National Bankshares, Inc. — Form 10-Q Summary
Business Context and Reporting Period
National Bankshares, Inc. is a Virginia-based 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 Financial Services provides investment and insurance services but is not a significant revenue contributor. This unaudited Form 10-Q covers the three and six months ended June 30, 2023. Dollar amounts are in thousands except per-share data.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 |
|---|---|---|---|---|
| Total interest income | $14,597 | $11,922 | $28,641 | $22,972 |
| Net interest income | $9,217 | $11,275 | $20,163 | $21,670 |
| Provision for credit losses | $10 | $310 | $12 | $444 |
| Noninterest income | $2,791 | $2,112 | $4,990 | $4,403 |
| Noninterest expense | $7,557 | $6,311 | $15,221 | $12,924 |
| Net income | $3,901 | $5,574 | $8,432 | $10,460 |
| Diluted EPS | $0.66 | $0.93 | $1.43 | $1.74 |
| Net interest margin | 2.34% | 2.75% | 2.57% | 2.70% |
| Efficiency ratio | 62.58% | 46.35% | 58.06% | 48.71% |
As of June 30, 2023, total assets were $1.626 billion, down 3.10% from December 31, 2022. Net loans were $835.9 million, down 1.02%, and securities available for sale were $614.2 million, down 6.50%. Total deposits were $1.487 billion, down 3.61%. Stockholders’ equity was $128.4 million, compared with $122.7 million at year-end 2022.
- Average assets for the first half of 2023 were $1.626 billion, while average loans increased 2.20% from the 2022 year-end comparison presented by management.
- Loan yields increased as Federal Reserve rate increases flowed through adjustable-rate and newly originated loans. Deposit pricing rose substantially, causing interest expense to increase to $8.5 million for the first half from $1.3 million in the prior-year period.
- The allowance for credit losses on loans was $10.6 million, or 1.26% of loans, compared with $8.2 million, or 0.96%, at December 31, 2022.
- Nonaccrual loans were $3.1 million, and other real estate owned was $662 thousand. The ratio of nonperforming assets to loans plus OREO was 0.44%.
- Net cash provided by operating activities was $8.4 million. Investing activities provided $56.1 million, primarily reflecting securities proceeds and net loan collections. Financing activities used $65.9 million, primarily due to deposit outflows and dividends.
- The company had no long-term debt at June 30, 2023. FHLB borrowings accessed during the first quarter were fully repaid, and there were no purchased deposits, discount-window borrowings, or short-term borrowings outstanding at quarter-end.
- Available liquidity included $400.1 million of FHLB borrowing capacity, $181.2 million of unused Federal Reserve discount-window capacity, and a $10.0 million unsecured federal funds line, with no amounts advanced. The loan-to-deposit ratio was 56.93%.
- The bank was well capitalized, with a common equity Tier 1 ratio of 17.58%, total capital ratio of 18.58%, and leverage ratio of 11.30%.
Material Changes Versus the Prior Comparable Period
- Second-quarter net income declined 30.0% to $3.9 million, while first-half net income declined 19.4% to $8.4 million. Diluted EPS declined to $0.66 for the quarter and $1.43 for the first half.
- Net interest income declined 18.3% in the quarter and 7.0% year to date. The net interest margin contracted by 41 basis points in the quarter and 13 basis points year to date as deposit funding costs increased faster than asset yields.
- Noninterest income increased 32.2% in the quarter and 13.3% year to date, but results included unusual items: a $3.0 million gain on the sale of VISA Class B securities, a $1.0 million gain from a BOLI settlement, and a $3.3 million loss on securities sales.
- Noninterest expense increased 19.7% in the quarter and 17.8% year to date. The increases reflected higher compensation, FDIC assessments, professional services, data processing, and other operating expenses. Professional services included $327 thousand in second-quarter and $768 thousand in year-to-date proxy-contest-related costs.
- The company adopted CECL on January 1, 2023, increasing the loan allowance by $2.342 million and reducing retained earnings by $2.014 million, net of tax.
- Deposits shifted toward higher-cost time deposits. Time deposits increased 117.3% from year-end, while noninterest-bearing demand deposits declined 8.2%, interest-bearing demand deposits declined 9.9%, and savings deposits declined 7.6%.
- Accumulated other comprehensive loss improved to $74.2 million from $83.8 million at year-end, primarily due to improved securities valuations, although the securities portfolio remained subject to significant unrealized losses.
Outlook, Commentary, Risks, and Unusual Items
Management provided no formal earnings or revenue guidance. Management stated that many loans are adjustable-rate and that repricing could support interest income if rates remain at or above current levels. However, continued competition for deposits may further increase funding costs and pressure margins.
- The company expects construction of a new full-service branch in Roanoke, Virginia, to begin during the third quarter of 2023.
- Management believes liquidity is sufficient under projected trends and tested stress scenarios and stated that the company remains well capitalized.
- Credit risk could increase from high inflation, monetary policy, higher payments on adjustable-rate loans, rising unemployment, weaker real estate conditions, higher bankruptcy filings, and broader economic deterioration.
- Commercial real estate owner-occupied loans included $6.4 million modified for a borrower experiencing financial difficulty. The loan was current at June 30, 2023 and received six months of interest-only payments before re-amortization.
- One $7 thousand real estate loan was in foreclosure and could increase future OREO. The company held one OREO property with a net carrying value of $662 thousand.
- The securities portfolio had $91.0 million of gross unrealized losses at June 30, 2023. Management reported no credit concerns and no allowance for credit losses on these securities, attributing the losses to interest-rate and market factors.
- Cybersecurity is identified as a major business risk. Insurance provides only partial protection, and reputational damage and loss of customer goodwill may not be insurable.
- The company continues to assess the transition of a small number of participation loans that reference LIBOR.
- Management stated that it does not anticipate further material proxy-contest-related expense. No material pending legal proceedings were reported.
Important Facts for Investors to Verify
- Whether deposit outflows stabilize and whether the increasing mix of time deposits produces further funding-cost pressure.
- Whether net interest margin continues to decline as deposits reprice and as the Federal Reserve’s rate environment changes.
- The sustainability of earnings excluding the VISA securities gain, BOLI settlement gain, securities-sale loss, and proxy-contest expenses.
- Changes in unrealized securities losses, tangible capital, and the company’s ability to avoid realizing losses while meeting liquidity needs.
- Trends in criticized loans, nonaccrual loans, commercial real estate exposure, loan modifications, foreclosures, and the CECL allowance.
- Execution costs and expected returns associated with the planned Roanoke branch.
- The company’s transition plan for remaining LIBOR-linked participation loans and the adequacy of cybersecurity controls and insurance coverage.