NATIONAL BANKSHARES INC

Previous wording

Conversion expense stems from an upcoming system upgrade that will provide greater efficiency and product offerings.

Current wording

Conversion expense stems from a core system upgrade that will provide greater efficiency and product offerings.

Previous wording

Key to understanding the Company’s results of operations and financial position is the acquisition of FCB in 2024, the impact of the interest rate environment and the upcoming system conversion that will enhance efficiency and product offerings.

Current wording

Key to understanding the Company’s results of operations and financial position is the acquisition of FCB in 2024, the impact of the interest rate environment and the system conversion completed during the second quarter of 2025 that will enhance efficiency and product offerings.

Previous wording

Between March 2022 and July 2023, the Federal Reserve increased interest rates 525 basis points. The rapidity and magnitude of the change was unprecedented and spurred intense competitive pressure for deposits, affected the fair value of the Company’s securities, and dampened loan demand. The effects of the interest rate environment continued into 2024, however, the Federal Reserve's 100 basis point interest rate cut between September and December eased deposit pricing pressure beginning in the fourth quarter of 2024 and continued to positively influence results in 2025. The following table presents the Company’s key performance indicators for the periods indicated.

Current wording

The Federal Reserve's 100 basis point interest rate cut between September and December of 2024 eased deposit pricing pressure beginning in the fourth quarter of 2024 and continued to positively influence results in 2025. The interest rate environment continues at a level that allows adjustable rate loans to reprice higher than their previous rates.

Previous wording

Net income for the three months ended March 31, 2025 increased when compared with the comparable period of 2024, due to net interest margin expansion and merger related expenses in 2024. The net interest margin as well as key noninterest income and expense items are discussed below.

Current wording

Net income for the three and six months ended June 30, 2025 increased when compared with the comparable periods of 2024, due to net interest margin expansion and merger related expenses in 2024. The net interest margin as well as key noninterest income and expense items are discussed below.

Previous wording

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.

Current wording

The following tables present 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.

Previous wording

Included in interest income are loan fees of $68 and $48 for the three months ended March 31, 2025 and 2024, respectively. Also included in interest income is accretion of discounts on acquired loans of $251 for the three months ended March 31, 2025.

Current wording

Included in interest income are loan fees of $113 and $60 for the three months ended June 30, 2025 and 2024, respectively. Also included in interest income is accretion of discounts on acquired loans of $363 and $111 for the three months ended June 30, 2025 and 2024, respectively.

Previous wording

Included in interest expense is amortization of premium on acquired time deposits of $58 for the three months ended March 31, 2025.

Current wording

Included in interest expense is amortization of premium on acquired time deposits of $43 and $57 for the three months ended June 30, 2025 and 2024, respectively.

Previous wording

When the three month periods ended March 31, 2025 and 2024 are compared, the yield on earning assets increased and the cost of interest bearing liabilities decreased, improving the net interest margin. The Federal Reserve's interest rate cuts between September and December 2024 immediately reduced expense for deposits with pricing based on the prime interest rate. Current interest rates are still at a level that will allow improved interest income as loans continue to reach repricing dates.

Current wording

When the three and six month periods ended June 30, 2025 and 2024 are compared, the yield on earning assets increased and the cost of interest bearing liabilities decreased, improving the net interest margin. The Federal Reserve's interest rate cuts between September and December 2024 immediately reduced expense for deposits with pricing based on the prime interest rate. Current interest rates are still at a level that will allow improved interest income as loans continue to reach repricing dates.

Previous wording

Service charges on deposit accounts increased when the three months ended March 31, 2025 are compared with the comparable period of 2024, due to higher levels of deposits.

Current wording

Service charges on deposit accounts increased when the three and six months ended June 30, 2025 are compared with the comparable periods of 2024, due to higher levels of deposits.

Previous wording

Credit and debit card fees, net, increased when the three months ended March 31, 2025 are compared with the comparable period of 2024, due to transaction volume.

Current wording

Credit and debit card fees, net, decreased when the three and six months ended June 30, 2025 are compared with the comparable periods of 2024, due to higher processing fees.

Previous wording

Trust income increased due to higher assets under management, when the three months ended March 31, 2025 are compared with the comparable period of 2024.

Current wording

Trust income increased due to higher assets under management, when the three and six months ended June 30, 2025 are compared with the comparable period of 2024.

Previous wording

BOLI income increased when the three months ended March 31, 2025 is compared with the comparable period of 2024 due to income from policies acquired from FCB.

