Company Overview
National Bankshares, Inc. (NKSH) is a community bank holding company headquartered in Blacksburg, Virginia. Through its wholly-owned subsidiary, The National Bank of Blacksburg (NBB), the company provides a range of banking and financial services to individuals and businesses across Virginia. With a history dating back to 1891, National Bankshares has established itself as a trusted financial institution, committed to supporting the growth and prosperity of the communities it serves.
National Bankshares, Inc. (NBI) was organized in 1986 under the laws of Virginia and is registered as a bank holding company under the Bank Holding Company Act of 1956. The company operates through two wholly-owned subsidiaries: The National Bank of Blacksburg (NBB) and National Bankshares Financial Services, Inc. (NBFS). NBB, doing business as National Bank, is a community bank with 27 office locations and two loan production offices, serving as the primary source of NBI's revenue. NBFS operates as National Bankshares Investment Services and National Bankshares Insurance Services, although its income contribution is currently not significant.
Recent Challenges and Acquisitions
In 2023, National Bankshares faced a challenge from an activist shareholder who launched a proxy contest. The company incurred $786,000 in professional services expenses related to responding to this proxy contest. Despite this challenge, National Bankshares remained focused on serving its customers and communities, demonstrating its resilience and commitment to its core values.
On June 1, 2024, the company completed the acquisition of Frontier Community Bank (FCB), a Virginia-chartered commercial bank. This transformative transaction added $148.5 million in assets, $137.0 million in liabilities, and $11.5 million in net assets to National Bankshares' balance sheet. The merger enabled the company to strengthen its presence in the Waynesboro, Staunton, and Lynchburg markets, further solidifying its position as a regional banking leader. The integration of FCB also added $4.87 million in goodwill and a $2.10 million core deposit intangible asset to National Bankshares' balance sheet.
Business Model and Strategy
Throughout its history, National Bankshares has remained committed to its community banking model, providing personalized service and local decision-making to its customers. The company has successfully navigated various economic conditions and industry changes, maintaining a strong capital position and focus on asset quality. This steady performance and disciplined approach have helped National Bankshares weather challenges and deliver value to its shareholders over the decades.
Financials
National Bankshares' financial performance has been mixed in recent years. For the full year 2023, the company reported revenue of $46.64 million, net income of $15.69 million, or $2.66 per diluted share, a decrease from the $25.93 million, or $4.33 per diluted share, reported in 2022. Operating cash flow (OCF) for 2023 was $15.52 million, with free cash flow (FCF) of $14.03 million. This decline was primarily driven by compression in the company's net interest margin, which fell from 2.38% in 2022 to 2.38% in 2023, as well as increased noninterest expenses related to the FCB acquisition and other strategic initiatives.
For the most recent quarter (Q3 2024), National Bankshares reported revenue of $18.67 million, net income of $2.68 million, OCF of $4.02 million, and FCF of $2.15 million. Compared to Q3 2023, revenue increased by 27.2% from $14.68 million, while net income decreased by 12.7% from $3.07 million. OCF decreased by 53.2% from $8.64 million, and FCF decreased by 50.7% from $4.35 million in the same period last year. The decrease in net income, OCF, and FCF was primarily attributed to net interest margin compression, merger-related expenses, and contract termination expenses.
The company's net interest margin was 2.20% for the three months ended September 30, 2024, compared to 2.23% in the same period of 2023. For the nine months ended September 30, 2024, the net interest margin was 2.14%, down from 2.45% in the prior-year period. The compression in net interest margin was attributed to the rising interest rate environment and competitive pressures for deposits.
Liquidity
The company's liquidity position remains strong, with cash and cash equivalents totaling $49.77 million as of September 30, 2024. National Bankshares also maintains a well-capitalized regulatory capital position, with a Tier 1 capital ratio of 16.55% and a total risk-based capital ratio of 17.40% as of December 31, 2023, well above the regulatory minimums.
National Bankshares has a debt-to-equity ratio of 0, indicating a conservative capital structure. The company's current ratio and quick ratio both stand at 0.5755, reflecting its ability to meet short-term obligations. Additionally, as of September 30, 2024, National Bankshares had $293.38 million of borrowing capacity from the Federal Home Loan Bank, further enhancing its liquidity position.
Loan Portfolio and Credit Quality
As of September 30, 2024, National Bankshares reported net loans of $991.33 million, representing a 16.96% increase from December 31, 2023. The loan portfolio is diversified across several categories, including commercial real estate (47.75% of total loans), consumer real estate (30.89%), real estate construction (7.24%), public sector and IDA (5.86%), commercial non-real estate (5.32%), and consumer non-real estate (4.08%).
The allowance for credit losses on loans stood at $10.33 million as of September 30, 2024, or 1.03% of total loans net of unearned income and deferred fees and costs. The company's analysis of the loan portfolio and economic factors resulted in a provision for credit losses on loans of $5,000 for the three months ended September 30, 2024, and a provision of $1.31 million for the nine months ended September 30, 2024.
Business Segments
National Bankshares operates through two main segments: NBB and NBFS. The NBB segment, which comprises the company's community banking operations, is the primary driver of revenue, accounting for nearly all of the company's total revenue. NBB operates 27 office locations and two loan production offices, providing a range of banking products and services to customers in its local markets.
The NBFS segment, while not a significant contributor to overall revenue, provides investment and insurance services to the company's customers. This segment includes revenue streams such as commissions from the sale of mutual funds, annuities, and other investments, as well as periodic service fees from mutual fund companies.
Geographic Markets
National Bankshares primarily operates in Virginia and does not have significant operations outside the United States. The company's focus on its local markets has allowed it to build strong relationships with customers and maintain a deep understanding of the communities it serves.
Future Outlook and Challenges
Looking ahead, National Bankshares faces several challenges and opportunities. The integration of FCB poses integration risks that National Bankshares will need to carefully manage. The successful execution of the acquisition, including the seamless integration of systems, processes, and personnel, will be a key determinant of the transaction's long-term success.
One area of concern for investors has been the company's exposure to the interest rate environment. As the Federal Reserve has aggressively raised interest rates to combat inflation, National Bankshares has faced pressure on its net interest margin. The recent 50-basis point rate cut by the Fed may provide some relief, but the company's ability to effectively manage its asset-liability mix will be crucial in the coming quarters.
Conclusion
Despite the challenges, National Bankshares remains well-positioned to capitalize on opportunities in its regional market. The company's strong capital position, diversified revenue streams, and commitment to community banking provide a solid foundation for future growth. As National Bankshares navigates the evolving financial landscape, investors will be closely monitoring the company's ability to effectively manage credit risk, maintain a healthy net interest margin, and integrate acquired entities to drive long-term shareholder value.
The company's focus on its core community banking model, coupled with strategic acquisitions like FCB, demonstrates its commitment to growth and expansion within its target markets. While the recent financial performance has shown some pressure due to margin compression and acquisition-related expenses, National Bankshares' strong liquidity position and conservative balance sheet management provide a buffer against potential economic headwinds.
As the company moves forward, successfully integrating FCB and realizing the synergies from the acquisition will be crucial. Additionally, navigating the challenging interest rate environment and maintaining strong credit quality will be key factors in determining National Bankshares' future performance and ability to create value for shareholders.