National Bankshares, Inc. — Form 10-Q Summary
Business Context and Reporting Period
National Bankshares, Inc. is a Virginia financial holding company whose principal subsidiary, The National Bank of Blacksburg, operates as a community bank through 25 offices and one loan production office. The filing covers the unaudited three and six months ended June 30, 2021, compared primarily with the same periods in 2020 and with December 31, 2020 balances.
Key Financial Metrics
| Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 |
|---|---|---|---|---|
| Net interest income | $10.063 million | $9.152 million | $20.090 million | $18.744 million |
| Provision for loan losses | $4 thousand | $1.352 million | $54 thousand | $1.831 million |
| Noninterest income | $1.941 million | $1.745 million | $4.275 million | $3.880 million |
| Noninterest expense | $6.447 million | $6.077 million | $12.983 million | $12.544 million |
| Net income | $4.613 million | $2.982 million | $9.379 million | $6.961 million |
| Diluted EPS | $0.74 | $0.46 | $1.49 | $1.07 |
| Dividends declared per share | $0.70 | $0.67 | $0.70 | $0.67 |
- Q2 net income increased approximately 55% year over year; six-month net income increased approximately 35%.
- Six-month return on average assets was 1.18%, return on average equity was 9.63%, net interest margin was 2.80%, and efficiency ratio was 53.26% for the six months ended June 30, 2021. The comparable 2020 figures were 1.01%, 7.15%, 3.05%, and 55.24%, respectively.
- Net interest margin declined because of lower market interest rates, loan refinancing, lower reinvestment yields, and elevated low-yielding deposits. PPP loan interest and fee recognition partially offset the decline.
- At June 30, 2021, total assets were $1.662 billion, net loans were $797.1 million, securities available for sale were $617.8 million, and total deposits were $1.450 billion.
- Loans, net of unearned income and deferred fees, increased 4.73% from year-end 2020. Deposits increased 11.76%, while total assets increased 9.34%.
- The allowance for loan losses was $8.077 million, or 1.00% of loans; excluding $29.922 million of SBA-guaranteed PPP loans, the ratio was 1.04%. Net charge-offs were $458 thousand for the first six months, or 0.12% annualized.
- Nonperforming assets were $4.829 million, or 0.60% of loans plus other real estate owned. Nonperforming loans were $3.822 million, and other real estate owned was $1.007 million.
- The company reported no long-term debt, discount-window borrowings, short-term borrowings, or Federal Home Loan Bank advances at June 30, 2021. Liquidity sources include deposits, securities sales and maturities, loan repayments, Federal Reserve facilities, and FHLB borrowing capacity.
- The subsidiary bank was well capitalized, with a common equity Tier 1 ratio of 18.69%, total capital ratio of 19.54%, and leverage ratio of 11.54%.
Material Changes Versus Prior Comparable Period
- Net interest income increased despite a lower net interest margin, primarily because average interest-earning assets grew and deposit funding costs declined.
- Interest expense fell to $834 thousand in Q2 from $1.598 million and to $1.689 million for six months from $3.394 million, reflecting lower deposit rates and lower time-deposit balances.
- Noninterest income rose 11.2% in Q2 and 10.2% for the six-month period. Credit and debit card fees, service charges, trust income, and other income increased, while mortgage-loan sale gains, BOLI income, and securities gains declined.
- Noninterest expense increased 6.1% in Q2 and 3.5% for six months. Salaries and benefits were the principal increase, partly offset by lower other operating expenses.
- The provision for loan losses declined substantially from the elevated 2020 pandemic-related provision. The allowance decreased from $8.481 million at December 31, 2020 to $8.077 million at June 30, 2021.
- Stockholders’ equity decreased 4.67% from year-end 2020 to $191.235 million, primarily due to $9.354 million of share repurchases and $4.319 million of dividends, partly offset by earnings.
- The company repurchased 261,962 shares for $9.354 million during the first six months, including 150,130 shares in Q2. A new authorization permits repurchases of up to 1 million additional shares through May 31, 2022.
Outlook, Risks, Contingencies, and Unusual Items
- The filing does not provide quantitative earnings or revenue guidance. Management states that interim results are not necessarily indicative of full-year results.
- COVID-19-related modification activity substantially subsided. Five loans totaling approximately $5.7 million remained within a modification period at June 30, 2021; one additional loan totaling approximately $1 thousand remained in deferral.
- COVID-19-related risks include future borrower stress, higher charge-offs and allowance requirements, lower interest income, deposit withdrawals, higher funding costs, asset valuation declines, and potential goodwill impairment. Management cannot project the potential materiality of future pandemic effects.
- The company held 1,259 PPP loans totaling $83.023 million since program inception; 674 loans totaling $51.473 million had been forgiven or paid off, and $29.922 million remained outstanding at June 30, 2021. Management expects most remaining loans to be forgiven and any remaining balances to be SBA-guaranteed.
- Total troubled debt restructurings increased to $6.120 million from $4.249 million at year-end 2020. Three TDRs were designated during the first six months, with no principal or interest forgiveness and no related specific allowance at June 30.
- The company had $140 thousand of loans in various stages of foreclosure, which could affect future other real estate owned balances.
- Management identifies cybersecurity, interest-rate risk, economic and real-estate conditions, deposit flows, regulation, competition, technology, vendors, and COVID-19 developments as material risks. Cybersecurity insurance does not provide complete protection against potential financial or reputational losses.
- CECL adoption is required for the company after December 15, 2022. Management is developing models, data processes, methodologies, and vendor support; the filing does not provide a quantified expected adoption impact.
- The company had one participation loan referencing LIBOR and was evaluating actions required for the transition from LIBOR.
- No material litigation was reported, and management concluded that disclosure controls were effective as of June 30, 2021.
Important Facts for Investors to Verify
- Whether the lower net interest margin persists as low-rate securities reinvestment, refinancing, and excess deposits continue.
- Whether remaining PPP loans are forgiven or fully repaid by the SBA and whether any additional credit-loss provision becomes necessary.
- Performance of the five remaining COVID-19-modified loans after modification periods expire.
- Trends in TDRs, nonaccrual loans, criticized assets, charge-offs, and the allowance for loan losses as pandemic accommodations unwind.
- Impact of continued share repurchases and dividends on capital, tangible book value, and future earnings per share.
- Potential valuation changes in the securities portfolio, real estate collateral, and other real estate owned.
- Future effects of CECL implementation and the transition of the LIBOR-referenced participation loan.