NATIONAL BANKSHARES INC 10-K

Item 7. 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 results of operations, financial condition, liquidity and capital resources of the Company. The discussion should be read in conjunction with the material presented in Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K. Subsequent events have been considered through the date of this Form 10-K. Cautionary Statement Regarding Forward-Looking Statements We make forward-looking statements in this Form 10-K 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 our 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: • inflation and changes in interest rates that may reduce our margins or reduce the fair value of financial instruments, • 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 OCC, the Federal Reserve, the CFPB and the 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 trade restrictions and tariffs, and acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to trade restrictions and tariffs, and 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. 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 this Form 10-K. 21 Table of Contents 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 designates 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. Please refer to Note 1 of Notes to Consolidated Financial Statements for information on these and other accounting policies. Non-GAAP Financial Measures This report refers to certain financial measures that are computed on 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 (non-GAAP) to measure profitability of 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. Year Ended December 31, Net Interest Margin, FTE 2024 2023 Interest income (GAAP) $ 70,122 $ 58,833 Add: FTE adjustment 968 890 Interest income, FTE (non-GAAP) 71,090 59,723 Interest expense (GAAP) 33,725 21,550 Net interest income, FTE (non-GAAP) $ 37,365 $ 38,173 Average balance of interest-earning assets $ 1,706,479 $ 1,606,667 Net interest margin (non-GAAP) 2.19 % 2.38 % 22 Table of Contents Efficiency Ratio The efficiency ratio (non-GAAP) 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. Year Ended December 31, Efficiency Ratio 2024 2023 Noninterest expense (GAAP) $ 35,008 $ 29,228 Less: merger-related expense (2,916 ) - Less: contract termination expense (1) (173 ) - Less: proxy-related expense (2) - (786 ) Adjusted noninterest expense (non-GAAP) $ 31,919 $ 28,442 Noninterest income (GAAP) $ 8,960 $ 9,359 Less: realized securities loss, net - 3,332 Less: gain on contract contingency (3) - (232 ) Less: gain on sale of investment (4) - (2,971 ) Less: gain on BOLI settlement - (1,044 ) Adjusted noninterest income (non-GAAP) 8,960 8,444 Net interest income, FTE (non-GAAP) 37,365 38,173 Total income for efficiency ratio (non-GAAP) $ 46,325 $ 46,617 Efficiency ratio (non-GAAP) 68.90 % 61.01 % (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) Gain recognized upon receipt of a contract contingency payment associated with the 2022 sale of a private equity investment. (4) Sale of the Company’s VISA Class B shares. 23 Table of Contents Performance Summary Key to understanding the Company’s results of operations and financial position is the acquisition of FCB and the impact of the interest rate environment. The acquisition of FCB on June 1, 2024 expanded the Company's footprint into desirable markets and increased its growth potential. The acquisition added to the balance sheet $118,743 in loans, $129,717 in deposits and $14,299 in equity. The Company also recorded one-time expenses of $2,916 and provision for credit loss of $1,290 associated with the merger. For more information on the acquisition, see Note 22: Business Combination. 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 somewhat during the fourth quarter of 2024. When comparing current and prior year results, items to note include the Company's 2023 special one-time dividend of $1 per common share, paid in addition to its usual bi-annual dividends. The dividend rewarded stockholders for the Company’s positive performance during 2022, which included a one-time pre-tax gain on the sale of a private equity investment. Related to the 2022 gain on the sale of a private equity investment, the Company recorded in 2023 pre-tax income of $232 upon receipt of a contract contingency payment. Also in 2023, the Company sold its VISA Class B shares and recognized a pre-tax gain of $2,971, and strategically sold securities, recording a pre-tax loss of $3,332. The Company recognized tax-free income of $1,044 for the settlement of a bank owned life insurance (“BOLI”) policy in 2023, and incurred expense in 2023 of $786 to respond to a proxy contest from an activist investor. Summary information on results of operations, changes in key balances and asset quality is presented below. Expanded discussion is provided in subsequent sections. Summary Results of Operations The following tables present summary income, expenses and key performance indicators for the years indicated. Key performance indicators provide a summary of the Company’s results and allow comparison with results from prior years. Year Ended December 31, Summary Income and Expenses 2024 2023 Interest income $ 70,122 $ 58,833 Interest expense 33,725 21,550 Net interest income 36,397 37,283 Provision for (recovery of) credit losses 1,227 (1,261 ) Net interest income after provision for (recovery of) credit losses 35,170 38,544 Noninterest income 8,960 9,359 Noninterest expense 35,008 29,228 Income before income taxes 9,122 18,675 Income tax expense 1,499 2,984 Net income $ 7,623 $ 15,691 Year Ended December 31, Summary Key Performance Indicators 2024 2023 Return on average assets 0.44 % 0.97 % Return on average equity 5.17 % 12.59 % Basic net income per common share $ 1.24 $ 2.66 Fully diluted net income per common share $ 1.24 $ 2.66 Net interest margin (1) 2.19 % 2.38 % Efficiency ratio (1) 68.90 % 61.01 % (1) See "Non-GAAP Financial Measures" above. Net income for the year ended December 31, 2024 decreased when compared with the year ended December 31, 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 under “Income Statement” below. 