nksh20240331

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 0-15204

NATIONAL BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Virginia

(State or other jurisdiction of incorporation or organization)

54-1375874

(I.R.S. Employer Identification No.)

101 Hubbard Street

Blacksburg, Virginia 24062-9002

(Address of principal executive offices) (Zip Code)

(540) 951-6300

(Registrant’s telephone number, including area code)

(Not applicable)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.25 per share	NKSH	Nasdaq Capital Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☒

Smaller reporting company ☒

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Outstanding shares of common stock at May 14, 2024

5,893,782

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NATIONAL BANKSHARES, INC.

Form 10-Q

Index

Part I – Financial Information		Page

Item 1	Financial Statements	3

	Consolidated Balance Sheets, March 31, 2024 (Unaudited) and December 31, 2023	3

	Consolidated Statements of Income for the Three Months Ended March 31, 2024 and 2023 (Unaudited)	4

	Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2024 and 2023 (Unaudited)	5

	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2024 and 2023 (Unaudited)	6

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2024 and 2023 (Unaudited)	7

	Notes to Consolidated Financial Statements (Unaudited)	9

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3	Quantitative and Qualitative Disclosures About Market Risk	39

Item 4	Controls and Procedures	39

Part II – Other Information

Item 1	Legal Proceedings	39

Item 1A	Risk Factors	39

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3	Defaults Upon Senior Securities	40

Item 4	Mine Safety Disclosures	40

Item 5	Other Information	40

Item 6	Exhibits	40

Signatures		41

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	Part I
Item 1. Financial Statements	Financial Information
	National Bankshares, Inc.
	Consolidated Balance Sheets

	(Unaudited)
	March 31,			December 31,
(in thousands, except share and per share data)	2024			2023
Assets
Cash and due from banks	$	10,656		$	12,967
Interest-bearing deposits		110,527			73,636
Total cash and cash equivalents		121,183			85,603
Securities available for sale, at fair value		609,968			618,601
Restricted stock, at cost		1,248			1,264
Mortgage loans held for sale		-			406
Loans:
Loans, net of unearned income and deferred fees and costs		863,548			856,646
Less allowance for credit losses		(9,055	)		(9,094	)
Loans, net		854,493			847,552
Premises and equipment, net		11,214			11,109
Accrued interest receivable		6,478			6,313
Goodwill		5,848			5,848
Bank-owned life insurance		43,840			43,583
Other assets		34,934			34,091
Total assets	$	1,689,206		$	1,655,370

Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits	$	283,870		$	281,215
Interest-bearing demand deposits		838,450			821,661
Savings deposits		175,587			177,856
Time deposits		239,901			223,240
Total deposits		1,537,808			1,503,972
Accrued interest payable		2,514			1,416
Other liabilities		9,494			9,460
Total liabilities		1,549,816			1,514,848
Commitments and contingencies
Stockholders' Equity
Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding	$	-		$	-
Common stock of $1.25 par value and additional paid in capital. Authorized 10,000,000 shares; issued and outstanding 5,893,782 (including 4,095 unvested) shares at March 31, 2024 and December 31, 2023		7,436			7,404
Retained earnings		200,158			197,984
Accumulated other comprehensive loss, net		(68,204	)		(64,866	)
Total stockholders' equity		139,390			140,522
Total liabilities and stockholders' equity	$	1,689,206		$	1,655,370

See accompanying notes to consolidated financial statements.

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National Bankshares, Inc.

Consolidated Statements of Income

(Unaudited)

	Three Months Ended March 31,
(in thousands, except share and per share data)	2024			2023
Interest Income
Interest and fees on loans	$	10,277		$	9,333
Interest on interest-bearing deposits		1,129			228
Interest on securities – taxable		4,276			4,118
Interest on securities – nontaxable		339			365
Total interest income		16,021			14,044
Interest Expense
Interest on time deposits		2,552			359
Interest on other deposits		5,224			2,454
Interest on borrowings		-			285
Total interest expense		7,776			3,098
Net interest income		8,245			10,946
(Recovery of) provision for credit losses		(10	)		2
Net interest income after (recovery of) provision for credit losses		8,255			10,944

Noninterest Income
Service charges on deposit accounts		675			592
Other service charges and fees		46			53
Credit and debit card fees, net		374			467
Trust income		503			445
BOLI income		258			239
Gain on sale of mortgage loans		24			16
Other income		319			375
Realized securities gain, net		-			12
Total noninterest income		2,199			2,199

Noninterest Expense
Salaries and employee benefits		4,466			4,434
Occupancy, furniture and fixtures		539			542
Data processing and ATM		867			873
FDIC assessment		187			117
Net costs of other real estate owned		-			11
Franchise taxes		350			375
Professional services		240			753
Merger-related expenses		484			-
Other operating expenses		629			559
Total noninterest expense		7,762			7,664
Income before income taxes		2,692			5,479
Income tax expense		518			948
Net Income	$	2,174		$	4,531
Basic earnings per common share	$	0.37		$	0.77
Diluted earnings per common share	$	0.37		$	0.77
Weighted average number of common shares outstanding, basic		5,889,687			5,889,687
Weighted average number of common shares outstanding, diluted		5,891,651			5,889,687
Dividends declared per common share	$	-		$	1.00

See accompanying notes to consolidated financial statements.

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National Bankshares, Inc.

Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended March 31, 2024 and 2023

(Unaudited)

	March 31,
(in thousands)	2024			2023
Net Income	$	2,174		$	4,531

Other Comprehensive (Loss) Income, Net of Tax
Unrealized holding (loss) gain on available for sale securities net of tax of ($887) and $3,121 for the periods ended March 31, 2024 and 2023, respectively		(3,338	)		11,738
Reclassification adjustment for gain included in net income, net of tax of ($3) in 2023		-			(9	)
Other comprehensive (loss) income, net of tax		(3,338	)		11,729
Total Comprehensive (Loss) Income	$	(1,164	)	$	16,260

See accompanying notes to consolidated financial statements.

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National Bankshares, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

Three Months Ended March 31, 2024 and 2023

(in thousands except share data)	Common Stock and Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Total
Balances at December 31, 2022	$	7,362	$	199,091		$	(83,766	)	$	122,687
Adoption of ASU 2016-13		-		(2,014	)		-			(2,014	)
Net income		-		4,531			-			4,531
Cash dividends of $1.00 per share		-		(5,890	)		-			(5,890	)
Other comprehensive income, net of tax of $3,118		-		-			11,729			11,729
Balances at March 31, 2023	$	7,362	$	195,718		$	(72,037	)	$	131,043

Balances at December 31, 2023	$	7,404	$	197,984		$	(64,866	)	$	140,522
Net income		-		2,174			-			2,174
Other comprehensive loss, net of tax of ($887)		-		-			(3,338	)		(3,338	)
Stock based compensation		32		-			-			32
Balances at March 31, 2024	$	7,436	$	200,158		$	(68,204	)	$	139,390

See accompanying notes to consolidated financial statements.

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National Bankshares, Inc.

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2024 and 2023

(Unaudited)

	March 31,			March 31,
(in thousands)	2024			2023
Cash Flows from Operating Activities
Net income	$	2,174		$	4,531
Adjustments to reconcile net income to net cash provided by operating activities:
(Recovery of) provision for credit losses		(10	)		2
Depreciation of premises and equipment		210			163
Amortization of premiums and accretion of discounts, net		259			253
Gain on sale of securities available for sale, net		-			(12	)
Loss on disposal of repossessed assets		-			5
Increase in cash value of bank-owned life insurance		(258	)		(239	)
Origination of mortgage loans held for sale		(1,023	)		(1,239	)
Proceeds from sale of mortgage loans held for sale		1,453			1,255
Gain on sale of mortgage loans held for sale		(24	)		(16	)
Equity based compensation expense		32			-
Net change in:
Accrued interest receivable		(165	)		(6	)
Other assets		44			200
Accrued interest payable		1,098			208
Other liabilities		50			(772	)
Net cash provided by operating activities		3,840			4,333

Cash Flows from Investing Activities
Proceeds from calls, principal payments, sales and maturities of securities available for sale		4,149			20,411
Net change in restricted stock		16			12
Purchase of loan participations		(5,609	)		(2,280	)
Collection of loan participations		610			3,126
Loan originations and principal collections, net		(2,012	)		(5,166	)
Proceeds from sale of repossessed assets		-			9
Recoveries on loans charged off		65			173
Purchases of premises and equipment		(315	)		(223	)
Net cash (used in) provided by investing activities		(3,096	)		16,062

Cash Flows from Financing Activities
Net change in time deposits		16,661			57,942
Net change in other deposits		17,175			(89,215	)
Cash dividends paid		-			(5,890	)
Net cash provided by (used in) financing activities		33,836			(37,163	)
				(Continued)

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Net change in cash and cash equivalents		34,580			(16,768	)
Cash and cash equivalents at beginning of period		86,603			71,429
Cash and cash equivalents at end of period	$	121,183		$	54,661

Supplemental Disclosures of Cash Flow Information
Interest paid on deposits and borrowings	$	6,678		$	2,890
Income taxes paid		260			1,015

Supplemental Disclosure of Noncash Activities
Loans charged against the allowance for credit losses	$	109		$	92
Loans transferred to repossessed assets		-			7
Unrealized holding (loss) gain on securities available for sale		(4,225	)		14,847

See accompanying notes to consolidated financial statements.

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National Bankshares, Inc.

Notes to Consolidated Financial Statements

March 31, 2024

(Unaudited)

$ in thousands, except per share data

Note 1: General and Summary of Significant Accounting Policies

The consolidated financial statements of National Bankshares, Inc. (“NBI”) and its wholly-owned subsidiaries, The National Bank of Blacksburg (the “Bank” or “NBB”) and National Bankshares Financial Services, Inc. (“NBFS”) (collectively, the “Company”), conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of the Company’s management, all adjustments consisting of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial statements, have been included.

Application of the principles of GAAP and practices within the banking industry requires management to make estimates, assumptions, and judgements that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgements are based on information available as of the date of the financial statement; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance of credit losses on loans.

The results of operations for the three month period ended March 31, 2024 are not necessarily indicative of results of operations for the full year or any other interim period. The interim period consolidated financial statements and financial information included in this Form 10-Q should be read in conjunction with the notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”). The Company’s significant accounting policies followed in preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the 2023 Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2023. All amounts and disclosures included in this quarterly report as of December 31, 2023, were derived from the Company’s audited consolidated financial statements. The Company posts all reports required to be filed under the Securities Exchange Act of 1934 on its web site at www.nationalbankshares.com.

Certain items in the prior period financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or stockholders’ equity.

Risks and Uncertainties

The Company is closely monitoring risks that may impact its business, including high inflation, along with U.S. monetary policy maneuvers to reduce inflation. Inflation and U.S. monetary policy maneuvers to reduce it may impact the Company’s customers’ demand for banking services and ability to qualify for and/or repay loans. These risks could adversely affect the Company’s business, financial condition, results of operations, cash flows, credit risk, asset valuations and capital position.

