National Bankshares, Inc. — Q3 2021 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 and one loan production office. Results cover the three and nine months ended September 30, 2021; the interim financial statements are unaudited. Common stock trades on Nasdaq under NKSH.
Financial performance and condition
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total interest income | $11.7 million | $10.7 million | $33.4 million | $32.8 million |
| Net interest income | $10.9 million | $9.3 million | $31.0 million | $28.0 million |
| Noninterest income | $2.0 million | $1.9 million | $6.3 million | $5.8 million |
| Noninterest expense | $6.4 million | $6.1 million | $19.4 million | $18.7 million |
| Net income | $5.8 million | $4.2 million | $15.1 million | $11.1 million |
| Diluted EPS | $0.94 | $0.64 | $2.42 | $1.71 |
| Net interest margin | 2.83% | 2.84% | 2.81% | 2.98% |
| Efficiency ratio | 48.34% | 53.29% | 51.54% | 54.58% |
| Return on average assets | 1.32% | 1.16% | 1.25% | 1.07% |
| Return on average equity | 11.26% | 8.32% | 10.36% | 7.61% |
All dollar amounts are in thousands unless otherwise stated. The nine-month net income increase was driven by higher net interest income, lower deposit funding costs and a $338 thousand recovery of loan losses, compared with a $1.985 million provision in the prior-year period.
- Total assets were $1.644 billion at September 30, 2021, up 8.18% from December 31, 2020.
- Loans, net of unearned income and deferred fees, were $797.5 million, up 3.73% from year-end; deposits were $1.433 billion, up 10.45%.
- Securities available for sale increased to $641.5 million from $546.7 million, reflecting investment of excess deposit liquidity.
- Cash flow from operating activities was $17.7 million; investing activities used $138.3 million, principally for securities purchases; financing activities provided $119.2 million, primarily from deposit growth.
- The Bank had no discount-window borrowings, short-term borrowings or FHLB advances. The company reported no long-term debt or finance lease obligations.
- The Bank was well capitalized, with Common Equity Tier 1, Tier 1, total capital and leverage ratios of 19.06%, 19.06%, 19.86% and 11.86%, respectively.
Material changes versus comparable periods
- Q3 net income increased 38.0% year over year; nine-month net income increased 36.0%.
- Net interest income increased 17.7% in Q3 and 10.7% for the first nine months. Interest expense declined sharply as deposit pricing fell, although the net interest margin remained pressured by low reinvestment yields and refinancing activity.
- Noninterest income increased 3.4% in Q3 and 7.9% year to date. Credit and debit card fees increased materially, while mortgage-loan sale gains declined as refinancing activity normalized.
- Noninterest expense increased 4.0% in Q3 and 3.7% year to date, led by salaries and employee benefits. The efficiency ratio improved.
- The allowance for loan losses declined to $7.698 million from $8.481 million at year-end. The allowance ratio declined to 0.97% from 1.10%, or 0.98% excluding PPP loans versus 1.16% at year-end.
- Nonperforming assets declined to $4.071 million from $5.238 million at year-end, and the nonperforming-asset ratio declined to 0.51% from 0.68%.
- Stockholders’ equity declined to $190.9 million from $200.6 million, reflecting $12.1 million of share repurchases, $4.3 million of dividends and an $8.5 million after-tax decline in accumulated other comprehensive income.
Guidance, outlook, risks and unusual items
- The filing provides no formal earnings or financial guidance. Management states that interim results are not necessarily indicative of full-year results.
- COVID-19 modification activity substantially subsided; no loans remained in a temporarily modified COVID-19 relief status at September 30, 2021. Management nevertheless identified possible future effects on borrowers, credit losses, securities values, funding costs and deposit stability.
- The company originated 1,259 PPP loans totaling $83.0 million since inception; 1,039 loans totaling $70.2 million had been forgiven or paid off. PPP loans held at September 30 were $12.1 million, net of deferred fees and costs. Management expects remaining balances to be forgiven or fully guaranteed by the SBA.
- COVID-related economic uncertainty remains incorporated into the allowance methodology. Management increased the unallocated allowance surplus to 5.0% of the calculated requirement.
- Accumulated other comprehensive income was adversely affected by unrealized securities losses, including a $10.7 million pre-tax unrealized loss during the first nine months.
- The company repurchased 335,062 shares during the first nine months, including 73,100 shares in Q3 at an average price of $37.35. A further authorization for up to 1 million shares runs through May 31, 2022.
- Management identifies interest-rate risk, economic conditions, deposit flows, credit quality, real estate values, regulatory changes, cybersecurity and technology risks as material uncertainties. Cybersecurity insurance does not provide complete protection against potential losses.
- One Blacksburg branch is scheduled to close on November 19, 2021, with business transferred to nearby locations.
- Three participation loans reference LIBOR; the company is evaluating the transition and related accounting implications.
- The company is preparing for adoption of CECL, which is required for this smaller reporting company for fiscal years and interim periods beginning after December 15, 2022. The expected financial impact has not yet been quantified.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material legal proceedings were reported.
Important facts for investors to verify
- Whether deposit growth associated with government stimulus funds persists and how deposit outflows could affect liquidity and net interest margin.
- Future credit losses, particularly in commercial real estate and other criticized or restructured loans, and the adequacy of the $7.698 million allowance.
- The effect of rising or changing interest rates on the $641.5 million securities portfolio, accumulated other comprehensive income and net interest margin.
- The timing and financial impact of PPP forgiveness and recognition of remaining deferred fees.
- The eventual effect of CECL adoption and the company’s continuing LIBOR transition.
- Execution and capital impact of the ongoing share repurchase authorization and dividend policy.