24 Table of Contents Summary Change in Key Balances Key balances are presented in the following table as of the dates indicated: December 31, Change 2024 2023 Dollars Percent Loans, net of deferred fees and costs, and the ACLL $ 977,688 $ 847,552 $ 130,136 15.35 % Securities available for sale 601,898 618,601 (16,703 ) (2.70 )% Deposits 1,644,752 1,503,972 140,780 9.36 % Total assets 1,811,636 1,655,370 156,266 9.44 % Stockholders’ equity 156,409 140,522 15,887 11.31 % Loans, net of deferred fees and costs and the ACLL, increased when December 31, 2024 is compared with December 31, 2023, primarily due to the FCB acquisition. The higher interest rate environment continues to restrain loan demand. The Company is positioned to continue to make every loan that meets its underwriting standards. 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 portfolio decreased during 2024 due to maturities and pay downs. Further detail is provided in the “Balance Sheet” section below. Customer deposits increased when December 31, 2024 is compared with December 31, 2023, primarily due to the FCB acquisition, supplemented by organic growth. Total assets increased from December 31, 2023 to December 31, 2024, primarily due to the acquisition of FCB. Stockholders’ equity increased from December 31, 2023 to December 31, 2024 due to the acquisition of FCB and improvements in accumulated other comprehensive loss related to the market value of securities and the Company's pension plan. Summary Asset Quality Key indicators of the Company’s asset quality are presented in the following table as of the dates indicated: December 31, 2024 2023 Nonaccrual loans $ 2,222 $ 2,629 Loans past due 90 days or more, and still accruing 548 188 ACLL to loans net of deferred fees and costs 1.04 % 1.06 % Net charge-off ratio 0.03 % 0.02 % Ratio of nonperforming assets to loans, net of deferred fees and costs 0.22 % 0.31 % Ratio of ACLL to nonperforming loans 461.84 % 345.91 % The Company monitors asset quality indicators in managing credit risk and in determining the ACLL and provision for credit losses. When December 31, 2024 is compared with December 31, 2023, nonaccrual loans improved. The net charge-off ratio and accruing loans past due 90 days or more increased, though remain at historically low levels. The Company believes that sufficient resources have been dedicated to resolving problem assets, and exposure to loss is somewhat mitigated by sufficient collateralization. More information about nonaccrual and past due loans is provided in Note 1 and Note 5 of Notes to Consolidated Financial Statements. The Company continues to carefully monitor risk levels within the loan portfolio. 25 Table of Contents Income Statement The following provides information on the results of operations for the years ended December 31, 2024 and December 31, 2023. Net Interest Income The Company’s primary source of revenue is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on customer deposits and other interest-bearing liabilities. Net interest income is affected by various factors, including the Federal Reserve’s monetary policy, U.S. fiscal policy, competitive pressure, the level and composition of the interest-earning assets and the composition of interest-bearing liabilities. Changes in the Federal Reserve’s target interest rate immediately affect the yield on the Company’s interest-bearing deposits in correspondent banks and affect other interest-earning assets over time. The net interest margin for the year ended December 31, 2024 decreased when compared with the year ended December 31, 2023. Loans, adjustable rate securities and interest bearing deposit assets repriced upward, but did not fully offset higher interest expense. The Federal Reserve's interest rate cuts during the last four months of 2024 immediately decreased interest rates on deposits with pricing based on the prime interest rate, however current interest rates are still at a level that will allow interest income and the yield on earning assets to grow as adjustable loans reach repricing dates. The frequency and/or magnitude of future changes in market interest are difficult to predict and may have a greater short-term impact on net interest income than adjustments by management. Please refer to the section titled “Analysis of Changes In Interest Income and Interest Expense” for further information related to rate and volume changes. Analysis of Net Interest Earnings The following table presents the major categories of 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 yield on average interest‑earning assets for the years indicated. Year Ended December 31, 2024 2023 Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Interest-earning assets: Loans (1)(2)(3)(4)(5) $ 938,446 $ 48,369 5.15 % $ 851,221 $ 39,320 4.62 % Taxable securities (4)(6) 627,656 16,797 2.68 % 652,477 16,536 2.53 % Nontaxable securities (4)(5) 63,566 1,828 2.88 % 65,309 1,885 2.89 % Federal funds sold 600 26 4.33 % - - - Interest-bearing deposits 76,211 4,070 5.34 % 37,660 1,982 5.26 % Total interest-earning assets $ 1,706,479 $ 71,090 4.17 % $ 1,606,667 $ 59,723 3.72 % Interest-bearing liabilities: Interest-bearing demand deposits $ 838,526 $ 20,445 2.44 % $ 826,112 $ 15,515 1.88 % Savings deposits 176,014 897 0.51 % 195,592 746 0.38 % Time deposits 278,535 12,381 4.45 % 150,395 4,989 3.32 % Borrowings 57 2 3.51 % 6,198 300 4.84 % Total interest-bearing liabilities $ 1,293,132 $ 33,725 2.61 % $ 1,178,297 $ 21,550 1.83 % Net interest income and interest rate spread $ 37,365 1.56 % $ 38,173 1.89 % Net interest margin 2.19 % 2.38 % (1) Loans are net of deferred fees and costs. Loans include loans held in portfolio and loans held for sale. (2) Net loan fees included in interest income in 2024 were $200. Net loan fees included in interest income in 2023 were $214. (3) Nonaccrual loans are included in average balances for yield computations. (4) Daily averages are presented at amortized cost. (5) Interest on nontaxable loans and securities is computed on an FTE basis using a Federal income tax rate of 21%. (6) Includes restricted stock. 26 Table of Contents The following table reconciles net interest income on an FTE basis (non-GAAP) to net interest income on a GAAP basis for the years indicated. December 31, 2024 2023 Net interest income, GAAP $ 36,397 $ 37,283 FTE adjustment 968 890 Net interest income, FTE (non-GAAP) $ 37,365 $ 38,173 Analysis of Changes in Interest Income and Interest Expense The following table summarizes changes in interest income and interest expense resulting from changes in average asset and liability balances (volume) and changes in average interest rates (rate), when the year ended December 31, 2024 is compared with the year ended December 31, 2023. 