Recent Accounting Pronouncements

ASU 2023-09

In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Company does not expect the adoption of ASU 2023-09 to have a material impact on its consolidated financial statements.

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Recently Adopted Accounting Standards

ASU 2022-03

In June 2022, the Financial Accounting Standards Board (FASB) issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. ASU 2022-03 was effective for the Company on January 1, 2024. The adoption of ASU 2022-03 did not have a material impact on the Company’s consolidated financial statements.

Note 2: Loans and Allowance for Credit Losses

Loans

The following table presents the composition of the loan portfolio, excluding mortgage loans held for sale, as of the dates indicated.

	March 31, 2024			December 31, 2023
Real estate construction	$	61,486		$	55,379
Consumer real estate		244,946			241,564
Commercial real estate		414,615			419,130
Commercial non real estate		41,835			41,555
Public sector and IDA		59,742			60,551
Consumer non real estate		41,467			38,996
Gross loans	$	864,091		$	857,175
Less unearned income and deferred fees and costs		(543	)		(529	)
Loans, net of unearned income and deferred fees and costs	$	863,548		$	856,646
Allowance for credit losses on loans		(9,055	)		(9,094	)
Total loans, net	$	854,493		$	847,552

The amortized cost of loans excludes accrued interest receivable of $3,035 at March 31, 2024 and $3,032 at December 31, 2023.

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Past Due and Nonaccrual Loans

The following tables present the aging of past due loans, by loan pool, as of the dates indicated.

March 31, 2024	Accruing Current Loans		Accruing Loans 30 – 89 Days Past Due		Accruing Loans 90 or More Days Past Due		Nonaccrual Loans		Total Loans		Accruing and Nonaccrual 90 or More Days Past Due
Real Estate Construction
Construction, 1-4 family residential	$	11,603	$	-	$	-	$	-	$	11,603	$	-
Construction, other		49,883		-		-		-		49,883		-
Consumer Real Estate
Equity line		17,404		112		-		-		17,516		-
Residential closed-end first liens		129,086		598		121		-		129,805		121
Residential closed-end junior liens		4,932		11		-		-		4,943		-
Investor-owned residential real estate		92,605		77		-		-		92,682		-
Commercial Real Estate
Multifamily residential real estate		118,309		-		-		-		118,309		-
Commercial real estate owner-occupied		112,302		147		-		2,381		114,830		225
Commercial real estate, other		181,476		-		-		-		181,476		-
Commercial Non Real Estate
Commercial and industrial		41,564		22		39		210		41,835		39
Public Sector and IDA
States and political subdivisions		59,742		-		-		-		59,742		-
Consumer Non-Real Estate
Credit cards		4,664		1		1		-		4,666		1
Automobile		12,817		104		-		-		12,921		-
Other consumer loans		23,762		117		1		-		23,880		1
Total	$	860,149	$	1,189	$	162	$	2,591	$	864,091	$	387

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December 31, 2023	Accruing Current Loans		Accruing Loans 30 – 89 Days Past Due		Accruing Loans 90 or More Days Past Due		Nonaccrual Loans		Total Loans		Accruing and Nonaccrual 90 or More Days Past Due
Real Estate Construction
Construction, 1-4 family residential	$	13,442	$	-	$	-	$	-	$	13,442	$	-
Construction, other		41,916		21		-		-		41,937		-
Consumer Real Estate
Equity line		17,178		104		-		-		17,282		-
Residential closed-end first liens		124,886		662		131		-		125,679		131
Residential closed-end junior liens		5,027		12		-		-		5,039		-
Investor-owned residential real estate		93,564		-		-		-		93,564		-
Commercial Real Estate
Multifamily residential real estate		119,052		195		-		-		119,247		-
Commercial real estate owner-occupied		114,477		336		-		2,408		117,221		231
Commercial real estate, other		182,662		-		-		-		182,662		-
Commercial Non-Real Estate
Commercial and industrial		41,249		57		28		221		41,555		28
Public Sector and IDA
States and political subdivisions		60,551		-		-		-		60,551		-
Consumer Non-Real Estate
Credit cards		4,648		17		3		-		4,668		3
Automobile		12,126		135		-		-		12,261		-
Other consumer loans		21,934		107		26		-		22,067		26
Total	$	852,712	$	1,646	$	188	$	2,629	$	857,175	$	419

The following table presents nonaccrual loans, by loan class, as of the dates indicated:

	March 31, 2024						December 31, 2023
	With No Allowance		With an Allowance		Total		With No Allowance		With an Allowance		Total
Commercial Real Estate
Commercial real estate owner-occupied	$	2,156	$	225	$	2,381	$	2,177	$	231	$	2,408
Commercial Non Real Estate
Commercial and industrial		-		210		210		-		221		221
Total	$	2,156	$	435	$	2,591	$	2,177	$	452	$	2,629

During the three months ended March 31, 2024, no accrued interest receivable was reversed against interest income.

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Allowance for Credit Losses on Loans (ACLL)

The following tables present the activity in the ACLL by portfolio segment for the periods indicated:

	Activity in the Allowance for Credit Losses on Loans for the Three Months Ended March 31, 2024
	Real Estate Construction			Consumer Real Estate			Commercial Real Estate		Commercial Non Real Estate			Public Sector and IDA			Consumer Non Real Estate			Unallocated		Total
Balance, December 31, 2023	$	408		$	3,162		$	3,576	$	682		$	333		$	583		$	350	$	9,094
Charge-offs		-			-			-		-			-			(109	)		-		(109	)
Recoveries		-			-			16		2			-			47			-		65
Provision for (recovery of) credit losses		(59	)		(194	)		264		(37	)		(12	)		12			31		5
Balance, March 31, 2024	$	349		$	2,968		$	3,856	$	647		$	321		$	533		$	381	$	9,055

	Activity in the Allowance for Credit Losses on Loans for the Three Months Ended March 31, 2023
	Real Estate Construction			Consumer Real Estate			Commercial Real Estate		Commercial Non Real Estate			Public Sector and IDA			Consumer Non Real Estate			Unallocated		Total
Balance, December 31, 2022	$	450		$	2,199		$	3,642	$	930		$	319		$	506		$	179	$	8,225
Adoption of ASU 2016-13		(21	)		1,261			700		216			(15	)		72			129		2,342
Charge-offs		-			-			-		(12	)		-			(80	)		-		(92	)
Recoveries		-			102			12		2			-			57			-		173
Provision for (recovery of) credit losses		22			(260	)		20		58			(10	)		-			172		2
Balance, March 31, 2023	$	451		$	3,302		$	4,374	$	1,194		$	294		$	555		$	480	$	10,650

	Activity in the Allowance for Credit Losses on Loans for the Year Ended December 31, 2023
	Real Estate Construction			Consumer Real Estate			Commercial Real Estate			Commercial Non-Real Estate			Public Sector and IDA			Consumer Non- Real Estate			Unallocated		Total
Balance, December 31, 2022	$	450		$	2,199		$	3,642		$	930		$	319		$	506		$	179	$	8,225
Adoption of ASU 2016-13		(21	)		1,261			700			216			(15	)		72			129		2,342
Charge-offs		-			(17	)		-			(214	)		-			(247	)		-		(478	)
Recoveries		-			103			45			6			-			129			-		283
Provision for (recovery of) for credit losses		(21	)		(384	)		(811	)		(256	)		29			123			42		(1,278	)
Balance, December 31, 2023	$	408		$	3,162		$	3,576		$	682		$	333		$	583		$	350	$	9,094

The following tables present information about the ACLL for individually evaluated loans and collectively evaluated loans by portfolio segment as of the dates indicated.

Allowance for Credit Losses on Loans by Segment and Evaluation Method

March 31, 2024

Real Estate

Construction

Consumer

Real Estate

Commercial

Real Estate

Commercial

Non Real

Estate

Public

Sector and

IDA

Consumer Non

Real Estate

Unallocated

Total

Individually evaluated

362

129

568

Collectively evaluated

349

2,894

3,494

518

321

530

381

8,487

Total

349

2,968

3,856

647

321

533

381

9,055

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	Allowance for Credit Losses on Loans by Segment and Evaluation Method
December 31, 2023	Real Estate Construction		Consumer Real Estate		Commercial Real Estate		Commercial Non-Real Estate		Public Sector and IDA		Consumer Non- Real Estate		Unallocated		Total
Individually evaluated	$	-	$	74	$	367	$	126	$	-	$	5	$	-	$	572
Collectively evaluated		408		3,088		3,209		556		333		578		350		8,522
Total	$	408	$	3,162	$	3,576	$	682	$	333	$	583	$	350	$	9,094

The following tables present information about individually evaluated loans and collectively evaluated loans by portfolio segment as of the dates indicated.

Loans by Segment and Evaluation Method as of

March 31, 2024

Real Estate

Construction

Consumer

Real Estate

Commercial

Real Estate

Commercial

Non-Real

Estate

Public

Sector and

IDA

Consumer

Non-Real

Estate

Total

Individually evaluated

280

1,237

8,777

237

10,565

Collectively evaluated

61,206

243,709

405,838

41,598

59,742

41,433

853,526

Total

61,486

244,946

414,615

41,835

59,742

41,467

864,091

	Loans by Segment and Evaluation Method as of
December 31, 2023	Real Estate Construction		Consumer Real Estate		Commercial Real Estate		Commercial Non-Real Estate		Public Sector and IDA		Consumer Non-Real Estate		Total
Individually evaluated	$	286	$	1,183	$	8,805	$	227	$	-	$	43	$	10,544
Collectively evaluated		55,093		240,381		410,325		41,328		60,551		38,953		846,631
Total	$	55,379	$	241,564	$	419,130	$	41,555	$	60,551	$	38,996	$	857,175

Collateral Dependent Loans

Loans are collateral dependent when repayment is expected substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Collateral dependent loans are individually evaluated. The Company measures the ACL on collateral dependent loans based upon the fair value of the collateral, as permitted by ASU 2016-13. Fair value of the collateral is adjusted for liquidation costs/discounts. If the fair value of the collateral falls below the amortized cost of the loan, the shortfall is recognized in the ACLL. If the fair value of the collateral exceeds the amortized cost, no ACL is required.

As of March 31, 2024, five of the Company’s individually evaluated loans were collateral dependent. As of December 31, 2023, three of the Company’s individually evaluated loans were collateral dependent. All collateral dependent loans were secured by real estate as of March 31, 2024 and December 31, 2023. The following table details the amortized cost of the collateral dependent loans as of the date indicated:

	March 31, 2024				December 31, 2023
	Balance		Related Allowance		Balance		Related Allowance
Consumer Real Estate
Residential closed-end first lien	$	121	$	-	$	7		-
Commercial Real Estate
Commercial real estate, owner occupied		2,156		-		2,177		-
Total Loans	$	2,277	$	-	$	2,184	$	-

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Credit Quality

The Company categorizes loans by risk based on relevant information about the ability of borrowers to service their debt, including: collateral and financial information, historical payment experience, credit documentation and current economic trends, among other factors. At origination, each loan is assigned a risk rating. Ongoing analysis of the loan portfolio adjusts risk ratings on an individual loan basis to reflect updated information. Loans rated pass have acceptable credit quality. Loans rated special mention have potential weakness due to challenging economic or financial conditions. Loans rated classified have well-defined weaknesses that heighten the risk of default. The tables below present the loan portfolio by amortized cost basis, year of origination, loan class, credit quality, and charge-offs as of the dates indicated.

