National Bankshares, Inc. Reports Results for the Second Quarter and First Half of 2023

BLACKSBURG, VA., July 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 second quarter and first half of 2023. The Company reported net income of $3.90 million, or basic earnings per common share of $0.66, for the second quarter and $8.43 million, or basic earnings per common share of $1.43, for the six months ended June 30, 2023. This compares to net income of $5.57 million, or basic earnings per common share of $0.93, for the second quarter of 2022 and $10.46 million, or basic earnings per common share of $1.74, for the six months ended June 30, 2022.  National Bankshares, Inc. ended June 30, 2023 with total assets of $1.63 billion.
President and CEO F. Brad Denardo commented, “Financial institutions across the nation have encountered intense interest rate pressure in the first half of 2023. Drastic increases in the interest paid on deposits outpaced the return on loans and other assets, resulting in lower net interest income for the quarter. In addition to reduced net interest income, the costs incurred by National Bankshares in a successfully-averted proxy contest and the increased salary expense resulting from last year’s 4th quarter base pay increase also contributed to lower net income when compared to the same period in 2022.”
Mr. Denardo continued, “While the current economic environment may last for some time, we are never satisfied with reduced earnings and are doing everything within our power to return to increased profitability in the second half of 2023. National Bankshares remains well-capitalized, and our lenders are working tirelessly to deploy that capital through sound, profitable loans. Our talented community bankers are seeking new opportunities for growth and deepening existing relationships to deliver profits through multiple lines of service. As always, we are working to increase operational efficiencies and reduce costs while maintaining our outstanding customer experience.”
The Company paid a semiannual dividend of $0.73 per share in June 2023.  Along with a special one-time cash dividend of $1.00 per common share during the first quarter of 2023, the Company rewarded shareholders with a dividend payout ratio of 120.84% for the first half of 2023.
The Company is pleased to announce that construction on a new branch in Roanoke, Virginia will begin during the third quarter of 2023. The full service branch will expand our already successful Loan Production Office and enhance our service in the Roanoke Valley.
Net Income
Net income for the three and six month periods ended June 30, 2023 decreased when compared with the three months ended March 31, 2023 and June 30, 2022, and the six months ended June 30, 2022.  Key items that impacted results are discussed below.
Net Interest Income
The Federal Reserve raised its benchmark interest rate by 500 basis points between March 2022 and May 2023, improving interest income when results for the three and six months ended June 30, 2023 are compared with the same periods of 2022.  However, rising rates and competition for deposits during 2023 increased interest expense and compressed the net interest margin when compared with 2022. 
Noninterest Income
Noninterest income for the second quarter of 2023 improved from the first quarter of 2023. During the second quarter, the Company recognized a gain of $2.97 million on the sale of its VISA Class B securities, as well as a gain of $1.04 million from the payout of a Bank Owned Life Insurance policy.  The Company also sold securities during the second quarter and recorded a loss of $3.34 million.  The sale of securities is discussed in more detail below.
Noninterest income for the first half of 2023 improved when compared with the first half of 2022, due primarily to the same factors discussed above.
Noninterest Expense
Noninterest expense for the second quarter of 2023 decreased when compared with the first quarter of 2023, reflecting lower expenses for professional services, partially offset by increased FDIC insurance expense. Professional services include legal and other expenses for the Company’s response to the previously mentioned proxy contest that amounted to $327 thousand for the second quarter and $441 thousand for the first quarter of 2023. The Company does not anticipate any further material expense for this matter.  FDIC insurance expense increased due to an increase in the FDIC’s general assessment rate.
When the first half of 2023 is compared with the first half of 2022, noninterest expense increased due to the FDIC assessment and the proxy contest, as discussed above, as well as salary and employee benefits, data processing and ATM, and pension non-service cost. As mentioned above, the Company increased its base compensation during 2022 in order to attract and retain talent, which is reflected in 2023 results.  Data processing and ATM expense increased due to higher maintenance costs. Pension non-service cost, included in other operating expense, increased $174 thousand based upon actuarial calculations. 
