National Bankshares, Inc. — Form 10-Q Summary
Business context and reporting period
National Bankshares, Inc. is a Virginia financial holding company whose principal subsidiary, National Bank of Blacksburg, operates as a community bank serving southwest Virginia through 25 offices and a loan production office. The filing covers the unaudited three months ended March 31, 2021, compared primarily with the three months ended March 31, 2020 and December 31, 2020 balance-sheet amounts.
Results remained affected by the COVID-19 pandemic, historically low interest rates, government stimulus and PPP lending. Management expected branch lobbies to reopen in May 2021 and reported no material pandemic-related business-continuity expenditures.
Key financial metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total interest income | $10.882 million | $11.388 million | (4.4%) |
| Net interest income | $10.027 million | $9.592 million | +4.5% |
| Provision for loan losses | $0.050 million | $0.479 million | (89.6%) |
| Noninterest income | $2.334 million | $2.135 million | +9.3% |
| Noninterest expense | $6.536 million | $6.467 million | +1.1% |
| Net income | $4.766 million | $3.979 million | +19.8% |
| Diluted EPS | $0.74 | $0.61 | +$0.13 |
| Net interest margin | 2.89% | 3.20% | (31 bps) |
| Return on average assets | 1.19% | 1.16% | +3 bps |
| Return on average equity | 9.30% | 8.03% | +127 bps |
| Efficiency ratio | 53.87% | 55.67% | Improved |
Net interest income benefited from lower deposit funding costs and PPP-related interest and fee income, despite lower asset yields. PPP loans contributed approximately $100,000 of interest income and $550,000 of net fee recognition; excluding PPP loans, management stated that net interest margin would have been 2.71%.
Financial condition, liquidity and capital
| Balance-sheet item | March 31, 2021 | December 31, 2020 | Change |
|---|---|---|---|
| Total assets | $1.568 billion | $1.520 billion | +3.19% |
| Loans, net | $770.824 million | $760.318 million | +1.38% |
| Securities available for sale | $571.359 million | $546.742 million | +4.51% |
| Total deposits | $1.359 billion | $1.297 billion | +4.74% |
| Stockholders’ equity | $189.069 million | $200.607 million | (5.75%) |
- Cash and due from banks were $12.677 million, supplemented by $135.142 million of interest-bearing deposits.
- The company had no discount-window borrowings, short-term borrowings or FHLB advances at March 31, 2021, and reported sufficient liquidity under stress scenarios.
- The loan-to-deposit ratio was 57.37%, below the company’s stated policy range of 65% to 75%.
- The subsidiary bank was well capitalized, with common equity Tier 1, Tier 1, total capital and leverage ratios of 18.80%, 18.80%, 19.73% and 11.48%, respectively.
- The company had no long-term debt and no finance lease or purchase obligations at quarter-end.
Cash flow and capital actions
- Operating activities provided $6.753 million of cash, compared with $5.213 million in Q1 2020.
- Investing activities used $64.677 million, primarily reflecting purchases of available-for-sale securities and increased interest-bearing deposits.
- Financing activities provided $57.454 million, mainly from a $61.378 million increase in other deposits, partially offset by $3.991 million of share repurchases.
- The company repurchased 111,832 shares at an average price of $35.69 during the quarter. The authorized 1,000,000-share program expires May 31, 2021, subject to the company’s discretion.
Material changes versus comparable periods
- Net income increased 19.8%, supported by a substantially lower loan-loss provision, higher net interest income and higher noninterest income.
- The net interest margin declined 31 basis points because securities calls, loan refinancing and low market rates reduced asset yields. The cost of interest-bearing liabilities fell from 0.80% to 0.34%.
- Noninterest income increased primarily from higher credit and debit card fees, mortgage-loan sale gains and other income. Other income included a one-time partnership-related bonus payment.
- Service charges on deposit accounts declined 19.4%, largely because customers generated fewer overdraft and nonsufficient-funds fees.
- Loans increased 1.37% from year-end, with commercial non-real-estate loans up 10.77% and consumer real-estate loans up 2.82%. Management stated that non-PPP loan demand remained soft because of unemployment and reduced economic activity.
- Deposits increased 4.74%, led by noninterest-bearing demand deposits and savings deposits. The company reported no brokered deposits.
- Accumulated other comprehensive income shifted from a $3.020 million gain at year-end to a $9.293 million loss, primarily because of a $12.313 million after-tax unrealized loss on available-for-sale securities. This reduced total equity despite quarterly net income.
- Asset quality remained generally stable: nonperforming assets were $4.648 million, or 0.60% of loans plus OREO, versus $5.238 million and 0.68% at year-end. The allowance was $8.536 million, or 1.10% of loans, and the annualized net charge-off ratio was 0.00%.
Guidance, outlook, risks and unusual items
- No formal earnings or financial guidance was provided. Management does not expect the Federal Reserve to increase rates in the near future.
- COVID-19 remains the principal uncertainty. Extended or renewed economic disruption could increase delinquencies, charge-offs, nonaccrual loans, OREO, allowance requirements and funding costs, while reducing loan demand, interest income and fee income.
- At March 31, 2021, 13 COVID-19-modified loans totaling approximately $22.2 million remained within their modification periods. Since the start of the pandemic, 147 loans totaling $103.7 million had received both initial and subsequent modifications.
- PPP loans totaled $43.631 million net of deferred fees at quarter-end. The company had originated 1,164 PPP loans totaling $80.999 million since program inception, of which 544 loans totaling $35.862 million had been forgiven or paid off. Changes to SBA guarantees or forgiveness expectations could increase credit-loss provisions.
- The allowance included a $356,000 unallocated surplus, or 4.4% above the calculated requirement, to address COVID-19 uncertainty. The company is preparing for CECL adoption, which for this smaller reporting company is required for fiscal years and interim periods beginning after December 15, 2022; the eventual impact was not yet quantified.
- The securities portfolio had $9.002 million of gross unrealized losses at quarter-end. Management considered the securities temporarily impaired and did not expect to be required to sell them before recovery of amortized cost.
- Cybersecurity, interest-rate risk, changing real-estate values, deposit withdrawals, regulatory changes, vendor performance and broader economic conditions remain material risks. Management reported no pandemic-related cybersecurity losses or breaches.
- Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting. No material litigation was reported.
Most important facts for investors to verify
- Whether COVID-19-modified borrowers continue to perform after deferral and interest-only periods expire, particularly the 13 loans still in modification periods.
- The effect of future interest-rate movements on the 2.89% net interest margin and the unrealized losses in the securities portfolio.
- The eventual allowance impact of CECL adoption and whether credit quality deterioration requires additional provisions.
- The sustainability of Q1 noninterest income, including the one-time partnership payment and elevated PPP fee recognition.
- Progress and completion of the share-repurchase program before its May 31, 2021 expiration, and the effect of repurchases and accumulated other comprehensive losses on equity and regulatory capital.
- The company’s ability to maintain strong deposit growth and excess liquidity if customers withdraw pandemic-related deposits or loan demand recovers.