Equibles

10-Q

NATIONAL BANKSHARES INC (NKSH)

10-Q 2024-08-14 For: 2024-06-30
View Original
Added on April 07, 2026

Table of Contents

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 June 30, 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<br> <br>(State or other jurisdiction of incorporation or organization) 54-1375874<br> <br>(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 August 14, 2024

6,361,433

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NATIONAL BANKSHARES, INC.

Form 10-Q

Index

Page
Part I –Financial Information
Item 1 Financial Statements 3
Consolidated Balance Sheets, June 30, 2024 (Unaudited) and December 31, 2023 3
Consolidated Statements of (Loss) Income for the Three Months Ended June 30, 2024 and 2023 (Unaudited) 4
Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended June 30, 2024 and 2023 (Unaudited) 5
Consolidated Statements of Income for the Six Months Ended June 30, 2024 and 2023 (Unaudited) 6
Consolidated Statements of Comprehensive (Loss) Income for the Six Months Ended June 30, 2024 and 2023 (Unaudited) 7
Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended June 30, 2024 and 2023 (Unaudited) 8
Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2024 and 2023 (Unaudited) 8
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2024 and 2023 (Unaudited) 9
Notes to Consolidated Financial Statements (Unaudited) 11
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
Item 3 Quantitative and Qualitative Disclosures About Market Risk 46
Item 4 Controls and Procedures 46
Part II –Other Information
Item 1 Legal Proceedings 47
Item 1A Risk Factors 47
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 47
Item 3 Defaults Upon Senior Securities 47
Item 4 Mine Safety Disclosures 47
Item 5 Other Information 47
Item 6 Exhibits 48
Signatures 49

2

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Part I

Item 1. Financial Statements Financial Information

National Bankshares, Inc.

Consolidated Balance Sheets

**** **** ****
(in thousands, except share and per share data) December 31, 2023
Assets **** **** **** **** ****
Cash and due from banks 14,908 $ 12,967
Interest-bearing deposits 80,477 73,636
Federal Funds sold 3,499 -
Total cash and cash equivalents 98,884 86,603
Securities available for sale, at fair value 605,196 618,601
Restricted stock, at cost 1,752 1,264
Mortgage loans held for sale 125 406
Loans:
Loans, net of unearned income and deferred fees and costs 989,367 856,646
Less allowance for credit losses (10,502 ) (9,094 )
Loans, net 978,865 847,552
Premises and equipment, net 15,468 11,109
Accrued interest receivable 6,615 6,313
Goodwill 10,733 5,848
Core deposit intangible, net 2,065 -
Bank-owned life insurance 46,775 43,583
Other assets 42,738 34,091
Total assets 1,809,216 $ 1,655,370
Liabilities and Stockholders' Equity **** **** **** **** ****
Noninterest-bearing demand deposits 296,242 $ 281,215
Interest-bearing demand deposits 867,899 821,661
Savings deposits 176,852 177,856
Time deposits 304,059 223,240
Total deposits 1,645,052 1,503,972
Accrued interest payable 2,525 1,416
Other liabilities 12,676 9,460
Total liabilities 1,660,253 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 6,361,433 (including 4,839 unvested) shares at June 30, 2024 and 5,893,782 (including 4,095 unvested) shares at December 31, 2023 21,768 7,404
Retained earnings 195,549 197,984
Accumulated other comprehensive loss, net (68,354 ) (64,866 )
Total stockholders' equity 148,963 140,522
Total liabilities and stockholders' equity 1,809,216 $ 1,655,370

All values are in US Dollars.

See accompanying notes to consolidated financial statements.

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National Bankshares, Inc.

Consolidated Statements of (Loss) Income

(Unaudited)

Three Months Ended June 30,
(in thousands, except share and per share data) 2024 2023
Interest Income **** **** **** **** ****
Interest and fees on loans $ 11,301 $ 9,644
Interest on federal funds sold **** 10 -
Interest on interest-bearing deposits **** 1,229 540
Interest on securities – taxable **** 4,239 4,066
Interest on securities – nontaxable **** 338 347
Total interest income **** 17,117 14,597
Interest Expense **** **** **** **** ****
Interest on time deposits **** 2,930 1,054
Interest on other deposits **** 5,486 4,314
Interest on borrowings **** 1 12
Total interest expense **** 8,417 5,380
Net interest income **** 8,700 9,217
Provision for credit losses **** 1,302 1
Net interest income after provision for credit losses **** 7,398 9,216
Noninterest Income **** **** **** **** ****
Service charges on deposit accounts **** 722 637
Other service charges and fees **** 48 49
Credit and debit card fees, net **** 423 414
Trust income **** 513 481
BOLI income **** 269 1,279
Gain on sale of investment **** - 2,971
Gain on sale of mortgage loans **** 58 55
Other income **** 213 249
Realized securities loss, net **** - (3,344 )
Total noninterest income **** 2,246 2,791
Noninterest Expense **** **** **** **** ****
Salaries and employee benefits **** 4,687 4,465
Occupancy, furniture and fixtures **** 561 411
Data processing and ATM **** 886 879
FDIC assessment **** 192 254
Intangible asset amortization **** 35 -
Net costs of other real estate owned **** - 4
Franchise taxes **** 358 358
Professional services **** 272 551
Merger-related expenses **** 2,257 -
Contract termination **** 173 -
Other operating expenses **** 706 644
Total noninterest expense **** 10,127 7,566

(Continued)

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(Loss) Income before income (benefit) tax **** (483 ) 4,441
Income tax (benefit) expense **** (177 ) 540
Net (Loss) Income $ (306 ) $ 3,901
Basic net (loss) income per common share $ (0.05 ) $ 0.66
Fully diluted net (loss) income per common share $ (0.05 ) $ 0.66
Weighted average number of common shares outstanding, basic **** 6,028,220 5,889,687
Weighted average number of common shares outstanding, fully diluted **** 6,028,220 5,890,048
Dividends declared per common share $ 0.73 $ 0.73

See accompanying notes to consolidated financial statements.

National Bankshares, Inc.

Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended June 30, 2024 and 2023

(Unaudited)
(in thousands) 2023
Net (Loss) Income (306 ) $ 3,901
Other Comprehensive Loss, Net of Tax **** **** **** **** ****
Unrealized holding loss on available for sale securities net of tax of (40) and (1,289) for the periods ended June 30, 2024 and 2023, respectively (150 ) (4,848 )
Reclassification adjustment for loss included in net income, net of tax of 702 in 2023 - 2,642
Other comprehensive loss, net of tax (150 ) (2,206 )
Total Comprehensive (Loss) Income (456 ) $ 1,695

All values are in US Dollars.

See accompanying notes to consolidated financial statements.

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National Bankshares, Inc.

Consolidated Statements of Income

(Unaudited)

Six Months Ended June 30,
(in thousands, except share and per share data) 2024 2023
Interest Income **** **** **** **** ****
Interest and fees on loans $ 21,578 $ 18,977
Interest on federal funds sold **** 10 -
Interest on interest-bearing deposits **** 2,358 768
Interest on securities – taxable **** 8,515 8,184
Interest on securities – nontaxable **** 677 712
Total interest income **** 33,138 28,641
Interest Expense **** **** **** **** ****
Interest on time deposits **** 5,482 1,413
Interest on other deposits **** 10,710 6,768
Interest on borrowings **** 1 297
Total interest expense **** 16,193 8,478
Net interest income **** 16,945 20,163
Provision for credit losses **** 1,292 3
Net interest income after provision for credit losses **** 15,653 20,160
Noninterest Income **** **** **** **** ****
Service charges on deposit accounts **** 1,397 1,229
Other service charges and fees **** 94 102
Credit and debit card fees, net **** 797 881
Trust income **** 1,016 926
BOLI income **** 527 1,518
Gain on sale of investment **** - 2,971
Gain on sale of mortgage loans **** 82 71
Other income **** 532 624
Realized securities loss, net **** - (3,332 )
Total noninterest income **** 4,445 4,990
Noninterest Expense **** **** **** **** ****
Salaries and employee benefits **** 9,153 8,899
Occupancy, furniture and fixtures **** 1,100 953
Data processing and ATM **** 1,753 1,752
FDIC assessment **** 379 371
Intangible asset amortization **** 35 -
Net costs of other real estate owned **** - 15
Franchise taxes **** 708 733
Professional services **** 512 1,304
Merger-related expenses **** 2,741 -
Contract termination **** 173 -
Other operating expenses **** 1,335 1,203
Total noninterest expense **** 17,889 15,230

(Continued)

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Income before income taxes **** 2,209 9,920
Income tax expense **** 341 1,488
Net Income $ 1,868 $ 8,432
Basic net income per common share $ 0.31 $ 1.43
Fully diluted net income per common share $ 0.31 $ 1.43
Weighted average number of common shares outstanding, basic **** 5,958,953 5,889,687
Weighted average number of common shares outstanding, fully diluted **** 5,961,037 5,889,868
Dividends declared per common share $ 0.73 $ 1.73

National Bankshares, Inc.

Consolidated Statements of Comprehensive (Loss) Income

Six Months Ended June 30, 2024 and 2023

(Unaudited)
(in thousands) 2023
Net Income 1,868 $ 8,432
Other Comprehensive (Loss) Income, Net of Tax **** **** **** ****
Unrealized holding (loss) gain on available for sale securities net of tax of (927) and 1,831 for the periods ended June 30, 2024 and 2023, respectively (3,488 ) 6,891
Reclassification adjustment for loss included in net income, net of tax of 700 in 2023 - 2,632
Other comprehensive (loss) income, net of tax (3,488 ) 9,523
Total Comprehensive (Loss) Income (1,620 ) $ 17,955

All values are in US Dollars.

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 June 30, 2024 and 2023

(in thousands except share data) Retained<br> <br>Earnings Accumulated<br> <br>Other<br> <br>Comprehensive<br> <br>Loss Total
Balances at March 31, 2023 7,362 $ 195,718 $ (72,037 ) $ 131,043
Net income - 3,901 - 3,901
Cash dividends of 0.73 per share - (4,299 ) - (4,299 )
Other comprehensive loss, net of tax of (587) - - (2,206 ) (2,206 )
Stock based compensation 5 - - 5
Balances at June 30, 2023 7,367 $ 195,320 $ (74,243 ) $ 128,444
Balances at March 31, 2024 7,436 $ 200,158 $ (68,204 ) $ 139,390
Net loss - (306 ) - (306 )
Acquisition of Frontier Community Bank 14,299 - - 14,299
Cash dividends of 0.73 per share - (4,303 ) - (4,303 )
Other comprehensive loss, net of tax of (40) - - (150 ) (150 )
Stock based compensation 33 - - 33
Balances at June 30, 2024 21,768 $ 195,549 $ (68,354 ) $ 148,963

All values are in US Dollars.

See accompanying notes to consolidated financial statements.

Six Months Ended June 30, 2024 and 2023

(in thousands except share data) Retained<br> <br>Earnings Accumulated<br> <br>Other<br> <br>Comprehensive<br> <br>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 - 8,432 - 8,432
Cash dividends of 1.73 per share - (10,189 ) - (10,189 )
Other comprehensive income, net of tax of 2,531 - - 9,523 9,523
Stock based compensation 5 - - 5
Balances at June 30, 2023 7,367 $ 195,320 $ (74,243 ) $ 128,444
Balances at December 31, 2023 7,404 $ 197,984 $ (64,866 ) $ 140,522
Net income - 1,868 - 1,868
Acquisition of Frontier Community Bank 14,299 - - 14,299
Cash dividends of 0.73 per share - (4,303 ) - (4,303 )
Other comprehensive loss, net of tax of (927) - - (3,488 ) (3,488 )
Stock based compensation 65 - - 65
Balances at June 30, 2024 21,768 $ 195,549 $ (68,354 ) $ 148,963

All values are in US Dollars.