2024 Over 2023 Increase (Decrease) due to Changes in: Net Dollar Rates (2) Volume (2) Change Interest income: (1) Loans $ 4,801 $ 4,248 $ 9,049 Taxable securities 904 (643 ) 261 Nontaxable securities (7 ) (50 ) (57 ) Federal Funds Sold - 26 26 Interest-bearing deposits 29 2,059 2,088 Interest income $ 5,727 $ 5,640 $ 11,367 Interest expense: Interest-bearing demand deposits $ 4,694 $ 236 $ 4,930 Savings deposits 232 (81 ) 151 Time deposits 2,108 5,284 7,392 Short-term borrowings (65 ) (233 ) (298 ) Interest expense $ 6,969 $ 5,206 $ 12,175 Net interest income $ (1,242 ) $ 434 $ (808 ) (1) FTE basis using a Federal income tax rate of 21%. (2) Variances caused by the change in rate multiplied by the change in volume have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each. The acquisition of FCB increased the volume of both loans and deposits, contributing to higher interest income and interest expense. The elevated rate environment increased interest income and while interest expense continued to rise, the increase moderated when compared with 2023. A portion of the Company’s taxable securities portfolio is subject to monthly repricing, while many of the Company’s loans are adjustable with repricing dates in the future. The volume of interest-bearing deposit assets increased due to higher customer deposits. Interest Rate Sensitivity Interest rate risk is the risk to earnings or capital arising from movements in market interest rates. When interest-earning assets and interest-bearing liabilities reprice at different times or in different degrees or when call options are exercised, in response to change in market interest rates, future net interest income is impacted. When interest-earning assets mature or re-price more quickly than interest-bearing liabilities, the balance sheet is considered “asset sensitive”. An asset sensitive position will produce relatively more net interest income when interest rates rise and less net interest income when rates decline. Conversely, when interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, the balance sheet is considered “liability sensitive”. A liability sensitive position will produce relatively more net interest income when interest rates fall and less net interest income when rates increase. The Company considers interest rate risk to be a significant risk and manages its exposure through policies approved by its Asset Liability Committee ("ALCO") and Board of Directors. ALCO reviews periodic reports of the Company's interest rate risk position, including results of simulation analysis. Simulation analysis applies interest rate shocks, hypothetical immediate shifts in interest rates, to the Company’s financial instruments and determines the impact to projected one-year net interest income and other key measures. The following table shows the results of rate shocks on net interest income projected for one year from the reporting date. 27 Table of Contents Rate Shift (basis points) Change in Projected Net Interest Income as of December 31, 2024 2023 300 -8.60 % -10.60 % 200 -4.70 % -6.80 % 100 -1.90 % -3.20 % (-)100 7.00 % 8.40 % (-)200 12.80 % 15.70 % (-)300 18.00 % 22.10 % Results of the net interest income simulation indicate that the Company is liability sensitive as of December 31, 2024 and December 31, 2023. The simulation process requires certain estimates and assumptions including, but not limited to, asset growth, the mix of assets and liabilities, the interest rate environment and local and national economic conditions. Asset growth and the mix of assets can, to a degree, be influenced by management. Other areas, such as the interest rate environment and economic factors, cannot be controlled. In addition, competitive pressures can make it difficult to price deposits and loans in a manner that optimally minimizes interest rate risk. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes; changes in market conditions and customer behavior; and changes in management strategies. While the asset/liability management program is designed to protect the Company over the long term, it does not provide near-term protection from interest rate shocks, as interest rate sensitive assets and liabilities do not by their nature move up or down in tandem in response to changes in the overall rate environment. The Company’s profitability in the near-term may be temporarily negatively affected in a period of rapidly rising or rapidly falling rates, because it takes some time for the Company’s portfolio to reflect changes to offering rates in response to a new interest rate environment. Provision for (Recovery of) Credit Losses Provision expense for the year ended December 31, 2024 was $1,227, reflecting provision for credit losses for funded loans of $1,242 and recovery of credit losses for unfunded loan balances of $15. Provision for funded loans included $1,290 in provision for non-PCD loans recorded upon acquisition date, offset by $48 resulting from changes in the Company's assessment of credit risk. For the year ended December 31, 2023, the Company recorded a net recovery of $1,261, reflecting an improvement in portfolio metrics and economic conditions when compared with December 31, 2022. More information about the ACLL is provided in “Balance Sheet – Loans – Allowance for Credit Losses” below and in Notes 1 and 5 of Notes to Consolidated Financial Statements. Noninterest Income The following table presents the Company’s noninterest income for the years indicated. Year Ended December 31, Change 2024 2023 Dollars Percent Service charges on deposits $ 2,898 $ 2,518 $ 380 15.09 % Other service charges and fees 229 297 (68 ) (22.90 )% Credit and debit card fees, net 1,448 1,678 (230 ) (13.71 )% Trust income 2,177 1,901 276 14.52 % BOLI income 1,120 2,026 (906 ) (44.72 )% Gain on sale of investment - 2,971 (2,971 ) NM Gain on sale of mortgage loans 168 107 61 57.01 % Other income 920 1,193 (273 ) (22.88 )% Realized securities loss, net - (3,332 ) 3,332 NM Total noninterest income $ 8,960 $ 9,359 $ (399 ) (4.26 )% Service charges on deposit accounts increased when the year ended December 31, 2024 is compared with the year ended December 31, 2023, primarily due to changes in fee structure, the FCB acquisition, and increased customer use of the Bank’s overdraft program. Service charges on deposit accounts also include account maintenance fees, ATM fees and wire transfer fees. Other service charges and fees decreased when 2024 is compared with 2023, due to lower fees associated with letters of credit and one time fee income received in 2023. Other service charges and fees also include charges for official checks, income from the sale of checks to customers, safe deposit box rent, and income from commissions on the sale of credit life, accident and health insurance. Credit and debit card fees, net, decreased when 2024 is compared with 2023 due to higher processing costs. Credit and debit card fees are presented net of certain processing expenses and are dependent on the volume of transactions. 