National Bankshares, Inc. — Form 10-Q Summary
Business context and reporting period
National Bankshares, Inc. is a Virginia-based financial holding company whose primary subsidiary, The National Bank of Blacksburg, operates as a community bank through 25 offices in southwest Virginia. National Bankshares Financial Services provides investment and insurance services, but contributes immaterial revenue. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods and December 31, 2010 balance-sheet data.
Financial condition and results
| Metric | Three months ended September 30, 2011 | Three months ended September 30, 2010 | Nine months ended September 30, 2011 | Nine months ended September 30, 2010 |
|---|---|---|---|---|
| Total interest income | $12.6 million | $12.3 million | $37.5 million | $36.9 million |
| Net interest income | $10.3 million | $9.6 million | $30.5 million | $28.3 million |
| Provision for loan losses | $643 thousand | $710 thousand | $2.2 million | $2.2 million |
| Noninterest income | $2.1 million | $2.1 million | $6.2 million | $6.2 million |
| Noninterest expense | $5.9 million | $5.8 million | $18.0 million | $17.3 million |
| Net income | $4.5 million | $4.0 million | $12.7 million | $11.8 million |
| Basic diluted EPS | $0.65 | $0.58 | $1.84 / $1.83 | $1.70 / $1.69 |
- Net income increased approximately 13% in the third quarter and 8% for the first nine months. The nine-month increase was driven principally by higher net interest income and lower interest expense.
- Annualized nine-month return on average assets was 1.66%, return on average equity was 12.62%, net interest margin was 4.62%, and noninterest margin was 1.54%. Management reported that the net interest margin improved primarily because funding costs declined faster than asset yields.
- At September 30, 2011, total assets were $1.042 billion, net loans were $587.7 million, securities were $318.3 million, deposits were $894.2 million, and stockholders’ equity was $141.8 million.
- Compared with December 31, 2010, net loans increased 3.33%, deposits increased 1.09%, total assets increased 1.95%, and equity increased 9.78%. Commercial and industrial loans increased 10.75%, while loans to individuals declined 7.37%.
- Net cash provided by operating activities for the first nine months was $16.3 million. Investing activities used $20.0 million, primarily reflecting net loan originations and securities purchases. Financing activities provided $6.4 million, and cash and due from banks increased to $12.5 million from $9.9 million at year-end.
- The company had no long-term debt, FHLB advances, purchased deposits, discount-window borrowings, or short-term borrowings at September 30, 2011. The loan-to-deposit ratio was 66.70%, within management’s stated 65% to 75% policy range.
- Tier I and Tier II risk-based capital ratios were 19.40% and 20.65%, respectively; management stated that the bank was well capitalized.
Material changes and asset quality
- The allowance for loan losses increased to $8.7 million, or 1.46% of loans, from $7.7 million, or 1.33%, at December 31, 2010. The nine-month provision was $2.2 million, essentially unchanged from 2010.
- Nonperforming loans declined to $4.3 million from $8.1 million at year-end 2010 and $7.6 million at September 30, 2010. Nonperforming assets declined to $6.1 million, or 1.02% of loans plus other real estate owned, from $9.8 million, or 1.69%, at year-end.
- Loans past due 90 days or more and still accruing declined to $339 thousand from $1.3 million at year-end. However, accruing restructured loans increased to $5.5 million from $350 thousand at year-end.
- Fourteen troubled debt restructurings occurred during the first nine months, with post-modification recorded investment of $3.9 million and $1.1 million of impairment accrued. Some modifications included payment relief, maturity extensions, principal forgiveness, or conversion to interest-only payments.
- Net charge-offs were $1.1 million for the first nine months, producing an annualized net charge-off ratio of 0.26%, compared with 0.46% for 2010.
- The securities portfolio had $280 thousand of unrealized losses at September 30, 2011. Management determined that no securities were other-than-temporarily impaired.
- Noninterest income was broadly stable. Credit card fees increased 8.94%, while deposit service charges declined 10.95% and trust fees declined 3.43%. Noninterest expense increased 3.98%, with higher salaries, data processing, FDIC assessments, credit-card processing, and other real-estate-owned costs partly offset by lower occupancy and franchise-tax expenses.
Outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings or revenue guidance. Management stated that any further increase in the allowance or provision would reflect refinement of loss estimates and was not expected to dramatically affect net income. Management also expects that other-real-estate-owned balances and related expenses could increase if the slow economic recovery and weak real-estate market continue.
- Key risks include interest-rate changes, economic conditions, unemployment, state funding for public universities in the company’s market, real-estate values, loan demand, deposit flows, competition, regulatory changes, securities-market volatility, technology initiatives, and accounting requirements.
- Credit risk remains concentrated in commercial real estate, commercial and industrial loans, and construction, development, and land loans. Allowance estimates depend on collateral values, risk ratings, loss rates, economic conditions, and other management judgments.
- Management warned that FDIC assessments could increase. It also noted that Dodd-Frank provisions governing debit-card interchange fees could affect fee income, although institutions with less than $10 billion in assets were exempt from the cited provision.
- Off-balance-sheet exposure consists primarily of unfunded loan commitments and standby letters of credit. Management stated that historical utilization has not been significant and that mortgage-sale recourse exposure was not material; no recourse provisions had been invoked.
- No material pending legal proceedings, material subsequent events, stock repurchases, senior-securities defaults, or material changes in internal controls were reported. Disclosure controls were deemed effective.
- The company adopted several accounting updates, including guidance on troubled debt restructurings, without a material effect. The filing states that the company was assessing the future effects of ASU 2011-03, ASU 2011-04, ASU 2011-05, and ASU 2011-08.
Important facts for investors to verify
- Whether the improvement in nonperforming loans is sustained and whether the increase in accruing restructured loans leads to future defaults or charge-offs.
- The adequacy of the $8.7 million allowance relative to commercial real-estate, construction, and other criticized loans, particularly if regional economic or real-estate conditions weaken.
- Future net interest margin performance as loans and securities reprice and low-cost deposits or time deposits change.
- The effect of higher FDIC assessments, data-processing costs, credit-card expenses, and other-real-estate-owned costs on operating leverage.
- Deposit composition and liquidity, including the continued migration from time deposits to demand and savings accounts.
- The potential impact of pending accounting standards and future regulatory changes on reported earnings, capital, fair values, and fee income.
- All dollar amounts are presented in thousands unless otherwise indicated, and the interim financial statements are unaudited; the filing cautions that quarterly results are not necessarily indicative of full-year results.