															Revolving
	Term Loans Amortized Cost Basis by Origination Year														Loans
															*Converted*
March 31, 2024	*Prior*		*2020*		*2021*		*2022*		*2023*		*2024*		*Revolving*		*to Term*		*Total*
Construction, residential
Pass	$	-	$	-	$	-	$	1,216	$	6,251	$	219	$	3,917	$	-	$	11,603
Construction, other
Pass	$	3,748	$	1,280	$	9,211	$	21,615	$	5,596	$	4,960	$	3,193	$	-	$	49,603
Classified		-		-		280		-		-		-		-		-		280
Total	$	3,748	$	1,280	$	9,491	$	21,615	$	5,596	$	4,960	$	3,193	$	-	$	49,883
Equity lines
Pass	$	76	$	-	$	-	$	-	$	-	$	-	$	17,303	$	47	$	17,426
Classified		-		-		-		-		-		-		90		-		90
Total	$	76	$	-	$	-	$	-	$	-	$	-	$	17,393	$	47	$	17,516
*Residential closed-end first liens*
Pass	$	37,144	$	14,707	$	30,734	$	30,468	$	12,135	$	4,170	$	-	$	-	$	129,358
Classified		447		-		-		-		-		-		-		-		447
Total	$	37,591	$	14,707	$	30,734	$	30,468	$	12,135	$	4,170	$	-	$	-	$	129,805
*Residential closed-end junior liens*
Pass	$	1,602	$	-	$	169	$	1,379	$	1,343	$	450	$	-	$	-	$	4,943
*Investor-owned residential real estate*
Pass	$	28,964	$	23,228	$	18,699	$	13,248	$	4,586	$	1,323	$	1,934	$	-	$	91,982
Classified		700		-		-		-		-		-		-		-		700
Total	$	29,664	$	23,228	$	18,699	$	13,248	$	4,586	$	1,323	$	1,934	$	-	$	92,682
*Multifamily residential real estate*
Pass	$	41,102	$	2,130	$	40,354	$	25,647	$	8,894	$	62	$	120	$	-	$	118,309
*Commercial real estate, owner occupied*
Pass	$	51,271	$	23,144	$	4,425	$	16,640	$	8,027	$	120	$	2,426	$	-	$	106,053
Special mention		6,396		-		-		-		-		-		-		-		6,396
Classified		2,381		-		-		-		-		-		-		-		2,381
Total	$	60,048	$	23,144	$	4,425	$	16,640	$	8,027	$	120	$	2,426	$	-	$	114,830
*Commercial real estate, other*
Pass	$	89,181	$	18,902	$	35,780	$	22,476	$	13,216	$	1,215	$	706	$	-	$	181,476
Commercial and industrial
Pass	$	6,338	$	944	$	12,299	$	6,475	$	6,164	$	2,139	$	7,239	$	-	$	41,598
Classified		210		-		-		7		-		-		20		-		237
Total	$	6,548	$	944	$	12,299	$	6,482	$	6,164	$	2,139	$	7,259	$	-	$	41,835
Public sector and IDA
Pass	$	20,432	$	231	$	26,375	$	6,242	$	6,462	$	-	$	-	$	-	$	59,742
Credit cards
Pass	$	-	$	-	$	-	$	-	$	-	$	-	$	4,666	$	-	$	4,666
YTD gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	22	$	-	$	22
Automobile
Pass	$	182	$	437	$	1,388	$	2,375	$	6,448	$	2,091	$	-	$	-	$	12,921
Other consumer
Pass	$	367	$	691	$	1,673	$	5,109	$	10,180	$	5,092	$	734	$	-	$	23,846
Special Mention		-		-		-		-		15		11		-		-		26
Classified		-		-		-		-		-		8		-		-		8
Total	$	367	$	691	$	1,673	$	5,109	$	10,195	$	5,111	$	734	$	-	$	23,880
YTD gross charge-offs	$	-	$	4	$	-	$	13	$	46	$	24	$	-	$	-	$	87
Total Loans
Pass	$	280,407	$	85,694	$	181,107	$	152,890	$	89,302	$	21,841	$	42,238	$	47	$	853,526
Special Mention		6,396		-		-		-		15		11		-		-		6,422
Classified		3,738		-		280		7		-		8		110		-		4,143
Total	$	290,541	$	85,694	$	181,387	$	152,897	$	89,317	$	21,860	$	42,348	$	47	$	864,091
YTD gross charge-offs	$	-	$	4	$	-	$	13	$	46	$	24	$	22	$	-	$	109

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															Revolving
	Term Loans Amortized Cost Basis by Origination Year														Loans
															*Converted*
December 31, 2023	*Prior*		*2019*		*2020*		*2021*		*2022*		*2023*		*Revolving*		*to Term*		*Total*
Construction, residential
Pass	$	-	$	-	$	246	$	158	$	3,275	$	5,157	$	4,606	$	-	$	13,442
Construction, other
Pass	$	2,741	$	1,094	$	1,305	$	12,671	$	17,397	$	4,884	$	1,559	$	-	$	41,651
Classified		-		-		-		286		-		-		-		-		286
Total	$	2,741	$	1,094	$	1,305	$	12,957	$	17,397	$	4,884	$	1,559	$	-	$	41,937
Equity lines
Pass	$	51	$	-	$	-	$	-	$	-	$	-	$	17,182	$	-	$	17,233
Classified		-		-		-		-		-		-		49		-		49
Total	$	51	$	-	$	-	$	-	$	-	$	-	$	17,231	$	-	$	17,282
*Residential closed-end first liens*
Pass	$	32,404	$	5,806	$	14,634	$	31,414	$	29,787	$	11,208	$	-	$	-	$	125,253
Classified		426		-		-		-		-		-		-		-		426
Total	$	32,830	$	5,806	$	14,634	$	31,414	$	29,787	$	11,208	$	-	$	-	$	125,679
YTD gross charge-offs	$	-	$	-	$	17	$	-	$	-	$	-	$	-	$	-	$	17
*Residential closed-end junior liens*
Pass	$	1,499	$	116	$	-	$	172	$	1,387	$	1,850	$	-	$	15	$	5,039
*Investor-owned residential real estate*
Pass	$	24,556	$	5,162	$	23,649	$	19,062	$	14,166	$	4,880	$	1,283	$	98	$	92,856
Classified		708		-		-		-		-		-		-		-		708
Total	$	25,264	$	5,162	$	23,649	$	19,062	$	14,166	$	4,880	$	1,283	$	98	$	93,564
*Multifamily residential real estate*
Pass	$	40,092	$	1,806	$	2,148	$	40,544	$	25,681	$	8,850	$	126	$	-	$	119,247
*Commercial real estate, owner occupied*
Pass	$	41,573	$	11,091	$	23,407	$	4,792	$	16,720	$	7,914	$	2,919	$	-	$	108,416
Special mention		6,396		-		-		-		-		-		-		-		6,396
Classified		2,409		-		-		-		-		-		-		-		2,409
Total	$	50,378	$	11,091	$	23,407	$	4,792	$	16,720	$	7,914	$	2,919	$	-	$	117,221
*Commercial real estate, other*
Pass	$	68,889	$	21,841	$	19,098	$	36,157	$	22,697	$	13,279	$	701	$	-	$	182,662
Commercial and industrial
Pass	$	6,004	$	438	$	1,060	$	12,667	$	6,954	$	6,938	$	7,267	$	-	$	41,328
Classified		220		-		-		-		7		-		-		-		227
Total	$	6,224	$	438	$	1,060	$	12,667	$	6,961	$	6,938	$	7,267	$	-	$	41,555
YTD gross charge-offs	$	-	$	12	$	-	$	-	$	-	$	12	$	190	$	-	$	214
Public sector and IDA
Pass	$	20,817	$	-	$	235	$	26,702	$	6,335	$	6,462	$	-	$	-	$	60,551
Credit cards
Pass	$	-	$	-	$	-	$	-	$	-	$	-	$	4,668	$	-	$	4,668
YTD gross charge-offs	$	-	$	-	$	-	$	-	$	-	$	-	$	39	$	-	$	39
Automobile
Pass	$	78	$	204	$	563	$	1,619	$	2,750	$	7,047	$	-	$	-	$	12,261
YTD gross charge-offs	$	-	$	3	$	-	$	1	$	38	$	-	$	-	$	-	$	42
Other Consumer
Pass	$	93	$	334	$	811	$	1,943	$	5,815	$	12,356	$	672	$	-	$	22,024
Special mention		-		-		-		-		-		17		-		-		17
Classified		-		-		-		-		11		15		-		-		26
Total	$	93	$	334	$	811	$	1,943	$	5,826	$	12,388	$	672	$	-	$	22,067
YTD gross charge-offs	$	-	$	-	$	-	$	19	$	52	$	95	$	-	$	-	$	166
Total Loans
Pass	$	238,797	$	47,892	$	87,156	$	187,901	$	152,964	$	90,825	$	40,983	$	113	$	846,631
Special mention		6,396		-		-		-		-		17		-		-		6,413
Classified		3,763		-		-		286		18		15		49		-		4,131
Total	$	248,956	$	47,892	$	87,156	$	188,187	$	152,982	$	90,857	$	41,032	$	113	$	857,175
YTD gross charge-offs	$	-	$	15	$	17	$	20	$	90	$	107	$	229	$	-	$	478

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Loan Modifications to Borrowers Experiencing Financial Difficulty

The Company modifies loans for a variety of reasons. At the date of modification, the Company assesses whether the borrower is experiencing financial difficulty. If the borrower is experiencing financial difficulty, the loan’s risk rating is evaluated and is typically changed to special mention or classified, which results in individual evaluation of the loan for the ACLL. There were two loans modified for borrowers experiencing financial difficulty during the three months period ended March 31, 2024. There were no loans to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2023.

The following table presents information about loans modified for borrowers experiencing financial difficulty during the three months and as of the date indicated.

March 31, 2024	Amortized Cost Basis		% of Class			Type of Modification	Financial Effect
Commercial Real Estate
Commercial real estate owner-occupied	$	6,396		5.57	%	Interest only payments	6 months of interest only payments, re-amortization of the balance to contractual maturity.
Commercial Non real estate
Commercial and industrial	$	7		0.02	%	Term extension	Renewal of single-payment note for an additional 3 months.

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty. Both loans are in current status as of March 31, 2024.

