National Bankshares, Inc. — Form 10-Q Summary
Business context and reporting period
National Bankshares, Inc. is a Virginia financial holding company whose primary subsidiary, National Bank of Blacksburg, operates as a community bank through 25 offices and a loan production office in southwest Virginia. The filing covers the unaudited three months ended March 31, 2020, with comparative results for the three months ended March 31, 2019 and balance-sheet comparisons with December 31, 2019.
The quarter was affected by the COVID-19 pandemic for approximately one month. The Company closed branch lobbies while continuing drive-through, ATM and digital services, implemented telework and other continuity measures, and reported effective disclosure controls with no material control changes.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total interest income | $11.388 million | $11.138 million | +2.2% |
| Net interest income | $9.592 million | $9.345 million | +2.6% |
| Provision for loan losses | $479 thousand | $200 thousand | +$279 thousand |
| Noninterest income | $2.135 million | $2.489 million | -14.2% |
| Noninterest expense | $6.467 million | $6.465 million | Approximately flat |
| Income before taxes | $4.781 million | $5.169 million | -7.5% |
| Net income | $3.979 million | $4.443 million | -10.4% |
| Basic and diluted EPS | $0.61 | $0.65 | -$0.04 |
| Net interest margin | 3.20% | 3.34% | -14 basis points |
| Return on average assets | 1.22% | 1.34% | -12 basis points |
| Return on average equity | 8.42% | 8.91% | -49 basis points |
Net interest income benefited from higher average loan and taxable securities balances, but the net interest margin declined because of lower earning-asset yields, a less favorable securities mix and interest reversals related to borrower payment extensions. The effective tax rate increased to 16.77% from 14.05%.
| Balance-sheet metric | March 31, 2020 | December 31, 2019 | Change |
|---|---|---|---|
| Total assets | $1.319 billion | $1.322 billion | -0.22% |
| Loans, net | $722.243 million | $726.588 million | -0.60% |
| Securities available for sale | $439.019 million | $435.263 million | +0.86% |
| Total deposits | $1.108 billion | $1.120 billion | -1.03% |
| Stockholders’ equity | $191.559 million | $183.726 million | +4.26% |
| Allowance for loan losses | $7.240 million | $6.863 million | +$377 thousand |
Q1 2020 operating cash flow was $5.213 million, compared with $5.096 million in Q1 2019. Investing activities provided $8.471 million, while financing activities used $11.570 million. Cash and due from banks increased to $12.404 million from $10.290 million at year-end 2019.
The Company had no long-term debt, discount-window borrowings, short-term borrowings or FHLB advances at March 31, 2020. The loan-to-deposit ratio was 65.83%, within the Company’s stated 65% to 75% policy range. Management reported sufficient liquidity under stress testing and identified multiple available funding sources.
The subsidiary bank was well capitalized, with a common equity Tier 1 ratio of 22.78%, Tier 1 capital ratio of 22.78%, total capital ratio of 23.67% and leverage ratio of 14.34%.
Material changes versus the prior comparable period
- Net income decreased $464 thousand, or 10.4%, primarily because of the higher loan-loss provision and lower noninterest income.
- Noninterest income declined $354 thousand. Q1 2019 included a $538 thousand recovery of a previously recognized insurance loss; excluding that item, the decline was substantially smaller.
- The loan-loss provision increased to $479 thousand from $200 thousand, and the allowance-to-loans ratio increased to 0.99% from 0.94% at December 31, 2019 and 1.02% at March 31, 2019.
- Net charge-offs declined to $102 thousand, or 0.06% annualized of average loans, from $230 thousand, or 0.13%, in Q1 2019.
- Nonperforming assets increased to $5.036 million from $4.987 million at December 31, 2019 but remained below $5.759 million at March 31, 2019. The nonperforming-assets ratio was 0.69% versus 0.68% at year-end 2019 and 0.80% a year earlier.
- Average total assets increased 4.5% from the 2019 year-end average, while average loans increased 1.7% and average securities increased 11.6%.
- The Company repurchased no shares in Q1 2020, compared with 452,400 shares repurchased for $17.997 million in Q1 2019.
Guidance, outlook, risks and unusual items
Management did not provide formal earnings guidance. Management expects subsequent quarters to reflect the effects of COVID-19 for the full quarter and stated that the duration and economic impact of the pandemic cannot be predicted.
- As of April 30, 2020, the Company had deferred payments on 221 loans totaling $85.883 million and provided other short-term modifications on nine loans totaling $19.700 million. These short-term accommodations generally were not treated as troubled debt restructurings under applicable relief guidance.
- As of April 30, 2020, the Company had submitted 717 PPP loan applications totaling $56.1 million, with 575 approvals and 516 funded loans totaling $48.2 million. PPP loans earn 1% interest, have two-year terms and are understood by the Company to be fully government guaranteed.
- COVID-19 may reduce fee income through fee waivers and reduce interest income through payment deferrals, interest reversals and possible future nonaccruals.
- Management added eight basis points to the allowance for loan losses for increased unemployment risk and maintained the unallocated allowance surplus at its policy maximum of 5%. Management cautioned that available economic data as of March 31, 2020 did not yet capture the full pandemic impact.
- Future credit deterioration, higher unemployment, reduced collateral values, additional foreclosures, increased allowance requirements and PPP-related liabilities or credit losses could materially affect results.
- Management’s March 31 analysis did not indicate a need for updated goodwill impairment testing, and no material impairment was recorded for OREO, securities, pension obligations or lease assets. A further stock-price decline or adverse economic conditions could nevertheless trigger future goodwill testing.
- The Company identified cybersecurity, payment fraud, vendor disruption, business-continuity and pandemic-related operational risks. It previously experienced two cybersecurity incidents, in 2016 and 2017, but reported no litigation against the Company associated with those breaches as of the filing.
Most important facts for investors to verify
- Whether COVID-19 loan deferrals convert into higher nonaccrual loans, TDRs, charge-offs or materially higher allowance requirements.
- The ultimate funding, forgiveness and guarantee performance of the PPP loan portfolio and any related fee income or servicing costs.
- Deposit trends, liquidity usage, funding costs and whether the loan-to-deposit ratio remains within policy.
- Changes in net interest margin as lower rates, payment deferrals and securities reinvestment affect asset yields and funding costs.
- Commercial real estate exposure, criticized loans, foreclosure activity and potential declines in collateral values.
- Future noninterest income trends, particularly after the nonrecurring insurance recovery included in Q1 2019.
- Whether the Company’s strong capital ratios remain intact if credit losses or securities valuation changes increase.