National Bankshares, Inc. — 2021 Form 10-K Summary
Business Context and Reporting Period
National Bankshares, Inc. (Nasdaq: NKSH) is a Virginia-based financial holding company operating primarily through National Bank of Blacksburg, a community bank serving southwest Virginia. The filing covers the fiscal year ended December 31, 2021, with comparative results for 2020. The company operated 23 branches and one loan production office; the bank had 218 full-time-equivalent employees.
Primary revenue is generated from lending and investment activities. At December 31, 2021, the bank reported total assets of $1.7 billion and deposits of approximately $1.5 billion. Branch lobbies reopened in May 2021 after pandemic-related restrictions.
Financial Performance and Position
| Metric | 2021 | 2020 | Change or commentary |
|---|---|---|---|
| Total assets | $1,702.2 million | $1,519.7 million | Increased 12.0% |
| Total deposits | $1,494.6 million | $1,297.1 million | Increased 15.2% |
| Loans, net | $795.6 million | $760.3 million | Increased 4.6% |
| Securities and restricted stock | $686.9 million | $548.0 million | Increased 25.4% |
| Net interest income | $41.9 million | $38.2 million | Increased 9.7% |
| Provision for loan losses | Recovery of $0.4 million | Expense of $2.0 million | Improved credit conditions |
| Noninterest income | $8.4 million | $7.9 million | Increased 6.1% |
| Noninterest expense | $26.1 million | $25.0 million | Increased 4.5% |
| Net income | $20.4 million | $16.1 million | Increased 26.8% |
| Diluted earnings per share | $3.28 | $2.48 | Increased 32.3% |
| Net interest margin | 2.81% | 2.98% | Declined 17 basis points |
| Efficiency ratio | 51.34% | 53.49% | Improved |
| Return on average assets | 1.26% | 1.15% | Improved |
| Return on average equity | 10.59% | 8.21% | Improved |
| Operating cash flow | $22.9 million | $13.8 million | Increased |
Interest income was $45.0 million, while interest expense declined to $3.1 million from $5.8 million as deposit rates were reduced. PPP-related interest and fee income contributed $2.7 million in 2021. Credit and debit card fees, trust income and other income increased, partly offsetting a decline in mortgage-loan sale gains.
Stockholders’ equity declined to $191.8 million from $200.6 million, primarily because of share repurchases, dividends and a $7.1 million decline in accumulated other comprehensive income. The available-for-sale securities portfolio increased to $686.1 million and had $7.1 million of gross unrealized losses at year-end.
Material Changes Versus the Prior Comparable Period
- Deposits grew substantially, supported in part by federal stimulus funds and government-related deposits. Time deposits declined 11.9%, while demand and savings deposits increased.
- Loan growth was moderate, and remaining PPP loans declined to $1.1 million from $36.9 million. The company originated 1,259 PPP loans in 2020 and 2021 with original principal balances totaling $83.0 million.
- Net interest income increased because lower funding costs and balance growth more than offset lower asset yields. The net interest margin declined because of low interest rates, securities reinvestment at lower yields and increased low-yielding deposits at other banks.
- Credit metrics improved. The allowance for loan losses declined to $7.7 million, or 0.96% of loans, from $8.5 million, or 1.10%. Net charge-offs remained low at 0.05% of average loans.
- Nonperforming loans declined to $2.9 million from $3.7 million, and total nonperforming assets declined to $3.8 million from $5.2 million.
- All COVID-19 payment extensions and interest-only modifications had returned to contractual terms by December 31, 2021. Forty-five COVID-related modifications totaling $38.6 million were provided during 2021, compared with 388 modifications totaling $182.8 million in 2020.
- The company repurchased 368,083 shares during 2021 for $13.4 million and paid $8.8 million in cash dividends. The board authorized repurchases of up to 1,000,000 shares through May 31, 2022.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects continued sensitivity to interest rates, deposit flows, loan demand, competition and local economic conditions. The company reported that liquidity was sufficient under tested scenarios and that it had no material commitments for long-term debt or capital expenditures.
- COVID-19: Management stated that pandemic-related modifications had subsided, but the expiration of government aid could increase borrower stress, credit losses and allowance requirements.
- Credit concentration: Approximately 82.6% of loans were secured by real property, and commercial real estate loans totaled $405.7 million, or approximately 51.5% of loans. A downturn in local real estate, university activity or the regional economy could materially affect results.
- Interest-rate risk: The company reported an asset-sensitive position. Rapid rate changes could adversely affect net interest income and securities values; its rate-simulation results are not forecasts.
- Liquidity: The loan-to-deposit ratio was 53.74%. The bank had no purchased deposits, short-term borrowings, discount-window borrowings or Federal Home Loan Bank advances at year-end, but may need secondary funding sources if deposits decline or loan demand increases.
- Capital: National Bank of Blacksburg was classified as well capitalized. Its total capital ratio was 19.495%, CET1 ratio was 18.715% and leverage ratio was 11.164% at December 31, 2021.
- Accounting changes: The company is preparing for adoption of the current expected credit losses standard, expected to apply for fiscal years beginning after December 15, 2022. Management had not quantified the eventual impact.
- Cybersecurity and technology: Cyberattacks, vendor disruptions and data breaches remain significant risks. The company disclosed prior intrusions in 2016 and 2017 in which certain customer information was compromised, although normal operations were not interrupted.
- Other unusual items: The company received a one-time payout from a partnership interest during 2021. Goodwill of $5.8 million was tested for impairment with no impairment indicated. A lease termination resulted in a $0.15 million early termination fee.
The independent registered public accounting firm issued an unqualified opinion on the consolidated financial statements. The critical audit matter was the qualitative-factor assessment supporting the allowance for loan losses; those factors represented approximately $6.61 million of the $7.67 million allowance.
Important Facts for Investors to Verify
- Reconcile the sustainability of 2021 earnings growth, particularly the benefit from lower deposit costs, PPP fees and the recovery of loan-loss provision expense.
- Assess commercial real estate concentration, including the $201.9 million exposure to college housing and professional office buildings.
- Monitor deposit balances and the approximately $599.9 million of uninsured deposits for potential funding or liquidity pressure.
- Evaluate the effect of rising interest rates on the securities portfolio, deposit repricing, net interest margin and accumulated other comprehensive income.
- Review management’s allowance methodology and the expected impact of CECL adoption in 2023.
- Confirm the company’s ability to continue dividends and share repurchases, given that dividend capacity depends substantially on regulatory approval of distributions from the bank subsidiary.
- Review off-balance-sheet exposures, including $181.4 million of commitments to extend credit, $14.0 million of standby letters of credit and $18.3 million of mortgage loans sold with potential recourse.