Current wording

BOLI income increased when the three and six months ended June 30, 2025 are compared with the comparable periods of 2024 due to income from policies acquired from FCB.

Previous wording

Other income includes revenue from investment and insurance sales, adjustments to partnership basis and other miscellaneous components. Insurance income and a vendor incentive payment account for the increase when the three months ended March 31, 2025 is compared with the comparable period of 2024.

Current wording

Other income includes revenue from investment and insurance sales, adjustments to partnership basis and other miscellaneous components. Insurance income and a vendor incentive payment account for the increase when the six months ended June 30, 2025 is compared with the comparable period of 2024.

Previous wording

Noninterest expense increased when the three months ended March 31, 2025 are compared with the comparable period of 2024. Salaries and employee benefits, which include payroll taxes, health insurance, contributions to the employee stock ownership plan and employee 401(k), pension expense, incentives and salary continuation increased when the three months ended March 31, 2025 is compared with the comparable period of 2024, reflecting the addition of FCB employees.

Current wording

Noninterest expense increased when the three and six months ended June 30, 2025 are compared with the comparable periods of 2024. Salaries and employee benefits, which include payroll taxes, health insurance, contributions to the employee stock ownership plan and employee 401(k), pension expense, incentives and salary continuation increased when the three and six months ended June 30, 2025 are compared with the comparable periods of 2024, reflecting the addition of FCB employees.

Previous wording

Occupancy, furniture and fixtures expense increased when the three months ended March 31, 2025 are compared with the comparable period of 2024 due to additional assets acquired from FCB and higher maintenance costs.

Current wording

Occupancy, furniture and fixtures expense increased when the three and six months ended June 30, 2025 are compared with the comparable periods of 2024 due to additional assets acquired from FCB and higher maintenance costs.

Previous wording

Data processing and ATM and FDIC assessment expenses increased when the three months ended March 31, 2025 are compared with the comparable period of 2024 due to expenses associated with the branches acquired from FCB and a larger assessment base.

Current wording

FDIC assessment increased when the three and six months ended June 30, 2025 are compared with the comparable periods of 2024 due to a larger assessment base.

Previous wording

Professional services include legal, audit and consulting expenses, which increased when the three months ended March 31, 2025 are compared with the comparable period of 2024 due to higher fees for the expanded asset base and system considerations associated with the FCB acquisition.

Current wording

Professional services include legal, audit and consulting expenses, which increased when the three and six months ended June 30, 2025 are compared with the comparable periods of 2024 due to higher legal expense.

Previous wording

Other operating expenses increased when the three months ended March 31, 2025 are compared with the comparable period of 2024. The category of other operating expenses includes expense for marketing and business development, supplies, non-service pension cost and charitable donations, among others. Included in various categories of noninterest expense are expenses to manage cybersecurity risk. The cost of these measures was $81 for the three months ended March 31, 2025 and $89 for the three months ended March 31, 2024. The Company places high priority on cybersecurity. The decrease in expense reflects renegotiation of contracts and licensing.

Current wording

Other operating expenses increased when the three and six months ended June 30, 2025 are compared with the comparable periods of 2024. The category of other operating expenses includes expense for marketing and business development, supplies, non-service pension cost and charitable donations, among others. Included in various categories of noninterest expense are expenses to manage cybersecurity risk. The cost of these measures was $100 for the three months ended June 30, 2025 and $94 for the three months ended June 30, 2024. For the six months ended June 30, 2025, total cybersecurity expense was $141 compared to $184 for the six months ended June 30, 2024. The Company places high priority on cybersecurity. The decrease in expense reflects renegotiation of contracts and licensing.

Previous wording

The Company’s income tax expense for the three months ended March 31, 2025 was $666 and effective tax rate was 17.07%. For the three months ended March 31, 2024, the Company’s income tax expense was $518 and effective tax rate was 19.24%. The merger related expense was not tax deductible, resulting in an increase to the Company’s effective tax rate for 2024.

Current wording

The Company’s income tax expense was $362 for the three months ended June 30, 2025 compared to an income tax benefit of $178 for the same period in 2024.The Company's income tax expense was $1,028 for the six months ended June 30, 2025 and effective tax rate was 15.69%. For the six months ended June 30, 2024, the Company’s income tax expense was $341 and effective tax rate was 15.44%. A large portion of merger related expense was not tax deductible, impacting the Company’s effective tax rate for 2024.

