Business Context and Reporting Period
National Bankshares, Inc. is a Virginia financial holding company operating primarily through National Bank of Blacksburg, a community bank serving southwest Virginia through 25 branches and digital banking channels. The company also owns National Bankshares Financial Services, which provides insurance and investment products but contributes little to consolidated earnings. This Form 10-K covers the fiscal year ended December 31, 2015; fourth-quarter results are included in the filing’s quarterly table. Dollar amounts are in thousands except per-share data.
Financial Performance and Position
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total interest income | $42,914 | $43,944 | Down $1,030 |
| Net interest income | $38,731 | $39,045 | Down 0.8% |
| Provision for loan losses | $2,009 | $1,641 | Up $368 |
| Noninterest income | $9,486 | $9,120 | Up 4.0% |
| Noninterest expense | $25,635 | $24,432 | Up 4.9% |
| Net income | $15,833 | $16,914 | Down 6.4% |
| Diluted EPS | $2.28 | $2.43 | Down $0.15 |
| Net interest margin | 3.86% | 4.00% | Down 14 bps |
| Return on average assets | 1.37% | 1.51% | Down 14 bps |
| Return on average equity | 9.22% | 10.72% | Down 150 bps |
At December 31, 2015, total assets were $1,199,739, loans net were $610,711, securities were $389,288, deposits were $1,018,859, and stockholders’ equity was $172,114. Loans grew 2.3%, deposits grew 3.7%, and assets grew 3.9%, with growth funded internally and through customer deposits. Commercial real estate represented approximately 50% of the loan portfolio, including $200,521 of loans for college housing and professional office buildings.
Net cash provided by operating activities was $20,529, compared with $20,338 in 2014. Investing activities used $49,945, principally from securities purchases and net loan growth, while financing activities provided $28,674 from deposit changes, partly offset by $7,930 of dividends. Cash and due from banks ended at $12,152.
The filing reports no outstanding discount-window borrowings, short-term borrowings, or Federal Home Loan Bank advances at year-end. The loan-to-deposit ratio was 60.76%, below the company’s stated policy range of 65% to 75%. Management reported sufficient liquidity, adequate liquidity under stress scenarios, and no material long-term debt or capital-expenditure commitments.
Material Changes Versus the Prior Comparable Period
- Profitability weakened as net interest income and the net interest margin declined in the low-rate environment.
- Interest expense fell $716 as higher-cost certificates of deposit repriced lower, partially offsetting the $1,030 decline in interest income.
- Noninterest income increased $366, led by higher credit-card fees and other income, including a $100 vendor signing incentive. Deposit service charges declined $184.
- Noninterest expense increased $1,203, primarily from a $916 increase in salaries and benefits and a $239 increase in net other-real-estate-owned costs.
- Asset quality improved overall: nonperforming loans declined to $6,682 from $9,287, and nonperforming assets declined to $10,847 from $14,031. However, net charge-offs increased to $1,975, or 0.32% of average loans, from $1,605, or 0.27%.
- The allowance for loan losses increased modestly to $8,297, while coverage of nonperforming loans improved to 124.17% from 88.97%.
- Common stock dividends increased to $1.14 per share from $1.13. No shares were repurchased under the authorized 100,000-share program.
- Accumulated other comprehensive loss increased to $7,937, primarily from unrealized securities losses and pension-related losses.
Guidance, Outlook, Risks, Contingencies and Unusual Items
The filing provides no formal earnings or revenue guidance. Management expected the Federal Reserve’s December 2015 rate increase to have a small positive effect on future net interest income, but stated that the timing and magnitude of future rate increases were uncertain. Rising rates could initially pressure earnings because deposits may reprice faster than loans.
Key risks include deterioration in the southwest Virginia economy, reduced state funding for universities, commercial real-estate and small-business credit exposure, declining collateral values, higher loan losses, deposit competition, regulatory and compliance costs, cybersecurity and third-party technology risks, and pressure on noninterest income from changing regulation and consumer behavior. Management noted $228 of loans in foreclosure, which could increase future foreclosure and other-real-estate-owned costs. The company had $125,934 of commitments to extend credit, $15,248 of standby letters of credit, and $17,571 of mortgage loans sold with potential recourse.
Basel III capital rules became effective for the company in 2015. The company and bank were reported as well capitalized, with NBI consolidated total risk-based capital of 25.5%, Tier 1 risk-based capital of 24.4%, and Tier 1 leverage of 15.1%. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the decline in net interest margin persists as interest rates and deposit costs change.
- The quality and concentration of commercial real-estate loans, particularly college housing and office-property exposure.
- Whether higher charge-offs, foreclosures, bankruptcies, or local economic weakness require additional loan-loss provisions.
- The sustainability of dividend payments, given reliance on dividends from the bank subsidiary and regulatory dividend restrictions.
- The impact of unrealized securities losses, pension underfunding, and future capital requirements.
- The status and potential loss exposure of foreclosure loans, unfunded commitments, standby letters of credit, and mortgage recourse obligations.