BLACKSBURG, VA., October 20, 2022 -- National Bankshares, Inc. (NASDAQ: NKSH), parent company of The National Bank of Blacksburg, today announced its results of operations for the third quarter and nine months ended September 30, 2022. The Company reported net income of $16.62 million, or $2.77 per common share, for the nine months ended September 30, 2022. This compares to net income of $15.13 million, or $2.42 per common share, for the nine months ended September 30, 2021. National Bankshares, Inc. ended September 30, 2022 with total assets of $1.70 billion.
President & CEO F. Brad Denardo commented, “We are pleased to share another good earnings report, with a nice increase in net income compared to the same period last year. Our talented team of banking professionals continued to grow the Company, bringing in quality new deposits and loans while providing excellent service to all of our customers. The backing of our communities and the investment of our shareholders remain vital to our success, and we thank them for their continued trust and support.”
Highlights for the Nine Months Ended September 30, 2022
When results for the nine months ended September 30, 2022 and September 30, 2021 are compared, the $1.49 million increase in net income was generated by growth in net interest income and service charges on deposit accounts, as well as decreased pension expense.
Net Interest Income
Net interest income benefitted from a decrease in interest expense and expansion in the yield on earning assets. Interest expense for the nine months ended September 30, 2022 was $2.01 million, improved from $2.41 million for the nine months ended September 30, 2021. The cost of interest-bearing liabilities improved from an annualized 0.30% for the nine months ended September 30, 2021 to 0.23% for the nine months ended September 30, 2022. Elevated levels of deposits and liquidity within the Company and across the general banking industry supported favorable deposit pricing during the nine months ended September 30, 2022.
Federal Reserve interest rate increases in 2022 as well as growth in earning assets expanded interest income. The fully taxable equivalent (“FTE”) interest income(1)
was $36.82 million for the nine months ended September 30, 2022, compared with $34.16 million for the nine months ended September 30, 2021. The FTE yield on earning assets for the nine months ended September 30, 2022 was 2.96%, compared with 3.03% for the nine months ended September 30, 2021. During the nine months ended September 30, 2021, $2.03 million in interest and fees from Paycheck Protection Program (PPP) loans contributed 18 basis points to the FTE yield on earning assets. PPP loans were essentially paid off by December 31, 2021. On a comparable basis, excluding PPP loans from 2021, the yield on earning assets for the nine months ended September 30, 2021 was 2.85%.
The Company expects further rate increases from the Federal Reserve, which will continue to benefit asset yields, but will also put upward pressure on deposit costs.
Service Charges on Deposit Accounts and Pension Expense
Service charges on deposit accounts increased $338 thousand when the nine months ended September 30, 2022 are compared with the same period of 2021. Fees for overdraft and nonsufficient funds provided most of the increase, as depositor activity recovered from lower levels earlier in the COVID-19 pandemic. The Company offers depositors various overdraft solutions and provides disclosures on its fees.
Pension expense is determined at the beginning of each year by actuarial calculations incorporating demographic and market assumptions. When the nine months ended September 30, 2022 are compared with the same period of 2021, the decrease in pension cost lowered salary expense by $111 thousand, and decreased other noninterest expense by $448 thousand. Pension expense is subject to fluctuations in equity and bond markets and may differ in coming years.
Customer deposits increased $137.92 million or 9.63% from September 30, 2021 to September 30, 2022.
Healthy demand grew loans, net of unearned income and deferred cost, by $55.37 million or 6.94% when September 30, 2022 is compared with September 30, 2021. At September 30, 2021, PPP loans were $12.09 million. On a comparable basis, excluding PPP loans, loan growth would have been $67.26 million or 8.56%. Due to the rise in interest rates, we expect loan demand to soften during coming quarters.
Loan quality continues to reflect low credit risk, with net charge-offs of $163 thousand or 0.03% of average loans for the nine months ended September 30, 2022. This compares with $445 thousand or 0.08% for the nine months ended September 30, 2021. The allowance for loan losses as a percentage of loans was 0.96% at September 30, 2022 and 0.97% at September 30, 2021.
Securities available for sale at September 30, 2022 grew $15.92 million or 2.48% from September 30, 2021. Securities are reported net of unrealized gains and losses, and yields on securities typically move inversely to interest rate movements. Beginning in March 2022, the Federal Reserve increased rates 300 basis points, leading to an unrealized loss of $107.96 million at September 30, 2022. This compares with an unrealized gain of $5.93 million at September 30, 2021. The Company’s Asset Liability Management Committee is closely monitoring interest rate risk on all of the Company’s financial assets and liabilities. At this time, the Company has high liquidity and a relatively low loan-to-deposit ratio. No securities sales are anticipated and the unrealized loss is not expected to impact net income.
Stockholders’ Equity decreased $78.67 million or 41.22% from September 30, 2021 to September 30, 2022. The ratio of tangible common equity to tangible assets(1)
decreased from 11.29% at September 30, 2021 to 6.28% at September 30, 2022. The decrease stems from the unrealized loss on securities that is reflected in the equity component, Accumulated Other Comprehensive Loss. Accumulated Other Comprehensive Loss is excluded from the Bank’s regulatory capital and does not impact regulatory capital ratios. The Bank is considered well capitalized, with capital ratios considerably higher than minimum regulatory requirements.
During the third quarter of 2022, the Company repurchased 23,500 shares under its publicly announced repurchase program.
Key ratios improved when results for the nine months ended September 30, 2022 are compared with those for the same period of 2021, including the return on average equity, return on average assets and efficiency ratio. The return on average equity for the nine months ended September 30, 2022 was 14.04%, compared with 10.36% for the nine months ended September 30, 2021. If Accumulated Other Comprehensive Income (Loss) is excluded, the return on average equity for the nine months ended September 30, 2022 was 11.09%, improved from 10.18% for the nine months ended September 30, 2021.
The return on average assets improved from 1.25% for the nine months ended September 30, 2021 to 1.29% for the nine months ended September 30, 2022. The Company’s efficiency ratio(1)
improved from 51.54% for the nine months ended September 30, 2021 to 48.03% for the nine months ended September 30, 2022.
(1)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 tangible common equity to tangible assets, the net interest margin and the efficiency ratio.
Tangible common equity and tangible assets exclude goodwill. The net interest margin is presented on a fully taxable equivalent basis (“FTE”), using the federal statutory income tax rate of 21%. Efficiency ratio is calculated as noninterest expense, less non-recurring items, divided by the sum of noninterest income and net interest income on an FTE basis. 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 24 full-service offices and two loan production offices. 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, including a version of this release with financial tables, is available at www.nationalbankshares.com
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.