National Bankshares, Inc. Reports Second Quarter and First Half Earnings

BLACKSBURG, VA., July 16, 2020 -- National Bankshares, Inc. (NASDAQ: NKSH), parent company of The National Bank of Blacksburg, today announced its results of operations for the second quarter and first half of 2020. The Company reported net income of $6.96 million, or $1.07 per common share, for the six months ended June 30, 2020. For the six months ended June 30, 2019, the Company reported net income of $8.44 million or $1.27 per common share. National Bankshares, Inc. ended the first half of 2020 with total assets of $1.43 billion. Additionally, the Company declared a semi-annual dividend to common shareholders of sixty-seven cents ($0.67) per common share during the second quarter of 2020.

Chairman, President, and CEO F. Brad Denardo commented, “National Bankshares and our subsidiaries have been working throughout the COVID-19 pandemic to meet the everyday banking needs as well as the emergency relief needs of our customers and communities. The situation is ongoing and the economic outlook remains uncertain, and we see this reflected in the second quarter numbers. Nonetheless, we remain committed to serving our customers through these difficult times, and are thankful for the continuing support of our customers, our communities, and our shareholders.”

First Half Highlights

In Light of the Pandemic

In order to protect our employees and customers during the COVID-19 Pandemic, we closed our branch offices on March 20^th and they have remained closed. We continue to serve customers through other channels or in person when requested. We plan to reopen those offices sometime in third quarter.
In order to aid our many business customers in their time of financial hardship, we have modified or deferred payments on 297 loans totaling $119.70 million.
Through July 6, 2020, National Bank has originated 806 Paycheck Protection Program loans totaling $58.1 million. We will continue to accept applications until August 8, 2020.

Income Statement

Our current net income includes a loan loss provision of $1.83 million, an increase of $1.58 million over the provision for the first half of 2019. The additional provision was taken in order to recognize the potential effect of the slowdown in business activity.
Despite the significant increase in the loan loss provision, the return on average assets was still a positive 1.03% for the first six months of 2020.
The net interest margin decreased to 3.05% for the six months ended June 30, 2020 from 3.32% for the six months ended June 30, 2019.
The Company has worked to contain expenses such that total noninterest expense for the six months ended June 30, 2020 is $0.374 million less than for the same period ending June 30, 2019.

Balance Sheet

Total assets have increased from June 30, 2019 by $164 million to $1.43 billion at June 30, 2020.
Total deposits have increased from June 30, 2019 by $149.8 million to $1.22 billion at June 30, 2020.
With total stockholders equity of $195.8 million, the Company’s capital position provides a source of strength and continues to significantly exceed all regulatory capital guidelines.

Other Notables

No shares of the Company’s common stock were repurchased this quarter.
Nonperforming loans as a percentage of total loans decreased to 0.48% at June 30, 2020, a 17.1% decrease from June 30, 2019.
The efficiency ratio decreased to 54.5% for the six months ended June 30, 2020, down from 55.6% for the six months ended June 2019.
The allowance for loan losses to total loans increased to 1.05%, compared with 1.00% at June 30, 2019. Excluding the Paycheck Protection Program loans, that ratio increases to 1.13% at June 30, 2020.
Book value per common share at June 30, 2020 increased to $30.17 from $28.26 at June 30, 2019.

Non-GAAP Financial Measures
In addition to financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company uses certain non-GAAP financial measures that provide useful information for financial and operational decision making, evaluating trends and comparing financial results to other financial institutions. The non-GAAP financial measures presented in this document include the efficiency ratio and certain financial measures presented on a fully taxable-equivalent (“FTE”) basis. FTE basis is calculated using the federal statutory income tax rate of 21%. Further, the Company elects not to annualize net securities gains and losses in 2020 and 2019 or the insurance recovery received in 2019 in calculating the return on average equity and return on average assets. The Company believes certain non-GAAP financial measures enhance the understanding of its business and performance. Non-GAAP financial measures are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP and may not be comparable to those reported by other financial institutions.

About National Bankshares
National Bankshares, Inc., headquartered in Blacksburg, Virginia, is the parent company of The National Bank of Blacksburg, which does business as National Bank, and of National Bankshares Financial Services, Inc. National Bank is a community bank operating from 25 full service offices and one loan production office throughout Southwest Virginia. National Bankshares Financial Services, Inc. is an investment and insurance subsidiary in the same trade area. The Company’s stock is traded on the NASDAQ Capital Market under the symbol “NKSH.” Additional information is available at www.nationalbankshares.com.

Forward-Looking Statements
Certain statements in this press release may be “forward-looking statements.” Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results that are not statements of historical fact and that involve significant risks and uncertainties. Although the Company believes that its expectations with regard to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual Company results will not differ materially from any future results implied by the forward-looking statements. Actual results may be materially different from past or anticipated results because of many factors, some of which may include changes in economic conditions, the interest rate environment, legislative and regulatory requirements, new products, competition, changes in the stock and bond markets and technology. The Company does not update any forward-looking statements that it may make.