See accompanying notes to consolidated financial statements.

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National Bankshares, Inc.

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2024 and 2023

(Unaudited)

June 30, June 30,
(in thousands) 2024 2023
Cash Flows from Operating Activities **** **** **** **** **** ****
Net income $ 1,868 $ 8,432
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses **** 1,292 3
Depreciation of premises and equipment **** 424 338
Net accretion of acquisition accounting estimates **** (31 ) -
Amortization of premiums and accretion of discounts, net **** 520 524
Loss on sale of securities available for sale, net **** - 3,332
Loss on disposal of repossessed assets **** - 5
Increase in cash value of bank-owned life insurance **** (527 ) (481 )
Origination of mortgage loans held for sale **** (5,125 ) (5,251 )
Proceeds from sale of mortgage loans held for sale **** 5,488 5,322
Gain on sale of mortgage loans held for sale **** (82 ) (71 )
Equity based compensation expense **** 65 5
Net change in:
Accrued interest receivable **** 35 283
Other assets **** (5,667 ) (2,497 )
Accrued interest payable **** 974 154
Other liabilities **** 1,661 (2,426 )
Net cash provided by operating activities **** 895 7,672
Cash Flows from Investing Activities **** **** **** **** **** ****
Proceeds from calls, principal payments, sales and maturities of securities available for sale **** 17,789 50,872
Net change in restricted stock **** 265 12
Purchase of loan participations **** (12,228 ) (3,630 )
Collection of loan participations **** 5,321 5,146
Loan originations and principal collections, net **** (7,247 ) 4,520
Proceeds from sale of repossessed assets **** - 9
Recoveries on loans charged off **** 103 207
Purchases of premises and equipment **** (1,331 ) (1,011 )
BOLI settlement - 712
Cash acquired in the acquisition, net of cash paid **** 1,654 -
Net cash provided by investing activities **** 4,326 56,837
Cash Flows from Financing Activities **** **** **** **** **** ****
Net change in time deposits **** 14,385 79,350
Net change in other deposits **** (3,023 ) (135,043 )
Cash dividends paid **** (4,302 ) (10,189 )
Net cash provided by (used in) financing activities **** 7,060 (65,882 )

(Continued)

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Net change in cash and cash equivalents **** 12,281 (1,373 )
Cash and cash equivalents at beginning of period **** 86,603 71,429
Cash and cash equivalents at end of period $ 98,884 $ 70,056
Supplemental Disclosures of Cash Flow Information **** **** **** **** **** ****
Interest paid on deposits and borrowings $ 15,219 $ 8,324
Income taxes paid **** 715 3,847
Supplemental Disclosure of Noncash Activities **** **** **** **** **** ****
Loans charged against the allowance for credit losses $ 177 $ 160
Loans transferred to repossessed assets **** - 7
Unrealized holding (loss) gain on securities available for sale **** (4,415 ) 12,054
Lease liabilities arising from obtaining right-of-use assets during the period **** 548 -

See accompanying notes to consolidated financial statements.

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National Bankshares, Inc.

Notes to Consolidated Financial Statements

June 30, 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 and acquisition accounting.

The results of operations for the three and six months ended June 30, 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.  All amounts and disclosures included in this quarterly report as of December 31, 2023, were derived from the Company’s audited consolidated financial statements.  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.  The Company posts all reports required to be filed under the Securities Exchange Act of 1934 on its web site at www.nationalbankshares.com.

In addition to applying significant accounting policies disclosed in Note 1 of the 2023 Form 10-K, the Company implemented accounting policies appropriate for its merger with Frontier Community Bank (“FCB”). Business combinations are accounted for under Accounting Standards Codification (“ASC”) 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company relies on internal or third-party valuations, such as appraisals, valuations based on discounted cash flow analyses, or other valuation techniques.

Under the acquisition method of accounting, the Company identifies the acquirer and the closing date and applies applicable recognition principles and conditions. Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of costs to the Company include systems conversions, integration planning consultants and advertising costs. The Company accounts for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities are recognized in accordance with other applicable GAAP. These acquisition-related costs have been and will be included within the consolidated statements of income classified within the noninterest expenses caption.

The most significant assessment of fair value in the Company’s accounting for business combinations relates to the valuation of an acquired loan portfolio. At acquisition, loans are classified as either (i) purchase credit-deteriorated (“PCD”) loans or (ii) non-PCD loans and are recorded at fair value on the date of acquisition. PCD loans are those for which there is more than insignificant evidence of credit deterioration since origination. Fair values are determined primarily through a discounted cash flow approach which considers the acquired loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, timing of principal and interest payments, current market rates, and remaining balances. Estimates of fair value also include estimates of default, loss severity, and estimated prepayments.

At acquisition, an allowance for credit losses (“ACL”) for PCD loans is determined based upon the Company’s methodology for estimating the ACL on loans. This allowance is credited to the ACL on loans with a corresponding adjustment to the amortized cost basis of the loan on the date of the acquisition. The difference between the new amortized cost basis and the unpaid principal balance is either a noncredit discount or premium that is amortized or accreted to interest income over the remaining life of the loan. Disposals of PCD loans, which may include sale of loans to third parties, receipt of payments in full or in part from the borrower or foreclosure of the collateral, result in removal of the loan from the loan portfolio at its carrying amount.

For non-PCD loans, an ACL is established in a manner that is consistent with the Company’s originated loans. The ACL is determined using the Company’s methodology and the related ACL for non-PCD loans is recorded through a charge to the provision for credit losses in the period in which the loans are purchased or acquired. The entirety of any purchase discount or premium on non-PCD loans is amortized or accreted to interest income over the remaining life of the loan.

In accordance with ASC 805, the Company also identified intangible assets acquired. Other intangible assets lack physical substance but have contractual or other legal rights or are capable of being sold or exchanged either on their own or in combination with a related contract, asset or liability. Intangible assets are initially recorded at fair value. Determining fair value is subjective, requiring the use of estimates, assumptions and management judgment. Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to impairment testing.  Upon acquisition of FCB, the Company recognized a core deposit intangible asset, which represents the value of customer deposit relationships.  Core deposit intangible assets are amortized over an estimated useful life of 10 years using an accelerated method which approximates the estimated attrition of the acquired deposits.

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 Financial Accounting Standards Board issued Accounting Standards Update ("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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Note 2: Business Combination

On *June 1, 2024 (*the “Acquisition Date”), the Company completed its acquisition of Frontier Community Bank (“FCB”), a Virginia chartered commercial bank, in accordance with the definitive merger agreement that was entered into on January 23, 2024, by and among the Company, the Bank and FCB. Upon completion of the merger, former FCB shareholders received a combination of common stock and cash.

The acquisition of FCB was accounted for as a business combination using the acquisition method of accounting.  Assets acquired, liabilities assumed, and consideration paid were recorded at estimated fair value on the Acquisition Date. The excess of the purchase price over the fair value of the net assets was recorded as provisional goodwill and represents the benefit from the transaction that is not otherwise quantifiable, including expected management and operational synergies and intangible assets that do not qualify for separate recognition. The Company will keep the measurement of goodwill open for twelve months following the Acquisition Date in order to reflect any adjustments to the fair value of assets acquired and liabilities assumed that may arise during the Company’s final review procedures of any updated information. The Company does not expect that any portion of goodwill will be deductible.

The following table presents the calculation of the purchase price and the fair value of the identifiable assets and liabilities.

June 1, 2024 As Recorded<br> <br>by FCB Estimated Fair Value<br> <br>Adjustments Estimated Fair<br> <br>Values as Recorded<br> <br>by NBI
Purchase Price Consideration: **** **** **** **** **** **** **** ****
Stock consideration^(1)^ $ 14,299
Cash consideration ^(2)^ 2,050
Total purchase price consideration **** **** **** **** **** **** $ 16,349
Identifiable assets: **** **** **** **** **** **** **** ****
Cash and cash equivalents $ 8,993 $ (59 ) $ 8,934
Securities 9,325 (5 ) 9,320
Loans, gross, purchased performing 115,589 (7,720 ) 107,869
Loans, gross, purchased credit deteriorated 11,157 (822 ) 10,335
Loans in process 539 - 539
Deferred fees and costs on loans 34 (34 ) -
Allowance for credit losses on loans (881 ) 881 -
Premises and equipment 3,003 449 3,452
Core deposit intangible - 2,100 2,100
Other assets 4,998 966 5,964
Total identifiable assets acquired $ 152,757 $ (4,244 ) $ 148,513
Identifiable Liabilities **** **** **** **** **** **** **** ****
Deposits 130,323 (606 ) $ 129,717
Borrowings 5,250 (20 ) 5,230
Other liabilities 1,960 131 2,091
Total identifiable liabilities assumed $ 137,533 $ (495 ) $ 137,038
Provisional fair value of net assets acquired **** **** **** **** **** **** $ 11,475
Provisional goodwill **** **** **** **** **** **** $ 4,874
(1) The Company issued 464,855 shares of its common stock valued at $30.76 per share, which was the closing price of the Company’s common stock on May 31, 2024, the last day of trading prior to the consummation of the acquisition.
--- ---
(2) Cash consideration was paid for shareholder elections, fractional shares and to settle outstanding vested stock options. The merger agreement provided for up to 10% of consideration to be paid in cash of $14.48 per FCB common share, at the shareholders’ election. Payments for shareholder elections and fractional shares totaled $1,769. Outstanding and vested options were settled at the difference between $14.48 and the strike price and totaled $281.
--- ---

Management made significant estimates and exercised significant judgement in accounting for the acquisition of FCB. The following is a brief description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed. The Company utilized a valuation specialist to assist with the determination of fair values for certain acquired assets and assumed liabilities.

Cash and equivalents

Included in cash and equivalents are an investment in time deposits of other financial institutions, valued at the present value of the expected contractual payments discounted at market rates for instruments with similar terms.

Securities

The estimated fair value of the acquired portfolio of debt securities was based on quoted market prices. All of the acquired portfolio was sold upon completion of the acquisition.

Loans

The fair valuation process identified loans with credit risk indicators that qualified for “purchase credit deteriorated” (“PCD”) status. PCD and non-PCD loans were then evaluated for credit risk and other fair value indicators. Consistent with GAAP, FCB’s related allowance for credit losses on loans and deferred fees and costs were not recorded.

Credit risk was quantified using a probability of default (“PD”)/loss given default(“LGD”) methodology from a market participant perspective and applied to each loan’s outstanding principal balance. PD/LGD rates were tailored to PCD or non-PCD status. Other fair value indicators were quantified using a discounted cash flow methodology, with discounts applied for current market rates, credit risk and liquidity. Cash flows were generated based upon the loans’ underlying characteristics and estimated prepayment speeds.

The following table provides information on PCD and non-PCD loans as of the Acquisition Date:

June 1, 2024 PCD Loans Non-PCD Loans
Number of loans **** 46 **** 498
FCB recorded value $ 11,157 $ 115,589
Discount for credit risk **** (295 ) **** (498 )
Discount for non-credit factors **** (527 ) **** (7,222 )
Fair value $ 10,335 $ 107,869

Premises and equipment

The fair value of premises acquired was based on a recent third-party appraisal. Acquired equipment was based on the remaining net book value of FCB, which approximated fair value.

Core Deposit Intangible

Core deposit relationships provide a stable source of funds for lending and contribute to profitability. The core deposit intangible was valued using an income approach focused on cost savings, which recognizes the cost savings represented by the expense of maintaining the core deposit base versus the cost of an alternative funding source. The valuation incorporates assumptions related to account retention, discount rates, deposit interest rates, deposit maintenance costs and alternative funding rates.