There were no loans to borrowers experiencing financial difficulty that had a payment default during the three months ended March 31, 2024 and 2023 and were modified in the twelve months prior to that default. Default is determined at 90 or more days past due, upon charge-off, or upon foreclosure. Modified loans in default are individually evaluated for the allowance for credit losses or if the modified loan is deemed uncollectible, the loan, or a portion of the loan, is written off and the allowance for credit losses is adjusted accordingly.

Residential Real Estate Loans In Process of Foreclosure

As of March 31, 2024 the Company had three 1-4 family residential real estate loans totaling $126 in process of foreclosure. As of December 31, 2023, one 1-4 family residential real estate loan of $7 was in process of foreclosure.

ACL on Unfunded Commitments

The following tables present the balance and activity in the ACL for unfunded commitments for the three months ended March 31, 2024 and 2023:

Allowance for Credit Losses on Unfunded Commitments
Balance, December 31, 2023	$	259
Recovery of credit losses		(15	)
Balance, March 31, 2024	$	244

Allowance for Credit Losses on Unfunded Commitments
Balance, December 31, 2022	$	35
Adoption of ASU 2016-13		207
Recovery of credit losses		-
Balance, March 31, 2023	$	242

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Note 3: Securities

The amortized cost and estimated fair value of securities available for sale along with gross unrealized gains and losses as of the dates indicated are summarized as follows:

March 31, 2024

Amortized

Cost

Gross

Unrealized Gains

Gross

Unrealized Losses

Fair Value

U.S. government agencies and corporations

352,961

44,972

307,989

States and political subdivisions

179,343

31,344

147,999

Mortgage-backed securities

153,572

6,255

147,323

Corporate debt securities

6,505

817

5,688

U.S. treasury

997

969

Total securities available for sale

693,378

83,416

609,968

December 31, 2023	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
U.S. government agencies and corporations	$	353,904	$	-	$	42,060	$	311,844
States and political subdivisions		179,507		-		29,614		149,893
Mortgage-backed securities		156,875		-		6,724		150,151
Corporate debt securities		6,504		-		754		5,750
U.S. treasury		996		-		33		963
Total securities available for sale	$	697,786	$	-	$	79,185	$	618,601

No allowance for credit loss on securities available for sale was recorded as of March 31, 2024 or December 31, 2023.

Accrued interest receivable on securities, included in accrued interest receivable on the Consolidated Balance Sheets, totaled $3,444 at March 31, 2024 and $3,281 at December 31, 2023.

The deferred tax asset for the net unrealized loss on securities available for sale was $17,516 as of March 31, 2024 and $16,629 as of December 31, 2023. The deferred tax asset is included in other assets on the Consolidated Balance Sheets.

The amortized cost and fair value of single maturity securities available for sale at March 31, 2024, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities included in these totals are categorized by final maturity.

	March 31, 2024
	Amortized Cost		Fair Value
Available for Sale:
Due in one year or less	$	13,749	$	13,419
Due after one year through five years		180,902		166,926
Due after five years through ten years		273,587		232,336
Due after ten years		225,140		197,287
Total securities available for sale	$	693,378	$	609,968

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Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that the individual securities have been in a continuous loss position, as of the dates indicated, follows.

March 31, 2024

Less Than 12 Months

12 Months or More

Fair

Value

Unrealized

Loss

Fair

Value

Unrealized

Loss

U.S. government agencies and corporations

307,989

44,972

State and political subdivisions

1,507

126

146,492

31,218

Mortgage-backed securities

583

135,492

6,254

Corporate debt securities

5,688

817

U.S. treasury

969

Total temporarily impaired securities

2,090

127

596,630

83,289

December 31, 2023	*Less Than 12 Months*				*12 Months or More*
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. government agencies and corporations	$	-	$	-	$	311,844	$	42,060
State and political subdivisions		884		1		148,763		29,613
Mortgage-backed securities		1,616		26		147,922		6,698
Corporate debt securities		-		-		5,750		754
U.S. treasury		-		-		963		33
Total temporarily impaired securities	$	2,500	$	27	$	615,242	$	79,158

The Company evaluates securities available for sale that are in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to the extent to which the fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

At March 31, 2024, the Company had 574 securities with a fair value of $598,720 in an unrealized loss position. The Company reviews securities in an unrealized loss position to evaluate credit risk. The Company considers payment history, risk ratings from external parties, financial statements for municipal and corporate securities, public statements from issuers and other available credible published sources in evaluating credit risk. No credit risk was found and no ACL on securities available for sale was recorded as of March 31, 2024. The unrealized losses are attributed to noncredit-related factors, including changes in interest rates and other market conditions. The Company does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the cost basis of the investments. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

Restricted Stock.

The Company holds restricted stock that is reported separately from available for sale securities. As a member of the Federal Reserve and the Federal Home Loan Bank of Atlanta (“FHLB”), NBB is required to maintain certain minimum investments in the common stock of those entities. Required levels of investment are based upon NBB’s capital and a percentage of qualifying assets. The Company purchases stock from or sells stock back to the correspondents based on their calculations. The stock is held by member institutions only and is not actively traded.

Redemption of FHLB stock is subject to certain limitations and conditions. At its discretion, the FHLB may declare dividends on the stock. In addition to dividends, NBB also benefits from its membership with FHLB through eligibility to borrow from the FHLB, using as collateral NBB’s capital stock investment in the FHLB and qualifying NBB real estate mortgage loans totaling $506,896 at March 31, 2024. The Company’s management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at March 31, 2024, did not determine any impairment.

Realized Securities Gains and Losses

There were no sales of securities during 2024. During the first three months of 2023, the Company realized net securities gains of $12 on the sale of securities with an amortized cost basis of $17,987. The sales were part of the Company’s interest rate risk management strategy.

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Note 4: Defined Benefit Plan

The following table presents components of Net Periodic Benefit Cost for the periods indicated:

	Pension Benefits
	Three Months Ended March 31,
	2024			2023
Service cost	$	261		$	203
Interest cost		302			273
Expected return on plan assets		(608	)		(518	)
Amortization of prior service cost		-			-
Recognized net actuarial loss		33			17
Net periodic benefit income	$	(12	)	$	(25	)

The service cost component of net periodic benefit cost is included in salaries and employee benefits expense in the Consolidated Statements of Income. All other components are included in other operating expense in the Consolidated Statements of Income. In April of 2024, the Company made a contribution of $3,000 to the defined benefit plan.

Note 5: Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of the observable inputs and minimize the use of the unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

	Level 1 –	Valuation is based on quoted prices in active markets for identical assets and liabilities.
	Level 2 –	Valuation is based on observable inputs including:

	●	quoted prices in active markets for similar assets and liabilities,
	●	quoted prices for identical or similar assets and liabilities in less active markets,
	●	inputs other than quoted prices that are observable, and
	●	model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 –

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

Fair value is best determined by quoted market prices. However, in cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from disclosure requirements. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements.

Financial Instruments Measured at Fair Value on a Recurring Basis

Securities Available for Sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). The carrying value of restricted Federal Reserve Bank of Richmond and Federal Home Loan Bank of Atlanta stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following tables. The following tables present the balances of financial assets measured at fair value on a recurring basis as of the dates indicated.

Fair Value Measurement Using

March 31, 2024

Balance

Level 1

Level 2

Level 3

U.S. government agencies and corporations

307,989

States and political subdivisions

147,999

Mortgage-backed securities

147,323

Corporate debt securities

5,688

U.S. treasury

969

Total securities available for sale

609,968

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			Fair Value Measurement Using
December 31, 2023	Balance		Level 1		Level 2		Level 3
U.S. government agencies and corporations	$	311,844	$	-	$	311,844	$	-
States and political subdivisions		149,893		-		149,893		-
Mortgage-backed securities		150,151		-		150,151		-
Corporate debt securities		5,750		-		5,750		-
U.S. treasury		963		-		963		-
Total securities available for sale	$	618,601	$	-	$	618,601	$	-

The Company’s securities portfolio is valued using Level 2 inputs. The Company relies on an independent third party vendor to provide market valuations. The inputs used to determine value include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The third party vendor also monitors market indicators, industry activity and economic events as part of the valuation process. Central to the final valuation is the assumption that the indicators used are representative of the fair value of securities held within the Company’s portfolio. Level 2 inputs are subject to a certain degree of uncertainty and changes in these assumptions or methodologies in the future, if any, may impact securities fair value, deferred tax assets or liabilities, or expense.

Interest Rate Loan Contracts and Forward Sale Commitment

The Company originates consumer real estate loans which it intends to sell to a correspondent lender. Interest rate loan contracts and forward sale commitments result from originating loans held for sale and are derivatives reported at fair value. The Company enters interest rate lock commitments with customers who apply for a loan which the Company intends to sell to a correspondent lender. The interest rate loan contract ends when the loan closes or the customer withdraws their application. Fair value of the interest rate loan contract is based upon the correspondent lender’s pricing quotes at the report date. Fair value is adjusted for the estimated probability of the loan closing with the borrower.

At the time the Company enters into an interest rate loan contract with a customer, it also enters into a best efforts forward sales commitment with the correspondent lender. If the loan is closed and funded, the best efforts commitment converts to a mandatory forward sales commitment. Fair value is based on the gain or loss that would occur if the Company were to pair-off the transaction with the investor at the measurement date. This is a Level 3 input. The Company measures and reports best efforts commitments at fair value.

Interest rate loan contracts and forward sale commitments are valued based on quotes from the correspondent lender at the reporting date. Pricing changes daily and if a loan has not been sold to the correspondent by the next reporting date, the fair value may be different from that reported currently. Changes in fair value measurement impacts net income.

The Company had two rate lock commitments as of March 31, 2024, resulting in interest rate loan contracts and forward sales commitments. The interest rate lock commitments gave rise to an asset and the forward loan sales contracts gave rise to a liability. The Company had one rate lock commitment as of December 31, 2023, resulting in an interest rate loan contract and a forward sales commitment. The interest rate lock commitment gave rise to an asset and the forward loan sales contracts gave rise to a liability. The following tables present information on the interest rate loan contracts and forward sale commitments as of the date indicated:

				Fair Value Measurement Using
March 31, 2024	Balance			(Level 1)		(Level 2)		(Level 3)
Interest rate loan contract	$	2		$	-	$	-	$	2
Forward sale commitment	$	(2	)	$	-	$	-	$	(2	)

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March 31, 2024	Valuation Technique	Unobservable Input	Range (Weighted Average)
Interest rate loan contract	Market approach	Pull-through rate		100%⁽¹⁾
Forward sale commitment	Market approach	Pull-through rate		100%⁽¹⁾

Interest rate loan contract	Market approach	Current reference price	102.61%	-	103.05% (102.76%)⁽²⁾
Forward sale commitment	Market approach	Current reference price	102.61%	-	103.05% (102.76%)⁽²⁾

				Fair Value Measurement Using
December 31, 2023	Balance			(Level 1)		(Level 2)		(Level 3)
Interest rate loan contract	$	3		$	-	$	-	$	3
Forward sale commitment	$	(4	)	$	-	$	-	$	(4	)

December 31, 2023	Valuation Technique	Unobservable Input	Range (Weighted Average)
Interest rate loan contract	Market approach	Pull-through rate		100%⁽¹⁾
Forward sale commitment	Market approach	Pull-through rate		100%⁽¹⁾

Interest rate loan contract	Market approach	Current reference price		102.64%⁽³⁾
Forward sale commitment	Market approach	Current reference price	101.60%	-	102.64% (101.98%)⁽²⁾

	(1)	All contracts are valued using the same pull-through rate
	(2)	Current reference prices were weighted by the relative amount of the loan
	(3)	Comprised of only one loan.