28 Table of Contents Trust income increased when the year ended December 31, 2024 is compared with the year ended December 31, 2023 due to higher volume. Trust fees are generated from a number of different types of accounts, including estates, personal trusts, employee benefit trusts, investment management accounts, attorney-in-fact accounts and guardianships. Trust income varies depending on the number and type of accounts under management and financial market conditions. BOLI income decreased when 2024 is compared with 2023, due to a gain of $1,044 recorded in 2023 for settlement of a policy. During 2023, the Company sold its VISA Class B securities, recognizing a gain of $2,971. The gain on sale of mortgage loans increased from 2023 to 2024 as volume improved. Other income includes dividends, adjustments to partnership basis in investments, commissions from investment and insurance sales and other miscellaneous components. During 2023, the Company recorded income of $232 upon receipt of a contract contingency payment. The Company recorded a net loss on the sale of securities during 2023, discussed in further detail under the “Securities” section. Noninterest Expense The following table presents the Company’s noninterest expense for the years indicated. Year Ended December 31, Change 2024 2023 Dollars Percent Salaries and employee benefits $ 19,214 $ 17,318 $ 1,896 10.95 % Occupancy, furniture and fixtures 2,339 2,005 334 16.66 % Data processing and ATM 3,923 3,549 374 10.54 % FDIC assessment 812 749 63 8.41 % Intangible asset amortization 237 - 237 NM Net costs of other real estate owned - 31 (31 ) NM Franchise taxes 1,454 1,422 32 2.25 % Professional services 1,051 1,739 (688 ) (39.56 )% Merger-related expenses 2,916 - 2,916 NM Contract termination expenses 173 - 173 NM Other operating expenses 2,889 2,415 474 19.63 % Total noninterest expense $ 35,008 $ 29,228 $ 5,780 19.78 % 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 2024 is compared with 2023, reflecting the addition of FCB employees. When the year ended December 31, 2024 is compared with the year ended December 31, 2023, occupancy, furniture and fixtures expense and data processing and ATM expense increased due to ATM upgrades, higher maintenance costs, and additional assets acquired from FCB. FDIC assessment expense increased from 2023 to 2024, due to an expanded assessment base after the FCB acquisition. Upon acquisition of FCB in 2024, the Company recognized a core deposit intangible asset that is amortized over 10 years. Franchise tax expense increased from 2023 to 2024. Franchise taxes are levied by the states in which NBB operates and are based upon NBB’s total equity at the prior year-end, adjusted for real estate taxes and certain other items. Professional services, which includes legal and other expenses decreased when 2024 is compared to 2023. During 2023, the Company incurred legal and consulting expenses of $786 to respond to a threatened proxy contest from an activist shareholder. Merger-related expenses included legal, accounting, regulatory, and executive and employee severance costs associated with the FCB acquisition. The Company does not expect any further material expense related to the transaction. During 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. Other operating expenses increased when the years ended December 31, 2024 and 2023 are compared. The category of other operating expenses includes expense for marketing and business development, supplies, non-service pension cost and charitable donations. Marketing and business development expenses increased during 2024 for advertising campaigns associated with the FCB acquisition and the coming Roanoke branch. Multiple additional items increased by smaller amounts. Included within other operating expense and data processing and ATM expense are expenses related to cybersecurity. These expenses include testing and vulnerability assessment, technological defenses, insurance and employee training. The cost of these measures was $365 for 2024 and $529 for 2023. The Company places high priority on cybersecurity. The decrease in expense reflects renegotiation of contracts and licensing. Income Taxes 29 Table of Contents Income tax expense for 2024 was $1,499 compared to $2,984 in 2023. The Company’s statutory tax rate was 21% for each year. The Company’s effective tax rates for 2024 and 2023 were 16.43% and 15.98%, respectively. The Company’s effective tax rate is lower than the statutory rate of 21% due to investments in tax-advantaged loans and securities. The Company's effective tax rate for 2024 was also affected by a significant portion of merger related expense that was not tax deductible. During 2023, the Company recognized a gain on the settlement of a BOLI policy that was not taxable. See Note 9 of Notes to Consolidated Financial Statements for information relating to income taxes. Balance Sheet The following provides information on the Company’s financial position as of December 31, 2024 and December 31, 2023. Loans The Company’s loan categorization reflects its approach to loan portfolio management and includes six groups. Real estate construction loans include construction loans for residential and commercial properties, as well as land. Consumer real estate loans include conventional and junior lien mortgages, equity lines and investor-owned residential real estate. Commercial real estate loans are comprised of owner-occupied and leased nonfarm, nonresidential properties, multi-family residence loans and farmland. Commercial non-real estate loans include agricultural loans, operating capital lines and loans