National Bankshares, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015. National Bankshares is a Virginia financial holding company whose primary operating subsidiary, The National Bank of Blacksburg, operates 26 offices in southwest Virginia. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | Three months ended Sept. 30, 2015 | Three months ended Sept. 30, 2014 | Nine months ended Sept. 30, 2015 | Nine months ended Sept. 30, 2014 |
|---|---|---|---|---|
| Net interest income | $9.751 million | $9.800 million | $29.131 million | $29.320 million |
| Net income | $4.199 million | $4.263 million | $12.275 million | $12.776 million |
| Basic EPS | $0.60 | $0.61 | $1.77 | $1.84 |
| Diluted EPS | $0.60 | $0.61 | $1.76 | $1.84 |
| Total noninterest income | $2.289 million | $2.258 million | $7.018 million | $6.836 million |
| Total noninterest expense | $6.322 million | $6.115 million | $19.378 million | $18.314 million |
| Net interest margin | 3.89% | 3.98% | 3.90% | 4.03% |
- Profitability: Third-quarter net income declined 1.5%; nine-month net income declined 3.9%. Return on average assets was 1.46% for the quarter and 1.43% for the nine-month period. Return on average equity was 9.70% and 9.60%, respectively.
- Balance sheet: Assets were $1.144 billion at September 30, 2015, compared with $1.155 billion at December 31, 2014. Net loans were $617.638 million, up 3.4% from year-end, while total deposits were $962.530 million, down 2.0%.
- Loan mix and growth: Commercial real estate loans were $315.008 million. Public sector and IDA loans increased 26.5% from year-end, commercial non-real-estate loans increased 17.5%, and consumer non-real-estate loans increased 7.0%.
- Credit costs and asset quality: The provision for loan losses was $178,000 in the third quarter and $734,000 for nine months, compared with $356,000 and $1.160 million, respectively, in the prior-year periods. The allowance for loan losses was $8.117 million, or 1.30% of loans. The annualized net charge-off ratio was 0.19%.
- Nonperforming assets: Nonperforming loans were $8.988 million and total nonperforming assets were $13.182 million, equal to 2.09% of loans plus other real estate owned. Other real estate owned was $4.194 million.
- Cash flow: Operating activities provided $15.020 million and investing activities provided $7.989 million during the first nine months. Financing activities used $23.457 million, primarily reflecting a $19.575 million reduction in time deposits and $3.686 million of dividends paid. Cash and due from banks ended at $12.446 million.
- Capital and liquidity: Stockholders’ equity was $174.392 million, up 4.9% from year-end. Common Equity Tier 1, Tier 1, total capital, and leverage ratios were 24.38%, 24.38%, 25.50%, and 15.44%, respectively, well above stated regulatory minimums. The loan-to-deposit ratio was 65.01%, within the company’s 65% to 75% internal target.
- Debt: The company reported no long-term debt, purchased deposits, discount-window borrowings, short-term borrowings, or Federal Home Loan Bank advances at September 30, 2015.
Material Changes Versus Comparable Periods
- Net interest income was essentially flat, but the net interest margin declined because earning-asset yields fell faster than funding costs. Loan yields declined 30 basis points in the quarter and 33 basis points for nine months.
- Noninterest income increased 1.4% in the quarter and 2.7% for nine months, supported by higher credit card fees and other income. Deposit service charges declined.
- Noninterest expense increased 3.4% in the quarter and 5.8% for nine months. Salaries and employee benefits rose 7.6% and 6.1%, respectively. Nine-month expense also reflected a 119.7% increase in net costs of other real estate owned, including valuation write-downs.
- Loan growth was funded partly through a reduction in securities, interest-bearing deposits, and time deposits. Management attributed the decline in time deposits partly to historically low rates and customer reluctance to commit funds for longer terms.
- Asset quality generally improved from December 31, 2014: nonperforming assets declined from $14.031 million, the nonperforming-asset ratio declined from 2.30%, and criticized loans as a percentage of loans declined from 5.01% to 4.49%. However, nonperforming loans increased from $9.287 million to $8.988 million? The filing reports $8.988 million at September 30, 2015 versus $9.287 million at December 31, 2014, indicating a decrease.
- Accumulated other comprehensive loss increased to $6.299 million from $5.672 million at year-end, primarily due to unrealized losses on available-for-sale securities.
Outlook, Risks, Contingencies, and Unusual Items
- The filing provides no specific earnings, revenue, margin, or balance-sheet guidance.
- Management expects results to remain sensitive to interest rates, economic conditions, competition, deposit flows, loan demand, regulatory and accounting changes, unemployment, real estate conditions, and technology initiatives.
- The company describes a slow economic recovery in its market area. Higher unemployment, reduced university funding, weaker consumer demand, business failures, or declining real estate values could increase delinquencies, foreclosures, credit losses, and other real estate owned.
- Total troubled debt restructurings were $11.861 million, including $5.781 million in nonaccrual status and $6.080 million accruing. One loan was restructured during the first nine months of 2015; no TDRs were modified during the third quarter.
- The securities portfolio included $6.147 million of unrealized losses on 210 temporarily impaired securities. Management stated it did not intend to sell these investments and did not expect to be required to sell them before recovery of amortized cost.
- Approximately $151,000 of residential properties were in various stages of foreclosure and could affect future other real estate owned. The timing and amount of future additions or disposals cannot be predicted reliably.
- There were no material pending or threatened legal proceedings, no material changes in off-balance-sheet arrangements, and no material operating lease or purchase obligations. Mortgage-sale recourse exposure was described as immaterial, and no recourse provisions had been invoked.
- Management concluded that disclosure controls were effective as of September 30, 2015 and reported no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether continued loan growth can offset declining earning-asset yields and pressure on the net interest margin.
- Trends in commercial real estate, public sector, and other growing loan categories, including related concentrations and criticized loans.
- Whether nonperforming loans, TDRs, OREO, and collateral values improve or require additional provisions and write-downs.
- The sustainability of deposit funding as time deposits and total deposits decline.
- The impact of interest-rate changes on securities valuations, funding costs, loan yields, and accumulated other comprehensive income.
- Whether rising salaries, franchise taxes, credit-card processing costs, and OREO expenses continue to outpace noninterest-income growth.
- Future dividend capacity and capital requirements, including the phased-in capital conservation buffer beginning January 1, 2016.