interest-rate and market-value changes.
- The company identified no material pending or threatened legal proceedings, no material changes in off-balance-sheet arrangements, and no material operating lease changes.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether continued loan growth, particularly in commercial real estate, produces adequate risk-adjusted returns as net interest margins remain under pressure.
- Whether the higher provision and net charge-off levels signal a sustained deterioration in credit quality despite lower reported nonperforming assets.
- The sensitivity of earnings and accumulated other comprehensive income to interest-rate movements and securities valuations.
- Whether technology, staffing, pension, and other operating-cost increases are temporary investments or a continuing source of margin pressure.
- The collectability and collateral values supporting impaired loans, TDRs, and OREO, including properties currently in foreclosure.
- The company’s ability to maintain strong capital and liquidity while continuing dividends and funding future loan demand without external borrowings.