BLACKSBURG, VA., April 20, 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 first quarter of 2023. The Company reported net income for the quarter of $4.53 million, or $0.77 per common share. This compares to net income for the first quarter of 2022 of $4.89 million, or $0.81 per common share. National Bankshares, Inc. ended March 31, 2023 with total assets of $1.65 billion.
President and CEO, F. Brad Denardo, commented, “Our proven business model has served us well through a challenging first quarter. In the face of broad banking sector volatility, our Company continued to operate from a position of strength, with ample capital and liquidity levels and solid earnings. National Bankshares remains confident in locally-based community banking and is committed to driving long-term stockholder value.”
The Company paid a special one-time cash dividend of $1.00 per common share during the first quarter of 2023. The dividend rewarded stockholders for the Company’s positive performance during 2022, which included a one-time gain on the sale of a private equity investment.
The Company’s deposits experienced increased competitive pressure during the first quarter of 2023, continuing a trend that began impacting the Company during the fourth quarter of 2022. Deposits at March 31, 2023 declined by 2.03% when compared with the level at December 31, 2022. The Company responded to the trend early in the quarter with special CD offering rates, as well as improved rates on other deposits that substantially reversed the trend later in the quarter, at costs well below the cost of borrowing.
The Company’s deposit base is diverse, including individuals, businesses and municipalities within its market area. The Company does not have any brokered deposits. Depositors are insured up to the FDIC maximum of $250 thousand. Municipal deposits, which account for approximately one-fourth of the Company’s deposits, have additional security from bonds pledged as collateral, in accordance with state regulation. Of the Company’s non-municipal deposits, approximately 24% are uninsured.
The Company’s liquidity position remains solid. The Company’s borrowing capacity with the Federal Home Loan Bank of Atlanta (“FHLB”) and other correspondent relationships currently exceeds $400 million as of March 31, 2023. During the first quarter of 2023, the Company accessed FHLB borrowings to reinforce liquidity. The advances were fully repaid during March 2023, due to the success of the Company’s deposit strategy. Combined with a loan-to-deposit ratio of 56.70%, positive results of the latest liquidity stress testing and success of recent deposit marketing, the Company believes it is well-positioned to meet foreseeable liquidity demands.
Loans and Credit Risk
Loans, net of unearned income and deferred cost, grew by $37.64 million when March 31, 2023 is compared with March 31, 2022. When compared with December 31, 2022, loans grew by $4.22 million. Loan demand has contracted under current economic conditions but the Company is positioned to continue to make every loan that meets its underwriting standards.
Loan quality continues to reflect low credit risk. For the first quarter of 2023, the Company recorded a net recovery of $81 thousand, or 0.04% (annualized) of average loans. This compares with a recovery of $8 thousand for the three months ended December 31, 2022 and a net charge off of $20 thousand for the three months ended March 31, 2022.
The Company adopted Accounting Standards Update 2016-13 (“ASU 2016-13”) as of January 1, 2023. Upon adoption, the allowance for credit loss on loans (“ACLL”) increased by $2.34 million, moving the ratio of the ACLL to loans, net of deferred fees and costs, to 1.24%, from 0.96% at December 31, 2022. Adoption also increased the Company’s liability for credit loss on unfunded commitments by $207 thousand, increased the deferred tax asset by $535 thousand and reduced retained earnings by $2.01 million
Provision expense for the three months ended March 31, 2023 was $2 thousand, compared with $134 thousand for the three months ended March 31, 2022, and $10 thousand for the fourth quarter of 2022.
Net income for the three months ended March 31, 2023 decreased from the same period of 2022 by $355 thousand. Contributing to the decrease in net income were pre-tax expenses of $441 thousand incurred to respond to a threatened proxy contest initiated by an activist stockholder. The Company announced on March 31, 2023 that the activist had withdrawn its nominees for the Company’s Board of Directors with no concessions or negotiated settlement with the Company. The Company expects to receive in the second quarter additional bills associated with its response to the threatened proxy contest. Excluding the proxy contest expenses, net income for the three months ended March 31, 2023 would have been $4.88 million, similar to net income of $4.89 million for the three months ended March 31, 2022.
Net Interest Income
Federal Reserve interest rate increases beginning in March 2022 expanded interest income. When results for the three months ended March 31, 2023 and March 31, 2022 are compared, fully taxable equivalent (“FTE”) interest income(1)
increased $2.98 million. Compared with results for the three months ended December 31, 2022, FTE interest income increased $41 thousand.
Interest expense increased $2.44 million when results for the three months ended March 31, 2023 are compared with results for the three months ended March 31, 2022. When the first quarter of 2023 is compared with the last quarter of 2022, interest expense increased $2.07 million. The increase reflects the current competitive environment for deposits.
Noninterest Income and Noninterest Expense
Noninterest income decreased $92 thousand when the three months ended March 31, 2023 are compared with the same period ended March 31, 2022, primarily due to a special commission on insurance sales received in 2022. When compared with the fourth quarter of 2022, noninterest income decreased $3.66 million, due to the gain on sale of a private equity investment of $3.82 million received in October of 2022.
Noninterest expense increased $1.05 million when the three months ended March 31, 2023 are compared with the same period ended March 31, 2022. When compared with the fourth quarter of 2022, noninterest expense increased $366. The increase stemmed primarily from the previously discussed proxy contest-related expenses, included in professional services expense, as well as increased salary and benefits expense. Like many employers, the Company faced challenges to hiring enough qualified employees in recent years. Since increasing its starting salary in 2022, the Company has been able to attract a better pool of applicants and fill needed positions.
Securities available for sale at March 31, 2023 decreased $5.81 million from December 31, 2022. 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 $88.22 million at March 31, 2023. This compares with an unrealized loss of $103.07 million at December 31, 2022, and $39.21 million at March 31, 2022. During the first quarter of 2023, the Company sold $18 million of securities at a weighted average yield below the cost of borrowing. The sale resulted in a small net gain and benefitted the net interest margin. 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 March 31, 2023, there are no credit risk concerns with any of the Company’s securities.
Stockholders’ equity increased $8.36 million, or 6.81%, from December 31, 2022 to March 31, 2023. The ratio of tangible common equity to tangible assets(1)
increased from 6.99% at December 31, 2022 to 7.59% at March 31, 2023. 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 FHLB.
Return on Average Equity
The return on average equity for the three months ended March 31, 2023 was 15.25%. For the three months ended March 31, 2022, the return on average equity was 10.21%. Excluding Accumulated Other Comprehensive Loss, the return on average equity for the three month periods ended March 31, 2023 and 2022 was 9.25%(1)
, respectively. For the three months ended December 31, 2022, excluding the gain on sale of the private equity investment and accumulated other comprehensive loss, the return on average equity was 12.24%(1)
Return on Average Assets
The return on average assets for the three months ended March 31, 2023 and 2022 was 1.16% and 1.11%, respectively. Excluding the unrealized loss on securities, the return on average assets for both of the three month periods ended March 31, 2023 and 2022 was 1.11%(1)
. The return on average assets for the three months ended December 31, 2022, excluding the gain on sale of the private equity investment and the unrealized loss on securities was 1.42%(1)
The efficiency ratio (1)
for the three months ended March 31, 2023 and 2022 was 54.99% and 52.71%, respectively. For the three months ended December 31, 2022, the efficiency ratio was 47.95%. The efficiency ratio increased from the fourth quarter of 2022 due to higher interest expense, and from the first quarter of 2022 due to higher noninterest expense.
(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 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).
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, including a full 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 is not obligated to update any forward-looking statements that it may make.