Leases: right of use asset, lease liability and fair value

Right of use assets (included in other assets) and lease liabilities (included in other liabilities) for branch locations were measured at the acquisition date. The fair value of leases was determined by applying a discounted cash flow methodology discounted by current lease rates within the appropriate market.

Deposits

Deposits were valued using methods appropriate to their characteristics. The fair value of noninterest bearing demand deposits, interest bearing demand deposits, money market and savings deposit accounts were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Time deposits were valued at the present value of the expected contractual payments discounted at market rates for instruments with similar terms.

Borrowings

The estimated fair value of borrowings was determined by obtaining payoff quotes from the lender. Borrowings were paid off upon completion of the acquisition.

Deferred Tax Asset

Application of fair value measurements resulted in an increase to the deferred tax asset, included in other assets.

Table of Contents

Note 3: Loans and Allowance for Credit Losses

Loans

Loans as of June 30, 2024 include acquired loans at their outstanding principal balance, net of the remaining purchase discount of $8,255. Originated loans as of June 30, 2024 and December 31, 2023 are presented at amortized cost, net of unearned income and deferred fees and costs. The following table presents the composition of the loan portfolio, excluding mortgage loans held for sale, as of the dates indicated.

June 30, 2024 December 31, 2023
Real estate construction $ 81,355 $ 55,379
Consumer real estate **** 299,310 241,564
Commercial real estate **** 454,978 419,130
Commercial non real estate **** 52,297 41,555
Public sector and IDA **** 59,043 60,551
Consumer non real estate **** 42,915 38,996
Gross loans $ 989,898 $ 857,175
Less unearned income and deferred fees and costs **** (531 ) (529 )
Loans, net of unearned income and deferred fees and costs $ 989,367 $ 856,646
Allowance for credit losses on loans **** (10,502 ) (9,094 )
Total loans, net $ 978,865 $ 847,552

Accrued interest receivable of $3,352 at June 30, 2024 and $3,032 at December 31, 2023 is not included in total loans above.

Table of Contents

Past Due and Nonaccrual Loans

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

June 30, 2024 Accruing<br> <br>Current<br> <br>Loans Accruing<br> <br>Loans<br> <br>30 – 89 Days<br> <br>Past Due Accruing<br> <br>Loans<br> <br>90 or More<br> <br>Days Past<br> <br>Due Nonaccrual<br> <br>Loans Total Loans Accruing<br> <br>and<br> <br>Nonaccrual<br> <br>90 or More<br> <br>Days Past<br> <br>Due
Real Estate Construction **** **** **** **** **** **** **** **** **** **** **** ****
Construction, 1-4 family residential $ 22,801 $ 140 $ - $ - $ 22,941 $ -
Construction, other **** 58,264 **** 150 **** - **** - **** 58,414 **** -
Consumer Real Estate **** **** **** **** **** **** **** **** **** **** **** ****
Equity line **** 21,751 **** 6 **** - **** - **** 21,757 **** -
Residential closed-end first liens **** 164,517 **** 353 **** 118 **** - **** 164,988 **** 118
Residential closed-end junior liens **** 6,582 **** 11 **** - **** - **** 6,593 **** -
Investor-owned residential real estate **** 105,716 **** 256 **** - **** - **** 105,972 **** -
Commercial Real Estate **** **** **** **** **** **** **** **** **** **** **** ****
Multifamily residential real estate **** 120,601 **** 190 **** - **** - **** 120,791 **** -
Commercial real estate owner-occupied **** 135,121 **** 720 **** - **** 2,307 **** 138,148 **** 220
Commercial real estate, other **** 196,039 **** - **** - **** - **** 196,039 **** -
Commercial Non Real Estate **** **** **** **** **** **** **** **** **** **** **** ****
Commercial and industrial **** 51,852 **** 199 **** 46 **** 200 **** 52,297 **** 46
Public Sector and IDA **** **** **** **** **** **** **** **** **** **** **** ****
States and political subdivisions **** 59,043 **** - **** - **** - **** 59,043 **** -
Consumer Non Real Estate **** **** **** **** **** **** **** **** **** **** **** ****
Credit cards **** 4,763 **** 2 **** - **** - **** 4,765 **** -
Automobile **** 13,482 **** 264 **** 13 **** - **** 13,759 **** 13
Other consumer loans **** 24,170 **** 164 **** 57 **** - **** 24,391 **** 57
Total $ 984,702 $ 2,455 $ 234 $ 2,507 $ 989,898 $ 454

Table of Contents

December 31, 2023 Accruing<br> <br>Current<br> <br>Loans Accruing<br> <br>Loans<br> <br>30 – 89 Days<br> <br>Past Due Accruing<br> <br>Loans<br> <br>90 or More<br> <br>Days Past<br> <br>Due Nonaccrual<br> <br>Loans Total Loans Accruing<br> <br>and<br> <br>Nonaccrual<br> <br>90 or More<br> <br>Days Past<br> <br>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:

June 30, 2024 December 31, 2023
With No<br> <br>Allowance With an<br> <br>Allowance Total With No<br> <br>Allowance With an<br> <br>Allowance Total
Commercial Real Estate **** **** **** **** **** **** **** **** **** **** **** ****
Commercial real estate owner-occupied $ 2,087 $ 220 $ 2,307 $ 2,177 $ 231 $ 2,408
Commercial Non Real Estate **** **** **** **** **** **** **** **** **** **** **** ****
Commercial and industrial **** - **** 200 **** 200 - 221 221
Total $ 2,087 $ 420 $ 2,507 $ 2,177 $ 452 $ 2,629

During the three and six months ended June 30, 2024, no accrued interest receivable was reversed against interest income.

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 ACLL for the Six Months Ended June 30, 2024
Real Estate<br> <br>Construction Consumer<br> <br>Real Estate Commercial<br> <br>Real Estate Commercial<br> <br>Non Real<br> <br>Estate Public<br> <br>Sector and<br> <br>IDA Consumer Non<br> <br>Real Estate Unallocated Total
Balance, December 31, 2023 $ 408 $ 3,162 $ 3,576 $ 682 $ 333 $ 583 $ 350 $ 9,094
Charge-offs **** - **** - **** - **** (20 ) **** - **** (157 ) **** - **** (177 )
Recoveries **** - **** - **** 29 **** 3 **** - **** 71 **** - **** 103
Provision for (recovery of) credit losses **** 131 **** 376 **** 594 **** 79 **** (10 ) **** 87 **** 50 **** 1,307
Merger adjustment^(1)^ **** 10 **** 97 **** 55 **** 4 **** - **** 9 **** - **** 175
Balance, June 30, 2024 $ 549 $ 3,635 $ 4,254 $ 748 $ 323 $ 593 $ 400 $ 10,502
(1) Adjustment for PCD acquired loans.
--- ---
Activity in the ACLL for the Six Months Ended June 30, 2023
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Real Estate<br> <br>Construction Consumer<br> <br>Real Estate Commercial<br> <br>Real Estate Commercial<br> <br>Non Real<br> <br>Estate Public<br> <br>Sector and<br> <br>IDA Consumer Non<br> <br>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 ) - (11 ) - (132 ) - (160 )
Recoveries - 102 25 3 - 77 - 207
Provision for (recovery of) credit losses 47 (180 ) (26 ) 78 (3 ) 70 26 12
Balance, June 30, 2023 $ 476 $ 3,365 $ 4,341 $ 1,216 $ 301 $ 593 $ 334 $ 10,626
Activity in the ACLL for the Year Ended December 31, 2023
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
Real Estate<br> <br>Construction Consumer<br> <br>Real Estate Commercial<br> <br>Real Estate Commercial<br> <br>Non Real<br> <br>Estate Public<br> <br>Sector and<br> <br>IDA Consumer Non<br> <br>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.

ACLL by Segment and Evaluation Method
June 30, 2024 Real Estate<br> <br>Construction Consumer<br> <br>Real Estate Commercial<br> <br>Real Estate Commercial<br> <br>Non Real<br> <br>Estate Public<br> <br>Sector and<br> <br>IDA Consumer Non<br> <br>Real Estate Unallocated Total
Individually evaluated $ - $ 114 $ 391 $ 117 $ - $ 22 $ - $ 644
Collectively evaluated **** 549 **** 3,521 **** 3,863 **** 631 **** 323 **** 571 **** 400 **** 9,858
Total $ 549 $ 3,635 $ 4,254 $ 748 $ 323 $ 593 $ 400 $ 10,502
ACLL by Segment and Evaluation Method
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
December 31, 2023 Real Estate<br> <br>Construction Consumer<br> <br>Real Estate Commercial<br> <br>Real Estate Commercial<br> <br>Non Real<br> <br>Estate Public<br> <br>Sector and<br> <br>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
June 30, 2024 Real Estate<br> <br>Construction Consumer<br> <br>Real Estate Commercial<br> <br>Real Estate Commercial<br> <br>Non Real<br> <br>Estate Public<br> <br>Sector and<br> <br>IDA Consumer<br> <br>Non Real<br> <br>Estate Total
Individually evaluated $ 276 $ 2,259 $ 10,452 $ 305 $ - $ 179 $ 13,471
Collectively evaluated **** 81,079 **** 297,051 **** 444,526 **** 51,992 **** 59,043 **** 42,736 **** 976,427
Total $ 81,355 $ 299,310 $ 454,978 $ 52,297 $ 59,043 $ 42,915 $ 989,898
Loans by Segment and Evaluation Method as of
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
December 31, 2023 Real Estate<br> <br>Construction Consumer<br> <br>Real Estate Commercial<br> <br>Real Estate Commercial<br> <br>Non Real<br> <br>Estate Public<br> <br>Sector and<br> <br>IDA Consumer<br> <br>Non Real<br> <br>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 ACLL 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 ACLL is required.

As of June 30, 2024, four 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 June 30, 2024 and December 31, 2023. The following table details the amortized cost of the collateral dependent loans as of the dates indicated:

June 30, 2024 December 31, 2023
Balance Related<br> <br>Allowance Balance Related<br> <br>Allowance
Consumer Real Estate **** **** **** **** **** **** **** ****
Residential closed-end first lien $ 84 $ - $ 7 $ -
Commercial Real Estate **** **** **** **** **** **** **** ****
Commercial real estate, owner occupied **** 2,087 **** - 2,177 -
Commercial real estate, other **** 883 **** - - -
Total Loans $ 3,054 $ - $ 2,184 $ -

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.