secured by capital assets. Public sector and industrial development authority (“IDA”) loans are extended to municipalities. Consumer non-real estate loans include automobile loans, personal loans, credit cards and consumer overdrafts. The following table presents the composition of the loan portfolio, excluding mortgage loans held for sale, as of the dates indicated. December 31, 2024 2023 Real estate construction $ 50,798 $ 55,379 Consumer real estate 307,855 241,564 Commercial real estate 478,078 419,130 Commercial non real estate 51,844 41,555 Public sector and IDA 57,171 60,551 Consumer non real estate 42,867 38,996 Gross loans $ 988,613 $ 857,175 Less deferred fees and costs (663 ) (529 ) Loans, net of deferred fees and costs $ 987,950 $ 856,646 Allowance for credit losses on loans (10,262 ) (9,094 ) Total loans, net $ 977,688 $ 847,552 30 Table of Contents A. Maturities and Interest Rate Sensitivities The following table presents maturities and interest rate sensitivities for total loans, loans with predetermined interest rates and loans with adjustable interest rates as of the dates indicated. Predetermined interest rates do not adjust throughout the life of the loan. Loans are presented on a gross basis. December 31, 2024 < 1 Year 1-5 Years 6-15 Years >15 Years Total Total loans: Real estate construction $ 19,656 $ 8,568 $ 5,195 $ 17,379 $ 50,798 Consumer real estate 8,703 13,861 68,100 217,191 307,855 Commercial real estate 8,898 9,121 110,272 349,787 478,078 Commercial non-real estate 19,786 24,751 7,020 287 51,844 Public sector and IDA – 8,542 29,939 18,690 57,171 Consumer non-real estate 10,726 28,652 3,413 76 42,867 Total loans $ 67,769 $ 93,495 $ 223,939 $ 603,410 $ 988,613 Loans with predetermined interest rates: Real estate construction $ 3,832 $ 2,072 $ 135 $ 410 $ 6,449 Consumer real estate 4,475 5,222 15,104 40,761 65,562 Commercial real estate 2,234 4,450 12,025 3,493 22,202 Commercial non-real estate 4,023 22,275 5,198 – 31,496 Public sector and IDA – 8,482 9,499 – 17,981 Consumer non-real estate 4,483 24,250 3,136 76 31,945 Total loans with predetermined interest rates $ 19,047 $ 66,751 $ 45,097 $ 44,740 $ 175,635 Loans with adjustable interest rates: Real estate construction $ 15,824 $ 6,496 $ 5,060 $ 16,969 $ 44,349 Consumer real estate 4,228 8,639 52,996 176,430 242,293 Commercial real estate 6,664 4,671 98,247 346,294 455,876 Commercial non-real estate 15,763 2,476 1,822 287 20,348 Public sector and IDA – 60 20,440 18,690 39,190 Consumer non-real estate 6,243 4,402 277 – 10,922 Total loans with adjustable interest rates $ 48,722 $ 26,744 $ 178,842 $ 558,670 $ 812,978 B. Modifications In the ordinary course of business the Company modifies loan terms on a case-by-case basis for a variety of reasons. Modifications may include rate reductions, payment extensions of varying lengths of time, a change in amortization term or method or other arrangements. Modifications to consumer loans generally involve short-term payment extensions to accommodate specific, temporary circumstances. Modifications to commercial loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants. The Company reviews modifications to determine whether the borrower is experiencing financial difficulty, including indicators of default, bankruptcy, going concern, insufficient projected cash flows and inability to obtain financing from other sources. Please refer to Note 5 of Notes to Financial Statements for information on modifications to loans for borrowers experience financial difficulty during the years ended December 31, 2024 and December 31, 2023. During the years ended December 31, 2024 and 2023, the Company modified loans in the normal course of business for borrowers who were not experiencing financial difficulty. During 2024, the Company modified 875 loans totaling $130,347. During 2023, the Company provided modifications for competitive purposes to 757 loans totaling $89,006. 31 Table of Contents C. Summary of Loan Loss Experience The following table provides information about the allowance for credit losses on loans, nonperforming assets and accruing loans past due 90 days or more as of the dates indicated: December 31, 2024 2023 ACLL $ 10,262 $ 9,094 Total loans, net of deferred fees 987,950 856,646 ACLL to loans, net of deferred fees and costs 1.04 % 1.06 % Nonaccrual loans $ 2,222 $ 2,629 Nonperforming loans to total loans, net of deferred fees and costs 0.22 % 0.31 % ACLL to nonperforming loans 461.84 % 345.91 % Accruing loans past due 90 days or more $ 548 $ 188 More information about the level and calculation methodology of the allowance for credit losses on loans is provided in the sections “Allowance for Credit Losses on Loans” as well as Notes 1 and 5 of Notes to Consolidated Financial Statements. D. Analysis of Net Charge-Offs The following tables show net charge-offs, average loan balance and the percentage of charge-offs to average loan balance for each of the Company’s loan segments at the end of each period. Average loans are presented net of deferred fees and costs. December 31, 2024 Net Charge-Offs (Recoveries) Average Loans, net of deferred fees and costs Percentage of Net Charge-Offs (Recoveries) to Average Loans Real estate construction $ - $ 66,654 0.00 % Consumer real estate - 278,351 0.00 % Commercial real estate (53 ) 445,212 (0.01 )% Commercial non-real estate 87 48,175 0.18 % Public Sector and IDA - 58,953 0.00 % Consumer non-real estate 215 41,003 0.52 % Total $ 249 $ 938,348 0.03 % December 31, 2023 Net Charge-Offs (Recoveries) Average Loans, net of deferred fees and costs Percentage of Net Charge-Offs (Recoveries) to Average Loans Real estate construction $ - $ 58,214 0.00 % Consumer real estate (86 ) 226,555 (0.04 )% Commercial real estate (45 ) 428,757 (0.01 )% Commercial non-real estate 208 50,529 0.41 % Public Sector and IDA - 51,278 0.00 % Consumer non-real estate 118 35,754 0.33 % Total $ 195 $ 851,087 0.02 % The Company charges off commercial real estate loans at the time that a loss is confirmed. When delinquency status or other information indicates that the borrower will not repay the loan, the Company considers collateral value based upon a current appraisal or internal evaluation. Any loan amount in excess of collateral value is charged off and the collateral is taken into OREO. 32 Table of Contents E. Allowance for Credit Losses on Loans The Company’s risk analysis as