National Bankshares, Inc.

Consolidated Balance Sheets

(Unaudited)

($ in thousands, except for share and per share data)	June 30, 2020			June 30, 2019			December 31, 2019
Assets
Cash and due from banks	$	13,315		$	17,170		$	10,290
Interest-bearing deposits		73,251			60,038			76,881
Securities available for sale, at fair value		489,926			396,347			435,263
Restricted stock		1,279			1,220			1,220
Total securities		491,205			397,567			436,483
Mortgage loans held for sale		2,367			809			905
Loans:
Loans, net of unearned income and deferred fees and costs		791,002			729,559			733,451
Less: allowance for loan losses		(8,308	)		(7,304	)		(6,863	)
Loans, net		782,694			722,255			726,588
Premises and equipment, net		9,955			9,012			8,919
Accrued interest receivable		4,797			5,192			4,285
Other real estate owned, net		1,553			2,025			1,612
Intangible assets and goodwill		5,848			5,848			5,848
Bank-owned life insurance		36,007			35,108			35,567
Other assets		12,758			14,493			14,459
Total assets	$	1,433,750		$	1,269,517		$	1,312,837

Liabilities and Stockholders' Equity
Noninterest-bearing deposits	$	263,113		$	203,534		$	201,866
Interest-bearing demand deposits		678,062			608,506			643,482
Savings deposits		160,551			143,024			146,377
Time deposits		117,882			114,733			128,028
Total deposits		1,219,608			1,069,797			1,119,753
Accrued interest payable		117			145			144
Other liabilities		18,244			15,727			18,214
Total liabilities		1,237,969			1,085,669			1,138,111

Stockholders' Equity
Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding		---			---			---
Common stock of $1.25 par value. Authorized 10,000,000 shares; issued and outstanding 6,489,574 shares at June 30, 2020 and December 31, 2019 and 6,505,574 at June 30, 2019		8,112			8,132			8,112
Retained earnings		186,733			180,272			184,120
Accumulated other comprehensive loss, net		936			(4,556	)		(8,506	)
Total stockholders' equity		195,781			183,848			183,726
Total liabilities and stockholders' equity	$	1,433,750		$	1,269,517		$	1,321,837

National Bankshares, Inc.

Consolidated Statements of Income

(Unaudited)

	Three Months Ended					Six Months Ended
($ in thousands, except for share and per share data)	June 30, 2020			June 30, 2019		June 30, 2020			June 30, 2019
Interest Income
Interest and fees on loans	$	8,419		$	8,460	$	16,885		$	16,729
Interest on federal funds		---			---		---			---
Interest on interest-bearing deposits		14			382		231			641
Interest on securities - taxable		1,863			1,603		4,219			3,286
Interest on securities - nontaxable		454			848		803			1,775
Total interest income		10,750			11,293		22,138			22,431
Interest Expense
Interest on time deposits		522			419		1,081			716
Interest on other deposits		1,076			1,495		2,313			2,991
Total interest expense		1,598			1,914		3,394			3,707
Net interest income		9,152			9,379		18,744			18,724
Provision for loan losses		1,352			55		1,831			255
Net interest income after provision for loan losses		7,800			9,324		16,913			18,469
Noninterest Income
Service charges on deposit accounts		377			607		959			1,197
Other service charges and fees		37			51		76			103
Credit card fees		386			356		692			665
Trust income		387			371		821			768
Bank-owned life insurance		219			232		440			451
Other income		277			231		810			1,141
Realized securities gain, net		62			8		82			20
Total noninterest income		1,745			1,856		3,880			4,345
Noninterest Expense
Salaries and employee benefits		3,692			3,802		7,671			7,623
Occupancy and furniture and fixtures		458			477		908			942
Data processing and ATM		806			789		1,597			1,540
FDIC assessment		40			82		40			167
Net cost of other real estate owned		(4	)		3		18			28
Franchise taxes		335			333		678			647
Other operating expenses		750			967		1,632			1,971
Total noninterest expense		6,077			6,453		12,544			12,918
Income before income tax expense		3,468			4,727		8,249			9,896
Income tax expense		486			733		1,288			1,459
Net Income	$	2,982		$	3,994	$	6,961		$	8,437
Basic net income per share	$	0.46		$	0.61	$	1.07		$	1.27
Fully diluted net income per share	$	0.46		$	0.61	$	1.07		$	1.27
Weighted average number of common shares outstanding
Basic		6,489,574			6,505,574		6,489,574			6,668,038
Diluted		6,489,574			6,505,574		6,489,574			6,668,038
Dividends declared per share	$	0.67		$	0.67	$	0.67		$	0.67
Dividend payout ratio		---			---		62.46	%		51.67	%
Book value per share	$	30.17		$	28.26	$	30.17		$	28.26