Financial Instruments Measured at Fair Value on a Non-Recurring Basis

Certain financial instruments are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale at March 31, 2024 or December 31, 2023.

Collateral Dependent Loans

Collateral dependent loans are measured on a non-recurring basis for the ACL. If the fair value of the collateral is lower than the loan’s amortized cost basis, the shortfall is recognized in the ACLL. When repayment is expected from the operation of the collateral, fair value is estimated as the present value of expected cash flows from the operation of the collateral. When repayment is expected from the sale of the collateral, fair value is estimated using measurement techniques discussed below and discounted by the estimated cost to sell. The ACLL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

For loans secured by real estate, fair value of collateral is determined by the “as-is” value of appraisals or third party evaluations that are less than 24 months of age. Appraisals are prepared by independent, licensed appraisers. Appraisals are based upon observable market data analyzed through an income or sales valuation approach. Valuation falls within Level 2 categorization. The Company may further discount appraisals for marketing strategies, which results in Level 3 categorization.

The value of business equipment is based upon an outside appraisal (Level 2) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

As of March 31, 2024, three consumer real estate loan totaling $121 and two commercial real estate loans totaling $2,156 were collateral dependent. Valuations were based upon a third party evaluation (Level 2) and did not result in a specific allocation.

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Other Real Estate Owned (“OREO”)

Certain assets such as OREO are measured at fair value less cost to sell. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. The Company works with a realtor to determine the list price, which may be set at appraised value or at a different amount based on the realtor’s advice and management’s judgement of marketability. Discounts to appraisals for selling costs or for marketability result in a Level 3 estimate.

The Company did not have any OREO as of March 31, 2024 or December 31, 2023.

Fair Value Summary

The following presents the recorded amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of the dates indicated. Fair values are estimated using the exit price notion.

			Estimated Fair Value
March 31, 2024	Carrying Amount		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	10,656	$	10,656	$	-	$	-
Interest-bearing deposits		110,527		110,527		-		-
Securities available for sale		609,968		-		609,968		-
Restricted stock, at cost		1,248		-		1,248		-
Loans, net		854,493		-		-		790,540
Accrued interest receivable		6,478		-		6,478		-
Bank-owned life insurance		43,840		-		43,840		-
Interest rate loan contract		2		-		-		2
Financial liabilities:
Deposits	$	1,537,808	$	-	$	1,297,907	$	241,538
Accrued interest payable		2,514		-		2,514		-
Forward sale commitment		2		-		-		2

			Estimated Fair Value
December 31, 2023	Carrying Amount		Level 1		Level 2		Level 3
Financial assets:
Cash and due from banks	$	12,967	$	12,967	$	-	$	-
Interest-bearing deposits		73,636		73,636		-		-
Securities available for sale		618,601		-		618,601		-
Restricted stock, at cost		1,264		-		1,264		-
Mortgage loans held for sale		406		-		406		-
Loans, net		847,552		-		-		793,800
Accrued interest receivable		6,313		-		6,313		-
Bank-owned life insurance		43,583		-		43,583		-
Interest rate loan contract		3		-		-		3
Financial liabilities:
Deposits	$	1,503,972	$	-	$	1,280,732	$	222,374
Accrued interest payable		1,416		-		1,416		-
Forward sale commitment		4		-		-		4

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Note 6: Components of Accumulated Other Comprehensive Loss

The following tables provide information about components of accumulated other comprehensive loss as of the dates indicated:

	Net Unrealized Loss on Securities			Adjustments Related to Pension Benefits			Accumulated Other Comprehensive Loss
Balance at December 31, 2022	$	(81,421	)	$	(2,345	)	$	(83,766	)
Unrealized holding gain on available for sale securities, net of tax of $3,121		11,738			-			11,738
Reclassification adjustment, net of tax of ($3)		(9	)		-			(9	)
Balance at March 31, 2023	$	(69,692	)	$	(2,345	)	$	(72,037	)

Balance at December 31, 2023	$	(62,556	)	$	(2,310	)	$	(64,866	)
Unrealized holding loss on available for sale securities, net of tax of ($887)		(3,338	)		-			(3,338	)
Balance at March 31, 2024	$	(65,894	)	$	(2,310	)	$	(68,204	)

Note 7: Revenue Recognition

Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams such as service charges on deposit accounts, other service charges and fees, credit and debit card fees, trust income, and annuity and insurance commissions are recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as financial guarantees, derivatives, and certain credit card fees are outside the scope of the guidance. Noninterest revenue streams within the scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, ATM fees, wire transfer fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Wire transfer fees, overdraft and nonsufficient funds fees and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

Other Service Charges and Fees

Other service charges include safe deposit box rental fees, check ordering charges, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Check ordering charges are transactional based, and therefore the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

Credit and Debit Card Fees

Credit and debit card fees are primarily comprised of interchange fee income and merchant services income. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa and MasterCard. Merchant services income mainly represents commission fees based upon merchant processing volume. The Company’s performance obligation for interchange fee income and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. In compliance with Topic 606, credit and debit card fee income is presented net of associated expense.

Trust Income

Trust income is primarily comprised of fees earned from the management and administration of trusts and estates and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Estate management fees are based upon the size of the estate. A partial fee is recognized half-way through the estate administration and the remainder of the fee is recognized when remaining assets are distributed and the estate is closed.

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Insurance and Investment

Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue.

Investment income consists of recurring revenue streams such as commissions from sales of mutual funds, annuities and other investments. Commissions from the sale of mutual funds, annuities and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined.

OREO Gains and Losses

The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the periods indicated.

	Three Months March 31,
Noninterest Income	2024		2023
In-scope of Topic 606:
Service charges on deposit accounts	$	675	$	592
Other service charges and fees		46		53
Credit and debit card fees, net		374		467
Trust income		503		445
Insurance and Investment (included within Other Income in the Consolidated Statements of Income)		305		285
Noninterest Income (in-scope of Topic 606)	$	1,903	$	1,842
Noninterest Income (out-of-scope of Topic 606)		296		357
Total noninterest income	$	2,199	$	2,199

Note 8: Leases

The Company’s leases are recorded under ASC Topic 842, “Leases”. The Company examines its contracts to determine whether they are or contain a lease. A contract with a lease is further examined to determine whether the lease is a short-term, operating or finance lease. As permitted by ASC Topic 842, the Company elected not to capitalize short-term leases, defined by the standard as leases with terms of 12 months or less. The Company also elected the practical expedient not to separate non-lease components from lease components within a single contract.

Right-of-use assets and lease liabilities are recognized for operating and finance leases. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease.

Lease payments

Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred. Payments for leases with terms longer than 12 months are included in the determination of the lease liability. Payments may be fixed for the term of the lease or variable. Variable payments result when the lease agreement includes a clause providing for escalation of lease payments at specified dates. If the escalation factor is known, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability. If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability. One of the Company’s leases provides a known escalator that is included in the determination of the lease liability. The remaining leases do not have variable payments during the term of the lease.

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Options to Extend, Residual Value Guarantees, Restrictions and Covenants

Of the Company’s six operating leases as of March 31, 2024, four leases offer the option to extend the lease term. At the time of capitalization, the Company was not reasonably certain whether it would exercise the options and did not include the time period in the calculation of the lease liability. The lease agreements provide that the lease payment will increase at the exercise date based on the Consumer Price Index for All Urban Consumers (“CPI-U”). Because the CPI-U at the exercise date is unknown, the increase is not included in the cash flows determining the lease liability. None of the Company’s leases provide for residual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The contracts in which the Company is lessee are with parties external to the Company and not related parties. The Company’s lease right of use asset is included in other assets and the lease liability is included in other liabilities. The following tables present information about leases as of the dates and for the periods indicated:

	March 31, 2024			December 31, 2023
Lease liability	$	1,048		$	1,127
Right-of-use asset	$	1,018		$	1,096
Weighted average remaining lease term (in years)		4.22			4.39
Weighted average discount rate		3.28	%		3.29	%

	For the Three Months Ended March 31,
Lease Expense	2024		2023
Operating lease expense	$	89	$	92
Short-term lease expense		5		1
Total lease expense	$	94	$	93
Cash paid for amounts included in lease liabilities	$	95	$	94
Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period	$	-	$	-

The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability:

Undiscounted Cash Flow for the Period	As of March 31, 2024
Twelve months ending March 31, 2025	$	340
Twelve months ending March 31, 2026		234
Twelve months ending March 31, 2027		203
Twelve months ending March 31, 2028		188
Twelve months ending March 31, 2029		158
Thereafter		-
Total undiscounted cash flows	$	1,123
Less: discount		(75	)
Lease liability	$	1,048

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Note 9: Stock Based Compensation

The Company’s 2023 Stock Incentive Plan (“the Plan”) was approved by shareholders at the annual shareholder’s meeting on May 9, 2023. The Plan provides for the grant of various forms of stock-based compensation awards that may be settled in, or based upon the value of, the Company’s common stock. The maximum number of shares available for issuance under the Plan is 120,000 shares. For further information on the Plan, refer to the Company’s Proxy Statement filed with the SEC on March 10, 2023 and the Company’s S-8 filed with the SEC on June 7, 2023.

Restricted Stock Awards

Under the Plan, part of the June and December 2023 semi-annual retainer for non-employee directors was paid in restricted stock awards (“RSAs”). A summary of changes in the Company’s nonvested RSAs under the Plan for the three months ended March 31, 2024 follows:

	Shares		Weighted-Average Grant Date Fair Value
Nonvested at January 1, 2024		4,095	$	30.73
Granted		-		-
Nonvested at March 31, 2024		4,095	$	30.73

The RSAs have a one year vesting period. Expense for the RSAs will be recognized over the vesting period based on the fair value of the stock at the issue date. Stock based compensation expense charged against income was $32 for the three months ended March 31, 2024. As of March 31, 2024, expense of $52 related to the nonvested RSAs is expected to be recognized over the coming 9 months.

