Business Context and Reporting Period
Company: National Bankshares, Inc. (NBI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Overview: NBI is a financial holding company incorporated in Virginia, operating primarily through its subsidiary, The National Bank of Blacksburg. The bank serves southwest Virginia with 25 office locations. The company reported as an accelerated filer with 6,933,474 shares of common stock outstanding as of July 30, 2010.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2010 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Income | $7,765,000 | $6,744,000 |
| Earnings Per Share (Diluted) | $1.12 | $0.97 |
| Total Assets | $994,875,000 | $982,367,000 (Dec 31, 2009) |
| Total Loans (Net) | $575,372,000 | $583,021,000 (Dec 31, 2009) |
| Total Deposits | $859,337,000 | $852,112,000 (Dec 31, 2009) |
| Net Interest Income | $18,758,000 | $16,603,000 |
| Net Interest Margin | 4.55% | 4.09% (YTD 2009) |
| Return on Average Assets | 1.60% | 1.47% (FY 2009) |
| Return on Average Equity | 12.41% | 12.23% (FY 2009) |
| Allowance for Loan Losses | $7,553,000 | $6,926,000 (Dec 31, 2009) |
| Provision for Loan Losses | $1,499,000 | $648,000 |
| Cash Flow from Operating Activities | $7,331,000 | $6,423,000 |
Material Changes vs. Prior Period
- Profitability: Net income increased by 15.1% year-over-year, driven primarily by a 12.98% increase in net interest income. Net interest margin expanded to 4.55% due to a faster decline in funding costs compared to yields on earning assets.
- Asset Quality Deterioration: Nonperforming loans increased significantly to $7,167,000 (from $2,729,000 in Q2 2009 and $6,750,000 at year-end 2009). Consequently, the provision for loan losses more than doubled to $1,499,000. The allowance for loan losses to total loans ratio rose to 1.30%.
- Loan Portfolio: Total gross loans declined 1.20% to $583,927,000. Commercial and industrial loans dropped 4.61%, and loans to individuals fell 5.36%, reflecting slow loan demand. Conversely, real estate construction and mortgage loans saw modest growth.
- Deposits: Total deposits grew 0.85% to $859,337,000. Savings deposits increased 13.13%, while time deposits declined 4.38% as customers moved funds to shorter-term instruments.
- Expenses: Total noninterest expense decreased slightly to $11,481,000. FDIC assessments dropped 47.12% due to the absence of the special assessment paid in 2009. However, data processing expenses rose 11.01% due to host computer replacement.
Outlook, Risks, and Management Commentary
- Economic Outlook: Management notes that while the local economy was insulated initially, the prolonged recession has led to increasing nonperforming assets. A slow recovery could lead to higher unemployment and further delinquencies.
- Asset Quality Risks: Management anticipates loan charge-offs will continue to increase in the second half of 2010. Other real estate owned (OREO) is expected to rise as foreclosures on nonperforming loans are processed.
- Regulatory Risks: The Dodd-Frank Wall Street Reform and Consumer Protection Act may negatively impact credit card fee income by controlling merchant fees. Future FDIC special assessments remain a possibility.
- Securities Portfolio: The company holds $40.6 million in securities with unrealized losses of $1.2 million. Management determined these are temporarily impaired due to interest rate fluctuations and does not intend to sell them before recovery.
- Liquidity: The loan-to-deposit ratio stands at 67.83%, within the company's policy range of 65-75%. Capital ratios (Tier I 17.35%, Tier II 18.49%) remain significantly above regulatory minimums.
Investor Verification Checklist
- Nonperforming Loan Trend: Verify the trajectory of nonperforming loans, which jumped from $2.7M to $7.2M in one year, and assess the adequacy of the 1.30% allowance coverage.
- Charge-off Forecast: Confirm management's expectation of increasing charge-offs in H2 2010 and its potential impact on future earnings.
- OREO Exposure: Monitor the growth of Other Real Estate Owned ($3.17M) and associated carrying costs as the foreclosure process continues.
- Deposit Mix Shift: Analyze the shift from time deposits to savings and demand deposits and its long-term impact on funding costs if interest rates rise.
- Regulatory Impact: Evaluate the potential reduction in credit card fee revenue resulting from Dodd-Frank merchant fee caps.