As part of its interest rate risk management, the Company periodically evaluates its position in financial assets.  During the second quarter, the Company strategically selected and sold securities with a market value of $25.52 million. The loss on the sale was largely offset by a gain on the sale of the Company’s VISA Class B stock.  Additionally, during the first quarter of 2023, the Company sold $18.00 million of securities, resulting in a small net gain.  The strategy for both sales prioritized enhancement of long-term earnings. Though not a primary objective, proceeds from the sales also bolstered liquidity.
The Company’s Asset Liability Management Committee is closely monitoring interest rate risk on all of the Company’s financial assets and liabilities.  As of June 30, 2023, the Company has the ability to hold securities until maturity and there are no further sales planned.  Analysis as of June 30, 2023 did not indicate any credit risk concerns with any of the Company’s securities. 
Competition continued to pressure the Company’s deposits during the second quarter of 2023, a trend that began impacting the Company during the fourth quarter of 2022. The Company implemented competitive pricing on CDs, raised offering rates on other deposits and negotiated with depositors to strengthen the deposit base, at costs well below the cost of borrowing.
The Company’s depositors within its market area are diverse, including individuals, businesses and municipalities.  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 26% 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 22% are uninsured.
The Company’s liquidity position remains solid.  The Company maintains borrowing lines with the Federal Home Loan Bank of Atlanta (“FHLB”), the Federal Reserve and another correspondent bank that provide substantial borrowing capacity.  During the first half of 2023, the Company accessed FHLB and Federal Reserve borrowings to reinforce liquidity.  The advances were fully repaid due to the success of the Company’s deposit strategy.   Combined with a low loan-to-deposit ratio, positive results of the latest liquidity stress testing and success of deposit marketing, the Company believes it is well-positioned to meet foreseeable liquidity demands.
Loans and Credit Risk
Loans decreased from 2022 and from March 31, 2023 as higher interest rates decreased demand.  The Company is positioned to continue to make every loan that meets its underwriting standards. 
Loan quality continues to reflect low credit risk, with low charge-off and past due levels. The allowance for credit losses on loans (“ACLL”) was 1.26% of loans as of June 30, 2023, compared with 1.24% of loans as of March 31, 2023.  At both dates, the Company held a surplus in excess of the calculated requirement to account for uncertainty in the general economic environment.  The Company adopted Accounting Standards Update 2016-13 (“ASU 2016-13”) as of January 1, 2023, which increased the ACL by $2.34 million from December 31, 2022. 
Stockholders’ Equity
Stockholders’ equity as of June 30, 2023 decreased from March 31, 2023 due to dividends of $4.30 million and an increase of $2.21 million in accumulated other comprehensive loss, offset to an extent by earnings of $3.90 million. Compared with June 30, 2022, stockholders equity at June 30, 2023 decreased due to dividends, share repurchases during 2022 and an increase in the accumulated other comprehensive loss, offset to an extent by net income. 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. 
The Company’s stockholders approved a new equity compensation plan at the annual meeting held in May 2023.  Under the plan, part of the June 2023 semi-annual retainer for non-employee directors was paid in a restricted stock grant. The equity compensation plan aims to align decision making with long-term value creation for the Company’s shareholders.
Key Ratios
The impact of margin compression accounts for the decrease in the return on average equity and the return on average assets and the increase in the efficiency ratio when the second quarter of 2023 is compared with the first quarter of 2023. Margin compression also resulted in the decrease in the return on average assets and increase in the efficiency ratio when the first half of 2023 is compared with the first half of 2022. Return on average equity increased when the first half of 2023 is compared with the first half of 2022 primarily due to a lower denominator for 2023, attributable to an increase in unrealized securities losses reflected in the accumulated other comprehensive loss.
(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 fully taxable equivalent 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 loss, net.  
The net interest margin is calculated using the fully taxable equivalent interest income, 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
Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by use of words such as “may,” “will,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “continue,” “should,” and similar words or phrases. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors, and other conditions which by their nature, are not susceptible to accurate forecast and are subject to significant uncertainty. Because of these uncertainties and the assumptions on which this discussion and the forward-looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. For details on factors that could affect these expectations, see the risk factors and other cautionary language included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and in the Company’s other periodic and current reports filed with the SEC. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company’s past results are not necessarily indicative of future performance.