National Bankshares, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2012. The interim financial statements are unaudited and should be read with the 2011 Form 10-K. National Bankshares is a Virginia financial holding company whose principal subsidiary, The National Bank of Blacksburg, operates 25 offices in southwest Virginia.
Financial Results and Condition
| Metric | Q1 2012 | Q1 2011 / Dec. 31, 2011 |
|---|---|---|
| Net interest income | $9,997 | $10,086 Q1 2011 |
| Provision for loan losses | $672 | $800 Q1 2011 |
| Noninterest income | $2,152 | $1,934 Q1 2011 |
| Noninterest expense | $5,711 | $6,084 Q1 2011 |
| Net income | $4,429 | $4,024 Q1 2011 |
| Basic and diluted EPS | $0.64 | $0.58 Q1 2011 |
| Total assets | $1,083,842 | $1,067,102 at Dec. 31, 2011 |
| Net loans | $576,501 | $580,402 at Dec. 31, 2011 |
| Total deposits | $931,792 | $919,333 at Dec. 31, 2011 |
| Stockholders’ equity | $144,792 | $141,299 at Dec. 31, 2011 |
Profitability: Return on average assets was 1.67% and return on average equity was 12.40%, both annualized. Net interest margin was 4.36%, compared with 4.59% for full-year 2011 and 4.68% on a comparable Q1 2011 tax-equivalent basis. Noninterest margin was 1.36%, compared with 1.45% for 2011.
Cash flow: Operating activities provided $7,657. Investing activities used $19,772, primarily reflecting net purchases of securities. Financing activities provided $12,459, principally from growth in non-time deposits. Cash and due from banks increased $344 to $12,241.
Liquidity and capital: The company had no purchased deposits, discount-window borrowings, short-term borrowings, or Federal Home Loan Bank advances at March 31, 2012. The loan-to-deposit ratio was 62.74%, below the company’s internal 65%–75% target range. Management stated that liquidity was sufficient under tested scenarios. Tier I and Tier II risk-based capital ratios were 20.50% and 21.71%, respectively, significantly above stated regulatory minimums. The company had no long-term debt.
Material Changes from Comparable Periods
- Net income increased 10.1% year over year, while EPS increased from $0.58 to $0.64.
- Net interest income declined 0.9% as lower earning-asset yields more than offset lower funding costs. The yield on earning assets decreased 47 basis points, while the cost of interest-bearing liabilities decreased 20 basis points.
- Noninterest income increased 11.3%, led by higher credit card fees, trust income, bank-owned life insurance income, and realized securities gains.
- Noninterest expense decreased 6.1%, primarily because the FDIC assessment declined $237 following a change in the assessment formula, with additional reductions in other real estate owned costs, data processing, and franchise taxes.
- Loans, net of unearned income and deferred fees, decreased 0.66% from year-end, while deposits increased 1.36%. Deposit growth was concentrated in non-time deposits; time deposits declined 1.61% as customers migrated away from low-yield certificates of deposit.
- The allowance for loan losses was $8,063, or 1.38% of loans, versus $8,068 and 1.37% at year-end. Net charge-offs were $677, and the annualized net charge-off ratio increased to 0.46% from 0.43% at year-end and 0.15% in Q1 2011.
- Nonperforming assets declined to $6,268, or 1.07% of loans plus other real estate owned, from $6,693 at year-end and $9,875 in Q1 2011. Other real estate owned decreased to $940 from $1,489 at year-end.
- Other comprehensive loss was $936, primarily from unrealized losses on available-for-sale securities, reducing total comprehensive income to $3,493.
Outlook, Risks, Contingencies, and Unusual Items
Management did not provide formal earnings or balance-sheet guidance. It described the economic recovery as mixed, with continued high unemployment and diminished real estate values. The company’s market is partly supported by public colleges and universities, but reductions in state funding could negatively affect employment and credit performance.
- Key forward-looking risks include interest-rate movements, economic and real-estate conditions, unemployment, loan and investment portfolio quality, deposit flows, competition, regulatory changes, financial-market volatility, technology initiatives, and retention of key executives.
- Management expects continued pressure on earning-asset yields in a historically low interest-rate environment. Changes in rates could adversely affect net interest income and margin.
- Approximately $627 of properties were in various stages of foreclosure and could affect future other real estate owned balances. Future OREO levels are uncertain because properties may be sold at foreclosure to third parties or disposed of by the bank.
- Five troubled debt restructurings occurred during the quarter, with a post-modification balance of $493 and $156 of impairment accrued. Four previously restructured loans, totaling $392, experienced payment default during the quarter.
- The company identified $88,892 of temporarily impaired securities with $1,521 of unrealized losses and concluded that the declines were not other-than-temporary.
- The company had ordinary-course unfunded loan commitments and standby letters of credit. Mortgage-sale recourse exposure was considered immaterial, and no recourse provisions had been invoked.
- There were no material pending legal proceedings, no stock repurchases, no senior-security defaults, and no material subsequent events through filing. Management concluded that disclosure controls were effective and reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether lower loan and securities yields continue to compress the 4.36% net interest margin.
- Whether the higher quarterly net charge-off rate and troubled debt restructurings lead to additional allowance provisions.
- Trends in commercial real estate exposure, classified loans, nonperforming assets, foreclosures, and OREO dispositions.
- Whether deposit migration from time deposits remains favorable for funding costs and liquidity.
- The sustainability of fee income growth, particularly credit card and trust income, and the potential effect of regulatory changes on interchange-related revenue.
- The effect of unrealized securities losses and interest-rate changes on accumulated other comprehensive income and capital.
- Capital and liquidity levels relative to regulatory requirements and the company’s internal loan-to-deposit target.