Note 10: Earnings Per Share

The factors used in the earnings per share computation for the periods indicated are presented below:

	For the Three Months Ended March 31,
	2024						2023
	Net Income (Numerator)		Common Shares¹ (Denominator)		Per Share		Net Income (Numerator)		Common Shares¹ (Denominator)		Per Share
Basic earnings per common share	$	2,174		5,889,687	$	0.37	$	4,531		5,889,687	$	0.77
Dilutive shares for restricted stock awards:				1,964						-
Diluted earnings per common share	$	2,174		5,891,651	$	0.37	$	4,531		5,889,687	$	0.77

(1)

Weighted average outstanding

RSA grants are disregarded in the computation of diluted earnings per share if they are determined to be anti-dilutive. There were no anti-dilutive RSAs for the three month periods ended March 31, 2024 and March 31, 2023.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

$ in thousands, except per share data

The purpose of this discussion and analysis is to provide information about the financial condition and results of operations of the Company. Please refer to the financial statements and other information included in this report as well as the Company’s 2023 Form 10-K for an understanding of the following discussion and analysis. References in the following discussion and analysis to “we” or “us” refer to the Company unless the context indicates that the reference is to the Bank.

Cautionary Statement Regarding Forward-Looking Statements

We make forward-looking statements in this Form 10-Q that are subject to significant risks and uncertainties. These forward-looking statements include statements regarding our profitability, liquidity, allowance for credit losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals, and are based upon management’s views and assumptions as of the date of this report. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements.

These forward-looking statements are based upon or are affected by factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. These factors include, but are not limited to, effects of or changes in:

	●	interest rates,
	●	the ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company’s or banking industry’s reputation becomes damaged,
	●	the adequacy of the level of the Company’s allowance for credit losses, the amount of credit loss provisions required in future periods, and the failure of assumptions underlying the allowance for credit losses,
	●	general 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 (“OCC”), the Federal Reserve, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation (“FDIC”), 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,
	●	demand for loan products,
	●	deposit flows,
	●	competition,
	●	demand for financial services in the Company’s market,
	●	the real estate market in the Company’s market,
	●	laws, regulations and policies impacting financial institutions,
	●	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, health related issues, 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, and
	●	risks associated with mergers, acquisitions, and other expansion activities.

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On January 23, 2024, the Company and the Bank entered into the Merger Agreement with Frontier Community Bank (“Frontier”), pursuant to which the Company will acquire Frontier in the Merger. In addition to the factors described above, the Company’s operations, performance, business strategy and results may be affected by the following factors:

	●	the businesses of the Company and Frontier may not be integrated successfully after the Merger or such integration may be more difficult, time-consuming or more costly than expected;
	●	the cost savings and synergies contemplated by the Merger may not be fully realized or realized within the expected timeframe;
	●	revenues following the Merger may be lower than expected;
	●	customer and employee relationships and business operations may be disrupted by the Merger; and
	●	the ability to obtain required regulatory and shareholder approvals and meet other closing conditions to the Merger; and
	●	the ability to complete the Merger in the expected timeframe may be more difficult, time-consuming or more costly than expected.

These risks and uncertainties should be considered in evaluating the forward-looking statements contained in this report. We caution readers not to place undue reliance on those statements, which speak only as of the date of this report. This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A of the most recently filed Form 10-K.

Overview

NBI is a financial holding company that was organized in 1986 under the laws of Virginia and is registered under the Bank Holding Company Act of 1956. NBI common stock is listed on the Nasdaq Capital Market and is traded under the symbol “NKSH.”

NBI has two wholly-owned subsidiaries; the National Bank of Blacksburg and National Bankshares Financial Services, Inc. NBB is a community bank and does business as National Bank from 24 office locations and two loan production offices. NBB is the source of nearly all of the Company’s revenue. NBFS does business as National Bankshares Investment Services and National Bankshares Insurance Services. Income from NBFS is not significant at this time, nor is it expected to be so in the near future.

The Company expects construction of a new branch in Roanoke, Virginia to be completed during the latter half of 2024. The full service branch will expand our already successful loan production office and enhance our service in the Roanoke Valley.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with GAAP. The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change.

Critical accounting policies are most important to the portrayal of the Company’s financial condition or results of operations and require management’s most difficult, subjective, and complex judgments about matters that are inherently uncertain. If conditions occur that differ from our assumptions, depending upon the severity of such differences, the Company’s financial condition or results of operations may be materially impacted. The Company has designated three policies as critical, including those governing the allowance for credit losses, goodwill and the pension plan. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Please refer to the Company’s 2023 Form 10-K, Note 1: Summary of Significant Accounting Policies for information on these and other accounting policies.

Non-GAAP Financial Measures

This report refers to certain financial measures that are computed under a basis other than GAAP (“non-GAAP”). The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. Non-GAAP measures are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP. Details on non-GAAP measures follow.

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Net Interest Margin

The Company uses the net interest margin to measure profit on interest generating activities, as a percentage of total interest-earning assets. The Company’s net interest margin is calculated on a fully taxable equivalent (“FTE”) basis. The portion of interest income that is nontaxable is grossed up to the tax equivalent by adding the tax benefit based on a tax rate of 21%. Annualized FTE net interest income is divided by total average earning assets to calculate the net interest margin. The following tables present the reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, for the periods indicated.

	Three Months Ended March 31,
Net Interest Income, FTE	2024			2023
Interest income (GAAP)	$	16,021		$	14,044
Add: FTE adjustment		244			209
Interest income, FTE (non-GAAP)		16,265			14,253
Interest expense (GAAP)		7,776			3,098
Net interest income, FTE (non-GAAP)	$	8,489		$	11,155
Average balance of interest-earning assets	$	1,638,704		$	1,620,686
Net interest margin		2.08	%		2.79	%

Further detail on the net interest margin is provided under the Net Interest Income discussion.

Efficiency Ratio

The efficiency ratio is computed by dividing noninterest expense by the sum of FTE net interest income and noninterest income, excluding certain items the Company’s management deems unusual or non-recurring. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. The components of the efficiency ratio calculation for the periods indicated are summarized in the following table.

	Three Months Ended March 31,
	2024			2023
Noninterest expense (GAAP)	$	7,762		$	7,664
Less: merger-related expense		(484	)		-
Less: proxy-related expense ⁽¹⁾		-			(441	)
Adjusted noninterest expense (non-GAAP)	$	7,278		$	7,223
Noninterest income (GAAP)	$	2,199		$	2,199
Less: realized securities gain, net		-			(12	)
Adjusted noninterest income (non-GAAP)		2,199			2,187
Net interest income, FTE (non-GAAP)		8,489			11,155
Total income for efficiency ratio (non-GAAP)	$	10,688		$	13,342
Efficiency ratio		68.10	%		54.14	%

(1)

Included in professional services in the Consolidated Statements of Income.

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Adjusted Return on Average Assets and Adjusted Return on Average Equity

The adjusted return on average assets and adjusted return on average equity are measures of profitability, calculated by annualizing net income and dividing by average year-to-date assets or equity, respectively. Larger nonrecurring income or expenses are not annualized, in order to reduce distortion within the ratios. The tables below present the reconciliation of adjusted annualized net income, which is not a measurement under GAAP, for the periods indicated.

	Three Months Ended March 31,
	2024			2023
Net income (GAAP)	$	2,174		$	4,531
Less: items not annualized:
Partnership income net of tax of ($35) and ($44) for the periods ended March 31, 2024 and 2023, respectively		(134	)		(164	)
Realized securities gain, net of tax of ($3) for the period ended March 31, 2023		-			(9	)
Proxy-related expense, net of tax of $93 for the period ended March 31, 2023		-			348
Merger-related expense, (non-deductible)		484			-
Recovery of credit losses, net of tax of ($2) for the period ended March 31, 2024		(8	)		-
Total non-annualized items		342	)		175
Adjusted net income	$	2,516		$	4,706
Adjusted net income, annualized	$	10,119		$	19,085
Add: total non-annualized items		(342	)		(175	)
Annualized net income for ratio calculation (non-GAAP)	$	9,777		$	18,910
Return on average assets (GAAP)		0.53	%		1.13	%
Adjusted return on average assets (non-GAAP)		0.59	%		1.16	%
Return on average equity (GAAP)		6.43	%		14.82	%
Adjusted return on average equity (non-GAAP)		7.19	%		15.25	%

Performance Summary

The following table presents the Company’s key performance indicators for the periods indicated.

	Three Months Ended March 31,
	2024			2023
Net Income	$	2,174		$	4,531
Return on average assets		0.53	%		1.13	%
Adjusted return on average assets ⁽¹⁾		0.59	%		1.16	%
Return on average equity		6.43	%		14.82	%
Adjusted return on average equity ⁽¹⁾		7.19	%		15.25	%
Basic diluted earnings per common share	$	0.37		$	0.77
Fully diluted earnings per common share ⁽²⁾	$	0.37		$	0.77
Net interest margin ⁽¹⁾		2.08	%		2.79	%
Efficiency ratio ⁽¹⁾		68.10	%		54.14	%

⁽¹⁾	See “Non-GAAP Financial Measures” above.
⁽²⁾	During 2023, the Company granted 4,095 of restricted stock awards with a one year vesting period.

Net income for the three months ended March 31, 2024 decreased when compared with the comparable period of 2023, primarily due to higher interest expense. The net interest margin as well as key noninterest income and expense items are discussed below.

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Net Interest Income

The following tables show interest‑earning assets and interest‑bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net interest margin for the periods indicated.

	Three Months Ended March 31,
	2024							2023
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
Interest-earning assets:
Loans ^(1)(2)(3)(4)	$	858,291	$	10,400		4.87	%	$	855,093	$	9,414		4.46	%
Taxable securities ⁽⁵⁾⁽⁶⁾		633,510		4,276		2.71	%		678,543		4,118		2.46	%
Nontaxable securities ⁽¹⁾⁽⁵⁾		64,179		460		2.88	%		67,335		493		2.97	%
Interest-bearing deposits		82,724		1,129		5.49	%		19,715		228		4.69	%
Total interest-earning assets	$	1,638,704	$	16,265		3.99	%	$	1,620,686	$	14,253		3.57	%
Interest-bearing liabilities:
Interest-bearing demand deposits	$	822,555	$	4,989		2.44	%	$	856,591	$	2,373		1.12	%
Savings deposits		175,949		235		0.54	%		208,376		81		0.16	%
Time deposits		234,670		2,552		4.37	%		91,666		359		1.59	%
Borrowings		-		-		-			23,962		285		4.82	%
Total interest-bearing liabilities	$	1,233,174	$	7,776		2.54	%	$	1,180,595	$	3,098		1.06	%
Net interest income and interest rate spread			$	8,489		1.45	%			$	11,155		2.51	%
Net interest margin						2.08	%						2.79	%

⁽¹⁾	Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a Federal income tax rate of 21%.
⁽²⁾	Included in interest income are loan fees of $48 and $40 for the three months ended March 31, 2024 and 2023, respectively.
⁽³⁾	Nonaccrual loans are included in average balances for yield computations.
⁽⁴⁾	Includes loans held for sale.
⁽⁵⁾	Daily averages are shown at amortized cost.
⁽⁶⁾	Includes restricted stock.

