NATIONAL BANKSHARES INC 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations $ in thousands, except per share data The purpose of this discussion and analysis is to provide information about the financial condition and results of operations of the Company. Please refer to the financial statements and other information included in this report as well as the Company’s 2025 Form 10-K for an understanding of the following discussion and analysis. References in the following discussion and analysis to “we” or “us” refer to the Company unless the context indicates that the reference is to the Bank. Cautionary Statement Regarding Forward-Looking Statements We make forward-looking statements in this Form 10-Q that are subject to significant risks and uncertainties. These forward-looking statements include statements regarding our profitability, liquidity, allowance for credit losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals, and are based upon management’s views and assumptions as of the date of this report. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements. These forward-looking statements are based upon or are affected by factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. These factors include, but are not limited to, effects of or changes in: • 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 Office of the Comptroller of the Currency (“OCC”), the Federal Reserve, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation (“FDIC”), and the impact of any policies or programs implemented pursuant to financial reform legislation, • unanticipated increases in the level of unemployment in the Company’s market, • the quality or composition of the loan and/or investment portfolios, • our ability to maintain existing deposit relationships or attract new deposit relationships, • changes in consumer spending, borrowing and savings habits, • increased competition with other financial institutions and fintech companies, • 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 the Company's 2025 Form 10-K. 27 Table of Contents Overview NBI is a financial holding company that was organized in 1986 under the laws of Virginia and is registered under the Bank Holding Company Act of 1956. NBI common stock is listed on the Nasdaq Capital Market and is traded under the symbol “NKSH.” NBI has two wholly-owned subsidiaries; the National Bank of Blacksburg ("NBB") and National Bankshares Financial Services, Inc. ("NBFS"). NBB is a community bank and does business as National Bank from 28 office locations and one loan production office. NBB is the source of nearly all of the Company’s revenue. NBFS does business as National Bankshares Investment Services and National Bankshares Insurance Services. 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 as critical those policies governing the ACLL and the pension plan. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. ACLL The ACLL represents the Company's best estimate of current expected credit losses on loans over the expected life as of the measurement date. The estimation utilizes internal and peer historical credit loss experience, current conditions and reasonable and supportable forecasts. The results are also dependent upon management's selection of methodologies, loan credit risk ratings, and determination of the impact of internal and external variables. The Company employs a discounted cash flow ("DCF") model whereby cash flows are projected according to each loan's contractual terms and modified by internal historical prepayment rates. Cash flows are then discounted at the loan's effective interest rate, modified by loss rates determined using the probability of default ("PD") and loss given default ("LGD") sourced from internal and peer historical experience, and a forecast variable. Application of historical prepayment rates to project cash flows lowers the ACLL. Historical prepayment rates may not be representative of realized prepayment rates. Similarly, historical loss experience modified by the forecast variable may not be representative of realized loss experience. Key to loss rate application is the Company's risk grading system, which is governed by a robust policy. Loss rates are calculated and applied by risk grade. Management relies upon risk grades to identify loans with risk characteristics that are different from other loans within a segment. Loans graded special mention or classified and that exceed a value threshold are individually evaluated. If management determines that a borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for estimated selling costs if satisfaction of the loan depends on the sale of the