BLACKSBURG, VA., February 2, 2023 -- National Bankshares, Inc. (“the Company”) (Nasdaq: NKSH), parent company of The National Bank of Blacksburg (“the Bank”), today announced its results of operations for the year and quarter ended December 31, 2022. The Company reported net income for the year of $25.93 million, or $4.33 per common share, and $9.31 million, or $1.57 per common share, for the fourth quarter. This compares to net income for the year ended December 31, 2021 of $20.38 million, or $3.28 per common share. National Bankshares, Inc. ended December 31, 2022 with total assets of $1.68 billion.
President and CEO, F. Brad Denardo commented, “National Bankshares performed very well in 2022. Solid core income growth was bolstered by a gain on the sale of a private equity investment, leading to outstanding earnings for the year. These good earnings translated directly to improved shareholder value, with increased regular dividend payments in 2022 and a special dividend payment in the first quarter of 2023. On behalf of the Board of Directors and the employees of National Bankshares, we thank our shareholders for their continued support.”
Sale of the private equity investment generated a gain of $3.82 million before tax and $3.02 million after tax during the fourth quarter of 2022. Excluding this gain, “core” net income(1)
for the year was $22.91 million, or $3.83 per common share. For the fourth quarter, core net income was $6.29 million, or $1.06 per common share.
Core net income grew $2.53 million, or 12.41%, when results for the years ended December 31, 2022 and 2021 are compared. The primary driver of growth was expansion in net interest income. When results for the fourth quarter of 2022 are compared with results from the third quarter of 2022, core net income grew $128 thousand, or 2.08%, primarily due to net interest income.
Net Interest Income
Federal Reserve interest rate increases in 2022 as well as growth in earning assets expanded interest income. When results for the years ended December 31, 2022 and 2021 are compared, fully taxable equivalent (“FTE”) interest income(1)
increased $5.08 million. Paycheck Protection Program (“PPP”) loans boosted interest and fees on loans by $2.71 million in 2021, and were essentially paid off by December 31, 2021.
Interest expense improved $15 thousand and the cost of interest-bearing liabilities improved from 0.28% to 0.26% when results for the years ended December 31, 2022 and 2021 are compared. Elevated levels of deposits and liquidity within the Company, similar to the general banking industry, supported favorable deposit pricing during 2022. During the latter half of 2022, pricing pressure increased, resulting in higher costs for certain large depositors during the fourth quarter.
If the Federal Reserve increases rates or holds rates steady, we expect increased yields on adjustable-rate and new earning assets, as well as increased deposit costs.
Provision for (Recovery of) Loan Losses
Provision expense for the year ended December 31, 2022 was $706, compared with a recovery of $398 for the year ended December 31, 2021. Provision expense for the fourth quarter of 2022 was $10, compared with $252 for the third quarter of 2022. Robust loan growth during 2022 was the primary driver of the increase in provision during 2022. The recovery for 2021 was primarily the result of economic conditions that improved as the impact of the pandemic began to recede.
Service Charges on Deposit Accounts and Pension Expense
Service charges on deposit accounts increased $380 thousand when results for the years ended December 31, 2022 and 2021 are compared. Fees for overdraft and nonsufficient funds provided most of the increase, as depositor activity recovered from lower levels earlier in the COVID-19 pandemic.
Pension expense is determined at the beginning of each year by actuarial calculations incorporating demographic and market assumptions. When the years ended December 31, 2022 and 2021 are compared, lower pension expense reduced salary expense by $148 thousand, and decreased other noninterest expense by $597 thousand. Pension expense is subject to fluctuations in equity and bond markets and may differ in coming years.
Customer deposits increased $48.14 million, or 3.22%, from December 31, 2021 to December 31, 2022. From September 30, 2022 to December 31, 2022, the Company began experiencing increased competition and customer deposits decreased $27.92 million.