Term Loans Amortized Cost Basis by Origination Year **** **** Revolving<br> <br>Loans **** ****
June 30, 2024 Prior 2020 2021 2022 2023 2024 Revolving Converted<br> <br>to Term Total
Construction, residential **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 177 $ 62 $ 269 $ 1,625 $ 6,504 $ 1,105 $ 13,199 $ - $ 22,941
Construction, other **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 4,080 $ 1,141 $ 7,929 $ 26,139 $ 5,663 $ 6,964 $ 6,222 $ - $ 58,138
Classified - - 276 - - - - - 276
Total $ 4,080 $ 1,141 $ 8,205 $ 26,139 $ 5,663 $ 6,964 $ 6,222 $ - $ 58,414
Equity lines **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 554 $ 329 $ 429 $ 528 $ 938 $ 171 $ 18,763 $ 45 $ 21,757
Residential closed-end first liens **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 42,736 $ 18,555 $ 35,607 $ 36,891 $ 17,900 $ 12,087 $ - $ 268 $ 164,044
Special Mention 370 - - - - - - - 370
Classified 574 - - - - - - - 574
Total $ 43,680 $ 18,555 $ 35,607 $ 36,891 $ 17,900 $ 12,087 $ - $ 268 $ 164,988
Residential closed-end junior liens **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 1,679 $ - $ 290 $ 2,081 $ 1,652 $ 891 $ - $ - $ 6,593
Investor-owned residential real estate **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 30,684 $ 23,613 $ 19,627 $ 16,561 $ 8,638 $ 2,775 $ 2,800 $ - $ 104,698
Special Mention - - - 142 166 - - - 308
Classified 759 - 168 39 - - - - 966
Total $ 31,443 $ 23,613 $ 19,795 $ 16,742 $ 8,804 $ 2,775 $ 2,800 $ - $ 105,972
Multifamily residential real estate **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 40,686 $ 2,114 $ 40,445 $ 28,096 $ 8,866 $ 442 $ 142 $ - $ 120,791
Commercial real estate, owner occupied **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 55,824 $ 25,096 $ 7,778 $ 23,749 $ 10,695 $ 1,377 $ 4,064 $ 85 $ 128,668
Special mention 6,396 - - - - - - - 6,396
Classified 2,307 759 - - - - 18 - 3,084
Total $ 64,527 $ 25,855 $ 7,778 $ 23,749 $ 10,695 $ 1,377 $ 4,082 $ 85 $ 138,148
Commercial real estate, other **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 93,009 $ 18,641 $ 38,340 $ 24,225 $ 17,239 $ 2,118 $ 1,771 $ - $ 195,343
Special Mention 696 - - - - - - - 696
Total $ 93,705 $ 18,641 $ 38,340 $ 24,225 $ 17,239 $ 2,118 $ 1,771 $ - $ 196,039
Commercial and industrial **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 6,673 $ 2,412 $ 12,702 $ 6,415 $ 7,282 $ 4,292 $ 12,218 $ - $ 51,994
Special Mention - - - - - - 96 - 96
Classified 200 - - 7 - - - - 207
Total $ 6,873 $ 2,412 $ 12,702 $ 6,422 $ 7,282 $ 4,292 $ 12,314 $ - $ 52,297
YTD gross charge-offs $ 20 $ 20
Public sector and IDA **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 20,062 $ 227 $ 26,162 $ 6,130 $ 6,462 $ - $ - $ - $ 59,043
Credit cards **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ - $ - $ - $ - $ - $ - $ 4,765 $ - $ 4,765
YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ 33 $ - $ 33
Automobile **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 111 $ 404 $ 1,139 $ 2,181 $ 5,946 $ 3,894 $ - $ - $ 13,675
Special Mention - - - - 4 - - - 4
Classified - - - - 69 11 - - 80
Total $ 111 $ 404 $ 1,139 $ 2,181 $ 6,019 $ 3,905 $ - $ - $ 13,759
Other consumer **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 322 $ 594 $ 1,318 $ 3,530 $ 8,901 $ 8,930 $ 698 $ - $ 24,293
Special Mention - - 2 - 13 11 - - 26
Classified - - 49 - 23 - - - 72
Total $ 322 $ 594 $ 1,369 $ 3,530 $ 8,937 $ 8,941 $ 698 $ - $ 24,391
YTD gross charge-offs $ - $ 4 $ 9 $ 17 $ 51 $ 43 $ - $ - $ 124
Total Loans **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** **** ****
Pass $ 296,597 $ 93,188 $ 192,035 $ 178,151 $ 106,686 $ 45,046 $ 64,642 $ 398 $ 976,743
Special Mention 7,462 - 2 142 183 11 96 - 7,896
Classified 3,840 759 493 46 92 11 18 - 5,259
Total $ 307,899 $ 93,947 $ 192,530 $ 178,339 $ 106,961 $ 45,068 $ 64,756 $ 398 $ 989,898
YTD gross charge-offs $ - $ 4 $ 9 $ 17 $ 51 $ 43 $ 53 $ - $ 177
Term Loans Amortized Cost Basis by Origination Year **** **** Revolving<br> <br>Loans **** ****
--- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
December 31, 2023 Prior 2019 2020 2021 2022 2023 Revolving Converted<br> <br>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

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. Two loans were modified for borrowers experiencing financial difficulty during the first three months of 2024.  One of these loans was modified a second time during the three months ended June 30, 2024. There was one loan to a borrower experiencing financial difficulty that was modified during the three and six months ended June 30, 2023.

The following table presents information as of June 30, 2024 about loans modified for borrowers experiencing financial difficulty during the six months ended June 30, 2024.

June 30, 2024 Amortized<br> <br>Cost Basis % of<br> <br>Class Type of<br> <br>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 **** 0.01 % Term extension Renewal of single-payment note for an additional 3 months.

The following table presents information as of June 30, 2023about loans modified for borrowers experiencing financial difficulty during the six months ended June 30, 2023.

June 30, 2023 Amortized<br> <br>Cost Basis % of<br> <br>Class Type of<br> <br>Modification Financial Effect
Commercial Real Estate **** **** **** **** ****
Commercial real estate owner-occupied $ 6,396 5.40 % Interest only payments 6 months of interest only payments, re-amortization of the balance to contractual maturity.

The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty. Both loans are in current status as of June 30, 2024.

There were no loans to borrowers experiencing financial difficulty that had a payment default during the three or six months ended June 30, 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 June 30, 2024, the Company had two 1-4 family residential real estate loans totaling $123 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 for Unfunded Commitments

The following tables present the balance and activity in the ACL for unfunded commitments for the six months ended June 30, 2024 and 2023:

Allowance for Credit Losses on Unfunded Commitments
Balance, December 31, 2023 $ 259
Recovery of credit losses **** (15 )
FCB acquisition **** 7
Balance, June 30, 2024 $ 251
Allowance for Credit Losses on Unfunded Commitments
--- --- --- ---
Balance, December 31, 2022 $ 35
Adoption of ASU 2016-13 207
Recovery of credit losses (9 )
Balance, June 30, 2023 $ 233

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Note 4: 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:

June 30, 2024 Amortized<br> <br>Cost Gross<br> <br>Unrealized Gains Gross<br> <br>Unrealized Losses Fair Value
U.S. government agencies and corporations $ 353,018 $ - $ 44,205 $ 308,813
States and political subdivisions **** 178,435 **** - **** 32,433 **** 146,002
Mortgage-backed securities **** 149,839 **** 27 **** 6,120 **** 143,746
Corporate debt securities **** 6,506 **** - **** 849 **** 5,657
U.S. treasury **** 998 **** - **** 20 **** 978
Total securities available for sale $ 688,796 $ 27 $ 83,627 $ 605,196
December 31, 2023 Amortized<br> <br>Cost Gross<br> <br>Unrealized Gains Gross<br> <br>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 June 30, 2024 or December 31, 2023.

Accrued interest receivable on securities, included in accrued interest receivable on the Consolidated Balance Sheets, totaled $3,263 at June 30, 2024 and $3,281 at December 31, 2023.

The deferred tax asset for the net unrealized loss on securities available for sale was $17,556 as of June 30, 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 June 30, 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.

June 30, 2024
Amortized Cost Fair Value
Available for Sale: **** **** **** ****
Due in one year or less $ 20,010 $ 19,618
Due after one year through five years **** 187,697 **** 172,569
Due after five years through ten years **** 268,663 **** 227,654
Due after ten years **** 212,426 **** 185,355
Total securities available for sale $ 688,796 $ 605,196

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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.

June 30, 2024 Less Than 12 Months 12 Months or More
Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses
U.S. government agencies and corporations $ - $ - $ 308,813 $ 44,205
State and political subdivisions **** 882 **** 120 **** 145,120 **** 32,313
Mortgage-backed securities **** 520 **** 1 **** 121,951 **** 6,119
Corporate debt securities **** - **** - **** 5,657 **** 849
U.S. treasury **** - **** - **** 978 **** 20
Total temporarily impaired securities $ 1,402 $ 121 $ 582,519 $ 83,506
December 31, 2023 Less Than 12 Months 12 Months or More
--- --- --- --- --- --- --- --- ---
Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses
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 June 30, 2024, the Company had 566 securities with a fair value of $583,921 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 June 30, 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 $503,383 at June 30, 2024. The Company’s management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at June 30, 2024, did not determine any impairment.

Realized Securities Gains and Losses

The Company initiated sale of FCB’s securities portfolio upon completion of the acquisition, and no gain or loss was recorded. During the first six months of 2023, the Company realized net securities losses of $3,332 on the sale of securities with an amortized cost basis of $46,850. The sales were part of the Company’s interest rate risk management strategy.

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Note 5: Defined Benefit Plan

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

Pension Benefits
Three Months Ended June 30,
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 )
Pension Benefits
--- --- --- --- --- --- ---
Six Months Ended June 30,
2024 2023
Service cost $ 522 $ 406
Interest cost **** 604 546
Expected return on plan assets **** (1,216 ) (1,036 )
Amortization of prior service cost **** - -
Recognized net actuarial loss **** 66 34
Net periodic benefit income $ (24 ) $ (50 )

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 6: 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:<br> <br>●    quoted prices in active markets for similar assets and liabilities,<br> <br>●    quoted prices for identical or similar assets and liabilities in less active markets,<br> <br>●    inputs other than quoted prices that are observable, and<br> <br>●    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 FHLB 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
June 30, 2024 Balance Level 1 Level 2 Level 3
U.S. government agencies and corporations $ 308,813 $ - $ 308,813 $ -
States and political subdivisions **** 146,002 **** - **** 146,002 **** -
Mortgage-backed securities **** 143,746 **** - **** 143,746 **** -
Corporate debt securities **** 5,657 **** - **** 5,657 **** -
U.S. treasury **** 978 **** - **** 978 **** -
Total securities available for sale $ 605,196 $ - $ 605,196 $ -
**** **** 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.

As of June 30, 2024, one interest rate lock commitment gave rise to an asset for the interest rate loan contract and a liability for the forward sales commitment.  Funded loans gave rise to a liability for the forward sales commitment. The Company had one rate lock commitment as of December 31, 2023, resulting in an asset for the interest rate loan contract and a liability for the forward sales commitment, and one funded loan resulting in a forward sales commitment.  The following tables present information on the interest rate loan contracts and forward sale commitments as of the date indicated:

**** **** **** Fair Value Measurement Using
June 30, 2024 Balance (Level 1) (Level 2) (Level 3)
Interest rate loan contract $ 1 $ - $ - $ 1
Forward sale commitment $ (2 ) $ - $ - $ (2 )
June 30, 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 **** 101.21% ^(3)^
Forward sale commitment Market approach Current reference price **** 100.08% - 102.00% (101.12%)^(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. A liability of $1 for the fair value of loans held for sale was recorded as of June 30, 2024. No nonrecurring fair value adjustments were recorded on loans held for sale at December 31, 2023.

Collateral Dependent Loans

Collateral dependent loans are measured on a non-recurring basis for the ACLL. 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 June 30, 2024, one consumer real estate loan totaling $84 and three commercial real estate loans totaling $2,970 were collateral dependent. Valuation of the consumer real estate loan and two of the commercial real estate loans were based upon third party evaluations (Level 2). Valuation for one commercial real estate loan was based upon an internal evaluation (Level 3). None of the measurements resulted in a specific allocation.

