Business Context and Reporting Period
Company: National Bankshares, Inc. (NBI)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: NBI is a financial holding company incorporated in Virginia, operating primarily through its wholly-owned subsidiary, The National Bank of Blacksburg (NBB). NBB operates as a community bank with 25 office locations in southwest Virginia. The company's revenue is derived almost entirely from NBB's banking operations.
Key Financial Metrics
| Metric ($ in thousands) | Q1 2011 | Q1 2010 | Dec 31, 2010 |
|---|---|---|---|
| Net Income | $4,024 | $3,769 | - |
| Net Interest Income | $10,086 | $9,261 | - |
| Total Assets | $1,026,558 | - | $1,022,238 |
| Total Loans (Net) | $579,657 | - | $568,779 |
| Total Deposits | $885,895 | - | $884,583 |
| Stockholders' Equity | $133,665 | - | $129,187 |
| Net Cash Provided by Operating Activities | $6,280 | $4,597 | - |
| Net Interest Margin (Annualized) | 4.68% | 4.57% | 4.52% |
| Return on Average Assets (Annualized) | 1.60% | - | 1.57% |
| Return on Average Equity (Annualized) | 12.44% | - | 12.07% |
| Earnings Per Share (Diluted) | $0.58 | $0.54 | - |
Material Changes vs. Prior Period
- Profitability: Net income increased by $255,000 (6.8%) compared to Q1 2010, driven primarily by higher net interest income.
- Net Interest Income: Increased by $825,000 (8.9%) year-over-year. The net interest margin expanded to 4.68% from 4.57% in the prior year, largely due to a 38 basis point decline in the cost of funds, which outpaced a 21 basis point decline in the yield on earning assets.
- Provision for Loan Losses: Increased to $800,000 from $647,000 in Q1 2010, reflecting economic trends and asset quality considerations. The allowance for loan losses to total loans ratio rose to 1.40% from 1.33% at year-end 2010.
- Asset Growth: Total assets increased by $4.3 million (0.42%) from December 31, 2010. Net loans grew by $10.9 million (1.91%), led by increases in commercial and industrial loans (4.00%) and real estate construction loans (5.42%).
- Deposit Mix: Total deposits remained relatively flat (+0.15%). However, there was a shift in composition: time deposits decreased by $13.8 million (4.16%) due to historically low rates, while noninterest-bearing and interest-bearing demand deposits increased.
- Asset Quality: Nonperforming loans increased to $8.537 million from $8.421 million at year-end 2010. Loans past due 90+ days and still accruing declined to $1.078 million from $1.336 million. Other real estate owned (OREO) increased to $2.222 million.
Guidance, Outlook, and Risks
- Management Commentary: Management attributes the increase in net interest margin to declining funding costs. They note that the prolonged recession and slow economic recovery have contributed to higher nonperforming loans. Management anticipates that OREO and related expenses may increase in the remaining quarters of 2011 as the weak real estate market continues to impact borrowers.
- Regulatory Risks: The company highlights potential impacts from the Dodd-Frank Wall Street Reform and Consumer Protection Act, specifically regarding controls on merchant fees which could negatively affect credit card fee income. There is also uncertainty regarding future FDIC assessment increases.
- Market Risks: Interest rate risk is identified as a significant market risk. The company notes that its cost of funding is more sensitive to interest rate changes than its yield on earning assets. A slow economic recovery could lead to higher unemployment and increased delinquencies.
- Capital Resources: The company is considered "well capitalized" with Tier I and Tier II risk-based capital ratios of 18.57% and 19.80%, respectively, significantly exceeding regulatory minimums.
- Unusual Items: No material unusual items were reported. The company made a $2.5 million contribution to its defined benefit pension plan in March 2011, which was funded from an accrued liability and had no material effect on the income statement.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of nonperforming loans and OREO, as management expects these to potentially increase due to the slow economic recovery.
- Deposit Stability: Monitor the migration of time deposits to lower-cost demand deposits and the sustainability of this trend in a rising rate environment.
- Provision Adequacy: Assess whether the 1.40% allowance for loan losses ratio is sufficient given the increase in nonperforming assets and the specific concentration in commercial real estate and construction loans.
- Regulatory Impact: Evaluate the potential impact of Dodd-Frank provisions on credit card fee income, a growing segment of noninterest income.
- Interest Rate Sensitivity: Review the company's interest rate risk management strategies, particularly given the sensitivity of funding costs to rate changes.