Loans, net of unearned income and deferred cost, grew by $49.50 million, or 6.16%, when December 31, 2022 is compared with December 31, 2021. Loan volume remained stable from September 30, 2022 to December 31, 2022. During 2022, the Company expanded its lending footprint, opening two new loan production offices in Charlottesville and Staunton.
Loan quality continues to reflect low credit risk, with net charge-offs of $155 thousand, or 0.02% of average loans, for the year ended December 31, 2022. This compares with $409 thousand, or 0.05%, for the year ended December 31, 2021. The allowance for loan losses as a percentage of loans was 0.96% on December 31, 2022 and December 31, 2021.
Securities available for sale at December 31, 2022 decreased $29.23 million from December 31, 2021. Securities are reported at market value, which moves inversely to interest rate movements. The Federal Reserve’s aggressive rate hikes during 2022 led to an unrealized loss of $103.07 million at December 31, 2022. This compares with an unrealized gain of $3.61 million at December 31, 2021. The Company’s Asset Liability Management Committee is closely monitoring interest rate risk on all of the Company’s financial assets and liabilities, and as of December 31, 2022, there are no credit risk concerns with any of the Company’s securities.
Stockholders’ equity decreased $69.06 million, or 36.02%, from December 31, 2021 to December 31, 2022. The ratio of tangible common equity to tangible assets(1)
decreased from 10.96% at December 31, 2021 to 6.99% at December 31, 2022, but improved from 6.28% from September 30, 2022. The unrealized loss on securities impacts stockholders’ equity through 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, and meets all requirements for borrowing from the Federal Home Loan Bank of Atlanta.
The Company paid a cash dividend of $0.78 per common share during the fourth quarter and $0.72 per common share during the second quarter. Share repurchases totaled 67,588 shares during the fourth quarter. For the year ended December 31, 2022, repurchases totaled 174,250 shares. The combined shareholder pay-out of dividends and share repurchases in 2022 totaled $15.29 million, or 58.95% of net income.
Key ratios improved when results for 2022 are compared with 2021, including the return on average equity, return on average assets, dividend yield and efficiency ratio.
Return on Average Equity
The return on average equity for the year ended December 31, 2022 was 17.81%, compared with 10.59% for the year ended December 31, 2021. Excluding the impact of Accumulated Other Comprehensive Loss, the return on average equity for 2022 was 12.92%, improved from 10.37% for 2021. Using “core” net income and excluding Accumulated Other Comprehensive Loss, return on average equity for 2022 was 11.42%.
Return on Average Assets
The return on average assets improved from 1.26% for the year ended December 31, 2021 to 1.52% for the year ended December 31, 2022. Excluding the impact of the unrealized gain (loss) on securities, return on average assets was 1.48% for 2022, compared with 1.26% for 2021. Using “core” net income and excluding the impact of the unrealized loss on securities, return on average assets for 2022 was 1.31%.
The Company’s dividend yield improved from 4.04% for the year ended December 31, 2021 to 4.27% for the year ended December 31, 2022.
The Company’s efficiency ratio(1)
improved from 51.34% for the year ended December 31, 2021 to 48.01% for the year ended December 31, 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 core net income, FTE interest income, the net interest margin, the efficiency ratio, tangible common equity to tangible assets, average assets excluding the impact of unrealized securities loss and average equity excluding accumulated other comprehensive income (loss).
Core net income is only used for 2022 and excludes the one-time gain on the sale of a private equity investment. Interest income and the net interest margin are presented on an FTE basis, using the federal statutory income tax rate of 21%. Efficiency ratio is calculated as noninterest expense divided by the sum of noninterest income, less non-recurring items, and net interest income on an FTE basis. Tangible common equity and tangible assets exclude goodwill. 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. For a reconciliation of non-GAAP financial measures, see “Reconciliation of Non-GAAP Financial Measures” at the end of this release.
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, primarily in southwest Virginia, and three 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 is available at www.nationalbankshares.com
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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 is not obligated to update any forward-looking statements that it may make.