Previous wording

The Company’s risk analysis as of March 31, 2025 determined an ACLL of $10,490, or 1.05% of loans net of deferred fees and costs. This compares with an allowance of $10,262 as of December 31, 2024, or 1.04% 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.

Current wording

The Company’s risk analysis as of June 30, 2025 determined an ACLL of $10,422, or 1.03% of loans net of deferred fees and costs. This compares with an allowance of $10,262 as of December 31, 2024, or 1.04% 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.

Previous wording

As of March 31, 2025, individually evaluated loans were $10,414. Three 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 $76.

Current wording

As of June 30, 2025, individually evaluated loans were $10,849. Three 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 $141.

Previous wording

Collectively evaluated loans totaled $993,491, with an ACLL of $10,414 as of March 31, 2025. As of December 31, 2024, collectively evaluated loans totaled $978,092, with an allowance of $10,182.

Current wording

Collectively evaluated loans totaled $1,000,286, with an ACLL of $10,281 as of June 30, 2025. As of December 31, 2024, collectively evaluated loans totaled $978,092, with an allowance of $10,182.

Previous wording

The Company applies national unemployment forecasts to project cash flows. The Company determined that 12 months represents a reasonable and supportable forecast period as of March 31, 2025, and set a period of 12 months to revert to historical losses on a straight-line basis. The forecast applied as of March 31, 2025 projects that unemployment will be stable over the next 12 months at a lower level than the forecast applied as of December 31, 2024. The lower unemployment forecast decreased the required level of the ACLL when March 31, 2025 is compared with December 31, 2024.

Current wording

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, 2025, and set a period of 12 months to revert to historical losses on a straight-line basis. The forecast applied as of June 30, 2025 projects that unemployment will slightly increase over the next 12 months at a lower level than the forecast applied as of December 31, 2024. The lower unemployment forecast decreased the required level of the ACLL when June 30, 2025 is compared with December 31, 2024.

Previous wording

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 as of December 31, 2024, business bankruptcy filings increased while personal bankruptcies filings decreased.

Current wording

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 as of December 31, 2024, business and personal bankruptcies filings decreased.

Previous wording

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 as of March 31, 2025 was the same as the data incorporated into the December 31, 2024 calculation. Housing data available as of March 31, 2025 showed higher inventory than as of December 31, 2024, resulting in a higher allocation.

Current wording

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 as of June 30, 2025 increased compared to the data incorporated into the December 31, 2024 calculation, resulting in a higher allocation. Housing inventory increased when June 30, 2025 is compared with December 31, 2024, resulting in a higher allocation.

Previous wording

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 0.19% of total loans as of March 31, 2025, a decrease from 0.30% as of December 31, 2024.

Current wording

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 0.50% of total loans as of June 30, 2025, an increase from 0.30% as of December 31, 2024. The increase is primarily due to certain loans awaiting renewal. Management expects the renewals to be approved and removed them from the allocation population.

Previous wording

The interest rate environment impacts variable rate loans. The Federal Reserve’s substantial 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, despite the Federal Reserve's recent reduction in their target rate. The Company allocates additional reserve each time the Federal Reserve increases rates, under the expectation that higher payments may increase credit risk. After the rate increase has been in effect for one year, the allocation may be removed if management deems that the impact of the change has become integrated to the portfolio. As of March 31, 2025, the Company maintained its allocation from December 31, 2024.

Current wording

The interest rate environment impacts variable rate loans. The Company allocates additional reserve each time the Federal Reserve increases rates, under the expectation that higher payments may increase credit risk. After the rate increase has been in effect for one year, the allocation may be removed if management deems that the impact of the change has become integrated to the portfolio. As of June 30, 2025, no allocation was included for interest rate changes, unchanged from December 31, 2024.

Previous wording

The unallocated surplus as of March 31, 2025 was $35, or 0.33% in excess of the calculated requirement. The unallocated surplus at December 31, 2024 was $50, or 0.49% in excess of the calculated requirement. The surplus provides some mitigation of current economic uncertainty that may impact credit risk.

Current wording

The unallocated surplus as of June 30, 2025 was $10, or 0.10% in excess of the calculated requirement. The unallocated surplus at December 31, 2024 was $50, or 0.49% in excess of the calculated requirement. The surplus provides some mitigation of uncertainty about events that may exist at the reporting date but that are not known to the Company and may impact credit risk.

