Hilton Capital Management Issues Letter Urging National Bankshares' Stockholders to Demand Return of Excess Capital

GARDEN CITY, N.Y., June 5, 2018 /PRNewswire/ -- Portfolio Managers for Hilton Capital Management's Financial Opportunities Strategy issued the following letter to National Bankshares stockholders:

Dear National Bankshares Stockholders:

How much of your money do you keep under your mattress?

As of March 31, 2018, National Bankshares had approximately $193 million of Tier 1 Common Capital--around $28 dollars per share—and roughly half of that is essentially being kept under a mattress.

According to National Bankshares' most recent 10-Q, they have around three times the amount of capital required by regulators, which seems more than excessive.

Like money under a mattress, National Bankshares' excess capital is effectively creating no value and generally not doing anyone any good.  Rather than continuing to keep stockholders' capital under a mattress, we would prefer National Bankshares to either put it to good use or return it to stockholders.

Given that National Bankshares grew net loans (their primary earning asset) during the first quarter by -1.34%, we are (justifiably) skeptical regarding National Bankshares' prospects of putting their excess capital to work in a profitable manner.  Rather than forcing loan growth, and potentially taking unnecessary risks or accepting uneconomic terms, we would prefer National Bankshares to immediately take steps to return excess capital to stockholders.

It is not clear to us why National Bankshares has allowed their capital position to become so excessive and in our (admittedly limited) interchanges with National Bankshares' CEO, no real explanations have been offered.  While we would appreciate it if National Bankshares would address this issue with all stockholders, here are our best guesses as to possible reasons and what our rebuttals would be:

We want to be prepared to take advantages for growth in the future, whether organically or through acquisitions

Given National Bankshares' recent track record with respect to organic growth, any excess capital earmarked for that purpose would be better off in the hands of stockholders.

As far as acquisitions go, we believe retaining earnings to create a large cash stockpile is extremely inefficient from a corporate finance perspective.  In addition, we believe that the impact of National Bankshares' excess capital on its valuation multiples makes their stock less attractive as an acquisition currency.

We want to prepared in case of a sudden or sharp economic downturn

Based on our comparison of National Bankshares' Loan Loss Reserve, it seems more than adequate, particularly when compared to peers and assuming that National Bankshares has been prudent in its underwriting.  Obviously, National Bankshares should review their Loan Loss Reserve to assess its adequacy. But, in our view, that is the proper way to prepare for an economic downturn.  Some additional capital cushion is obviously acceptable, but National Bankshares' capital cushion crossed the line from reasonable to excessive quite a while ago.

To the extent that you agree that National Bankshares should return excess capital to its stockholders, please let National Bankshares' management and directors know that now is the time to adopt and implement a comprehensive capital return policy.

About Hilton Capital Management, LLC

Hilton Capital Management is a privately held investment management boutique based in Garden City, NY. Founded in 2001, the firm manages over $1.4 billion in balanced and equity strategies on behalf of a diverse client base comprised of corporate and public pensions, endowments, foundations, sub-advisory, family offices, wealth managers, financial advisors and individuals, nationwide. Hilton emphasizes integrity, transparency, and the alignment of the firm's interests with its clients. For more information, please visit www.hiltoncapitalmanagement.com.

Hilton Capital Management ("HCM" or the "Firm") is a registered investment adviser with its principal place of business in the State of New York. HCM and its representatives are in compliance with the current registration requirements imposed upon registered investment advisers by those states in which HCM maintains clients. HCM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.

SOURCE Hilton Capital Management

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