National Bankshares, Inc. Form 10-Q Summary
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. National Bankshares Financial Services provides investment and insurance services. The filing covers the quarter and six months ended June 30, 2022; financial statements are unaudited.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Total interest income | $11.9 million | $10.9 million | $23.0 million | $21.8 million |
| Net interest income | $11.3 million | $10.1 million | $21.7 million | $20.1 million |
| Provision for loan losses | $0.3 million | $0.0 million | $0.4 million | $0.1 million |
| Noninterest income | $2.1 million | $1.9 million | $4.4 million | $4.3 million |
| Noninterest expense | $6.3 million | $6.4 million | $12.9 million | $13.0 million |
| Net income | $5.6 million | $4.6 million | $10.5 million | $9.4 million |
| Diluted earnings per share | $0.93 | $0.74 | $1.74 | $1.49 |
Second-quarter net interest margin was 2.75%, compared with 2.72% in the prior-year quarter. The six-month margin was 2.70%, compared with 2.80%. The efficiency ratio improved to 46.35% for the quarter and 49.40% for the six months, from 52.66% and 53.26%, respectively. Return on average assets was 1.30% for the quarter and 1.22% year to date; return on average equity was 15.00% and 12.45%, respectively.
- Total assets were $1.730 billion at June 30, 2022, up 1.61% from December 31, 2021.
- Loans, net, were $840.7 million, up 5.68%; gross loans increased particularly in real estate construction and commercial real estate.
- Total deposits were $1.578 billion, up 5.57%. Deposits included no brokered deposits.
- Available-for-sale securities were $682.3 million at fair value, with $71.0 million of gross unrealized losses.
- The allowance for loan losses was $8.1 million, or 0.95% of loans. Net charge-offs were $49 thousand year to date, or 0.01% of average loans.
- Nonperforming assets were $3.9 million, or 0.46% of loans plus other real estate owned. The allowance covered nonperforming loans by 270.86%.
- The Bank had no borrowings or long-term debt at June 30, 2022. The loan-to-deposit ratio was 53.80%.
- Cash and due from banks were $11.8 million, and interest-bearing deposits were $95.8 million. Management stated that liquidity was sufficient under tested scenarios.
- Stockholders’ equity was $136.2 million, down from $191.8 million at year-end 2021. Book value per share declined from $31.62 to $22.78.
- The Bank was well capitalized, with common equity Tier 1, Tier 1, total capital, and leverage ratios of 17.26%, 17.26%, 18.00%, and 10.92%, respectively.
Material changes versus comparable periods
- Second-quarter net income increased 20.8%, while six-month net income increased 11.5%, reflecting higher net interest income, stronger service-charge and card-fee revenue, and lower operating expenses.
- Net interest income increased 12.0% in the quarter and 7.9% year to date. Higher securities and deposit yields following Federal Reserve rate increases more than offset lower loan yields.
- Loan yields declined because the prior-year periods benefited from Paycheck Protection Program fee recognition. PPP fees were fully recognized by June 30, 2022.
- Noninterest income increased 8.8% in the quarter and 3.0% year to date. Deposit service charges and card fees increased, while mortgage-loan sale gains and other income declined as higher rates reduced refinancing and purchase activity.
- The provision for loan losses rose to $310 thousand in the quarter and $444 thousand year to date, compared with $4 thousand and $54 thousand, respectively, in the prior-year periods.
- Accumulated other comprehensive loss increased substantially because of interest-rate-driven unrealized losses on available-for-sale securities. The six-month unrealized loss, net of tax, was $58.7 million, producing total comprehensive loss of $48.3 million despite net income of $10.5 million.
- The Company repurchased 83,162 shares during the first six months and declared dividends of $0.72 per share, compared with $0.70 per share in the prior-year period. A new 250,000-share repurchase authorization began June 1, 2022.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings or financial guidance. Management stated that loan demand continued to support growth and that liquidity was adequate. Management does not intend to sell securities in unrealized loss positions and believes the losses are primarily related to interest-rate and market fluctuations rather than credit impairment.
- Interest-rate increases may affect securities fair values, loan payment burdens, deposit pricing, net interest margin, and credit losses.
- Management identified potential risks from economic conditions, unemployment, real estate values, deposit flows, competition, regulation, technology, cybersecurity, vendor performance, geopolitical conditions, and COVID-19 resurgence.
- COVID-19 effects appeared to be receding, but a renewed escalation could adversely affect business, credit risk, asset valuations, cash flows, and capital.
- Loans in various stages of foreclosure totaled $224 thousand and could increase other real estate owned. Other real estate owned was $957 thousand and consisted of one property.
- Total troubled debt restructurings were $5.8 million; no new TDRs were designated during the quarter or first six months of 2022.
- The Company is preparing for adoption of the current expected credit loss standard, which applies to it for fiscal years and interim periods beginning after December 15, 2022. The filing does not provide a quantified expected adoption impact.
- There were no material pending legal proceedings, material changes in off-balance-sheet arrangements, or material mortgage-sale recourse reserves. The Company had no finance lease or purchase obligations and no long-term debt.
Important facts for investors to verify
- Whether continued Federal Reserve rate increases further reduce the fair value of the securities portfolio and materially affect tangible book value.
- Whether loan growth, particularly in construction and commercial real estate, leads to higher provisions, delinquencies, or charge-offs.
- The timing and balance-sheet impact of CECL adoption after December 15, 2022.
- Whether deposit growth supported by stimulus-related and municipal funds remains stable as liquidity conditions change.
- Future mortgage origination volumes and noninterest income, given the decline in refinancing and mortgage-sale activity.
- The sustainability of dividends and share repurchases in light of the decline in reported stockholders’ equity and accumulated other comprehensive loss.