of December 31, 2024 determined an ACLL of $10,262, or 1.04% of loans net of deferred fees and costs. This compares with an allowance of $9,094 as of December 31, 2023, or 1.06% of loans. For information on the Company’s policies on the ACLL, please refer to Note 1 and Note 5 of Notes to Consolidated Financial Statements. To determine the appropriate level of the ACLL, the Company considers credit risk for individually evaluated loans and for groups of loans evaluated collectively. Individually Evaluated Loans Individually evaluated loans were $10,521 as of December 31, 2024, a decrease from $10,544 as of December 31, 2023. Please refer to Note 1 of Notes to Consolidated Financial Statements for information on the Company’s identification of individually evaluated loans. As of December 31, 2024, 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 $80. Collectively Evaluated Loans Collectively evaluated loans totaled $978,092 with an ACLL of $10,182 as of December 31, 2024. At December 31, 2023, collectively evaluated loans totaled $846,631, with an allowance of $8,522. Collectively evaluated loans are divided into pools based upon risk characteristics. Utilizing historical loss information and peer data, the Company calculates probability of default (“PD”) and loss given default (“LGD”) 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 PD and LGD 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 December 31, 2024, and set a period of 12 months to revert to historical losses on a straight-line basis. The forecast applied as of December 31, 2024 projects that unemployment will rise over the next 12 months to a higher level than the forecast applied as of December 31, 2023. The higher unemployment forecast increased the required level of the ACLL when December 31, 2024 is compared with December 31, 2023. Qualitative Factors: Economic The Company sources economic data pertinent to its market from the most recently available publications, including business and personal bankruptcy filings, the residential vacancy rate and the inventory of new and existing homes. Higher bankruptcy filings indicate heightened credit risk and increase the ACLL, while lower bankruptcy filings have a beneficial impact on credit risk. Compared with data available at December 31, 2023, business bankruptcy filings and personal bankruptcy filings increased. 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 December 31, 2024 increased from the data incorporated into the December 31, 2023 calculation, resulting in a higher allocation. Housing data available as of December 31, 2024 showed higher inventory than at December 31, 2023, resulting in a higher allocation. 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. On a portfolio level, accruing loans past due 30-89 days were 0.30% of total loans at December 31, 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 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 its 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 December 31, 2024, the Company reduced its allocation from December 31, 2023. 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. Compared with December 31, 2023, the competitive, legal and regulatory environments remained in similar postures and no changes were made to related allocations. 33 Table of Contents 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 for the addition of FCB lenders and removed a previously added allocation recorded for the retirement of a long-time credit administration manager. 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, resulting in an increased allocation. Unallocated Surplus The unallocated surplus as of December 31, 2024 was $50, or 0.49% 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. 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 December 31, 2024. Please refer to Note 5 of Notes to Consolidated Financial Statements for further information on collectively evaluated loans, individually evaluated impaired loans and the unallocated portion of the allowance for credit losses on loans. Allocation of the Allowance for Credit Losses on Loans The allowance for credit losses on loans has been allocated according to the amount deemed necessary to provide for anticipated losses within the categories of loans as of the dates indicated. Loans are presented net of deferred fees and costs. The following table presents information on the ACLL as of the dates indicated: December 31, 2024 December 31, 2023 Allowance Amount Percent of Loans to Total Gross Loans Percent of Allowance to Gross Loans Allowance Amount Percent of Loans to Total Gross Loans Percent of Allowance to Gross Loans Real estate construction $ 348 5.14 % 0.69 % $ 408 6.45 % 0.74 % Consumer real estate 3,926 31.14 % 1.28 % 3,162 28.20 % 1.31 % Commercial real estate 4,299 48.36 % 0.90 % 3,576 48.92 % 0.85 % Commercial non-real estate 655 5.24 % 1.26 % 682 4.85 % 1.64 % Public sector and IDA 336 5.78 % 0.59 % 333 7.07 % 0.55 % Consumer non-real estate 648 4.34 % 1.51 % 583 4.51 % 1.51 % Unallocated 50 - - 350 - - $ 10,262 100.00 % 1.04 % $ 9,094 100.00 % 1.06 % 34 Table of Contents Securities The Company’s securities are designated as available for sale and as such, are reported at fair value. The following table presents information on securities available for sale as of the dates indicated. As of December 31, Change 2024 2023 Dollars Percent Amortized cost $ 680,496 $ 697,786 $ (17,290 ) (2.48 )% Unrealized loss, net (78,598 ) (79,185 ) 587 0.74 % Securities available for sale, at fair value $ 601,898 $ 618,601 $ (16,703 ) (2.70 )% The securities portfolio is subject to the volatility and risk in the financial markets. The risk in financial markets, including interest rate risk and credit risk, affects the Company in the same way that it affects other institutional and individual investors. The fair value of available for sale securities is reflected on the Company's balance sheet. The unrealized loss in the Company’s investment portfolio is due to interest rate risk. The majority of the securities portfolio was purchased prior to the Federal Reserve’s rate increases during 2022 and 2023. The Company’s Asset Liability Management Committee closely monitors all of the Company’s financial assets and liabilities in managing interest rate risk. During 2024, the Company did not purchase securities to replace matured securities. During the first