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
June 30, 2024 Carrying Amount Level 1 Level 2 Level 3
Financial assets: **** **** **** **** **** **** **** ****
Cash and due from banks $ 14,908 $ 14,908 $ - $ -
Federal funds sold 3,499 3,499
Interest-bearing deposits **** 80,477 **** 80,477 **** - **** -
Securities available for sale **** 605,196 **** - **** 605,196 **** -
Restricted stock, at cost **** 1,752 **** - **** 1,752 **** -
Mortgage loans held for sale **** 125 **** - **** 125 **** -
Loans, net **** 978,865 **** - **** - **** 919,403
Accrued interest receivable **** 6,615 **** - **** 6,615 **** -
Bank-owned life insurance **** 46,775 **** - **** 46,775 **** -
Interest rate loan contract **** 1 **** - **** - **** 1
Financial liabilities: **** **** **** **** **** **** **** ****
Deposits $ 1,645,052 $ - $ 1,340,993 $ 303,497
Accrued interest payable **** 2,525 **** - **** 2,525 **** -
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 7: Components of Accumulated Other Comprehensive Loss

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

Adjustments<br> <br>Related to<br> <br>Pension Benefits Accumulated Other<br> <br>Comprehensive Loss
Balance at March 31, 2023 (69,692 ) $ (2,345 ) $ (72,037 )
Unrealized holding loss on available for sale securities, net of tax of (1,289) (4,848 ) - (4,848 )
Reclassification adjustment, net of tax of 702 2,642 - 2,642
Balance at June 30, 2023 (71,898 ) $ (2,345 ) $ (74,243 )
Balance at March 31, 2024 (65,894 ) $ (2,310 ) $ (68,204 )
Unrealized holding loss on available for sale securities, net of tax of (40) (150 ) - (150 )
Balance at June 30, 2024 (66,044 ) $ (2,310 ) $ (68,354 )

All values are in US Dollars.

Adjustments<br> <br>Related to<br> <br>Pension Benefits Accumulated Other<br> <br>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 1,831 6,891 - 6,891
Reclassification adjustment, net of tax of 700 2,632 - 2,632
Balance at June 30, 2023 (71,898 ) $ (2,345 ) $ (74,243 )
Balance at December 31, 2023 (62,556 ) $ (2,310 ) $ (64,866 )
Unrealized holding loss on available for sale securities, net of tax of (927) (3,488 ) - (3,488 )
Balance at June 30, 2024 (66,044 ) $ (2,310 ) $ (68,354 )

All values are in US Dollars.

Note 8: 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"). 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.

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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.

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 other real estate owned ("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 Ended June 30,
Noninterest Income 2024 2023
In-scope of Topic 606:
Service charges on deposit accounts $ 722 $ 637
Other service charges and fees **** 48 49
Credit and debit card fees, net **** 423 414
Trust income **** 513 481
Insurance and Investment (included within Other Income in the Consolidated Statements of Income) **** 126 112
Noninterest Income (in-scope of Topic 606) $ 1,832 $ 1,693
Noninterest Income (out-of-scope of Topic 606) **** 414 1,098
Total noninterest income $ 2,246 $ 2,791
Six Months Ended June 30,
--- --- --- --- ---
Noninterest Income 2024 2023
In-scope of Topic 606:
Service charges on deposit accounts $ 1,397 $ 1,229
Other service charges and fees **** 94 102
Credit and debit card fees, net **** 797 881
Trust income **** 1,016 926
Insurance and Investment (included within Other Income in the Consolidated Statements of Income) **** 432 397
Noninterest Income (in-scope of Topic 606) $ 3,736 $ 3,535
Noninterest Income (out-of-scope of Topic 606) **** 709 1,455
Total noninterest income $ 4,445 $ 4,990

Note 9: Leases

The Company’s leases are recorded under ASC Topic 842, “Leases”. The Company categorizes leases as short-term, operating or finance leases. Leases with terms of 12 months or less are designated as short-term and are not capitalized. Operating and finance leases are capitalized as right-of-use assets and lease liabilities. Right-of-use assets, included in other 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, included in other 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. The Company does not separate non-lease components from lease components within a single contract. Counterparties for the Company’s lease contracts are external to the Company and not related parties.

On June 1, 2024, the Company’s acquisition of FCB added two long-term branch leases. At the Acquisition Date, the leases were remeasured using the Company’s incremental borrowing rate and remaining lease terms, resulting in an increase of $548 to the right of use asset and the lease liability.

Lease payments

Short-term lease payments 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. Operating and finance lease payments may be fixed for the term of the lease or variable. If the escalation factor for a variable lease payment 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.

Options to Extend, Residual Value Guarantees, Restrictions and Covenants

Certain of the Company’s operating leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably certain of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The following tables present information about leases as of the dates and for the periods indicated:

June 30, 2024 December 31, 2023
Lease liability $ 1,506 $ 1,127
Right-of-use asset $ 1,476 $ 1,096
Weighted average remaining lease term (in years) **** 5.03 4.39
Weighted average discount rate **** 3.84 % 3.29 %

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For the Three Months Ended June 30,
Lease Expense 2024 2023
Operating lease expense $ 99 $ 92
Short-term lease expense **** 6 -
Total lease expense $ 105 $ 92
Cash paid for amounts included in lease liabilities $ 104 $ 92
Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period $ 548 $ -
For the Six Months Ended June 30,
--- --- --- --- ---
Lease Expense 2024 2023
Operating lease expense $ 188 $ 184
Short-term lease expense **** 11 1
Total lease expense $ 199 $ 185
Cash paid for amounts included in lease liabilities $ 199 $ 186
Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period $ 548 $ -

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<br> <br>June 30, 2024
Twelve months ending June 30, 2025 $ 420
Twelve months ending June 30, 2026 **** 322
Twelve months ending June 30, 2027 **** 286
Twelve months ending June 30, 2028 **** 272
Twelve months ending June 30, 2029 **** 194
Thereafter **** 173
Total undiscounted cash flows $ 1,667
Less: discount **** (161 )
Lease liability $ 1,506

Note 10: Stock Based Compensation

The Company’s 2023 Stock Incentive Plan (“the Plan”) was approved by shareholders at the annual shareholders 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 28, 2024 and the Company’s S-8 filed with the SEC on June 7, 2023.

Restricted Stock **** Awards

Under the Plan, non-employee directors receive restricted stock awards (“RSAs”) each June and December. The RSAs are valued at the closing stock price on the grant date and expensed over the one-year vesting period. Stock based compensation expense charged against income was $33 and $65 for the three and six months ended June 30, 2024. As of June 30, 2024, expense of $103 related to the nonvested RSAs is expected to be recognized over the coming 12 months. A summary of changes in the Company’s nonvested RSAs under the Plan for the six months ended June 30, 2024 follows:

Shares Weighted-Average Grant-Date Fair Value
Nonvested at January 1, 2024 **** 4,095 $ 30.73
Granted **** 2,796 **** 30.00
Vested and released **** (2,052 ) **** 30.70
Nonvested at June 30, 2024 **** 4,839 $ 30.32

Note 11: Net (Loss) Income Per Share

The factors used in the computation of net (loss) income per share computation for the periods indicated are presented below:

For the Three Months Ended June 30,
2024 2023
Net Loss<br> <br>(Numerator) Common<br> <br>Shares^1^<br> <br>(Denominator) Per Share Net Income<br> <br>(Numerator) Common<br> <br>Shares^1^<br> <br>(Denominator) Per Share
Basic net (loss) income per common share $ (306 ) **** 6,028,220 $ (0.05 ) $ 3,901 5,889,687 $ 0.66
Dilutive shares for restricted stock awards: **** **** **** **** - 361
Diluted net (loss) income per common share $ (306 ) **** 6,028,220 $ (0.05 ) $ 3,901 5,890,048 $ 0.66
(1) Weighted average outstanding
--- ---
For the Six Months Ended June 30,
--- --- --- --- --- --- --- --- --- --- --- --- ---
2024 2023
Net Income<br> <br>(Numerator) Common<br> <br>Shares^1^<br> <br>(Denominator) Per Share Net Income<br> <br>(Numerator) Common<br> <br>Shares^1^<br> <br>(Denominator) Per Share
Basic net income per common share $ 1,868 **** 5,958,953 $ 0.31 $ 8,432 5,889,687 $ 1.43
Dilutive shares for restricted stock awards: **** **** **** 2,084 181
Diluted net income per common share $ 1,868 **** 5,961,037 $ 0.31 $ 8,432 5,889,868 $ 1.43

RSA grants are disregarded in the computation of diluted net income per share if they are determined to be anti-dilutive. There were no anti-dilutive RSAs for the three and six months ended June 30, 2024 and June 30, 2023.

Note 12 – Goodwill and Other Intangibles

The aggregate amortization expense was $35 for the three and six months ended June 30, 2024. The following table provides information on the significant components of goodwill and other acquired intangible assets at June 30, 2024.

Gross Carrying<br> <br>Amount Additions Measurement Period Adjustment Accumulated<br> <br>Amortization Net Carrying<br> <br>Amount
Goodwill $ 5,848 $ 4,874 $ 11 $ - $ 10,733
Core deposit intangible $ - $ 2,100 $ - $ (35 ) $ 2,065

At June 30, 2024, estimated future remaining amortization core deposit intangible within the years ending December 31, is as follows:

Amortization Expense
2024 $ 202
2025 **** 373
2026 **** 331
2027 **** 290
2028 **** 248
Thereafter **** 621
Total amortizing core deposit intangible $ 2,065

Table of Contents

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 Annual Report on Form 10-K for the year ended December 31, 2023 (the "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.
--- ---

On June 1, 2024, the Company and the Bank acquired Frontier Community Bank (“FCB”). 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.
--- ---

33

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 2023 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 27 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 the following policies as critical: those governing the allowance for credit losses, goodwill, the pension plan, core deposit intangibles and loans acquired in a business combination. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed.  For information on the allowance for credit losses, goodwill and the pension plan, please refer to the Company’s 2023 Form 10-K, Note 1: Summary of Significant Accounting Policies. For information on policies governing core deposit intangibles and loans acquired in a business combination, please refer to Note 1: General and Summary of Significant Accounting Policies of this Form 10-Q report.

Acquisition of Frontier Community Bank

On June 1, 2024, the Company and the Bank acquired FCB, a Virginia chartered commercial bank headquartered in Waynesboro, Virginia.  FCB’s results of operations are included in the Company’s consolidated results since the Acquisition Date, and accordingly the Company’s second quarter and first half of 2024 results reflect increased levels of average balances, net interest income, and expense compared to the prior quarter and first half of 2024 results.

The acquisition was made pursuant to an Agreement and Plan of Merger, dated January 23, 2024, by and among the Company, the Bank and FCB under which FCB merged with and into the Bank (the “FCB Merger Agreement”). Pursuant to the terms of the FCB Merger Agreement, at the effective time of the acquisition, each share of FCB common stock was converted into either $14.48 in cash or 0.4250 shares of the Company’s common stock, with FCB shareholders having the ability to elect the merger consideration to be received, subject to the allocation and proration procedures set forth in the FCB Merger Agreement. The Company issued 464,855 shares of common stock and paid $2,050 to former FCB shareholders in the acquisition. As a result of the transaction, the Bank expanded its operations into the Waynesboro, Staunton and Lynchburg, Virginia markets. Please refer to Note 2: Business Combination in Part I, Item 1 of this report for additional information of the acquisition of FCB.

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.