National Bankshares, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended
($ in thousands)	June 30, 2020			June 30, 2019
Net income	$	2,982		$	3,994

Other Comprehensive Income, Net of Tax
Unrealized holding gain on available for sale securities net of tax of $1,498 for the period ended June 30, 2020 and $795 for the period ended June 30, 2019		5,637			2,991
Reclassification adjustment for gain included in net income, net of tax of ($13) for the period ended June 30, 2020 and ($2) for the period ended June 30, 2019		(49	)		(6	)
Other comprehensive income, net of tax	$	5,588		$	2,985
Total Comprehensive Income	$	8,570		$	6,979

	Six Months Ended
($ in thousands)	June 30, 2020			June 30, 2019
Net income	$	6,961		$	8,437

Other Comprehensive Income, Net of Tax
Unrealized holding gain on available for sale securities net of tax of $2,526 for the period ended June 30, 2020 and $2,003 for the period ended June 30, 2019		9,507			7,545
Reclassification adjustment for gain included in net income, net of tax of ($17) for the period ended June 30, 2020 and ($4) for the period ended June 30, 2019		(65	)		(16	)
Other comprehensive income, net of tax	$	9,442		$	7,529
Total Comprehensive Income	$	16,403		$	15,966

National Bankshares, Inc.

Key Ratios and Other Data

(Unaudited)

	Three Months Ended						Six Months Ended
($ in thousands)	June 30, 2020			June 30, 2019			June 30, 2020			June 30, 2019
Average Balances
Cash and due from banks	$	11,466		$	11,266		$	11,335		$	11,254
Interest-bearing deposits		91,425			63,456			79,004			53,904
Securities available for sale		452,549			398,602			445,733			407,626
Restricted stock		1,279			1,220			1,252			1,220
Mortgage loans held for sale		1,406			453			949			304
Gross Loans		764,336			720,910			747,876			715,852
Loans, net		756,590			713,000			740,280			707,886
Intangible assets		5,848			5,848			5,848			5,848
Total assets		1,393,227			1,260,195			1,352,827			1,254,654
Total deposits		1,180,484			1,061,692			1,142,330			1,053,891
Stockholders' equity		193,260			182,201			191,388			184,800
Interest-earning assets		1,303,352			1,183,803			1,268,209			1,180,872
Interest-bearing liabilities		931,099			861,350			917,589			858,001

Financial Ratios
Return on average assets⁽¹⁾		0.85	%		1.27	%		1.03	%		1.32	%
Return on average equity⁽¹⁾		6.13	%		8.78	%		7.28	%		8.96	%
Net interest margin		2.90	%		3.30	%		3.05	%		3.32	%
Net interest income-fully taxable equivalent	$	9,409		$	9,726		$	19,220		$	19,438
Efficiency ratio⁽²⁾		54.79	%		55.75	%		54.50	%		55.62	%
Average equity to average assets		13.87	%		14.46	%		14.15	%		14.73	%

Allowance for Loan Losses
Beginning balance	$	7,240		$	7,360		$	6,863		$	7,390
Provision for losses		1,352			55			1,831			255
Charge-offs		(365	)		(180	)		(540	)		(508	)
Recoveries		81			69			154			167
Ending balance	$	8,308		$	7,304		$	8,308		$	7,304

	(1)	Return on average assets and return on average equity are calculated by dividing adjusted annualized net income by average assets or average equity, respectively. Net income is adjusted by removing securities gains, net of tax in 2020 and 2019 and the insurance recovery in 2019 net of tax and annualizing the remainder. Securities gains net of tax in 2020 and 2019 and the insurance recovery net of tax in 2019 are then added back to arrive at adjusted annualized net income.
	(2)	Efficiency ratio is calculated as noninterest expense, less non-recurring items, divided by the sum of noninterest income and net interest income on a fully taxable equivalent basis.
	(3)	Net interest margin is calculated as net interest income on a fully taxable equivalent basis divided by average interest earning assets.

National Bankshares, Inc.

Asset Quality Data

(Unaudited)

($ in thousands)	June 30, 2020			June 30, 2019
Nonperforming Assets
Nonaccrual loans	$	943		$	856
Nonaccrual restructured loans		2,887			3,406
Total nonperforming loans		3,830			4,262
Other real estate owned	$	1,553		$	2,025
Total nonperforming assets	$	5,383		$	6,287
Accruing restructured loans		1,453			1,954
Loans 90 days or more past due	$	237		$	50

Asset Quality Ratios
Nonperforming assets to loans net of unearned income and deferred fees, plus other real estate owned		0.68	%		0.86	%
Allowance for loans losses to total loans		1.05	%		1.00	%
Allowance for loan losses to nonperforming loans		216.92	%		171.37	%
Loans past due 90 days or more to loans net of unearned income and deferred fees		0.03	%		0.01	%