half of 2023, the Company strategically selected and sold securities with an amortized cost of $46,850, realizing a loss of $3,332. The strategy for the sales prioritized enhancement of long-term earnings. Credit risk in the Company’s investment portfolio is evaluated on an individual security basis. The Company’s investment portfolio includes corporate bonds. If the corporate issuers were to default, there could be a delay in the payment of interest, or there could be a loss of principal and accrued interest. To date, there have been no defaults in any of the corporate bonds held in the portfolio. The Company’s investment portfolio also contains a large percentage of municipal bonds. If economic forces reduce the ability of states and municipalities to make scheduled principal and interest payments on their outstanding indebtedness, or if their income from taxes and other sources declines significantly, states and municipalities could default on their bond obligations. There have been no defaults among the municipal bonds in the Company’s investment portfolio. As of December 31, 2024, there are no credit risk concerns with any of the Company’s securities. In making investment decisions, management follows internal policy guidelines that help to limit risk by specifying parameters for both security quality and industry and geographic concentrations. Management regularly monitors the quality of the investment portfolio as part of its risk management function. An allowance for credit risk will be recorded if analysis indicates the presence of credit risk. Additional information about securities available for sale can be found in Note 3 of Notes to Consolidated Financial Statements. Deposits The following table presents deposits by category as of the dates indicated: As of December 31, Change 2024 2023 Dollars Percent Noninterest-bearing demand deposits $ 290,088 $ 281,215 $ 8,873 3.16 % Interest-bearing demand deposits 864,753 821,661 43,092 5.24 % Savings deposits 177,297 177,856 (559 ) (0.31 )% Time deposits 312,614 223,240 89,374 40.03 % Total deposits $ 1,644,752 $ 1,503,972 $ 140,780 9.36 % Deposits, including noninterest-bearing demand deposits, interest-bearing deposits and interest-bearing time deposits are obtained in the Company’s markets through traditional marketing techniques. The Company’s deposits do not include any brokered deposits. Competition for deposits began impacting the Company during the latter part of 2022 and continued during 2023. Included in deposits as of December 31, 2024 are $113,605 acquired from FCB. 35 Table of Contents A. Average Amounts of Deposits and Average Rates Paid Average amounts and average rates paid on deposit categories during the periods indicated are presented below: Years Ended December 31, 2024 2023 Average Amounts Average Rates Paid Average Amounts Average Rates Paid Noninterest-bearing demand deposits $ 290,038 - $ 299,748 - Interest-bearing demand deposits 838,526 2.44 % 826,112 1.88 % Savings deposits 176,014 0.51 % 195,592 0.38 % Time deposits 278,535 4.45 % 150,395 3.32 % Average total deposits $ 1,583,113 2.13 % $ 1,471,847 1.44 % B. Uninsured Deposits FDIC insurance covers deposits of up to $250 per depositor. As of December 31, 2024, $741,063 of the Bank’s deposits were uninsured. Municipal deposits, which account for 23.58% 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, 22.38% are uninsured. The following table presents time deposits that exceed $250 as of the date indicated. December 31, 2024 3 Months or Less Over 3 Months Through 6 Months Over 6 Months Through 12 Months Over 12 Months Total Total time deposits exceeding $250 $ 45,414 $ 22,295 $ 11,316 $ 5,614 $ 84,639 Derivatives and Market Risk Exposures The Company engages in derivative financial instruments associated with its secondary market operation, recorded within other assets and other liabilities. Please refer to Note 1 of Notes to Consolidated Financial Statements for information on derivative valuation. The Company is not a party to derivatives with off-balance sheet risks such as futures, forwards, swaps, and options. The Company is a party to financial instruments with off-balance sheet risks such as commitments to extend credit, standby letters of credit, and recourse obligations in the normal course of business to meet the financing needs of its customers. See Note 13 of Notes to Consolidated Financial Statements for additional information relating to financial instruments with off-balance sheet risk. Management does not plan any future involvement in high risk derivative products. The Company’s investments in mortgage-backed securities are primarily through the Government National Mortgage Association and Federal National Mortgage Association. See Note 3 of Notes to Consolidated Financial Statements for information on securities. The Company’s securities and loans are subject to credit and interest rate risk, and its deposits are subject to interest rate risk. Management considers credit risk when a loan is granted and monitors credit risk after the loan is granted. The Company maintains an allowance for credit losses to absorb losses in the collection of its loans. See Note 5 of Notes to Consolidated Financial Statements for information relating to the allowance for credit losses on loans. See Note 14 of Notes to Consolidated Financial Statements for information relating to concentrations of credit risk. The effects of changing interest rates are primarily managed through adjustments to the loan portfolio and deposit base, to the extent competitive factors allow. Adjustments for asset and liability management are made when securities are called or mature and funds are subsequently reinvested. Securities may be sold for reasons related to credit quality, to maintain compliance with regulatory limitations or for interest rate risk management. No trading activity is planned in the foreseeable future. See Interest Rate Sensitivity for further details on asset liability management and Note 15 of Notes to Consolidated Financial Statements for information relating to fair value of financial instruments. 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 December 31, 2024, the Company had borrowing capacity of $300,667 from the FHLB and $174,632 of borrowing capacity at the Federal Reserve discount window, with no amounts advanced against those lines. The Company assumed FHLB borrowings from FCB, which it repaid during the week following acquisition. Periodically during 2023, the Company accessed FHLB and Federal 36 Table of Contents Reserve discount window borrowings to reinforce liquidity. The advances were fully repaid, due to the success of the Company’s deposit strategy. As of December 31, 2024, the Company did not have purchased deposits, discount window borrowings or short-term borrowings. The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters. Portions of the securities portfolio are pledged to meet state requirements for public funds deposits. Discount window borrowings also require pledged securities. Increased/decreased liquidity from public funds deposits or discount window borrowings results in increased/decreased liquidity from pledging requirements. The Company monitors public funds pledging requirements and unpledged available for sale securities accessible for liquidity needs. Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve discount window. As of December 31, 2024, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve discount window. The Company monitors factors that may increase its liquidity needs. Some of these factors include deposit trends, large depositor activity, maturing deposit promotions, interest rate sensitivity, maturity and repricing timing gaps between assets and liabilities, the level of unfunded loan commitments and loan growth. As of December 31, 2024, the Company’s liquidity is sufficient to meet projected trends. To monitor and estimate liquidity levels, the Company performs stress testing under varying assumptions on credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows. The Company’s Contingency Funding Plan sets forth avenues for rectifying liquidity shortfalls. As of December 31, 2024, the analysis indicated adequate liquidity under the tested scenarios. The Company utilizes several other strategies to maintain sufficient liquidity. Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s internally-set target range. As of December 31, 2024, the loan to deposit ratio was 60.07%. 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. In the normal course of business, we enter into certain contractual obligations, including obligations to make future payments on lease arrangements, contractual commitments with depositors, and service contracts. The table below presents our significant contractual obligations as of the dates indicated, except for pension and other postretirement benefit plans, which are included in Note 8 of Notes to Consolidated Financial Statements. Payments Due by Period December 31, 2024 Total Less Than 1 Year 1-3 Years 4-5 Years More Than 5 Years Time deposits $ 312,614 $ 297,330 $ 9,001 $ 5,636 $ 647 Purchase obligations (1) 27,669 6,729 5,483 5,648 9,809 Operating leases 1,656 368 644 434 210 Total $ 341,939 $ 304,427 $ 15,128 $ 11,718 $ 10,666 (1) Includes contracts with a minimum annual payment of $100. As of December 31, 2024, the Company was not aware of any other known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of December 31, 2024, the Company has no material commitments for long-term debt or for capital expenditures, other than commitments for capital expenditures associated with building the Roanoke branch location. Capital Resources The following table presents components of stockholders’ equity: As of December 31, Change 2024 2023 Dollars Percent Common stock and additional paid in capital $ 21,831 $ 7,404 $ 14,427 194.85 % Retained earnings 196,343 197,984 (1,641 ) (0.83 )% Accumulated other comprehensive loss (61,765 ) (64,866 ) 3,101 (4.78 )% Total stockholders’ equity $ 156,409 $ 140,522 $ 15,887 11.31 % Total stockholders’ equity increased when December 31, 2024 is compared with December 31, 2023, due to issuance of equity for the FCB acquisition and improvement in the value of assets held by the Company's retirement plan reflected in accumulated other comprehensive loss. The largest component of stockholders’ equity, retained earnings, decreased slightly from December 31, 2023 to December 31, 2024. While earnings were lower in 2024 when compared to 2023, the Company maintained its regular semiannual dividend. 37 Table of Contents 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 and presented below. December 31, 2024 December 31, 2023 Regulatory Capital Minimum Ratios Regulatory Capital Minimum Ratios with Capital Conservation Buffer Common Equity Tier I Capital Ratio 15.28 % 17.23 % 4.50 % 7.00 % Tier I Capital Ratio 15.28 % 17.23 % 6.00 % 8.50 % Total Capital Ratio 16.14 % 18.09 % 8.00 % 10.50 % Leverage Ratio 10.25 % 11.05 % 4.00 % 4.00 % Off-Balance Sheet Arrangements The Company’s off-balance sheet arrangements as of December 31, 2024 are detailed in the table below. All are due in less than one year. Payments Due by Period Total Less Than 1 Year Commitments to extend credit $ 248,661 $ 248,661 Standby letters of credit 21,081 21,081 Mortgage loans with potential recourse 10,303 10,303 Total $ 280,045 $ 280,045 In the normal course of business the Company’s banking affiliate extends lines of credit to its customers. The Bank also issues two types of standby letters of credit to customers: financial standby letters of credit that guarantee payment to facilitate customer purchases and performance letters of credit that guarantee payment if the customer fails to perform a specific obligation. Associated revenue from letters of credit was $31 in 2024. Amounts drawn upon these lines and letters of credit vary at any given time depending on the business needs of the customers. 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 manage liquidity using cash on hand, borrowing capacity, or sale of investments or loans. The Company sells mortgages on the secondary market subject to recourse agreements. The mortgages originated must meet strict underwriting and documentation requirements for the sale to be completed. The Company estimates a potential loss reserve for recourse provisions. The amount is not material as of December 31, 2024. To date, no recourse provisions have been invoked. Operating leases are for buildings used in the Company’s day-to-day operations. Recent Accounting Pronouncements See Note 1 of Notes to Consolidated Financial Statements for information relating to recent accounting pronouncements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable.