Business Context and Reporting Period
Company: National Bankshares, Inc. (NBI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: NBI is a financial holding company based in Southwest Virginia with two wholly-owned subsidiaries: The National Bank of Blacksburg (NBB), a community bank with 25 locations, and National Bankshares Financial Services, Inc. (NBFS). NBB is the primary revenue generator. The company operates in a low-interest-rate environment amidst a global recession, though its specific trade area has been somewhat insulated due to a diverse economy including public educational institutions.
Key Financial Metrics
| Metric ($ in thousands) | Q3 2009 (3 Months) | YTD 2009 (9 Months) | YTD 2008 (9 Months) |
|---|---|---|---|
| Total Assets | $965,888 | $965,888 | $935,374 |
| Total Deposits | $835,873 | $835,873 | $817,848 |
| Total Loans (Net) | $575,188 | $575,188 | $569,699 |
| Net Interest Income | $8,740 | $25,343 | $23,175 |
| Net Income | $3,780 | $10,524 | $10,265 |
| Diluted EPS | $0.54 | $1.52 | $1.48 |
| Return on Average Assets | N/A | 1.45% | 1.51% (FY 2008) |
| Return on Average Equity | N/A | 12.20% | 12.52% (FY 2008) |
| Net Interest Margin | N/A | 4.13% | 4.12% (FY 2008) |
| Allowance for Loan Losses | $6,453 | $6,453 | $5,858 |
| Nonperforming Loans | $3,888 | $3,888 | $1,333 |
Material Changes vs. Prior Period
- Profitability: Net income for the nine months ended September 30, 2009, increased to $10.5 million from $10.3 million in the prior year period. However, Return on Average Assets (ROAA) and Return on Average Equity (ROAE) declined slightly due to asset growth outpacing earnings growth.
- Interest Income/Expense: Net interest income rose 9.4% year-over-year to $25.3 million. This was driven by a $1.9 million decrease in interest expense (due to lower rates and prudent pricing) and a modest increase in interest income.
- FDIC Expenses: Noninterest expenses increased significantly, primarily due to FDIC insurance premiums rising from $90,000 in the first nine months of 2008 to $1.4 million in 2009. This included a special assessment to replenish the Deposit Insurance Fund.
- Asset Quality: Nonperforming loans increased by $2.6 million (191%) to $3.9 million, and loans past due 90 days or more increased to $2.2 million. Consequently, the allowance for loan losses was increased to 1.11% of total loans (up from 1.02% at year-end 2008).
- Loan Portfolio Composition: Commercial and industrial loans grew 9.2%, while real estate construction loans declined 21.6% as projects were completed and converted to permanent financing. Loans to individuals declined 7.7%.
Guidance, Outlook, and Risks
- Economic Outlook: Management notes that while the recession may have ended, the recovery is expected to be slow, with unemployment likely to rise before declining. This poses a risk of increased delinquencies and foreclosures.
- Interest Rate Sensitivity: The company benefits from the current low, stable interest rate environment. However, management anticipates that if rates rise, the net interest margin may narrow as deposit rates increase faster than loan rates.
- FDIC Assessments: The FDIC proposed a rule requiring institutions to prepay risk-based assessments for 2009-2012. Management believes the company has sufficient liquidity to meet these requirements without material impact.
- Capital Position: The company remains well-capitalized with Tier I and Tier II risk-based capital ratios of 16.40% and 17.37%, respectively, significantly exceeding regulatory minimums.
- Securities Portfolio: The company holds $82.6 million in securities with unrealized losses of $2.6 million. Management has determined these are temporary impairments and does not intend to sell them before recovery.
Investor Verification Checklist
- FDIC Impact: Verify the final impact of the proposed FDIC prepayment rule on future cash flows and liquidity.
- Asset Quality Trends: Monitor the trajectory of nonperforming loans and the adequacy of the allowance for loan losses given the slow economic recovery.
- Deposit Mix: Assess the sustainability of the shift from time deposits to noninterest-bearing and interest-bearing demand deposits.
- Construction Loan Exposure: Review the conversion of real estate construction loans to commercial loans and the associated credit risk in the commercial real estate sector.
- Securities Valuation: Track the duration of unrealized losses in the securities portfolio to ensure they remain classified as temporary impairments.