Interest income and the yield on earning assets continues to grow in response to the Federal Reserve’s interest rate increases between March 2022 and July 2023. 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 competitive pressure for deposits that first began affecting the Company in the first quarter of 2023 and increased throughout 2023 has moderated, but continues to contribute to higher cost of funds and compressed net interest margin when results for the first quarter of 2024 are compared with the first quarter of 2023. 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

	Three Months Ended March 31,
	2024		2023		Percent Change
Service charges on deposits	$	675	$	592		14.02	%
Other service charges and fees		46		53		(13.21	)%
Credit and debit card fees, net		374		467		(19.91	)%
Trust income		503		445		13.03	%
BOLI income		258		239		7.95	%
Gain on sale of mortgage loans		24		16		50.00	%
Other income		319		375		(14.93	)%
Gain on sale of securities		-		12		NM
Total noninterest income	$	2,199	$	2,199		0.00	%

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Service charges on deposit accounts increased when the three months ended March 31, 2024 is compared with the comparable period of 2023, primarily due to fees generated from increased customer use of the Bank’s overdraft program. Service charges on deposit accounts also include account maintenance fees, ATM fees and wire transfer fees.

Other service charges and fees decreased when the three months ended March 31, 2024 is compared with the comparable period of 2023 due to lower fees associated with letters of credit.

Credit and debit card fees, net, decreased when the three months ended March 31, 2024 are compared with the comparable period of 2023, due to higher processing costs.

Trust income increased due to higher volume and BOLI reflected normal increase, when the three months ended March 31, 2024 are compared with the comparable period of 2023.

Other income includes revenue from investment and insurance sales, adjustments to partnership basis and other miscellaneous components. These areas fluctuate with market conditions and competitive factors. Other income decreased for the three month period ended March 31, 2024 compared to the same period in 2023 due to a decrease in income from partnership interests.

The Company also recorded a gain on the sale of securities during the first quarter of 2023. The sale of securities is discussed in more detail under the Securities section below.

Noninterest Expense

	Three Months Ended March 31,
	2024		2023		Percent Change
Salaries and employee benefits	$	4,466	$	4,434		0.72	%
Occupancy, furniture and fixtures		539		542		(0.55	)%
Data processing and ATM		867		873		(0.69	)%
FDIC assessment		187		117		59.83	%
Net costs of other real estate owned		-		11		NM
Franchise taxes		350		375		(6.67	)%
Professional services		240		753		(68.13	)%
Merger-related expenses		484		-		NM
Other operating expenses		629		559		12.52	%
Total noninterest expense	$	7,762	$	7,664		1.28	%

Noninterest expense increased when the three months ended March 31, 2024 are compared with the comparable period of 2023. Key noninterest expense items include FDIC insurance, professional services and merger-related expenses. FDIC insurance expense increased due to an increase in the FDIC’s general assessment rate. Professional services include legal and other expenses for the Company’s response to a threatened proxy contest from an activist shareholder during 2023, which amounted to $441 for the three months ended March 31, 2023. The Company also recognized expenses associated with its planned merger with Frontier Community Bank in 2024.

Included in various categories of noninterest expense are expenses to manage cybersecurity risk. The cost of these measures was $89 for the three months ended March 31, 2024 and $133 for the three months ended March 31, 2023.

Income Tax

The Company’s effective tax rate was 19.24% and 17.30% for the three month periods ended March 31, 2024 and 2023, respectively. The increase in the Company’s effective tax rate was primarily due to recognition of non-deductible merger-related expenses.

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Asset Quality

Key indicators of the Company’s asset quality are presented in the following table.

	March 31, 2024			March 31, 2023			December 31, 2023
Nonaccrual loans	$	2,591		$	2,814		$	2,629
Loans past due 90 days or more, and still accruing		162			33			188
Other real estate owned		-			662			-
ACLL to loans net of unearned income and deferred fees and costs		1.05	%		1.24	%		1.06	%
Net charge-off ratio		0.02	%		(0.04	)%		0.02	%
Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned		0.30	%		0.41	%		0.31	%
Ratio of ACLL to nonperforming loans		349.48	%		378.46	%		345.91	%

For information on the Company’s policies on the ACLL, please refer to the Company’s 2023 Form 10-K, Note 1: Summary of Significant Accounting Policies.

The Company’s risk analysis as of March 31, 2024 determined an ACLL of $9,055, or 1.05% of loans net of unearned income and deferred fees and costs. This compares with an allowance of $9,094 as of December 31, 2023, or 1.06% of loans. To determine the appropriate level of the ACLL, the Company considers credit risk for individually evaluated loans and for groups of loans evaluated collectively.

Individually Evaluated Loans

Individually evaluated loans were $10,565 as of March 31, 2024, a slight increase from $10,544 as of December 31, 2023. As of March 31, 2024, five individually evaluated loans were collateral dependent but were adequately collateralized and did not result in an individual allocation. The remaining individually evaluated loans were measured using the discounted cash flow method, resulting in an allocation of $568.

Collectively Evaluated Loans

Collectively evaluated loans totaled $853,526, with an ACLL of $8,487 as of March 31, 2024. At December 31, 2023, collectively evaluated loans totaled $846,631, with an allowance of $8,522.

Collectively evaluated loans are divided into classes based upon risk characteristics. Utilizing historical loss information and peer data, the Company calculates a probability of default and loss given default for each class, which is adjusted for a reasonable and supportable forecast. Cash flow projections based on each loan’s contractual terms are modified by the adjusted probability of default and loss given default for its class. Loan classes are allocated additional loss estimates based upon the Company’s analysis of qualitative factors including economic measures, asset quality indicators, loan characteristics, and changes to internal Company policies and management.

Reasonable and Supportable Forecast

The Company applies national unemployment forecasts to project cash flows. The Company determined that 12 months represents a reasonable and supportable forecast period as of March 31, 2024, and set a period of 12 months to revert to historical losses on a straight-line basis. The forecast applied at March 31, 2024 projects that unemployment will rise over the next 12 months, to a higher level than the forecast applied as of December 31, 2023. The higher unemployment forecast increased the required level of the ACLL when March 31, 2024 is compared with December 31, 2023.

Qualitative Factors: Economic

The Company sources economic data pertinent to its market from the most recently available publications, including business and personal bankruptcy filings, the residential vacancy rate and the inventory of new and existing homes.

Higher bankruptcy filings indicate heightened credit risk and increase the ACLL, while lower bankruptcy filings have a beneficial impact on credit risk. Compared with data available at December 31, 2023, business bankruptcy filings decreased slightly while personal bankruptcy filings increased slightly.

Residential vacancy rates and housing inventory impact the Company’s residential construction customers and the consumer real estate market. Higher levels increase credit risk. The residential vacancy rate available at March 31, 2024 remained at the same level as the data incorporated into the December 31, 2023 calculation. Housing data available as of March 31, 2024 showed lower inventory than at December 31, 2023, resulting in a lower allocation.

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Qualitative Factors: Asset Quality Indicators

Accruing past due loans are analyzed at the class level and compared with previous levels. Increases in past due loans indicate heightened credit risk. Accruing loans past due 30-89 days were 0.14% of total loans at March 31, 2024, a decrease from 0.19% at December 31, 2023.

Qualitative Factors: Other Considerations

The Company considers other factors that impact credit risk, including the interest rate environment, the competitive, legal and regulatory environments, changes in lending policies and loan review, changes in lending management, and high risk loans.

The interest rate environment affects variable rate loans. The Federal Reserve’s interest rate increases between March 2022 and July 2023 have increased and are expected to continue to increase payments on variable rate loans as they reach contractual repricing dates. Higher payments may increase credit risk. The Company allocates additional reserve each time the Federal Reserve increases rates. After the rate increase has been in effect for one year, the allocation may be removed under the assumption that the impact of the change has become integrated to the portfolio. For the calculation as of March 31, 2024, the Company opted to maintain the allocation at December 31, 2023 to account for uncertainty surrounding the impact of loans that will reprice in the future.

The competitive, legal and regulatory environments were evaluated for changes that would affect credit risk. Higher competition for loans increases credit risk, while lower competition decreases credit risk. Competition remained at similar levels to those at December 31, 2023. The legal and regulatory environments also remain in a similar posture to December 31, 2023.

Lending policies, loan review procedures and management’s experience influence credit risk. Policies and procedures remain similar to those at December 31, 2023.

Levels of high risk loans are considered in the determination of the level of the ACLL. A decrease in the level of high risk loans within a class decreases the required allocation for the loan class, and an increase in the level of high risk loans within a class increases the required allocation for the loan class. Total high risk loans decreased from the level at December 31, 2023, resulting in a lower allocation.

Unallocated Surplus

The unallocated surplus as of March 31, 2024 is $381, or 4.39% in excess of the calculated requirement. The unallocated surplus at December 31, 2023 was $350, or 4.00% in excess of the calculated requirement. The surplus provides some mitigation of current economic uncertainty that may impact credit risk.

Conclusion

The calculation of the appropriate level for the ACLL incorporates analysis of multiple factors and requires management’s prudent and informed judgment. The Company augmented the calculated requirement with an unallocated surplus. Based on analysis of historical indicators, asset quality and economic factors, management believes the level of ACLL is reasonable for the credit risk in the loan portfolio as of March 31, 2024.

ACL on Unfunded Commitments

The ACL on unfunded commitments as a percentage of unfunded commitments decreased from 0.16% as of December 31, 2023 to 0.14% as of March 31, 2024 primarily due to lower loss rates derived from the calculations for the ACLL.

(Recovery of) Provision for Credit Losses

The Company recorded a provision for credit losses on loans of $5 and a recovery of credit losses on unfunded commitments of $15 for the three months ended March 31, 2024, compared with a provision for credit losses on loans of $2 for the three months ended March 31, 2023.

Loan Modifications

In the ordinary course of business the Company modifies loan terms on a case-by-case basis for a variety of reasons. Modifications may include rate reductions, payment extensions of varying lengths of time, a change in amortization term or method or other arrangements. Modifications to consumer loans generally involve short-term payment extensions to accommodate specific, temporary circumstances. Modifications to commercial loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants.

The Company reviews modifications to determine whether the borrower is experiencing financial difficulty, including indicators of default, bankruptcy, going concern, insufficient projected cash flows and inability to obtain financing from other sources. If a modification is made to a borrower experiencing financial difficulty, the loan’s risk rating is downgraded to special mention or classified, resulting in individual evaluation for the ACL. During the three months ended March 31, 2024, the Company modified two loans totaling $6,403 for borrowers who were experiencing financial difficulty. Both loans were individually evaluated for the ACLL in previous periods and as of March 31, 2024, using the discounted cash flow methodology. There were no loans to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2023.

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Modifications for Borrowers Who Were Not Experiencing Financial Difficulty

During the three month periods ended March 31, 2024 and 2023, the Company modified loans in the normal course of business for borrowers who were not experiencing financial difficulty. During the three months ended March 31, 2024, the Company modified 216 loans totaling $22,322. During the three months ended March 31, 2023, the Company provided 201 modifications to loans totaling $30,508.

