National Bankshares, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
National Bankshares, Inc. is a Virginia financial holding company operating primarily through National Bank of Blacksburg, a community bank serving southwest and central Virginia. The Bank provides commercial, real estate, consumer, deposit, trust, investment and insurance services through 25 branches and three loan production offices. This Form 10-K covers the fiscal year ended December 31, 2022, with comparative information for 2021. Amounts are in thousands, except per-share data.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Total assets | $1,677,551 | $1,702,175 | (1.45%) |
| Net income | $25,932 | $20,382 | +27.2% |
| Basic and diluted EPS | $4.33 | $3.28 | +32.0% |
| Net interest income | $47,026 | $41,889 | +12.3% |
| Noninterest income | $12,401 | $8,426 | +47.2% |
| Noninterest expense | $26,958 | $26,080 | +3.4% |
| Return on average assets | 1.52% | 1.26% | Improved |
| Return on average equity | 17.81% | 10.59% | Improved |
| Net interest margin, FTE | 2.88% | 2.81% | +7 basis points |
| Efficiency ratio | 48.01% | 51.34% | Improved |
| Provision for loan losses | $706 | $(398) recovery | Higher expense |
Net income benefited from higher net interest income and a $3,823 gain on the sale of the Company’s private equity investment in Infinex. Excluding unusual items, the filing’s reported efficiency-ratio calculation also excludes partnership income and certain securities gains.
Balance sheet, asset quality, liquidity and capital
- Net loans increased 6.15% to $844,519, driven by customer demand and expansion into Charlottesville and Staunton. Commercial real estate loans were $437,888, approximately 51.3% of total loans.
- Total deposits increased 3.22% to $1,542,725. Time deposits declined 14.36%, while demand and savings deposits increased. The Bank had no brokered deposits.
- Available-for-sale securities declined 4.26% in fair value to $656,852. Amortized cost increased to $759,917, while unrealized losses expanded to approximately $103,152 because of higher interest rates.
- Stockholders’ equity declined 36.02% to $122,687, primarily because of the securities portfolio’s after-tax unrealized losses. Retained earnings increased to $199,091.
- Nonperforming loans were $2,847, compared with $2,873 in 2021; nonperforming assets were $3,509, compared with $3,830. The allowance for loan losses was $8,225, or 0.96% of loans, and net charge-offs were 0.02% of average loans.
- Liquidity was described as sufficient under management’s projections and stress testing. The loan-to-deposit ratio was 55.28%. At year-end, the Bank had no FHLB advances, discount-window borrowings, short-term borrowings or purchased deposits.
- The Bank remained well capitalized: total capital ratio was 17.57%, CET1 ratio was 16.81%, Tier 1 leverage ratio was 10.50%, and the Bank exceeded applicable minimum and prompt-corrective-action thresholds.
- Cash dividends paid were $8,950, or $1.50 per share. The Company repurchased 174,250 shares during 2022, including 67,588 shares in the fourth quarter, and had authorization remaining for 149,543 shares at year-end.
Material changes versus the prior comparable period
- Net interest income rose as higher securities and deposit yields and asset growth more than offset lower loan yield caused partly by the reduction in PPP fee income.
- Noninterest income increased substantially, principally because of the $3,823 Infinex-related gain; mortgage-loan sale gains declined as higher rates reduced refinancing and purchase activity.
- Federal Reserve rate increases caused a major increase in unrealized securities losses and changed the Company’s modeled interest-rate position from asset sensitive at year-end 2021 to liability sensitive at year-end 2022.
- Management reported increased deposit competition and pricing pressure during the fourth quarter and expected that pressure to continue into 2023.
- Loan growth increased credit exposure, particularly to commercial real estate, although most reported asset-quality indicators improved.
- On January 1, 2023, the Company adopted CECL. The allowance for credit losses increased from $8,225 to $10,567 and the reserve for unfunded commitments increased from $35 to $242. The after-tax effect reduced retained earnings by $2,014.
Outlook, commentary, risks and unusual items
- No formal earnings or revenue guidance was provided. Management stated that interest-rate changes, deposit pricing, economic conditions and competition could materially affect future results.
- The Company is liability sensitive under its year-end 2022 simulation. A modeled immediate 300-basis-point rate increase reduced projected one-year net interest income by 10.7%; actual results may differ materially from the simulation.
- Key credit risks include concentration in commercial real estate, reliance on local economies, exposure to small and midsized businesses, and the fact that 83.6% of loans were secured by real estate.
- Liquidity risks include deposit outflows, increased funding costs and potential reliance on secondary sources such as FHLB advances, securities sales, correspondent lines or Federal Reserve borrowing. Management said these sources were currently adequate.
- Cybersecurity remains a significant risk. The Company reported prior intrusions in 2016 and 2017, no customer losses from those events, and cybersecurity costs of $418 in 2022 versus $357 in 2021. Insurance may not cover all related losses.
- The Company has a small number of LIBOR-linked loan participations and is working with originating banks on the transition to alternative benchmarks.
- A shareholder proxy contest was initiated for the 2023 annual meeting. The Company expected approximately $560 of incremental expenses, excluding internal personnel costs, and the activist shareholder indicated it may seek reimbursement of its expenses if successful.
- The Company and its subsidiaries were not involved in material pending legal proceedings, and management reported effective disclosure controls and internal control over financial reporting.
Most important facts for investors to verify
- Whether the $3,823 private-equity gain is nonrecurring and how normalized earnings compare with reported 2022 net income.
- The effect of continued deposit repricing and competition on net interest margin, funding costs and future net interest income.
- The market value, duration and liquidity of the securities portfolio and the potential effect of further rate changes on accumulated other comprehensive loss and capital.
- Commercial real estate concentrations, including college housing and professional office exposure, and trends in criticized, delinquent and nonperforming loans.
- The actual post-CECL allowance, reserve for unfunded commitments and retained-earnings impact in 2023 filings.
- The sustainability of dividends and share repurchases given that the Bank had no retained net income free of regulatory restriction at December 31, 2022 and may require regulatory approval for additional dividends.
- The outcome and cost of the 2023 proxy contest and any resulting changes to the Board or strategic direction.