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 June 30,
Net Interest Income, FTE 2024 2023
Interest income (GAAP) $ 17,117 $ 14,597
Add: FTE adjustment **** 243 209
Interest income, FTE (non-GAAP) **** 17,360 14,806
Interest expense (GAAP) **** 8,417 5,380
Net interest income, FTE (non-GAAP) $ 8,943 $ 9,426
Average balance of interest-earning assets $ 1,688,945 $ 1,614,318
Net interest margin **** 2.13 % 2.34 %

34

Six Months Ended June 30,
Net Interest Income, FTE 2024 2023
Interest income (GAAP) $ 33,138 $ 28,641
Add: FTE adjustment **** 488 418
Interest income, FTE (non-GAAP) **** 33,626 29,059
Interest expense (GAAP) **** 16,193 8,478
Net interest income, FTE (non-GAAP) $ 17,433 $ 20,581
Average balance of interest-earning assets $ 1,663,824 $ 1,617,484
Net interest margin **** 2.11 % 2.57 %

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 June 30,
2024 2023
Noninterest expense (GAAP) $ 10,127 $ 7,566
Less: merger-related expense **** (2,257 ) -
Less: contract termination expense ^(1)^ **** (173 ) **** **** ****
Less: proxy-related expense ^(2)^ **** - (344 )
Adjusted noninterest expense (non-GAAP) $ 7,697 $ 7,222
Noninterest income (GAAP) $ 2,246 $ 2,791
Less: realized securities loss, net **** - 3,344
Less: gain on sale of investment ^(3)^ **** - (2,971 )
Less: gain on BOLI settlement **** - (1,037 )
Adjusted noninterest income (non-GAAP) **** 2,246 2,127
Net interest income, FTE (non-GAAP) **** 8,943 9,426
Total income for efficiency ratio (non-GAAP) $ 11,189 $ 11,553
Efficiency ratio **** 68.79 % 62.51 %
Six Months Ended June 30,
--- --- --- --- --- --- ---
2024 2023
Noninterest expense (GAAP) $ 17,889 $ 15,230
Less: merger-related expense **** (2,741 ) -
Less: contract termination expense ^(1)^ **** (173 ) **** **** ****
Less: proxy-related expense ^(2)^ **** - (784 )
Adjusted noninterest expense (non-GAAP) $ 14,975 $ 14,446
Noninterest income (GAAP) $ 4,445 $ 4,990
Less: realized securities loss, net **** - 3,332
Less: gain on sale of investment ^(3)^ **** - (2,971 )
Less: gain on BOLI settlement **** - (1,037 )
Adjusted noninterest income (non-GAAP) **** 4,445 4,314
Net interest income, FTE (non-GAAP) **** 17,433 20,581
Total income for efficiency ratio (non-GAAP) $ 21,878 $ 24,895
Efficiency ratio **** 68.45 % 58.03 %
(1) Contract termination expense was recorded to reflect the Company’s notification to a vendor that it intends to end its relationship in 2025.
--- ---
(2) Included in professional services in the Consolidated Statements of Income.
--- ---
(3) Sale of VISA Class B shares.
--- ---

35

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.
2023
Net (loss) income per GAAP (306 ) $ 3,901
Less: items not annualized:
Realized securities loss, net of tax of 702 for the period ended June 30, 2023 - 2,642
Proxy-related expense, net of tax of 72 for the period ended June 30, 2023 - 272
Gain on sale of investment, net of tax of (624) for the period ended June 30, 2023 - (2,347 )
Gain on BOLI settlement - (1,037 )
ACL provision, net of tax of 271 for the period ended June 30, 2024 (1) 1,019 -
Merger-related expense, net of tax of 411 for the period ended June 30, 2024 1,846 -
Contract termination expense, net of tax of 36 for the period ended June 30, 2024 137 -
Total non-annualized items 3,002 (470 )
Adjusted net income 2,696 $ 3,431
Adjusted net income, annualized 10,843 $ 13,762
Add: total non-annualized items (3,002 ) 470
Annualized net income for ratio calculation (non-GAAP) 7,841 $ 14,232
Return on average assets (GAAP) (0.07 )% 0.96 %
Adjusted return on average assets (non-GAAP) 0.46 % 0.87 %
Return on average equity (GAAP) (0.89 )% 12.06 %
Adjusted return on average equity (non-GAAP) 5.68 % 10.97 %

All values are in US Dollars.
2023
Net income per GAAP 1,868 $ 8,432
Less: items not annualized:
Partnership income net of tax of (35) and (44) for the periods ended June 30, 2024 and 2023, respectively (134 ) (164 )
Realized securities gain, net of tax of 700 for the period ended June 30, 2023 - 2,632
Proxy-related expense, net of tax of 165 for the period ended June 30, 2023 - 619
Gain on sale of investment, net of tax of (624) for the period ended June 30, 2023 - (2,347 )
Gain on BOLI settlement - (1,037 )
ACL provision, net of tax of 271 for the period ended June 30, 2024 (1) 1,019 -
Merger-related expense, net of tax of 411 for the period ended June 30, 2024 2,330 -
Contract termination expense, net of tax of 36 for the period ended June 30, 2024 137 -
Total non-annualized items 3,352 (297 )
Adjusted net income 5,220 $ 8,135
Adjusted net income, annualized 10,497 $ 16,405
Add: total non-annualized items (3,352 ) 297
Annualized net income for ratio calculation (non-GAAP) 7,145 $ 16,702
Return on average assets (GAAP) 0.22 % 1.05 %
Adjusted return on average assets (non-GAAP) 0.42 % 1.03 %
Return on average equity (GAAP) 2.74 % 13.40 %
Adjusted return on average equity (non-GAAP) 5.21 % 13.16 %

All values are in US Dollars.

(1) Upon acquisition of FCB, the Company recorded a provision for credit losses of $1,290 to establish an ACL for non-PCD loans.

36

Performance Summary

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

Three Months Ended June 30,
2024 2023
Net Income $ (306 ) $ 3,901
Return on average assets **** (0.07 )% 0.96 %
Adjusted return on average assets ^(1)^ **** 0.46 % 0.87 %
Return on average equity **** (0.89 )% 12.06 %
Adjusted return on average equity ^(1)^ **** 5.68 % 10.97 %
Basic net (loss) income per common share $ (0.05 ) $ 0.66
Fully diluted net (loss) income per common share ^(2)^ $ (0.05 ) $ 0.66
Net interest margin ^(1)^ **** 2.13 % 2.34 %
Efficiency ratio ^(1)^ **** 68.79 % 62.51 %
Six Months Ended<br> <br>June 30, 2024 Six Months Ended<br> <br>June 30, 2023 Twelve Months Ended<br> <br>December 31, 2023
--- --- --- --- --- --- --- --- --- ---
Net Income $ 1,868 $ 8,432 $ 15,691
Return on average assets **** 0.22 % 1.05 % 0.97 %
Adjusted return on average assets ^(1)^ **** 0.42 % 1.03 % 0.97 %
Return on average equity **** 2.74 % 13.40 % 12.59 %
Adjusted return on average equity ^(1)^ **** 5.21 % 13.16 % 12.59 %
Basic net income per common share $ 0.31 $ 1.43 $ 2.66
Fully diluted net income per common share ^(2)^ $ 0.31 $ 1.43 $ 2.66
Net interest margin ^(1)^ **** 2.11 % 2.57 % 2.38 %
Efficiency ratio ^(1)^ **** 68.45 % 58.03 % 61.01 %
^(1)^ See “Non-GAAP Financial Measures” above.
--- ---
^(2)^ As of June 30, 2024, the Company had 4,839 unvested shares of restricted stock outstanding with a one year vesting period.
--- ---

Net income for the three and six months ended June 30, 2024 decreased when compared with the comparable periods of 2023, due to net interest margin compression, merger related expenses and contract termination expense. The net interest margin as well as key noninterest income and expense items are discussed below.

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.

37

Table of Contents

Three Months Ended June 30,
2024 2023
Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate
Interest-earning assets:
Loans ^(1)(2)(4)(5)^ $ 904,317 $ 11,423 **** 5.08 % $ 853,119 $ 9,730 4.57 %
Taxable securities ^(6)(7)^ **** 629,871 **** 4,239 **** 2.71 % 654,021 4,066 2.49 %
Nontaxable securities ^(1)(6)^ **** 63,819 **** 459 **** 2.89 % 65,231 470 2.89 %
Federal funds sold **** 891 **** 10 **** 4.51 % - - -
Interest-bearing deposits **** 90,047 **** 1,229 **** 5.49 % 41,947 540 5.16 %
Total interest-earning assets $ 1,688,945 $ 17,360 **** 4.13 % $ 1,614,318 $ 14,806 3.68 %
Interest-bearing liabilities:
Interest-bearing demand deposits $ 842,809 $ 5,270 **** 2.51 % $ 847,986 $ 4,115 1.95 %
Savings deposits **** 174,699 **** 216 **** 0.50 % 199,606 199 0.40 %
Time deposits **** 261,584 **** 2,930 **** 4.51 % 138,261 1,054 3.06 %
Borrowings **** 230 **** 1 **** 1.75 % 954 12 5.05 %
Total interest-bearing liabilities $ 1,279,322 $ 8,417 **** 2.65 % $ 1,186,807 $ 5,380 1.82 %
Net interest income and interest rate spread **** **** $ 8,943 **** 1.48 % $ 9,426 1.86 %
Net interest margin **** **** **** **** **** 2.13 % 2.34 %
Six Months Ended June 30,
--- --- --- --- --- --- --- --- --- --- --- --- --- --- ---
2024 2023
Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate
Interest-earning assets:
Loans ^(1)(3)(4)(5)^ $ 881,304 $ 21,823 **** 4.98 % $ 854,101 $ 19,144 4.52 %
Taxable securities ^(6)(7)^ **** 631,690 **** 8,515 **** 2.71 % 666,214 8,184 2.48 %
Nontaxable securities ^(1)(6)^ **** 63,999 **** 920 **** 2.89 % 66,277 963 2.93 %
Federal funds sold **** 446 **** 10 **** 4.51 % - - -
Interest-bearing deposits **** 86,385 **** 2,358 **** 5.49 % 30,892 768 5.01 %
Total interest-earning assets $ 1,663,824 $ 33,626 **** 4.06 % $ 1,617,484 $ 29,059 3.62 %
Interest-bearing liabilities:
Interest-bearing demand deposits $ 832,682 $ 10,259 **** 2.48 % $ 852,264 $ 6,488 1.54 %
Savings deposits **** 175,324 **** 451 **** 0.52 % 203,967 280 0.28 %
Time deposits **** 248,127 **** 5,482 **** 4.44 % 115,093 1,413 2.48 %
Borrowings **** 115 **** 1 **** 1.75 % 12,394 297 4.83 %
Total interest-bearing liabilities $ 1,256,248 $ 16,193 **** 2.59 % $ 1,183,718 $ 8,478 1.44 %
Net interest income and interest rate spread **** **** $ 17,433 **** 1.47 % $ 20,581 2.18 %
Net interest margin **** **** **** **** **** 2.11 % 2.57 %
^(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 $55 and $66 for the three months ended June 30, 2024 and 2023, respectively.
--- ---
^(3)^ Included in interest income are loan fees of $103 and $106 for the six months ended June 30, 2024 and 2023, respectively.
--- ---
^(4)^ Nonaccrual loans are included in average balances for yield computations.
--- ---
^(5)^ Includes loans held for sale.
--- ---
^(6)^ Daily averages are shown at amortized cost.
--- ---
^(7)^ 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, the Company expects that repricing will continue to contribute to improved interest income.

