Business Context and Reporting Period
Company: National Bankshares, Inc. (NBI)
Reporting Period: Fiscal Year Ended December 31, 2009
Business Overview: NBI is a Virginia-based financial holding company operating primarily through its wholly-owned subsidiary, The National Bank of Blacksburg (NBB). The bank serves southwest Virginia with 24 branch offices, focusing on retail and commercial banking, including loans to small/mid-sized businesses, agriculture, and real estate. A secondary subsidiary, National Bankshares Financial Services, Inc., provides insurance and investment services but contributes insignificantly to net income.
Key Financial Metrics
| Metric ($ in thousands, except per share) | 2009 | 2008 |
|---|---|---|
| Total Assets | $982,367 | $935,374 |
| Total Deposits | $852,112 | $817,848 |
| Net Loans | $583,021 | $569,699 |
| Net Interest Income | $34,662 | $31,293 |
| Net Income | $14,319 | $13,593 |
| Diluted EPS | $2.06 | $1.96 |
| Return on Average Assets (ROA) | 1.47% | 1.51% |
| Return on Average Equity (ROE) | 12.23% | 12.52% |
| Net Interest Margin | 4.23% | 4.12% |
| Stockholders' Equity | $122,076 | $110,108 |
| Cash Flow from Operating Activities | $14,874 | $15,864 |
Material Changes vs. Prior Period
- Profitability: Net income increased 5.3% to $14.3 million, driven by a 10.8% increase in net interest income. This growth occurred despite a significant rise in FDIC assessments.
- Interest Rates: Net interest margin expanded to 4.23% from 4.12%. Interest expense declined $2.99 million due to lower rates on renewing certificates of deposit and growth in noninterest-bearing deposits.
- Asset Quality Deterioration: Nonperforming loans surged from $1.33 million in 2008 to $6.75 million in 2009 (1.14% of loans). This included a $2.65 million troubled debt restructuring. Consequently, the allowance for loan losses increased to $6.93 million (1.17% of loans) from $5.86 million (1.02%).
- Expense Growth: Noninterest expense rose 8.3% to $23.85 million. The primary driver was FDIC assessments, which jumped from $209,000 to $1.73 million due to special assessments and prepayment requirements for future years.
- Balance Sheet Growth: Total assets grew 5.0% and deposits grew 4.2%, largely internally generated. Securities increased 12.2% as deposit growth outpaced loan demand.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management anticipates net interest income may increase in 2010 if rates remain low and stable, as time deposit expenses are expected to continue declining. However, rising rates could narrow the margin as deposit rates reprice faster than loans.
- Risks:
- Economic Sensitivity: The market area relies heavily on state-supported universities (Virginia Tech, Radford) and manufacturing (Volvo, Celanese). Layoffs or state funding cuts could increase loan delinquencies.
- Asset Quality: Management expects nonperforming assets to remain elevated compared to historical levels, though manageable relative to peers.
- Regulatory Costs: Future FDIC assessments remain uncertain and could increase further to rebuild the Deposit Insurance Fund.
- Unusual Items:
- FDIC Assessments: A special assessment of 5 basis points and a requirement to prepay assessments for 2010-2012 significantly impacted 2009 expenses.
- Real Estate Owned (OREO): Net costs for OREO increased to $393,000 from $100,000, including $309,000 in write-downs.
Investor Verification Checklist
- Nonperforming Loan Composition: Verify the collateral coverage and specific industry exposure of the $6.75 million in nonperforming loans, particularly the $2.65 million troubled debt restructuring.
- FDIC Assessment Impact: Confirm the cash flow impact of the prepayment of FDIC assessments for 2010-2012 and monitor for additional special assessments.
- Loan Loss Reserve Adequacy: Assess whether the 1.17% allowance for loan losses is sufficient given the rapid increase in nonperforming assets and the local economic downturn.
- Interest Rate Sensitivity: Review the asset/liability management strategy regarding the risk of rising rates, given that liabilities reprice faster than assets.
- Market Concentration: Evaluate the risk associated with the 56% concentration of the loan portfolio in commercial real estate and the 26% concentration in college housing/professional office buildings.