Key Assets and Liabilities

NBI’s key assets and liabilities and their change from December 31, 2023 are shown in the following table.

	March 31, 2024		December 31, 2023		Percent Change
Interest-bearing deposits	$	110,527	$	73,636		50.10	%
Securities available for sale, at fair value and restricted stock		609,968		618,601		(1.40	)%
Loans, net		854,493		847,552		0.82	%
Total assets		1,689,206		1,655,370		2.04	%
Deposits		1,537,808		1,503,972		2.25	%

Average Balances

Year-to-date daily averages for the major balance sheet categories are as follows:

Assets	March 31, 2024		December 31, 2023		Percent Change
Interest-bearing deposits	$	82,724	$	37,660		119.66	%
Securities available for sale, at fair value		615,473		620,535		(0.82	)%
Loans, net		849,075		840,590		1.01	%
Total assets		1,660,253		1,613,854		2.88	%

Liabilities and stockholders’ equity
Noninterest-bearing demand deposits	$	279,232	$	299,748		(6.84	)%
Interest-bearing demand deposits		822,555		826,112		(0.43	)%
Savings deposits		175,949		195,592		(10.04	)%
Time deposits		234,670		150,395		56.04	%
Stockholders’ equity		136,039		124,641		9.14	%

Increased customer deposits resulted in increased investment in interest bearing deposit assets. Changes in securities, loans, deposits and stockholders’ equity are discussed below.

Securities

	March 31, 2024			December 31, 2023			Percent Change
Amortized cost	$	693,378		$	697,786			(0.63	)%
Unrealized loss, net		(83,410	)		(79,185	)		(5.34	)%
Securities available for sale, at fair value	$	609,968		$	618,601			(1.40	)%

Securities available for sale are presented at fair value as of each reporting date. The fair value of bonds moves inversely to interest rate changes and expectations of interest rate changes. Most of the Company’s securities were purchased during periods prior to the Federal Reserve’s interest rate increases that began in March of 2022. The Company’s analysis of the securities portfolio determined no identifiable credit risk as of March 31, 2024 and no ACL has been recorded. Please refer to Note 1: General and Summary of Significant Accounting Policies and Note 3: Securities for additional information.

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Loans

	March 31, 2024			December 31, 2023			Percent Change
Real estate construction	$	61,486		$	55,379			11.03	%
Consumer real estate		244,946			241,564			1.40	%
Commercial real estate		414,615			419,130			(1.08	)%
Commercial non real estate		41,835			41,555			0.67	%
Public sector and IDA		59,742			60,551			(1.34	)%
Consumer non real estate		41,467			38,996			6.34	%
Less: unearned income and deferred fees and costs		(543	)		(529	)		2.65	%
Loans, net of unearned income and deferred fees and costs	$	863,548		$	856,646			0.81	%

The higher interest rate environment continues to restrain loan demand. The Company is positioned to make every loan that meets its underwriting standards.

Deposits

	March 31, 2024		December 31, 2023		Percent Change
Noninterest-bearing demand deposits	$	283,870	$	281,215		0.94	%
Interest-bearing demand deposits		838,450		821,661		2.04	%
Savings deposits		175,587		177,856		(1.28	)%
Time deposits		239,901		223,240		7.46	%
Total deposits	$	1,537,808	$	1,503,972		2.25	%

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 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 21.5% are uninsured.

Capital Resources

	March 31, 2024			December 31, 2023			Percent Change
Common stock and additional paid in capital	$	7,436		$	7,404			0.43	%
Retained earnings		200,158			197,984			1.10	%
Accumulated other comprehensive loss		(68,204	)		(64,866	)		(5.15	)%
Total stockholders’ equity	$	139,390		$	140,522			(0.81	)%

The decrease in stockholders’ equity reflects an increase in the unrealized loss on securities available for sale, partially offset by net income for the three months ended March 31, 2024.

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The Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement, which exempts bank holding companies with less than $3 billion in assets from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements. NBB is subject to various capital requirements administered by banking agencies, including an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments. Risk-based capital ratios are calculated in compliance with OCC rules based on the Basel III Capital Rules. The Bank’s ratios are well above the required minimums as of March 31, 2024. Risk based capital ratios for NBB are shown in the following tables.

	NBB			Regulatory Capital Minimum Ratios			Regulatory Capital Minimum Ratios with Capital Conservation Buffer
Common Equity Tier I Capital Ratio		17.29	%		4.50	%		7.00	%
Tier I Capital Ratio		17.29	%		6.00	%		8.50	%
Total Capital Ratio		18.15	%		8.00	%		10.50	%
Leverage Ratio		11.02	%		4.00	%		4.00	%

Liquidity

Liquidity measures the Company’s ability to meet its financial commitments at a reasonable cost. Demands on the Company’s liquidity include funding additional loan demand and accepting withdrawals of existing deposits. The Company has diverse liquidity sources, including customer and purchased deposits, customer repayments of loan principal and interest, sales, calls and maturities of securities, Federal Reserve discount window borrowing, short-term borrowing, and FHLB advances.

As of March 31, 2024, the Company had $308,943 of borrowing capacity from the FHLB and an unsecured federal funds line of credit with an unaffiliated bank of $10,000, with no amounts advanced against those lines. Additionally, the Company had $180,839 of unused capacity at the Federal Reserve Bank discount window. Periodically during 2023, the Company accessed FHLB borrowings. The advances were fully repaid, due to the success of the Company’s deposit strategy. As of March 31, 2024, the Company did not have purchased deposits, discount window borrowings or short-term borrowings.

The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters. Portions of the securities portfolio are pledged to meet state requirements for public funds deposits. Discount window borrowings also require pledged securities. Increased/decreased liquidity from public funds deposits or discount window borrowings results in increased/decreased liquidity from pledging requirements. The Company monitors public funds pledging requirements and unpledged available for sale securities accessible for liquidity needs.

Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve discount window. As of March 31, 2024, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve discount window.

The Company monitors factors that may increase its liquidity needs. Some of these factors include deposit trends, large depositor activity, maturing deposit promotions, interest rate sensitivity, maturity and repricing timing gaps between assets and liabilities, the level of unfunded loan commitments and loan growth. As of March 31, 2024, the Company’s liquidity is sufficient to meet projected trends.

To monitor and estimate liquidity levels, the Company performs stress testing under varying assumptions on credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows. The Company’s Contingency Funding Plan sets forth avenues for rectifying liquidity shortfalls. As of March 31, 2024, the analysis indicated adequate liquidity under the tested scenarios.

The Company utilizes several other strategies to maintain sufficient liquidity. Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s internally-set target range. As of March 31, 2024, the loan to deposit ratio was 56.15%. The investment strategy takes into consideration the term of the investment, and securities in the available for sale portfolio are laddered based upon projected funding needs.

Off-Balance Sheet Arrangements

In the normal course of business, NBB extends lines of credit and letters of credit to its customers. Depending on their needs, customers may draw upon lines of credit at any time in any amount up to a pre-approved limit. Financial letters of credit guarantee payments to facilitate customer purchases. Performance letters of credit guarantee payment if the customer fails to complete a specific obligation.

While it would be possible for customers to fully draw on approved lines of credit and for beneficiaries to call all letters of credit, historically this has not occurred. In the event of a sudden and substantial draw on these lines, the Company would be able to access multiple options, including its lines of credit with correspondents, raising additional deposits, or selling securities available for sale or loans. The Company estimates an ACL on unfunded loan commitments under the CECL model.

The Company sells mortgages on the secondary market. Our agreement with the purchaser provides for strict underwriting and documentation requirements. Violation of the representations and warranties of the agreement would entitle the purchaser to recourse provisions. The Company has determined that its risk in this area is not significant because of a low volume of secondary market mortgage loans and high underwriting standards. The Company estimates a potential loss reserve for recourse provisions that is not material as of March 31, 2024. To date, no recourse provisions have been invoked. If funds were needed, the Company would access the same sources as noted above for funding lines and letters of credit. There were no material changes in off-balance sheet arrangements during the three months ended March 31, 2024.

Contractual Obligations

The Company had no finance lease or purchase obligations and no long-term debt at March 31, 2024.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.

Controls and Procedures

The Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of March 31, 2024 to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Because of the inherent limitations in all control systems, the Company believes that no system of controls, no matter how well designed and operated, can provide absolute assurance that all control issues have been detected.

Part II

Other Information

Item 1.

Legal Proceedings

There are no pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

Item 1A.

Risk Factors

Please refer to the “Risk Factors” previously disclosed in Item 1A of our 2023 Annual Report on Form 10-K and the factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” in Part I. Item 2 of this Form 10-Q.

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Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

Item 6.

Exhibits

Index of Exhibits

Exhibit No.	Description
2(i)	Agreement and Plan of Merger, dated as of January 23, 2024, by and among National Bankshares, Inc., The National Bank of Blacksburg and Frontier Community Bank	(incorporated herein by reference to Exhibit 2.1 of the Form 8-K filed on January 24, 2024)
3(i)	Amended and Restated Articles of Incorporation of National Bankshares, Inc.	(incorporated herein by reference to Exhibit 3.1 of the Form 8-K filed on March 16, 2006)
3(ii)	Amended and Restated Bylaws of National Bankshares, Inc.	(incorporated herein by reference to Exhibit 3.2 of the Form 8-K filed on January 24, 2024)
4	Specimen copy of certificate for National Bankshares, Inc. common stock	(incorporated herein by reference to Exhibit 4(a) of the Annual Report on Form 10-K for fiscal year ended December 31, 1993)
10	National Bankshares, Inc. 2023 Stock Incentive Plan	(incorporated by reference to Appendix A of the Proxy Statement for the Annual Meeting of Shareholders held on May 9, 2023, filed on March 24, 2023)
+31(i)	Section 302 Certification of Chief Executive Officer	Filed herewith
+31(ii)	Section 302 Certification of Chief Financial Officer	Filed herewith
+32(i)	18 U.S.C. Section 1350 Certification of Chief Executive Officer	Filed herewith
+32(ii)	18 U.S.C. Section 1350 Certification of Chief Financial Officer	Filed herewith
+101	The following materials from National Bankshares, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2024 are formatted in iXBRL (Inline Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets at March 31, 2024 and December 31, 2023; (ii) Consolidated Statements of Income for the three month periods ended March 31, 2024 and 2023; (iii) Consolidated Statements of Comprehensive (Loss) Income for the three month periods ended March 31, 2024 and 2023; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three month periods ended March 31, 2024 and 2023; (v) Consolidated Statements of Cash Flows for the three month periods ended March 31, 2024 and 2023; and (vi) Notes to Consolidated Financial Statements.	Filed herewith
104	Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)	Filed herewith

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NATIONAL BANKSHARES, INC.



Date: May 15, 2024		/s/ F. Brad Denardo
		By: F. Brad Denardo Chairman, President and Chief Executive Officer (Principal Executive Officer)

Date: May 15, 2024		/s/ Lora M. Jones
		By: Lora M. Jones Treasurer and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer)