BLACKSBURG, VA., January 25, 2024 -- National Bankshares, Inc. (“the Company”) (Nasdaq: NKSH), parent company of The National Bank of Blacksburg (“the Bank”) and National Bankshares Financial Services, today announced its results of operations for the fourth quarter and year ended December 31, 2023. The Company reported net income of $4.19 million, or basic and diluted earnings per common share of $0.71, for the fourth quarter and $15.69 million, or basic and diluted earnings per common share of $2.66, for the year ended December 31, 2023. This compares with net income of $9.31 million, or basic earnings per common share of $1.57, for the fourth quarter of 2022 and $25.93 million, or basic earnings per common share of $4.33, for the year ended December 31, 2022. National Bankshares, Inc. ended December 31, 2023 with total assets of $1.66 billion.
President and CEO F. Brad Denardo commented, “In an exceptionally challenging year for the banking sector, National Bankshares remains fundamentally strong, with solid, diversified deposits, excellent asset quality, and ample liquidity. 2023’s sustained Federal Reserve interest rate hikes pressured net interest margins, while the failure of several high-profile regional banks shook public confidence in the industry. Our effort to maintain a strong deposit base in this difficult environment was successful but at a substantial cost to 2023 net income.”
Mr. Denardo continued, “Throughout 2023 and into the first quarter of 2024, we have not only survived, but we have continued to pursue growth, with investments in our people, improvements in our infrastructure, and entry into promising new markets. Yesterday we announced that we have entered into a definitive merger agreement to acquire Frontier Community Bank headquartered in Waynesboro, Virginia. The acquisition will allow us to expand our community banking model into the Shenandoah Valley and central Virginia markets. As we move ahead into the promise of a new year, we remain confident in our ability to deliver value for our customers, our communities, and our shareholders.”
Highlights
Credit Quality
Loan quality continues to reflect low credit risk, with low charge-off and past due levels. Along with improvements in the forecast and credit risk indicators, the calculation for the allowance for credit losses on loans (“ACLL”) indicated a decrease in risk when December 31, 2023 is compared with September 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 ACLL by $2.34 million from December 31, 2022.
Net Income
Net income for the fourth quarter of 2023 improved from net income recorded for the third quarter of 2023, primarily due to the recovery of the provision discussed above and improvement in noninterest expense. When the years ended December 31, 2023 and December 31, 2022 are compared, net income decreased. Key items that affected 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 fourth quarter is compared with the third quarter of 2023, and when the years ended December 31, 2023 and December 31, 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 do not decrease substantially, repricing will continue to contribute to improved interest income.
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.
Noninterest Income
Noninterest income increased when the fourth quarter is compared with the third quarter of 2023. During the fourth quarter, the Company recognized income of $232 thousand upon receipt of a contract contingency payment associated with the 2022 sale of a private equity investment.
Noninterest income for the year ended December 31, 2023 decreased when compared with the year ended December 31, 2022. During 2022, the Company recorded a gain of $3.82 million for the previously mentioned sale of a private equity investment. During 2023, the Company recognized 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 $3.33 million on the sale of securities.
Noninterest Expense
Noninterest expense for the fourth quarter decreased when compared with the third quarter of 2023, primarily due to adjustment of discretionary expense accruals and the Company’s ongoing cost control initiatives.
Noninterest expense for the year ended December 31, 2023 increased when compared with the year ended December 31, 2022, due to expenses within professional services of $786 thousand associated with a proxy contest in 2023, as well as increased 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 ATM upgrades and 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 $348 thousand based upon actuarial calculations.
Securities
The impact of the Federal Reserve’s interest rate increases reduced the market value of the Company’s bond portfolio. Federal Open Market Committee minutes from December 2023 indicated that further increases are less likely, which improved the market value of the Company’s securities as of December 31, 2023 when compared with September 30, 2023.
As part of its interest rate risk management, the Company strategically selected and sold securities during 2023 with a market value of $43.52 million. The sale prioritized enhancement of long-term earnings. The loss on the securities sale was largely offset by a gain on the sale of the Company’s VISA Class B stock.
The Company’s Asset Liability Management Committee closely monitors interest rate risk on all of the Company’s financial assets and liabilities. As of December 31, 2023, the Company has the ability to hold securities until maturity and there are no further sales planned. Analysis as of December 31, 2023 did not indicate credit risk concerns with any of the Company’s securities.
Deposits
Deposit levels improved during the fourth quarter when compared with September 30, 2023. Time deposits as well as interest bearing demand deposits increased. In response to competitive pressure during 2023, 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 areas 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 25% 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.
Liquidity
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 September 30, 2023. While higher interest rates 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 December 31, 2023 increased from September 30, 2023 due to improvement in market value of securities. 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 affect 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 regular dividends of $1.51 per common share in 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 94.21% for 2023.
Key Ratios
Long-term strategies as well as management of the business environment of the period affected results for 2023 and 2022. As previously mentioned, during 2023, the Company also incurred expense to respond to a proxy contest. The expense associated with the proxy contest reduced earnings by $0.11 per share and reduced the return on average equity by 50 basis points. The return on average assets was lower by 4 basis points. Please refer to the Reconciliation of Non-GAAP Financial Measures for detail.
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 in Roanoke, Staunton and Charlottesville, Virginia. 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. Although we believe that our expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of our existing knowledge of our business and operations, there can be no assurance that actual future results, performance, achievements, or trends will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the following: the businesses of the Company and Frontier Community Bank (“FCB”) may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected; the expected growth opportunities or cost savings from the merger with FCB may not be fully realized or may take longer to realize than expected; deposit attrition, operating costs, customer losses and business disruption prior to and following the merger with FCB, including adverse effects on relationships with employees and customers, may be greater than expected; the regulatory and shareholder approvals required for the merger with FCB may not be obtained; the level of inflation; interest rates; national and local economic conditions; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation, and the impact of any policies or programs implemented pursuant to financial reform legislation; unanticipated increases in the level of unemployment in the Company’s market; the quality or composition of the loan and/or investment portfolios; the sufficiency of the Company’s allowance for credit losses; demand for loan products; deposit flows, including impact on liquidity; competition; demand for financial services in the Company’s market; the real estate market conditions in the Company’s market; laws, regulations and policies impacting financial institutions; adverse developments in the financial industry generally, such as the recent bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer behavior; technological risks and developments, and cyber-threats, attacks or events; the Company’s technology initiatives; geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts; the occurrence of significant natural disasters, including severe weather conditions, floods, and other catastrophic events; the Company's ability to identify, attract, and retain experienced management, relationship managers, and support personnel, particularly in a competitive labor environment; performance by the Company’s counterparties or vendors; applicable accounting principles, policies and guidelines; the impact of public health events, including the adverse impact on our business and operations and on our customers; and other factors described from time to time in the Company’s reports (such as our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
President and CEO F. Brad Denardo commented, “In an exceptionally challenging year for the banking sector, National Bankshares remains fundamentally strong, with solid, diversified deposits, excellent asset quality, and ample liquidity. 2023’s sustained Federal Reserve interest rate hikes pressured net interest margins, while the failure of several high-profile regional banks shook public confidence in the industry. Our effort to maintain a strong deposit base in this difficult environment was successful but at a substantial cost to 2023 net income.”
Mr. Denardo continued, “Throughout 2023 and into the first quarter of 2024, we have not only survived, but we have continued to pursue growth, with investments in our people, improvements in our infrastructure, and entry into promising new markets. Yesterday we announced that we have entered into a definitive merger agreement to acquire Frontier Community Bank headquartered in Waynesboro, Virginia. The acquisition will allow us to expand our community banking model into the Shenandoah Valley and central Virginia markets. As we move ahead into the promise of a new year, we remain confident in our ability to deliver value for our customers, our communities, and our shareholders.”
Highlights
Credit Quality
Loan quality continues to reflect low credit risk, with low charge-off and past due levels. Along with improvements in the forecast and credit risk indicators, the calculation for the allowance for credit losses on loans (“ACLL”) indicated a decrease in risk when December 31, 2023 is compared with September 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 ACLL by $2.34 million from December 31, 2022.
Net Income
Net income for the fourth quarter of 2023 improved from net income recorded for the third quarter of 2023, primarily due to the recovery of the provision discussed above and improvement in noninterest expense. When the years ended December 31, 2023 and December 31, 2022 are compared, net income decreased. Key items that affected 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 fourth quarter is compared with the third quarter of 2023, and when the years ended December 31, 2023 and December 31, 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 do not decrease substantially, repricing will continue to contribute to improved interest income.
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.
Noninterest Income
Noninterest income increased when the fourth quarter is compared with the third quarter of 2023. During the fourth quarter, the Company recognized income of $232 thousand upon receipt of a contract contingency payment associated with the 2022 sale of a private equity investment.
Noninterest income for the year ended December 31, 2023 decreased when compared with the year ended December 31, 2022. During 2022, the Company recorded a gain of $3.82 million for the previously mentioned sale of a private equity investment. During 2023, the Company recognized 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 $3.33 million on the sale of securities.
Noninterest Expense
Noninterest expense for the fourth quarter decreased when compared with the third quarter of 2023, primarily due to adjustment of discretionary expense accruals and the Company’s ongoing cost control initiatives.
Noninterest expense for the year ended December 31, 2023 increased when compared with the year ended December 31, 2022, due to expenses within professional services of $786 thousand associated with a proxy contest in 2023, as well as increased 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 ATM upgrades and 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 $348 thousand based upon actuarial calculations.
Securities
The impact of the Federal Reserve’s interest rate increases reduced the market value of the Company’s bond portfolio. Federal Open Market Committee minutes from December 2023 indicated that further increases are less likely, which improved the market value of the Company’s securities as of December 31, 2023 when compared with September 30, 2023.
As part of its interest rate risk management, the Company strategically selected and sold securities during 2023 with a market value of $43.52 million. The sale prioritized enhancement of long-term earnings. The loss on the securities sale was largely offset by a gain on the sale of the Company’s VISA Class B stock.
The Company’s Asset Liability Management Committee closely monitors interest rate risk on all of the Company’s financial assets and liabilities. As of December 31, 2023, the Company has the ability to hold securities until maturity and there are no further sales planned. Analysis as of December 31, 2023 did not indicate credit risk concerns with any of the Company’s securities.
Deposits
Deposit levels improved during the fourth quarter when compared with September 30, 2023. Time deposits as well as interest bearing demand deposits increased. In response to competitive pressure during 2023, 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 areas 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 25% 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.
Liquidity
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 September 30, 2023. While higher interest rates 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 December 31, 2023 increased from September 30, 2023 due to improvement in market value of securities. 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 affect 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 regular dividends of $1.51 per common share in 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 94.21% for 2023.
Key Ratios
Long-term strategies as well as management of the business environment of the period affected results for 2023 and 2022. As previously mentioned, during 2023, the Company also incurred expense to respond to a proxy contest. The expense associated with the proxy contest reduced earnings by $0.11 per share and reduced the return on average equity by 50 basis points. The return on average assets was lower by 4 basis points. Please refer to the Reconciliation of Non-GAAP Financial Measures for detail.
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 in Roanoke, Staunton and Charlottesville, Virginia. 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. Although we believe that our expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of our existing knowledge of our business and operations, there can be no assurance that actual future results, performance, achievements, or trends will not differ materially from any projected future results, performance, achievements or trends expressed or implied by such forward-looking statements. Actual future results, performance, achievements or trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the following: the businesses of the Company and Frontier Community Bank (“FCB”) may not be combined successfully, or such combination may take longer, be more difficult, time-consuming or costly to accomplish than expected; the expected growth opportunities or cost savings from the merger with FCB may not be fully realized or may take longer to realize than expected; deposit attrition, operating costs, customer losses and business disruption prior to and following the merger with FCB, including adverse effects on relationships with employees and customers, may be greater than expected; the regulatory and shareholder approvals required for the merger with FCB may not be obtained; the level of inflation; interest rates; national and local economic conditions; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation, and the impact of any policies or programs implemented pursuant to financial reform legislation; unanticipated increases in the level of unemployment in the Company’s market; the quality or composition of the loan and/or investment portfolios; the sufficiency of the Company’s allowance for credit losses; demand for loan products; deposit flows, including impact on liquidity; competition; demand for financial services in the Company’s market; the real estate market conditions in the Company’s market; laws, regulations and policies impacting financial institutions; adverse developments in the financial industry generally, such as the recent bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer behavior; technological risks and developments, and cyber-threats, attacks or events; the Company’s technology initiatives; geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts; the occurrence of significant natural disasters, including severe weather conditions, floods, and other catastrophic events; the Company's ability to identify, attract, and retain experienced management, relationship managers, and support personnel, particularly in a competitive labor environment; performance by the Company’s counterparties or vendors; applicable accounting principles, policies and guidelines; the impact of public health events, including the adverse impact on our business and operations and on our customers; and other factors described from time to time in the Company’s reports (such as our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K) filed with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.