Business Context and Reporting Period
National Bankshares, Inc. is a Virginia financial holding company whose primary subsidiary, The National Bank of Blacksburg, operates as a community bank through 24 offices and two loan production offices. The company also owns investment and insurance services subsidiaries. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared primarily with the same 2021 periods and December 31, 2021.
Financial Performance and Position
| Metric | Q3 2022 | Q3 2021 | Change |
|---|---|---|---|
| Total interest and noninterest income | $14.5 million | $12.9 million | 12.5% |
| Net interest income | $12.4 million | $10.9 million | 13.4% |
| Provision for loan losses | $252 thousand | Recovery of $392 thousand | Unfavorable shift |
| Noninterest income | $2.1 million | $2.0 million | 7.4% |
| Noninterest expense | $6.7 million | $6.4 million | 5.8% |
| Net income | $6.2 million | $5.8 million | 7.1% |
| Diluted EPS | $1.03 | $0.94 | 9.6% |
| Net interest margin | 2.95% | 2.83% | Up 12 basis points |
| Efficiency ratio | 45.59% | 48.34% | Improved |
For the nine months ended September 30, 2022, total interest and noninterest income was $40.6 million, net interest income was $34.1 million, net income was $16.6 million, and diluted EPS was $2.77, compared with $37.3 million, $31.0 million, $15.1 million, and $2.42, respectively, in the prior-year period. The nine-month net interest margin was 2.79% versus 2.81%, while the efficiency ratio improved to 48.03% from 51.54%.
At September 30, 2022, total assets were $1.699 billion, loans net of allowance were $844.7 million, securities available for sale were $657.4 million, and total deposits were $1.571 billion. Loans increased 6.17% and deposits increased 5.09% from December 31, 2021. The company had no bank borrowings and no long-term debt.
Operating cash flow for the first nine months was $18.3 million. Investing activities used $84.1 million, primarily reflecting purchases of securities and loan growth, while financing activities provided $68.0 million through deposit growth. Cash and due from banks increased by $2.2 million to $11.0 million.
Stockholders’ equity declined to $112.2 million from $191.8 million at December 31, 2021, principally because accumulated other comprehensive loss increased to $92.2 million from $4.1 million. The loss was driven by after-tax unrealized losses on available-for-sale securities and did not reduce reported net income. The bank remained well capitalized, with Common Equity Tier 1, Tier 1, total capital, and leverage ratios of 17.52%, 17.52%, 18.26%, and 10.88%, respectively.
Material Changes Versus Comparable Periods
- Net interest income benefited from Federal Reserve rate increases, higher earning assets, and lower deposit funding costs. Interest income on interest-bearing deposits and taxable securities increased substantially, while loan interest income declined partly because 2021 included significant PPP loan fees.
- Loan balances grew 6.18% from year-end, led by real estate construction, consumer real estate, and commercial real estate loans. Commercial non-real-estate loans declined 13.03%.
- The loan-loss provision shifted from a $338 thousand recovery in the first nine months of 2021 to a $696 thousand provision in 2022, reflecting loan growth, higher interest rates, increased high-risk loans, and certain worsening economic indicators.
- Nonperforming assets were $3.8 million, or 0.44% of loans plus other real estate owned, versus 0.48% at year-end 2021. The allowance was $8.2 million, or 0.96% of loans, and covered nonperforming loans by 284.18%.
- Noninterest income increased, primarily from higher deposit service charges, trust income, and BOLI income. Mortgage loan sale gains declined as higher interest rates reduced refinancing and purchase activity.
- Share repurchases totaled 106,662 shares for the nine months and 23,500 shares in the third quarter. The company paid $0.72 per share in dividends through September 30, 2022, compared with $0.70 per share in the prior-year period.
- Available-for-sale securities had an amortized cost of $765.4 million and fair value of $657.4 million, including $108.1 million of gross unrealized losses. Management classified these losses as temporary and stated that no securities sales were anticipated.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide specific earnings, revenue, margin, or balance-sheet guidance. Management reported sufficient liquidity, a 54.30% loan-to-deposit ratio, no borrowings, and adequate liquidity under tested stress scenarios. The bank had access to the Federal Reserve discount window and Federal Home Loan Bank funding sources and was considered well capitalized.
Key risks include interest-rate changes, inflation, economic weakness, credit deterioration, real estate values, deposit flows, loan demand, competition, regulatory developments, cybersecurity threats, vendor performance, and potential renewed COVID-19 effects. Rising rates have reduced the fair value of the securities portfolio and could increase payment burdens for variable-rate borrowers.
At September 30, 2022, loans in various stages of foreclosure totaled $224 thousand, and future foreclosures could increase other real estate owned. The company reported no material pending or threatened legal proceedings and no material changes in off-balance-sheet arrangements. Potential mortgage-sale recourse exposure was considered immaterial, and no recourse provisions had been invoked.
The company is preparing for adoption of the current expected credit loss standard and related amendments effective for smaller reporting companies for fiscal years beginning after December 15, 2022. The filing states that the impact has not yet been determined.
In October 2022, the company completed the sale of stock of a securities brokerage firm and recognized a pretax gain of $3.823 million, which will be reported in fourth-quarter 2022 results.
Most Important Facts to Verify
- Whether unrealized securities losses continue to expand or reverse as interest rates and bond valuations change.
- The effect of CECL adoption on the allowance for loan losses, retained earnings, and regulatory capital.
- Loan growth and concentration, particularly in commercial real estate and construction lending.
- Deposit stability and funding costs as pandemic-related deposit inflows normalize and competition for deposits increases.
- Future nonperforming loans, criticized assets, foreclosures, and other real estate owned.
- The timing and after-tax impact of the $3.823 million brokerage-sale gain in fourth-quarter results.
- Whether strong regulatory capital and liquidity metrics remain intact despite the substantial decline in reported book value from accumulated other comprehensive losses.