NATIONAL BANKSHARES INC annual report, FY2023

National Bankshares, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023; filed March 19, 2024. The filing reports annual results rather than a standalone fourth quarter. National Bankshares, Inc. is a Virginia financial holding company operating principally through National Bank of Blacksburg, a community bank serving Virginia and surrounding markets.

Business Context

National Bank of Blacksburg operates 24 banking locations, three loan production offices and 22 ATMs, offering commercial, residential, construction, consumer, trust, insurance and investment services.
As of December 31, 2023, consolidated assets were $1.655 billion, deposits were $1.504 billion, loans were $857.2 million gross and stockholders’ equity was $140.5 million.
Interest and fees on loans represented 57.08% of operating revenue, interest on investments represented 26.29%, and noninterest income represented 13.72%.

Financial Performance and Key Metrics

Metric	2023	2022	Change
Interest income	$58.833 million	$50.109 million	17.4% increase
Interest expense	$21.550 million	$3.083 million	Significant increase
Net interest income	$37.283 million	$47.026 million	20.7% decrease
Net interest margin, FTE	2.38%	2.88%	Down 50 basis points
Noninterest income	$9.359 million	$12.401 million	24.5% decrease
Noninterest expense	$29.228 million	$26.958 million	8.4% increase
Net income	$15.691 million	$25.932 million	39.5% decrease
Diluted earnings per share	$2.66	$4.33	38.6% decrease
Return on average assets	0.97%	1.52%	Down 55 basis points
Return on average equity	12.59%	17.81%	Down 522 basis points
Efficiency ratio	61.01%	47.69%	Deteriorated

The increase in interest income was more than offset by higher deposit and borrowing costs. Average interest-bearing deposit costs rose materially as the Company competed for funding.
The Company recorded a $1.261 million recovery of credit-loss provisions in 2023 versus a $706 thousand provision in 2022.
Operating cash flow was $15.523 million, compared with $29.500 million in 2022. Investing activities provided $53.188 million, principally from securities sales, maturities and repayments. Financing activities used $53.537 million, largely reflecting deposit mix changes and $14.784 million of dividends paid.
Dividends declared were $2.51 per share, including a special one-time $1.00 per-share dividend. No shares were repurchased in 2023.

Balance Sheet, Credit Quality and Capital

Total assets declined 1.32% to $1.655 billion. Net loans increased 0.36% to $847.6 million, while available-for-sale securities declined 5.82% to $618.6 million.
Total deposits declined 2.51% to $1.504 billion. Noninterest-bearing, interest-bearing demand and savings deposits declined, while time deposits increased 230.1% to $223.2 million as the Company used higher-rate products to retain funding.
Approximately 44.34% of deposits were uninsured; municipal deposits were supported by pledged collateral, and approximately 19.65% of non-municipal deposits were uninsured.
The allowance for credit losses on loans was $9.094 million, or 1.06% of loans, compared with $8.225 million, or 0.96%, at year-end 2022. Adoption of CECL increased the allowance by $2.342 million and reduced retained earnings by $2.014 million, net of tax.
Nonaccrual loans were $2.629 million, nonperforming loans were 0.31% of loans, other real estate owned declined to zero, and the net charge-off ratio remained low at 0.02%.
Commercial real estate loans totaled $419.1 million, or approximately 48.9% of total loans. Approximately 83.5% of loans were secured by real property.
NBB exceeded all applicable capital minimums and was classified as well capitalized. Its December 31, 2023 ratios were 18.09% total capital, 17.23% Tier 1 capital, 17.23% CET1 and 11.05% leverage.
There was no material long-term debt outstanding at year-end. The Company had $301.020 million of FHLB borrowing capacity, a $10 million unsecured federal funds line and $182.037 million of Federal Reserve discount-window capacity, with no amounts outstanding against these facilities at year-end.

Material Changes Versus 2022

Net income decreased primarily because deposit repricing and funding competition increased interest expense by $18.467 million, while net interest income declined $9.743 million.
Noninterest income declined because 2022 included a $3.823 million gain on a private-equity investment. In 2023, the Company recognized a $2.971 million gain on VISA Class B shares, a $232 thousand contingency payment related to the 2022 transaction, $1.044 million of tax-free BOLI settlement income and a $3.332 million realized securities loss.
Noninterest expense increased $2.270 million. The 2023 amount included $786 thousand of professional fees related to a threatened proxy contest, which management did not expect to recur materially.
Accumulated other comprehensive loss improved by $18.900 million as securities fair values recovered, increasing total stockholders’ equity 14.54% despite lower earnings and higher dividends.
The Company strategically sold securities with an amortized cost of $46.850 million, realizing a $3.332 million loss to improve long-term earnings positioning and support liquidity.

Guidance, Outlook, Commentary and Risks

Management did not provide quantitative earnings or revenue guidance. It stated that liquidity was sufficient under tested scenarios and that it intended to request approval for additional bank dividends in 2024.
The Company expects to complete the acquisition of Frontier Community Bank in the second or third quarter of 2024, subject to regulatory and shareholder approvals. The estimated aggregate purchase price is approximately $16.822 million, consisting of cash and stock.
The proposed Frontier transaction carries integration, cost, regulatory approval, customer-retention, employee-retention, appraisal-rights and execution risks.
A new Roanoke branch is under construction and is expected to be completed during the fourth quarter of 2024. Capital expenditures related to that project are a continuing commitment.
The Company is liability-sensitive to interest rates. Its simulation indicated that a 100-basis-point rate increase could reduce projected one-year net interest income by 3.2%, while a 100-basis-point decrease could increase it by 8.4%; actual results may differ materially.
Key risks include deposit outflows, uninsured deposits, unrealized securities losses, commercial real estate concentration, local real estate and economic conditions, rising funding costs, credit-loss estimation, competition, cybersecurity and third-party service-provider disruptions.
The Company reported no material pending legal proceedings and stated that cybersecurity events have not materially affected it since 2017. Cybersecurity threats remain a significant ongoing risk.
The independent auditor issued an unqualified opinion. The critical audit matter was the allowance for credit losses on collectively evaluated loans, reflecting significant modeling and management judgment.

Important Facts for Investors to Verify

Whether deposit competition and funding costs continue to compress net interest margin and earnings.
Trends in uninsured deposits, deposit maturities and reliance on higher-cost time deposits.
Commercial real estate exposure, including office and college-housing loans, and any deterioration in collateral values or borrower cash flows.
Whether the $9.094 million allowance for credit losses remains adequate under changing economic and unemployment forecasts.
The timing, regulatory approvals, consideration mix, integration costs and expected benefits of the Frontier acquisition.
The effect of unrealized securities losses, interest-rate movements and any future need to sell securities for liquidity.
The sustainability of the $2.51 per-share dividend and the Company’s ability to obtain required subsidiary-bank dividend approvals.
Actual 2024 capital spending and completion costs for the Roanoke branch.