National Bankshares, Inc. — Q2 2011 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 25 offices in southwest Virginia. National Bankshares Financial Services provides investment and insurance services, but contributed an insignificant amount of income. The filing covers the quarter and six months ended June 30, 2011; interim financial statements are unaudited. Dollar amounts are in thousands except per-share data.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total interest income | $12,475 vs. $12,347 | $24,940 vs. $24,587 |
| Net interest income | $10,129 vs. $9,497 | $20,215 vs. $18,758 |
| Provision for loan losses | $753 vs. $852 | $1,553 vs. $1,499 |
| Noninterest income | $2,090 vs. $2,123 | $4,024 vs. $4,094 |
| Noninterest expense | $6,025 vs. $5,697 | $12,109 vs. $11,481 |
| Net income | $4,216 vs. $3,996 | $8,240 vs. $7,765 |
| Basic and diluted EPS | $0.61 vs. $0.58 | $1.19 vs. $1.12 |
| Dividends declared per share | $0.48 vs. $0.44 | $0.48 vs. $0.44 |
- Six-month net interest margin was 4.64%, compared with 4.55% for the prior-year period and 4.52% at December 31, 2010. Management attributed the improvement primarily to lower funding costs, especially lower time-deposit costs.
- Annualized return on average assets was 1.63% and return on average equity was 12.48%, compared with 1.57% and 12.07%, respectively, for the year ended December 31, 2010.
- At June 30, 2011, total assets were $1.035 billion, net loans were $585.1 million, securities were $327.1 million, deposits were $892.2 million, and stockholders’ equity was $136.3 million.
- Gross loans increased 2.98% from year-end 2010, led by a 7.74% increase in commercial and industrial loans. Consumer loans declined 3.82%.
- Cash provided by operating activities was $10.6 million for the six months, compared with $7.3 million in the prior-year period. Investing activities used $11.7 million, financing activities provided $4.3 million, and cash and due from banks increased by $3.3 million to $13.1 million.
- The company had no long-term debt, purchased deposits, discount-window borrowings, short-term borrowings, or Federal Home Loan Bank advances at June 30, 2011. The loan-to-deposit ratio was 66.53%, within management’s stated 65%–75% policy range.
- Tier I and Tier II risk-based capital ratios were 18.66% and 19.90%, respectively. Management stated that the company was well capitalized.
Material changes versus comparable periods
- Six-month net income increased $475, or approximately 6.1%, while second-quarter net income increased $220, or approximately 5.5%.
- Six-month net interest income increased $1.46 million, or approximately 7.8%, despite a 21-basis-point decline in the yield on interest-earning assets. The cost of interest-bearing liabilities declined 35 basis points.
- Six-month noninterest income decreased $70, primarily because service charges on deposits declined $226, partially offset by a $134 increase in credit card fees.
- Six-month noninterest expense increased $628, or approximately 5.5%. Notable increases included FDIC assessments, data processing and ATM costs, credit card processing, salaries and benefits, and other real-estate-owned costs.
- Total deposits increased $7.6 million, or 0.86%, from year-end. Non-time deposits increased $27.9 million, while time deposits declined $20.3 million as customers migrated away from longer-term certificates of deposit in the low-rate environment.
- Nonperforming loans declined to $6.85 million from $8.07 million at December 31, 2010 and $7.17 million at June 30, 2010. Nonperforming assets were $8.70 million, or 1.46% of loans plus other real estate owned.
- The allowance for loan losses increased to $8.49 million, or 1.43% of loans, from $7.66 million, or 1.33%, at year-end 2010. The annualized net charge-off ratio improved to 0.25% from 0.46% at year-end 2010.
Guidance, outlook, risks, contingencies, and unusual items
- No quantitative earnings or revenue guidance was provided. Management stated that any further increase in the allowance or provision for loan losses would likely reflect refinement of loss estimates and was not expected to dramatically affect net income.
- Management expects continued weakness in the economy and real estate markets could increase unemployment, delinquencies, foreclosures, other real estate owned, and related expenses. The company’s markets are also exposed to reductions in state funding for public colleges and universities.
- Management expects other-real-estate-owned balances and related expenses may increase as the slow economic recovery and weak real estate market continue to affect borrowers; future balances cannot be predicted accurately.
- Credit card and debit-card-related fee income may be affected by provisions of the Dodd-Frank Act governing interchange fees, although the timing and magnitude were not known.
- Interest-rate risk is a significant market risk. Management reported no changes that would significantly alter the interest-rate risk results disclosed in the 2010 Form 10-K.
- The securities portfolio included $65.6 million of temporarily impaired securities with $1.45 million of unrealized losses; management determined that none was other-than-temporarily impaired.
- Off-balance-sheet commitments included lines of credit and standby letters of credit. Historical drawdowns have not reached the full approved amounts, and the company considered mortgage-sale recourse exposure immaterial. No material changes occurred other than normal seasonal fluctuations.
- The company made a $292,000 pension contribution during the quarter. The 2011 minimum required contribution, after considering the plan’s prefunding balance, was reported as zero.
- Management reported no material legal proceedings, no stock repurchases, no defaults on senior securities, and no material subsequent events through the filing date.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2011, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the sustainability of the improved net interest margin as time-deposit costs decline and asset yields remain under pressure.
- Monitor commercial and industrial loan growth, commercial real estate exposure, impaired loans, accruing restructurings, and the allowance coverage ratio.
- Assess whether weak economic conditions could increase other real estate owned, credit losses, foreclosure activity, and related operating expenses.
- Evaluate the effect of Dodd-Frank interchange-fee provisions on credit card and other fee income.
- Review the securities portfolio for future unrealized losses, ratings changes, and potential other-than-temporary impairment.
- Verify capital ratios, deposit mix, liquidity sources, unfunded commitments, and the continued absence of borrowed funds or long-term debt.
- Read the 2010 Form 10-K risk factors and the complete footnotes for assumptions underlying fair values, impaired-loan measurements, pension obligations, and allowance estimates.