38

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 three and six months ended June 30, 2024 are compared with the same periods 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 June 30, **** **** ****
2024 2023 Percent Change
Service charges on deposits $ 722 $ 637 **** 13.34 %
Other service charges and fees **** 48 49 **** (2.04 )%
Credit and debit card fees, net **** 423 414 **** 2.17 %
Trust income **** 513 481 **** 6.65 %
BOLI income **** 269 1,279 **** (78.97 )%
Gain on sale of investment **** - 2,971 **** NM
Gain on sale of mortgage loans **** 58 55 **** 5.45 %
Other income **** 213 249 **** (14.46 )%
Realized securities loss, net **** - (3,344 ) **** NM
Total noninterest income $ 2,246 $ 2,791 **** (19.53 )%
Six Months Ended June 30, **** **** ****
--- --- --- --- --- --- --- --- ---
2024 2023 Percent Change
Service charges on deposits $ 1,397 $ 1,229 **** 13.67 %
Other service charges and fees **** 94 102 **** (7.84 )%
Credit and debit card fees, net **** 797 881 **** (9.53 )%
Trust income **** 1,016 926 **** 9.72 %
BOLI income **** 527 1,518 **** (65.28 )%
Gain on sale of investment **** - 2,971 **** NM
Gain on sale of mortgage loans **** 82 71 **** 15.49 %
Other income **** 532 624 **** (14.74 )%
Realized securities loss, net **** - (3,332 ) **** NM
Total noninterest income $ 4,445 $ 4,990 **** (10.92 )%

Service charges on deposit accounts increased when the three and six months ended June 30, 2024 are compared with the comparable periods of 2023, due to changes in fee structure.

Other service charges and fees decreased when the three and six months ended June 30, 2024 are compared with the comparable periods of 2023, due to lower fees associated with letters of credit.

Credit and debit card fees, net, increased when the three months ended June 30, 2024 are compared with the comparable period of 2023, due an increase in customer use. When the six months ended June 30, 2024 and June 30, 2023 are compared, credit and debit card fees, net, decreased due to higher processing expense.

Trust income increased due to higher volume, when the three and six months ended June 30, 2024 are compared with the comparable periods of 2023. BOLI income decreased when compared over the same periods due to the settlement of a policy in the second quarter of 2023.

Other income includes revenue from investment and insurance sales, adjustments to partnership basis and other miscellaneous components. During 2023, the Company recognized an incentive payment from a vendor. These areas fluctuate with market conditions and competitive factors.

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

39

Table of Contents

Noninterest Expense

Three Months Ended June 30, **** **** ****
2024 2023 Percent Change
Salaries and employee benefits $ 4,687 $ 4,465 **** 4.97 %
Occupancy, furniture and fixtures **** 561 411 **** 36.50 %
Data processing and ATM **** 886 879 **** 0.80 %
FDIC assessment **** 192 254 **** (24.41 )%
Intangible asset amortization **** 35 - **** NM
Net costs of other real estate owned **** - 4 **** NM
Franchise taxes **** 358 358 **** 0.00 %
Professional services **** 272 551 **** (50.64 )%
Merger-related expenses **** 2,257 - **** NM
Contract termination expenses **** 173 - **** NM
Other operating expenses **** 706 644 **** 9.63 %
Total noninterest expense $ 10,127 $ 7,566 **** 33.85 %
Six Months Ended June 30, **** **** ****
--- --- --- --- --- --- --- ---
2024 2023 Percent Change
Salaries and employee benefits $ 9,153 $ 8,899 **** 2.85 %
Occupancy, furniture and fixtures **** 1,100 953 **** 15.42 %
Data processing and ATM **** 1,753 1,752 **** 0.06 %
FDIC assessment **** 379 371 **** 2.16 %
Intangible asset amortization **** 35 - **** NM
Net costs of other real estate owned **** - 15 **** NM
Franchise taxes **** 708 733 **** (3.41 )%
Professional services **** 512 1,304 **** (60.74 )%
Merger-related expenses **** 2,741 - **** NM
Contract termination expenses **** 173 - **** NM
Other operating expenses **** 1,335 1,203 **** 10.97 %
Total noninterest expense $ 17,889 $ 15,230 **** 17.46 %

Noninterest expense increased when the three and six months ended June 30, 2024 are compared with the comparable periods of 2023. Key noninterest expense items include occupancy, furniture and fixtures, professional services, merger-related expenses, and contract termination expenses.

Occupancy, furniture and fixtures expense increased when compared with 2023 due to receipt of a one-time insurance reimbursement during 2023.

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 $327 and $768 for the three and six months ended June 30, 2023, respectively.

During 2024, the Company recorded expenses associated with its acquisition of FCB, including executive and employee severance benefits and legal and consulting fees.

During the second quarter of 2024, the Company recorded a contract termination expense when it gave formal notification to a vendor that it intends to end its relationship in 2025.

Included in various categories of noninterest expense are expenses to manage cybersecurity risk. The cost of these measures was $94 for the three months ended June 30, 2024 and $150 for the three months ended June 30, 2023. For the six months ended June 30, 2024, the total cybersecurity expense was $184 compared to $283 for the six months ended June 30, 2023.

Income Tax

The Company’s income tax benefit for the three months ended June 30, 2024 was $177.  For the three months ended June 30, 2023, the Company recorded an income tax expense of $540. For the six months ended June 30, 2024, the Company’s income tax expense was $341 and effective tax rate was 15.44%.  For the six months ended June 30, 2023, the Company’s income tax expense was $1,488 and effective tax rate was 15.00%. A significant portion of the merger related expense was not tax deductible, resulting in an increase to the Company’s effective tax rate for 2024. During 2023, the Company recognized a gain on the settlement of a BOLI policy that was not taxable.

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Asset Quality

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

June 30, 2024 June 30, 2023 December 31, 2023
Nonaccrual loans $ 2,507 $ 3,075 $ 2,629
Loans past due 90 days or more, and still accruing **** 234 21 188
Other real estate owned **** - 662 -
ACLL to loans net of unearned income and deferred fees and costs **** 1.06 % 1.26 % 1.06 %
Net charge-off ratio **** 0.02 % (0.01 )% 0.02 %
Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned **** 0.25 % 0.44 % 0.31 %
Ratio of ACLL to nonperforming loans **** 418.91 % 345.56 % 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 June 30, 2024 determined an ACLL of $10,502, or 1.06% 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 $13,471 as of June 30, 2024, a slight increase from $10,544 as of December 31, 2023. As of June 30, 2024, four 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 $644.

Collectively Evaluated Loans

Collectively evaluated loans totaled $976,427, with an ACLL of $9,858 as of June 30, 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 June 30, 2024, and set a period of 12 months to revert to historical losses on a straight-line basis. The forecast applied at June 30, 2024 projects that unemployment will rise over the next 12 months, to a slightly higher level than the forecast applied as of December 31, 2023. The higher unemployment forecast increased the required level of the ACLL when June 30, 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 remained the same 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 June 30, 2024 increased from the data incorporated into the December 31, 2023 calculation. Housing data available as of June 30, 2024 showed higher inventory than at December 31, 2023, resulting in a higher 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 0.25% of total loans at June 30, 2024, an increase 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 impacts 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 the Company’s 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. As of June 30, 2024, the Company reduced its allocation from the December 31, 2023 allocation to reflect improvement in inflationary pressures.

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. The Company added an allocation to account for absorption of FCB acquired loans and integration of FCB lenders.

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 increased from the level at December 31, 2023.

Unallocated Surplus

The unallocated surplus as of June 30, 2024 is $400, or 3.96% 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 June 30, 2024.

ACL on Unfunded Commitments ****

The ACL on unfunded commitments was $251, or 0.14% of unfunded commitments as of June 30, 2024.  The ACL on unfunded commitments was $259, or 0.16% as of December 31, 2023..

Provision for (Recovery of) Credit Losses

The provision for credit losses represents charges to earnings necessary to maintain an adequate allowance.  The adequacy of the ACLL is reviewed quarterly and adjustments are made as considered necessary. The Company recorded a provision for credit losses on loans of $1,307 and a recovery of credit losses on unfunded commitments of $15 for the six months ended June 30, 2024, compared with provision for credit losses on loans of $12 for the six months ended June 30, 2023 and a recovery of $9 for unfunded commitments. Upon acquisition of FCB in June 2024, the Company recorded a provision for credit losses of $1,290 to establish an allowance on non-PCD loans.

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.

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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 ACLL. During the three months ended June 30, 2024, the Company modified one loan totaling $7 for a borrower who was experiencing financial difficultly. During the six months ended June 30, 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 June 30, 2024, using the discounted cash flow methodology. During the three and six months ended June 30, 2023, the Company modified one loan totaling $6,396 for a borrower who was experiencing financial difficulty. The loan was individually evaluated using the discounted cash flow methodology for the ACLL as of June 30, 2023.

Modifications for Borrowers Who Were Not Experiencing Financial Difficulty

During the three and six months ended June 30, 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 June 30, 2024, the Company modified 216 loans totaling $21,704. During the six months ended June 30, 2024, the Company modified 432 loans totaling $43,936. During the three months ended June 30, 2023, the Company provided 194 modifications to loans totaling $11,528. For the six months ended June 30, 2023, the Company provided 395 modifications to loans totaling $42,036.

Key Assets and Liabilities

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

June 30, 2024 December 31, 2023 Percent Change
Interest-bearing deposits $ 80,477 $ 73,636 **** 9.29 %
Securities available for sale, at fair value and restricted stock **** 606,948 619,865 **** (2.08 )%
Loans, net **** 978,865 847,552 **** 15.49 %
Total assets **** 1,809,216 1,655,370 **** 9.29 %
Deposits **** 1,645,052 1,503,972 **** 9.38 %

Average Balances

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

June 30, 2024 December 31, 2023 Percent Change
Assets **** **** **** **** **** **** ****
Interest-bearing deposits $ 86,385 $ 37,660 **** 129.38 %
Securities available for sale, at fair value and restricted stock **** 609,828 620,535 **** (1.73 )%
Loans, net **** 871,713 840,590 **** 3.70 %
Total assets **** 1,687,446 1,613,854 **** 4.56 %
Liabilities and stockholders’ equity **** **** **** **** **** **** ****
Noninterest-bearing demand deposits $ 281,635 $ 299,748 **** (6.04 )%
Interest-bearing demand deposits **** 832,682 826,112 **** 0.80 %
Savings deposits **** 175,324 195,592 **** (10.36 )%
Time deposits **** 248,127 150,395 **** 64.98 %
Stockholders’ equity **** 136,955 124,641 **** 9.88 %

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

Securities

June 30, 2024 December 31, 2023 Percent Change
Amortized cost $ 688,796 $ 697,786 **** (1.29 )%
Unrealized loss, net **** (83,600 ) (79,185 ) **** (5.58 )%
Securities available for sale, at fair value $ 605,196 $ 618,601 **** (2.17 )%

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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 June 30, 2024 and no ACL has been recorded. Please refer to Note 1: General and Summary of Significant Accounting Policies of the 2023 Form 10-K and Note 4: Securities in Part I, Item 1 of this report for additional information on the securities portfolio.

Loans

June 30, 2024 December 31, 2023 Percent<br> <br>Change
Real estate construction $ 81,355 $ 55,379 **** 46.91 %
Consumer real estate **** 299,310 241,564 **** 23.91 %
Commercial real estate **** 454,978 419,130 **** 8.55 %
Commercial non real estate **** 52,297 41,555 **** 25.85 %
Public sector and IDA **** 59,043 60,551 **** (2.49 )%
Consumer non real estate **** 42,915 38,996 **** 10.05 %
Less: unearned income and deferred fees and costs **** (531 ) (529 ) **** (0.38 )%
Loans, net of unearned income and deferred fees and costs $ 989,367 $ 856,646 **** 15.49 %

The increase from December 31, 2023 reflects the acquisition of FCB. The higher interest rate environment continues to restrain loan demand. The Company is positioned to make every loan that meets its underwriting standards.

Deposits

June 30, 2024 December 31, 2023 Percent<br> <br>Change
Noninterest-bearing demand deposits $ 296,242 $ 281,215 **** 5.34 %
Interest-bearing demand deposits **** 867,899 821,661 **** 5.63 %
Savings deposits **** 176,852 177,856 **** (0.56 )%
Time deposits **** 304,059 223,240 **** 36.20 %
Total deposits $ 1,645,052 $ 1,503,972 **** 9.38 %

The Company’s depositors within its market area are diverse, including individuals, businesses and municipalities. The Company does not have any brokered deposits. Depositors are insured up to the FDIC maximum of $250 thousand. Municipal deposits, which account for approximately 24% of the Company’s deposits, have additional security from bonds pledged as collateral, in accordance with state regulation. Of the Company’s non-municipal deposits, approximately 21% are uninsured.

Borrowings

The Company acquired FHLB borrowings in the FCB merger, which were repaid upon completion of the merger.

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Capital Resources

June 30, 2024 December 31, 2023 Percent<br> <br>Change
Common stock and additional paid in capital $ 21,768 $ 7,404 **** 194.00 %
Retained earnings **** 195,549 197,984 **** (1.23 )%
Accumulated other comprehensive loss **** (68,354 ) (64,866 ) **** (5.38 )%
Total stockholders’ equity $ 148,963 $ 140,522 **** 6.01 %

The increase in stockholders’ equity reflects the stock consideration issued to acquire FCB. The Company paid dividends to shareholders in June 2024.

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 June 30, 2024. Capital ratios for NBB are shown in the following tables.

NBB Regulatory<br> <br>Capital Minimum<br> <br>Ratios Regulatory Capital Minimum<br> <br>Ratios with Capital<br> <br>Conservation Buffer
Common Equity Tier I Capital Ratio **** 16.32 % 4.50 % 7.00 %
Tier I Capital Ratio **** 16.32 % 6.00 % 8.50 %
Total Capital Ratio **** 17.19 % 8.00 % 10.50 %
Leverage Ratio **** 11.40 % 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 June 30, 2024, the Company had $297,917 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 $180,278 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 June 30, 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 Bank discount window. As of June 30, 2024, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve Bank 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 June 30, 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 June 30, 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 June 30, 2024, the loan to deposit ratio was 60.14%. 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.

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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 current expected credit losses ("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 June 30, 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 and six months ended June 30, 2024.

Contractual Obligations

The Company had no finance lease or purchase obligations and no long-term debt at June 30, 2024.

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. In conducting the evaluation of the effectiveness of its disclosure controls and procedures as of June 30, 2024, the Company has excluded the operations of FCB as permitted by the guidance issued by the Office of the Chief Accountant of the Securities and Exchange Commission (not to extend more than one year beyond the date of the acquisition or for more than one annual reporting period). The merger was completed on June 1, 2024. See "Note 2. Business Combinations" for further discussion of the merger and its impact on the Company’s consolidated financial statements.

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 June 30, 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 June 30, 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.

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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 the 2023 Form 10-K and the factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” in Part I. Item 2 of this Form 10-Q.

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

(a) None.
(b) None.
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(c) During the fiscal quarter ended June 30, 2024, none of the Company’s directors or officers (as defined in Rule 16a-1(f) of the Securities Exchange Act of 1934) adopted or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement (as such terms are defined in Item 408(a) of Regulation S-K).
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Table of Contents

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 July 10, 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 (i) Advisory Services Agreement, dated June 1, 2024, by and between Alan J. Sweet and National Bankshares, Inc. Filed herewith
+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 June 30, 2024 are formatted in iXBRL (Inline Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets at June 30, 2024 and December 31, 2023; (ii) Consolidated Statements of (Loss) Income for the three and six months ended June 30, 2024 and 2023; (iii) Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2024 and 2023; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2024 and 2023; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 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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Table of Contents

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: August 14, 2024 /s/ F. Brad Denardo
By: F. Brad Denardo<br> Chairman, President and<br> <br>Chief Executive Officer<br> <br>(Principal Executive Officer)
Date: August 14, 2024 /s/ Lora M. Jones
By: Lora M. Jones<br> Treasurer and<br> <br>Chief Financial Officer<br> <br>(Principal Financial Officer)<br> <br>(Principal Accounting Officer)

49

ex_711789.htm

Exhibit 10(i)

ADVISORY SERVICES AGREEMENT

THIS ADVISORY SERVICES AGREEMENT (this “Agreement”) is entered into by and between Alan J. Sweet (the “Consultant”) and National Bankshares, Inc. (the “Company”) as of June 1, 2024, to be effective immediately following the Effective Time (as defined in the Agreement and Plan of Merger, dated January 23, 2024 (the “Merger Agreement”), by and among the Company, The National Bank of Blacksburg, the Company’s wholly-owned bank subsidiary (the “Bank”) and Frontier Community Bank) (the “Effective Date”). If the Effective Time does not occur, this Agreement shall be null and void ab initio and of no further force and effect.

WITNESSETH:

WHEREAS, the Consultant has valuable knowledge and expertise regarding the business of Frontier Community Bank; and

WHEREAS, due to the Consultant’s knowledge and expertise, the Company wishes to have the cooperation of, access to, and services of the Consultant following the Effective Time.

NOW, THEREFORE, in consideration of the premises and mutual covenants contained in this Agreement, the Company and the Consultant, intending to be legally bound hereby, mutually agree as follows:

1.Services; Term; Termination .

(a) The Consultant shall serve as a Special Advisor beginning on the Effective Date for a three (3)-month period, unless such period is earlier terminated in accordance with Sections 1(c) or 1(d) below (the applicable period, the “Term”). During the Term, the Consultant shall provide general advisory services to the Company as requested by the President and Chief Executive Officer of the Company, including, without limitation, attending meetings upon request, and providing advice and assistance as requested with respect to the transition and integration of Frontier Community Bank into the Bank (the “Services”).
(b) To the extent that the Term is not terminated in accordance with Section 1(c) or 1(d), the Term may be extended for successive one (1)-month periods only through mutual written agreement of the parties hereto.
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(c) The Company may terminate the Term only for Cause, upon ten (10)^^calendar days’ advance written notice to the Consultant. For purposes of this Agreement, “Cause” shall mean the Consultant’s material failure to perform the Services (other than a failure to perform the Services as a result of the Company’s refusal to accept performance of the Services, the Company’s failure to request the Services, or the Company’s material failure to comply with the terms of this Agreement) or the Consultant’s breach of this Agreement.
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1

(d) The Consultant may terminate the Term for any reason, at any time, upon ten (10) calendar days’ advance written notice to the Company.
(e) No additional Consulting Fees (as defined below) will be paid for any period after the Term has been terminated in accordance with this Agreement. For the avoidance of doubt, if the Company terminates the Term for any reason other than that specified in Section 1(c), it shall pay the Consultant the Consulting Fees that otherwise would have paid for the Term had the Term not been terminated by the Company.
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2.Compensation During the Consulting Period. In exchange for the Services, the Company shall pay to the Consultant $15,000 per month for the Term (the “Consulting Fees”). The Consulting Fee for each month (or portion thereof) during the Term shall be paid not less frequently than monthly.

3.Independent Contractor Status.

(a) In performing the Services, the Consultant shall be acting and shall act at all times as an independent contractor only and not as an employee of the Company. The Consultant shall be responsible for reasonably determining the method, details, and means of performing the Services required under this Agreement, and the specific hours to be worked. It is understood and agreed that the Consultant shall have no power or authority to supervise, direct, or manage any employee of the Company or the Bank; to enter into contracts on behalf of the Company or the Bank; or to borrow or incur debts or liabilities, of any kind or nature whatsoever, on behalf of the Company or the Bank. The Consultant shall not be entitled to participate in or otherwise accrue benefits or receive contributions under any employee benefit plans, policies, or other arrangements that might be available to the employees of the Company or any affiliate of the Company.
(b) The Consultant shall be solely responsible for the payment of all federal, state, and local taxes with respect to the compensation or benefits for Services provided hereunder.
--- ---

4.Entire Agreement; Amendment. This Agreement contains the entire agreement between the Company and the Consultant with respect to the matters described herein. This Agreement may not be amended, waived, changed, modified, or discharged except by an instrument in writing executed by the Company and the Consultant.

5.Notice. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by prepaid overnight courier service, addressed as follows:

If to the Consultant:

At the Consultant’s then current address in accordance with the Company’s records

2

If to the Company:

National Bankshares, Inc.

101 Hubbard Street

Blacksburg, Virginia 24062

Attention: F. Brad Denardo

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received or refused by the addressee.

6.Binding Agreement; Waiver. This Agreement shall be binding upon and inure to the benefit of the Consultant and the Consultant’s heirs, executors, administrators, and legal representatives. This Agreement shall be binding upon and inure to the benefit of the Company, its affiliates, and its successors, and any such successors shall assume the obligations under this Agreement and expressly agree to perform the obligations under this Agreement. The Services are personal in nature and shall not be assigned or subcontracted, and the Consultant may not assign this Agreement. Neither the failure nor any delay by either party in exercising, in whole or in part, any right, power, or privilege under this Agreement will operate as a waiver of such right, power, or privilege.

7.Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. The parties agree that any dispute arising under this Agreement shall be brought only in a state or federal court having proper jurisdiction within Virginia. Both parties submit to such jurisdiction and waive any objection to venue and/or claim of inconvenient forum.

8.Counterparts. This Agreement may be executed by facsimile or other electronic transmission and in counterparts, each of which will be deemed an original, and all of which taken together will constitute one agreement binding on the parties.

[Signature Page Follows]

3

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement effective as of the day and year first above written.

NATIONAL BANKSHARES, INC.
By: /s/ F. Brad Denardo
F. Brad Denardo
President and Chief Executive Officer
/s/ Alan J. Sweet
Alan J. Sweet

4

ex_710677.htm

Exhibit 31(i)

CERTIFICATIONS

I, F. Brad Denardo, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of National Bankshares, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2024

/s/ F. Brad Denardo
F. Brad Denardo<br> Chairman, President and Chief Executive Officer<br> (Principal Executive Officer)

ex_710678.htm

Exhibit 31(ii)

CERTIFICATIONS

I, Lora M. Jones, certify that:

1.    I have reviewed this quarterly report on Form 10-Q of National Bankshares, Inc.;

2.    Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.    Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.    The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a–15(f) and 15d–15(f)) for the registrant and have:

(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.    The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 14, 2024

/s/ Lora M. Jones
Lora M. Jones<br> Treasurer and<br><br> <br>Chief Financial Officer<br><br> <br>(Principal Financial Officer)

ex_710679.htm

Exhibit 32 (i)

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the Form 10-Q of National Bankshares, Inc. for the quarter ended June 30, 2024, I, F. Brad Denardo, Chairman, President and Chief Executive Officer (Principal Executive Officer) of National Bankshares, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

(1)    such Form 10-Q for the quarter ended June 30, 2024, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    the information contained in such Form 10-Q for the quarter ended June 30, 2024, fairly presents, in all material respects, the financial condition and results of operations of National Bankshares, Inc.

/s/ F. Brad Denardo
F. Brad Denardo<br> Chairman, President and Chief Executive Officer<br> (Principal Executive Officer)<br><br> <br>August 14, 2024

ex_710680.htm

Exhibit 32 (ii)

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350

In connection with the Form 10-Q of National Bankshares, Inc. for the quarter ended June 30, 2024, I, Lora M. Jones, Treasurer and Chief Financial Officer (Principal Financial Officer) of National Bankshares, Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that:

(1)    such Form 10-Q for the quarter ended June 30, 2024, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)    the information contained in such Form 10-Q for the quarter ended June 30, 2024, fairly presents, in all material respects, the financial condition and results of operations of National Bankshares, Inc.

/s/ Lora M. Jones
Lora M. Jones<br> Treasurer and<br><br> <br>Chief Financial Officer<br><br> <br>(Principal Financial Officer)<br><br> <br>August 14, 2024

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