Previous wording

The calculation of the appropriate level for the ACLL incorporates analysis of multiple factors and requires management’s prudent and informed judgment. The Company augmented the calculated requirement with an unallocated surplus. Based on analysis of historical indicators, asset quality and economic factors, management believes the level of ACLL is reasonable for the credit risk in the loan portfolio as of March 31, 2025.

Current wording

The calculation of the appropriate level for the ACLL incorporates analysis of multiple factors and requires management’s prudent and informed judgment. Based on analysis of historical indicators, asset quality and economic factors, management believes the level of the ACLL is reasonable for the credit risk in the loan portfolio as of June 30, 2025.

Previous wording

The ACL on unfunded commitments was $250, or 0.15% of unfunded commitments as of March 31, 2025. The ACL on unfunded commitments was $251, or 0.14% as of December 31, 2024.

Current wording

The ACL on unfunded commitments was $241, or 0.14 % of unfunded commitments as of June 30, 2025. The ACL on unfunded commitments was $251, or 0.14% as of December 31, 2024.

Previous wording

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 determined necessary. The Company recorded a provision for credit losses on loans of $277 and a recovery of credit losses on unfunded commitments of $1 for the three months ended March 31, 2025, compared with a provision for credit losses on loans of $5 and a recovery of $15 for unfunded commitments for the three months ended March 31, 2024. The increase in the provision for credit losses on loans was due to growth in the loan portfolio and softening economic factors.

Current wording

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 determined necessary. The Company recorded a provision for credit losses on loans of $322 and a recovery of credit losses on unfunded commitments of $10 for the six months ended June 30, 2025, compared with a provision for credit losses on loans of $1,307 and a recovery of $15 for unfunded commitments for the six months ended June 30, 2024. For the three month period ended June 30, 2025, the Company recorded a provision for credit losses on loans of $45 and a recovery of credit losses on unfunded commitments of $9. For the three month period ended June 30, 2024, the Company recorded a provision for credit losses on loans of $1,302, which included $1,290 for loans acquired on June 1, 2024.

Previous wording

The Company reviews each modification 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. Please refer to Note 3: Loans and Allowance for Credit Losses in Part I, Item 1 of this report for more information on loans modified for borrowers experiencing financial difficulty.

Current wording

The Company reviews each modification 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.

Previous wording

During the three months ended March 31, 2025 and 2024, the Company modified loans in the normal course of business for borrowers who were not experiencing financial difficulty. During the three months ended March 31, 2025, the Company modified 195 loans totaling $24,105. During the three months ended March 31, 2024, the Company provided 216 modifications to loans totaling $22,322.

Current wording

During the three and six months ended June 30, 2025 and 2024, 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, 2025, the Company modified 173 loans totaling $17,750. During the six months ended June 30, 2025, the Company modified 368 loans totaling $41,855. During the three and six months ended June 30, 2024, the Company provided 216 modifications to loans totaling $21,704 and 432 modifications totaling $43,936.

Previous wording

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

Current wording

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

Previous wording

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 23% are uninsured.

Current wording

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 24% are uninsured.

Previous wording

The increase in stockholders’ equity reflects a decrease in the unrealized losses on securities available for sale and net income during the three months ended March 31, 2025

Current wording

The increase in stockholders’ equity reflects an improvement in the unrealized losses on securities available for sale and net income during the period.

Previous wording

As of March 31, 2025, the Company had $295,790 of borrowing capacity from the FHLB and the Company had $176,162 of unused capacity at the Federal Reserve Bank discount window. As of March 31, 2025, the Company did not have purchased deposits, discount window borrowings or short-term borrowings.

Current wording

As of June 30, 2025, the Company had $292,916 of borrowing capacity from the FHLB and the Company had $173,226 of available capacity at the Federal Reserve Bank discount window. As of June 30, 2025, the Company did not have purchased deposits, discount window borrowings or short-term borrowings.

Previous wording

The Company utilizes several other strategies to maintain sufficient liquidity. Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s internally-set target range. As of March 31, 2025, the loan to deposit ratio was 60.52%. 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.

Current wording

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, 2025, the loan to deposit ratio was 62.09%. 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.

Previous wording

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 the low volume of secondary market mortgage loans and high underwriting standards. The Company estimates a potential loss reserve for recourse provisions that is not material as of March 31, 2025. To date, no recourse provisions have been invoked. If funds were needed, the Company would access the same sources as noted above for funding lines and letters of credit. There were no material changes in off-balance sheet arrangements during the three months ended March 31, 2025.

Current wording

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 the 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, 2025. 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, 2025.