National Bankshares, Inc. — 2023 Q1 Form 10-Q Summary
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 through 24 offices and three loan production offices. National Bankshares Investment Services and National Bankshares Insurance Services are not significant contributors to revenue. The filing covers the unaudited three months ended March 31, 2023, compared primarily with the three months ended March 31, 2022 and December 31, 2022. Amounts are in thousands except per-share data.
Financial condition and performance
| Metric | Q1 2023 | Comparable / prior period |
|---|---|---|
| Net interest income | $10,946 | $10,395 in Q1 2022 |
| Net income | $4,531 | $4,886 in Q1 2022 |
| Basic and diluted EPS | $0.77 | $0.81 in Q1 2022 |
| Net interest margin | 2.79% FTE | 2.65% in Q1 2022 |
| Efficiency ratio | 54.99% | 52.71% in Q1 2022 |
| Total assets | $1,654,277 | $1,677,551 at Dec. 31, 2022 |
| Net loans | $846,315 | $844,519 at Dec. 31, 2022 |
| Total deposits | $1,511,452 | $1,542,725 at Dec. 31, 2022 |
| Stockholders’ equity | $131,043 | $122,687 at Dec. 31, 2022 |
- Total interest income increased 27.1% to $14,044, driven by higher loan and taxable securities yields and Federal Reserve rate increases.
- Total interest expense increased to $3,098 from $655, reflecting higher deposit pricing and $285 of borrowing expense. Net interest income increased 5.3%.
- Noninterest income declined 4.0% to $2,199, primarily because mortgage-loan sale gains and other income decreased. The company recognized a $12 securities gain.
- Noninterest expense increased 15.9% to $7,664. Salaries and employee benefits rose 11.5%, while professional services increased to $753, including $441 of proxy contest-related costs.
- Income before taxes was $5,479 and income tax expense was $948, producing a 17.30% effective tax rate.
- Cash provided by operating activities was $4,333, compared with $6,685 in Q1 2022. Investing activities provided $16,062, versus $72,843 used in Q1 2022, primarily because the company made no securities purchases in Q1 2023. Financing activities used $37,163, principally reflecting deposit movements and the $5,890 special dividend.
- Cash and due from banks totaled $54,661 at March 31, 2023, compared with $120,275 at March 31, 2022.
- The company had no long-term debt at March 31, 2023. Temporary FHLB advances obtained during the quarter were fully repaid in March.
Material changes versus prior comparable periods
- Net income decreased 7.3% and EPS decreased 4.9% year over year, primarily due to proxy contest-related expenses and higher operating costs.
- Average loan balances increased to $855,093 from $803,693, and the average loan yield increased to 4.46% from 4.13%.
- Deposit costs increased materially: average interest-bearing deposit rates rose as the company responded to competition with CD promotions and other rate increases.
- Loans, net of unearned income and deferred fees, increased 0.49% from year-end. Commercial non-real-estate loans increased 4.97%, while consumer non-real-estate loans declined 2.24%.
- Total deposits declined 2.03% from year-end. Noninterest-bearing, interest-bearing demand and savings deposits decreased, partially offset by an 85.68% increase in time deposits.
- Available-for-sale securities declined 0.88% from year-end to $651,047. Unrealized losses improved to $88,218 from $103,065, increasing accumulated other comprehensive loss from $(83,766) to $(72,037).
- Stockholders’ equity increased 6.81% from year-end despite payment of a one-time $1.00-per-share special dividend, primarily because of net income and the improvement in securities-related unrealized losses.
Credit quality, liquidity, outlook and risks
- The company adopted CECL on January 1, 2023. The adoption increased the loan allowance by $2,342 and reduced retained earnings by $2,014, net of tax. The allowance for credit losses on loans was $10,650, or 1.24% of loans, at March 31, 2023, compared with 0.96% at year-end 2022.
- Q1 provision expense was $2, compared with $134 in Q1 2022. Nonaccrual loans were $2,814, and the allowance covered nonaccrual loans by 378.46%. Net charge-offs were negative, reflecting net recoveries.
- Management’s CECL forecast assumed rising national unemployment over the next 12 months. Higher interest rates and a 7.33% increase in high-risk loans contributed to higher estimated credit losses.
- Other real estate owned was $662, consisting of one construction property. Loans in foreclosure totaled $95. Future real estate values and foreclosure activity could affect loss recognition.
- Liquidity was described as sufficient under management’s projected trends and stress scenarios. The loan-to-deposit ratio was 56.70%. At March 31, 2023, the company had $402,089 of FHLB borrowing capacity, a $10,000 unsecured federal funds line and $15,629 of unused Federal Reserve discount-window capacity. Additional securities pledged in April increased discount-window capacity to $67,878 as of April 30, 2023.
- Approximately 24% of non-municipal deposits were uninsured; the company had no brokered deposits. Deposit competition, deposit outflows and the maturity of promotional CDs remain key liquidity and funding risks.
- National Bank of Blacksburg was well capitalized, with a common equity Tier 1 ratio of 17.00%, total capital ratio of 18.00% and leverage ratio of 11.01%.
- Management stated that loan demand had contracted under current economic conditions but that the company remained positioned to make loans meeting its underwriting standards. No specific earnings or revenue guidance was provided.
- Key risks include interest-rate changes, inflation, monetary policy, economic and real-estate weakness, unemployment, deposit competition, credit deterioration, cybersecurity incidents, technology and vendor risks, regulatory changes and the transition of a small number of LIBOR-linked participation loans.
- The company reported no material pending legal proceedings, no material changes in off-balance-sheet arrangements and effective disclosure controls as of March 31, 2023.
Most important facts for investors to verify
- Reconcile the reported net interest margin across the filing’s non-GAAP tables and confirm the effect of further deposit repricing on future margins.
- Monitor deposit balances, uninsured deposits, promotional CD maturities, borrowing capacity and reliance on securities or wholesale funding.
- Evaluate CECL assumptions, particularly unemployment forecasts, high-risk loan trends, commercial real-estate exposure and the increase in the allowance ratio to 1.24%.
- Assess the sensitivity of accumulated other comprehensive loss and capital to changes in interest rates and available-for-sale securities valuations.
- Determine whether proxy contest-related expenses were nonrecurring and whether operating expenses normalize after Q1.
- Review the one-time $1.00-per-share dividend, future capital distributions and the bank’s regulatory capital ratios.
- Verify developments related to the $95 of loans in foreclosure, the $662 OREO property and the company’s transition from LIBOR-linked contracts.