National Bankshares, Inc. 2023 Q3 Form 10-Q Summary
Business Context and Reporting Period
National Bankshares, Inc. is a Virginia financial holding company whose principal subsidiary, National Bank of Blacksburg, operates as a community bank through 24 offices and three loan production offices. The unaudited filing covers the three and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods. Amounts are in thousands except per-share data.
Management announced plans to open a full-service branch in Roanoke, Virginia, in 2024. The filing states that the interim results are not necessarily indicative of full-year results.
Financial Performance and Key Metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total interest income | $14,679 | $13,155 | $43,320 | $36,127 |
| Net interest income | $8,640 | $12,402 | $28,803 | $34,072 |
| Provision/(recovery) for credit losses | $(401) recovery | $252 provision | $(389) recovery | $696 provision |
| Noninterest income | $2,115 | $2,140 | $7,105 | $6,543 |
| Noninterest expense | $7,465 | $6,736 | $22,686 | $19,660 |
| Net income | $3,074 | $6,162 | $11,506 | $16,622 |
| Diluted EPS | $0.52 | $1.03 | $1.95 | $2.77 |
- Q3 net income declined 50.1% year over year; nine-month net income declined 30.8%.
- Q3 fully taxable-equivalent net interest margin was 2.23%, down from 2.95%; the nine-month margin was 2.45%, down from 2.79%.
- Q3 return on average assets was 0.77% and return on average equity was 9.63%, compared with 1.41% and 17.61%, respectively, in Q3 2022.
- The reported efficiency ratio increased to 67.96% in Q3 from 45.59%. The nine-month efficiency ratio was 61.09%, compared with 47.60%.
- Effective tax rates were 16.72% for Q3 and 15.47% for the first nine months, versus 18.43% and 17.95%, respectively, in the comparable 2022 periods.
Balance Sheet, Liquidity, Capital, and Cash Flow
| Balance-sheet item | September 30, 2023 | December 31, 2022 | Change |
|---|---|---|---|
| Total assets | $1,591,902 | $1,677,551 | Down 5.11% |
| Loans, net | $838,794 | $844,519 | Down 0.68% |
| Securities available for sale | $591,552 | $656,852 | Down 9.94% |
| Total deposits | $1,465,000 | $1,542,725 | Down 5.04% |
| Stockholders’ equity | $116,113 | $122,687 | Down 5.36% |
- Deposit mix shifted materially: time deposits increased to $187,885 from $67,629, while interest-bearing demand deposits declined to $789,148 from $933,269.
- The loan-to-deposit ratio was 57.95%. The bank had no purchased deposits, discount-window borrowings, or short-term borrowings at September 30, 2023.
- Available liquidity included $301,515 of FHLB borrowing capacity, a $10,000 unsecured federal funds line, and $176,210 of unused Federal Reserve discount-window capacity. Management stated that liquidity was sufficient under projected trends and stress scenarios.
- The bank’s regulatory capital ratios were well above minimums: CET1 17.83%, Tier 1 17.83%, total capital 18.79%, and leverage 11.71%.
- Nine-month operating cash flow was $13,332, compared with $18,271 in 2022. Investing activities provided $56,595, versus $134,656 used in 2022, while financing activities used $87,914, versus $68,019 provided in 2022. Cash and due from banks ended at $53,442, compared with $90,423 a year earlier.
- The filing states that the company had no long-term debt, finance lease obligations, or purchase obligations at September 30, 2023.
Material Changes Versus Prior Comparable Period
- Interest income increased as loan and securities yields benefited from Federal Reserve rate increases, but deposit pricing competition sharply increased interest expense. Q3 interest expense rose to $6,039 from $753, causing net interest income to fall 30.3%.
- Noninterest expense increased 10.8% in Q3 and 15.4% for nine months. Drivers included higher compensation, technology and data-processing costs, FDIC assessments, and professional services.
- Professional services included $768 of nine-month legal and other expenses related to a threatened activist shareholder proxy contest. Management does not anticipate further material expense for the matter.
- Nine-month noninterest income included a $2,971 gain on the sale of VISA Class B securities, a $1,037 gain from a BOLI policy settlement, and a $3,332 loss on securities sales. These items materially affected reported results.
- The company adopted CECL on January 1, 2023. The allowance for credit losses on loans increased from $8,225 at year-end 2022 to $10,181 at September 30, 2023, and the adoption reduced retained earnings by $2,014 net of tax.
- Loans modified for a borrower experiencing financial difficulty totaled $6,396; the loan was current at quarter-end and had six months of interest-only payments.
- Accumulated other comprehensive loss increased to $89,664 from $83,766, primarily due to unrealized losses on available-for-sale securities. The securities portfolio had $110,531 of gross unrealized losses at quarter-end, but management identified no credit impairment and recorded no securities ACL.
Guidance, Outlook, Commentary, and Risks
- No formal earnings or financial guidance was provided.
- Management stated that adjustable-rate loan repricing could continue to support interest income if rates remain elevated or increase, but competition for deposits is increasing funding costs and compressing margins.
- Management expects to continue making loans that meet underwriting standards, although higher rates have reduced loan demand. Commercial real estate represented $424,765 of loans, or approximately half of the portfolio.
- Asset quality remained relatively strong: nonaccrual loans were $2,981, nonperforming assets were 0.43% of loans plus OREO, and annualized net charge-offs were 0.00%. However, management’s CECL forecast assumes higher unemployment, and higher interest rates, bankruptcy filings, housing inventory, and high-risk loans could increase credit losses.
- OREO totaled $662 and consisted of one construction property. One $7 real estate-secured loan was in foreclosure and could increase future OREO.
- Key disclosed risks include interest-rate changes, deposit outflows and liquidity pressure, local economic and real estate conditions, credit quality, regulatory developments, adverse events in the banking industry, cybersecurity and technology risks, vendor performance, competition, and the ability to retain personnel.
- The company reported no material pending or threatened legal proceedings and no material changes in off-balance-sheet arrangements. Mortgage-sale recourse exposure was described as immaterial, and no recourse provisions had been invoked.
Most Important Facts for Investors to Verify
- Whether deposit competition and higher funding costs continue to reduce net interest margin and profitability.
- The stability of deposits, particularly the decline in non-time deposits and the growth in higher-cost time deposits.
- Trends in commercial real estate concentrations, criticized loans, nonaccrual loans, and the adequacy of the $10,181 CECL allowance.
- The duration and market-value sensitivity of the securities portfolio, including the $110,531 unrealized loss position and related effect on tangible capital.
- Whether liquidity capacity remains available if deposit outflows accelerate, and whether FHLB or other borrowings are required again.
- The sustainability of reported earnings excluding the securities-sale loss, VISA gain, BOLI settlement gain, and other nonrecurring items.
- Execution and cost implications of the planned 2024 Roanoke branch and ongoing technology investments.