National Bankshares, Inc. Reports Results for the Third Quarter and Nine Months Ended September 30, 2023

BLACKSBURG, VA., October 26, 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 third quarter of 2023. The Company reported net income of $3.07 million, or basic earnings per common share of $0.52, for the third quarter and $11.51 million, or basic earnings per common share of $1.95, for the nine months ended September 30, 2023. This compares to net income of $6.16 million, or basic earnings per common share of $1.03, for the third quarter of 2022 and $16.62 million, or basic earnings per common share of $2.77, for the nine months ended September 30, 2022. National Bankshares, Inc. ended September 30, 2023 with total assets of $1.59 billion.

“An extremely competitive banking environment and shrinking profit margins marked the latest reporting period,” said President and CEO F. Brad Denardo. “The Federal Reserve’s sustained rate increases over the past eighteen months have drastically increased the cost of attracting and retaining deposits, resulting in much higher interest expense and reduced earnings. Under these tough conditions, our dedicated community bankers are working harder than ever to provide exceptional service, grow the business, and return value to our shareholders.”

Mr. Denardo added, "As a part of our plan for future growth, we are excited to announce that this month we will begin construction of our new branch office in Roanoke, Virginia. We look forward to serving the Roanoke Valley with the truly personalized community banking experience that has been our hallmark for over 130 years.”

Highlights

Credit Quality

Loan quality continues to reflect low credit risk, with low charge-off and past due levels. The calculation for the allowance for credit losses on loans (“ACLL”) indicated a decrease in risk when September 30, 2023 is compared with June 30, 2023 and January 1, 2023, resulting in a recovery of previously recognized provision.  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.

Net Income

Net income for the three and nine month periods ended September 30, 2023 decreased when compared with the three months ended June 30, 2023 and September 30, 2022, and the nine months ended September 30, 2022. Key items that impacted results are discussed below.

Net Interest Income

The 525 basis point increase in the Federal Reserve’s benchmark interest rate between March 2022 and July 2023 expanded the yield on earning assets when the three months ended September 30, 2023 is compared with the three months ended June 30, 2023 and September 30, 2022, and when the nine month periods ended September 30, 2023 and 2022 are compared. Many of the Company’s loans are adjustable with repricing dates in the future. If rates remain at the current level or increase, repricing will continue to contribute to improved interest income.

As noted above, the rapidity and magnitude of the Federal Reserve’s rate increases stimulated competition for deposits, resulting in higher cost of funds and compressed net interest margin when results for 2023 are compared with 2022. The Company continuously monitors its deposit base and funding costs. Further information on the Company’s funds management and deposit strategy is discussed under the Deposits section below.

Noninterest Income

Noninterest income decreased when the third quarter of 2023 is compared with the second quarter of 2023. During the second quarter of 2023, the Company recognized certain non-recurring items, including a gain of $2.97 million on the sale of VISA Class B securities, $1.04 million from the payout of a Bank Owned Life Insurance policy, and a loss of $3.34 million on the sale of securities.

Noninterest income for the nine months ended September 30, 2023 improved when compared with the nine months ended September 30, 2022, due primarily to the same factors discussed above.

Noninterest Expense

Noninterest expense for the third quarter decreased when compared with the second quarter of 2023, primarily due to lower expenses for professional services. Professional services include legal and other expenses for the Company’s response to the proxy contest that amounted to $327 thousand for the second quarter. The Company does not anticipate any further material expense for this matter.

When results for the nine months ended September 30, 2023 are compared with the same period of 2022, noninterest expense increased due to the proxy contest, as discussed above, as well as salary and employee benefits, data processing and ATM, FDIC insurance and pension non-service cost. 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. FDIC insurance increased due to an industry-wide assessment increase implemented by the FDIC. Pension non-service cost, included in other operating expense, increased $261 thousand based upon actuarial calculations.

Securities

The impact of the Federal Reserve’s interest rate increases decreased the market value of the Company’s bond portfolio. 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 September 30, 2023, the Company has the ability to hold securities until maturity and there are no further sales planned. Analysis as of September 30, 2023 did not indicate credit risk concerns with any of the Company’s securities.

Deposits
Competition continued to pressure the Company’s deposits during the third 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 24% 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 20% are uninsured.

Overdraft Policy

During the third quarter, the Company modified its policy to exempt from charge small overdrafts on deposit accounts, and small items that overdraw deposit accounts. The policy change is intended to address recent industry-wide regulatory comments and build goodwill with the Company’s deposit base.

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 2023, the Company accessed short-term borrowings with the FHLB and Federal Reserve 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

Loans increased slightly from June 2023. While higher interest rates have challenged loan demand during 2023, the Company is positioned to continue to make every loan that meets its underwriting standards.

Stockholders’ Equity

Stockholders’ equity as of September 30, 2023 decreased from June 30, 2023 due to higher unrealized losses on securities, offset to an extent by earnings. 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 substantially higher than minimum regulatory requirements, and meets all requirements for borrowing from the FHLB.

Dividends

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 88.55% for the first nine months of 2023.

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 results for the three and nine months ended September 30, 2023 are compared with the same period of 2022 and the second quarter of 2023.

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.”

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.