collateral. Specific reserves for other individually evaluated loans are estimated using a DCF approach. Cash flows are determined by analyzing the borrower's ability to repay and economic conditions affecting the borrower's industry, discounted at loss rates appropriate to the risk grade. The ultimate recoverability of the loan may be higher or lower than the specific reserve. The Company adjusts collectively-evaluated DCF model results for qualitative risk factors that are not inherent in historical losses, but are relevant in assessing expected credit losses within the loan portfolio. Risks considered include the impact of changes in(i) economic conditions, (ii) the nature and volume of the loan portfolio, (iii) the existence, growth and effect of any concentrations in credit, (iv) lending policies and procedures, including underwriting standards and practices, (v) the quality of the credit review function, (vi) the experience, ability and depth of lending management and staff, (vii) the volume and severity of past due loans, (viii)the value of underlying collateral for collateral-dependent loans, and (ix) other factors such as the regulatory, legal and competitive environments. Because of low loss rate history, statistical correlation between losses and qualitative risk factors is not possible and adjustments are based upon management judgment. Management assesses each factor and determines the adjustment to the ACLL based upon a documented and consistently applied methodology. Management's assessment my be higher or lower than actual impact. The estimation of the ACLL involves analysis of internal and external variables, methodologies, assumptions and management’s judgment and experience. These judgments are inherently subjective and actual losses could be greater or less than the estimate.Future estimates of the ACLL could increase or decrease based on changes in the financial condition of individual borrowers,concentrations of various types of loans, economic conditions or the markets in which collateral may be sold. The estimate of the ACLL determines the amount of provision expense and directly affects our financial results. 28 Table of Contents Pension Plan Pension obligations are determined through actuarial calculations based upon significant assumptions, including the IRS mortality table, an effective interest rate of 5.35% for 2026 and 5.32% for 2025, a discount rate of 5.25% for 2026 and 5.50% for 2025, anticipated rate of compensation increases of 4% for both 2026 and 2025, and an expected long-term rate of return of 7.50% for 2026 and 2025. Actual outcomes could vary from the assumptions and result in underaccrual or overaccrual of pension obligations. For information on the Company's critical accounting policies, please refer to the Company’s 2025 Form 10-K, Note 1: Summary of Significant Accounting Policies. Performance Summary Key to understanding the Company’s results of operations and financial position is the interest rate environment. The Federal Reserve's interest rate cuts between September 2025 and December 2025 eased deposit pricing pressure but remain at a level that allows adjustable rate loans to reprice higher than their previous rates. The Company completed the core system conversion during the second quarter of 2025, with related expenses presented in core system conversion expense on the Consolidated Statements of Income. Expanded discussion is provided in subsequent sections. The following table presents the Company’s key performance indicators for the periods indicated. Three Months Ended March 31, Summary Key Performance Indicators 2026 2025 Net Income $ 4,981 $ 3,236 Return on average assets 1.11 % 0.72 % Adjusted return on average assets (1) 1.08 % 0.69 % Return on average equity 10.88 % 8.14 % Adjusted return on average equity (1) 10.57 % 7.84 % Basic net income per common share $ 0.78 $ 0.51 Diluted net income per common share $ 0.78 $ 0.51 Net interest margin (1) 2.98 % 2.40 % Efficiency ratio (1) 59.96 % 65.96 % (1) See “Non-GAAP Financial Measures” below. (2) Average dilutive common shares were 2,783 and 1,982 for the three months ended March 31, 2026 and 2025, respectively. Dilutive common shares stem from unvested restricted stock. Net income for the three months ended March 31, 2026 increased when compared with the comparable period of 2025, due to net interest margin expansion. Analysis of the net interest margin as well as key noninterest income and expense items are presented below. Non-GAAP Financial Measures This report refers to certain financial measures that are computed under a basis other than GAAP (“non-GAAP”). The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. Non-GAAP measures are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP. Details on non-GAAP measures follow. Net Interest Margin The Company uses the net interest margin (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. 29 Table of Contents Three Months Ended March 31, Net Interest Margin, FTE 2026 2025 Interest income (GAAP) $ 18,941 $ 18,198 Add: FTE adjustment 256 207 Interest income, FTE (non-GAAP) 19,197 18,405 Interest expense (GAAP) 6,318 7,947 Net interest income, FTE (non-GAAP) $ 12,879 $ 10,458 Average balance of interest-earning assets $ 1,749,925 $ 1,766,645 Net interest margin (non-GAAP) 2.98 % 2.40 % Efficiency Ratio The efficiency ratio is computed by dividing noninterest expense by the sum of FTE net interest income and noninterest income, excluding certain items the Company’s management deems unusual or non-recurring. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. The components of the efficiency ratio calculation for the periods indicated are summarized in the following table. For the Three Months Ended March 31, Efficiency Ratio 2026 2025 Noninterest expense (GAAP) $ 9,328 $ 8,633 Less: core system conversion expense - (46 ) Adjusted noninterest expense (non-GAAP) $ 9,328 $ 8,587 Noninterest income (GAAP) $ 2,679 $ 2,560 Net interest income, FTE (non-GAAP) 12,879 10,458 Total income for efficiency ratio (non-GAAP) $ 15,558 $ 13,018 Efficiency ratio (non-GAAP) 59.96 % 65.96 % Adjusted Return on Average Assets and Adjusted Return on Average Equity The adjusted return on average assets and adjusted return on average equity are measures of profitability, calculated by annualizing net income and dividing by average year-to-date assets or equity, respectively. Significant income or expenses that are unusual or not expected to recur during the year are not annualized, in order to reduce distortion within the ratios. The tables below present the reconciliation of adjusted annualized net income, which is not a measurement under GAAP, for the periods indicated. Three Months Ended March 31, Annualized Net Income for Ratio Calculation 2026 2025 Net income per GAAP $ 4,981 $ 3,236 Less items not annualized: Partnership income net of tax of ($49) and ($52) for the periods ended March 31, 2026 and 2025, respectively (184 ) (197 ) Core system conversion expense, net of tax of $10 for the period ended March 31, 2025 - 36 Total non-annualized items (184 ) (161 ) Adjusted net income $ 4,797 $ 3,075 Adjusted net income, annualized $ 19,455 $ 12,471 Add: total non-annualized items 184 161 Annualized net income for ratio calculation (non-GAAP) $ 19,639 $ 12,632 Return on average assets (GAAP) 1.11 % 0.72 % Adjusted return on average assets (non-GAAP) 1.08 % 0.69 % Return on average equity (GAAP) 10.88 % 8.14 % Adjusted return on average equity (non-GAAP) 10.57 % 7.84 % 30 Table of Contents Net Interest Income The following tables show interest‑earning assets and interest‑bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net interest margin for the periods indicated. Three Months Ended March 31, 2026 2025 ($ in thousands) Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Interest-earning assets: Loans (1)(2)(3)(4)(5) $ 995,459 $ 14,110 5.75 % $ 995,049 $ 13,078 5.33 % Taxable securities (5) 640,048 4,233 2.68 % 613,940 3,860 2.55 % Nontaxable securities (1)(5) 62,500 430 2.79 % 62,964 425 2.74 % Federal funds sold - - - 261 3 4.66 % Interest-bearing deposits 51,918 424 3.31 % 94,431 1,039 4.46 % Total interest-earning assets $ 1,749,925 $ 19,197 4.45 % $ 1,766,645 $ 18,405 4.23 % Interest-bearing liabilities: Interest-bearing demand deposits $ 855,206 $ 3,635 1.72 % $ 871,007 $ 4,583 2.13 % Savings deposits 144,444 52 0.15 % 143,987 53 0.15 % Time deposits (6) 315,751 2,631 3.38 % 341,322 3,311 3.93 % Total interest-bearing liabilities $ 1,315,401 $ 6,318 1.95 % $ 1,356,316 $ 7,947 2.38 % Net interest income and interest rate spread $ 12,879 2.50 % $ 10,458 1.85 % Net interest margin 2.98 % 2.40 % (1) Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a Federal income tax rate of 21%. (2) Included in interest income are loan fees of $202 and $87 for the three months ended March 31, 2026 and 2025, respectively. Also included in interest income is accretion of discounts on acquired loans of $417 and $251 for the three months ended March 31, 2026 and 2025. (3) Nonaccrual loans are included in average balances for yield computations. (4) Includes loans held for sale. (5) Daily averages are shown at amortized cost. (6) Included in interest expense is amortization of premium on acquired time deposits of $18 and $58 for the three months ended March 31, 2026 and 2025, respectively. When the three months ended March 31, 2026 and 2025 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 2025 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. Noninterest Income Three Months Ended March 31, Change 2026 2025 Dollars Percent Service charges on deposits $ 649 $ 699 $ (50 ) (7.15 )% Other service charges and fees 142 83 59 71.08 % Credit and debit card fees, net 457 417 40 9.59 % Trust income 584 579 5 0.86 % BOLI income 301 292 9 3.08 % Gain on sale of mortgage loans 19 25 (6 ) (24.00 )% Other income 527 465 62 13.33 % Total noninterest income $ 2,679 $ 2,560 $ 119 4.65 % Service charges on deposit accounts decreased when the three months ended March 31, 2026 are compared with the comparable period of 2025, while other service charges and fees increased. The increase in other service charges and fees is due to a change in the way the Company recognizes safe deposit box rent. Prior to the core system conversion during the second quarter of 2025, safe deposit box rent was recognized on an accrual basis. Following the core system conversion, safe deposit box rent is recognized upon receipt. 31 Table of Contents Credit and debit card fees, net, increased when the three months ended March 31, 2026 are compared with the comparable period of 2025, due to contract re-negotiation associated with the core system conversion. Other income includes revenue from investment and insurance sales, adjustments to partnership basis and other miscellaneous components. Securities sales, FHLB dividends and derivatives income account for the increase when the three months ended March 31, 2026 is compared with the comparable period of 2025. Noninterest Expense Three Months Ended March 31, Change 2026 2025 Dollars Percent Salaries and employee benefits $ 5,834 $ 5,180 $ 654 12.63 % Occupancy, furniture and fixtures 884 739 145 19.62 % Data processing 928 983 (55 ) (5.60 )% FDIC assessment 207 207 - 0.00 % Intangible asset amortization 87 97 (10 ) (10.31 )% Franchise taxes 350 373 (23 ) (6.17 )% Professional services 373 299 74 24.75 % Core system conversion expense - 46 (46 ) (100 )% Other operating expenses 665 709 (44 ) (6.21 )% Total noninterest expense $ 9,328 $ 8,633 $ 695 8.05 % Noninterest expense increased when the three months ended March 31, 2026 are compared with the comparable period of 2025. 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, 2026 is compared with the comparable period of 2025, driven by higher incentive and insurance expense. Occupancy, furniture and fixtures expense increased when the three months ended March 31, 2026 are compared with the comparable period of 2025 due to depreciation of assets placed in service after the first quarter of 2025 and additional lease expense. Data processing expenses decreased when the three months ended March 31, 2026 are compared with the comparable period of 2025 due to savings related to the core system conversion. Professional services include legal, audit and consulting expenses, which increased when the three months ended March 31, 2026 are compared with the comparable period of 2025 due to higher audit and consulting fees. Core system conversion expense includes payments made to vendors in advance of the system upgrade completed during the second quarter of 2025. Other operating expense decreased when the three months ended March 31, 2026 are compared with the comparable period of 2025. 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 $131 for the three months ended March 31, 2026 and $81 for the three months ended March 31, 2025. The Company places high priority on cybersecurity. The decrease in expense reflects renegotiation of contracts and licensing. Income Tax The Company’s income tax expense for the three months ended March 31, 2026 was $1,066 and effective tax rate was 17.63%. For the three months ended March 31, 2025, the Company’s income tax expense was $666 and effective tax rate was 17.07%. The effective tax rate increased due to comparable levels of nontaxable income while pre-tax earnings increased during the period. Asset Quality Key indicators of the Company’s asset quality are presented in the following table. March 31, December 31, 2026 2025 Nonaccrual loans $ 344 $ 188 Loans past due 90 days or more, and still accruing 230 881 ACLL to loans net of deferred fees and costs 0.98 % 0.99 % Year-to-date net charge-offs as a percentage of average loans 1 0.04 % 0.03 % Ratio of nonperforming loans to loans, net of deferred fees and costs 0.03 % 0.02 % Ratio of ACLL to nonperforming loans 2831.10 % 5261.70 % 32 Table of Contents (1) Net charge-offs are annualized through the period indicated. For information on the Company’s policies on the ACLL, please refer to the Company’s 2025 Form 10-K, Note 1: Summary of Significant Accounting Policies. The Company’s risk analysis as of March 31, 2026 determined an ACLL of $9,739, or 0.98% of loans net of deferred fees and costs. This compares with an ACLL of $9,892 as of December 31, 2025, or 0.99% of loans. To determine the appropriate level of the ACLL, the Company considers credit risk for individually evaluated loans and for groups of collectively evaluated loans. Individually Evaluated Loans Individually evaluated loans were $8,898 as of March 31, 2026 and $8,802 as of December 31, 2025. As of both reporting dates, two 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 $106. Collectively Evaluated Loans Collectively evaluated loans totaled $987,166, with an ACLL of $9,633 as of March 31, 2026. As of December 31, 2025, collectively evaluated loans totaled $991,124, with an allowance of $9,786. Collectively evaluated loans are divided into classes 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 March 31, 2026, and set a period of 12 months to revert to historical losses on a straight-line basis. The forecast applied as of March 31, 2026 projects that unemployment will increase slightly over the next 12 months, higher than the forecast applied as of December 31, 2025. The higher unemployment forecast increased the required level of the ACLL when March 31, 2026 is compared with December 31, 2025. 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 as of December 31, 2025, business bankruptcy filings increased while personal bankruptcies filings decreased. Residential vacancy rates and housing inventory are used to measure the health of the housing market. The housing market directly or indirectly affects all loan classes.. Higher vacancy and inventory levels increase credit risk. The residential vacancy rate available as of March 31, 2026 was at a lower level than the data incorporated into the December 31, 2025 calculation. Housing data available as of March 31, 2026 showed slightly lower inventory than as of December 31, 2025, resulting in a lower 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. Accruing loans past due 30-89 days were 0.29% of total loans as of March 31, 2026, a decrease from 0.35% as of December 31, 2025. Qualitative Factors: Other Considerations The Company considers other factors that impact credit risk, including the competitive, legal and regulatory environments, changes in lending policies and loan review, changes in lending management and high risk loans. Competitive, legal and regulatory environments were evaluated for changes that would affect credit risk. Higher competition for loans is deemed to increase credit risk, while lower competition decreases credit risk. Competition remained at similar levels to those at December 31, 2025. The legal and regulatory environments also remain in a similar posture to December 31, 2025. Lending policies, loan review procedures and management’s experience influence credit risk. Policies and procedures remain similar to those at December 31, 2025. 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, 2025. 33 Table of Contents The Company monitors local economic news and internal indicators to consider the presence of risk that may not be reflected in its designated qualitative factors above. As of March 31, 2026, management identified elevated local unemployment data and collection activity, similar to December 31, 2025. The Company maintained its allocation from December 31, 2025. 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 March 31, 2026. ACL on Unfunded Commitments The ACL on unfunded commitments was $288, or 0.15% of unfunded commitments as of March 31, 2026. The ACL on unfunded commitments was $298, or 0.17% as of December 31, 2025. Provision for (Recovery of) Credit Losses The provision for credit losses represents charges to earnings necessary to maintain an adequate allowance. The adequacy of the ACLL is reviewed quarterly and adjustments are made as determined necessary. The Company recorded a recovery of credit losses on loans of $63 and a recovery of credit losses on unfunded commitments of $10 for the three months ended March 31, 2026, compared with a provision for credit losses on loans of $277 and a recovery of $1 for unfunded commitments for the three months ended March 31, 2025. Changes in loss rates, qualitative factors and a lower balance of loans accounted for the difference in (recovery of) provision for credit losses. Loan Modifications In the ordinary course of business the Company modifies loan terms on a case-by-case basis for a variety of reasons. Modifications may include rate reductions, payment extensions of varying lengths of time, a change in amortization term or method or other arrangements. Modifications to consumer loans generally involve short-term payment extensions to accommodate specific, temporary circumstances. Modifications to commercial loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants. The Company reviews modifications to determine whether the borrower is experiencing financial difficulty, including indicators of default, bankruptcy, going concern, insufficient projected cash flows and inability to obtain financing from other sources. Please refer to Note 2: 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. During the three months ended March 31, 2026 and 2025, 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, 2026, the Company modified 70 loans totaling $27,988. During the three months ended March 31, 2025, the Company provided 195 modifications to loans totaling $24,105. Key Assets and Liabilities NBI’s key assets and liabilities and their change from March 31, 2025 are shown in the following table. 34 Table of Contents March 31, March 31, Change 2026 2025 Dollars Percent Interest-bearing deposits $ 54,177 $ 107,385 $ (53,208 ) (49.55 )% Securities available for sale, at fair value 658,112 596,253 61,859 10.37 % Loans, net 985,651 992,774 (7,123 ) (0.72 )% Total assets 1,828,993 1,835,717 (6,724 ) (0.37 )% Deposits 1,629,764 1,657,760 (27,996 ) (1.69 )% Average Balances Year-to-date daily averages for the major balance sheet categories are as follows: March 31, December 31, Change 2026 2025 Dollars Percent Assets Interest-bearing deposits $ 51,918 $ 76,223 $ (24,305 ) (31.89 )% Securities available for sale, at fair value 653,722 603,869 49,853 8.26 % Loans, net 985,473 995,531 (10,058 ) (1.01 )% Total assets 1,819,379 1,809,631 9,748 0.54 % Liabilities and stockholders’ equity Noninterest-bearing demand deposits $ 306,202 $ 305,115 $ 1,087 0.36 % Interest-bearing demand deposits 855,206 842,479 12,727 1.51 % Savings deposits 144,444 142,547 1,897 1.33 % Time deposits 315,751 328,286 (12,535 ) (3.82 )% Stockholders’ equity 185,707 170,428 15,279 8.97 % Increased customer deposits resulted in increased investment in interest bearing deposit assets. Changes in securities, loans, deposits and stockholders’ equity are discussed below. 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: March 31, December 31, Change 2026 2025 Dollars Percent Amortized cost $ 713,197 $ 706,229 $ 6,968 0.99 % Unrealized loss, net (55,085 ) (51,852 ) (3,233 ) (6.24 )% Securities available for sale, at fair value $ 658,112 $ 654,377 $ 3,735 0.57 % The Company purchased bonds totaling $19,555 during the first quarter of 2026. The unrealized loss in the Company’s investment portfolio is due to interest rate risk. The fair value of bonds moves inversely to interest rate changes and expectations of interest rate changes. A large percentage of the Company’s securities were purchased during the period prior to the Federal Reserve’s interest rate increases that began in March of 2022. The Company’s analysis of the securities portfolio determined no identifiable credit risk as of March 31, 2026 and no ACL has been recorded. Please refer to Note 1: General and Summary of Significant Accounting Policies of the Company's 2025 Form 10-K and Note 3: Securities in Part I, Item 1 of this report for additional information on the securities portfolio. 35 Table of Contents Loans March 31, December 31, Change 2026 2025 Dollars Percent Real estate construction $ 53,500 $ 40,694 $ 12,806 31.47 % Consumer real estate 331,110 328,653 2,457 0.75 % Commercial real estate 452,881 467,783 (14,902 ) (3.19 )% Commercial non real estate 50,736 52,018 (1,282 ) (2.46 )% Public sector and IDA 62,740 63,677 (937 ) (1.47 )% Consumer non real estate 45,097 47,101 (2,004 ) (4.25 )% Less: deferred fees and costs (674 ) (616 ) (58 ) 9.42 % Loans, net of deferred fees and costs $ 995,390 $ 999,310 $ (3,920 ) (0.39 )% Lower demand and increased competition resulted in a slight decrease in the loan portfolio when March 31, 2026 is compared with December 31, 2025. The Company is positioned to make every loan that meets its underwriting standards. Deposits March 31, December 31, Change 2026 2025 Dollars Percent Noninterest-bearing demand deposits $ 302,844 $ 313,022 $ (10,178 ) (3.25 )% Interest-bearing demand deposits 866,848 853,756 13,092 1.53 % Savings deposits 145,134 142,645 2,489 1.74 % Time deposits 314,938 317,510 (2,572 ) (0.81 )% Total deposits $ 1,629,764 $ 1,626,933 $ 2,831 0.17 % The Company continues to focus on providing new deposit products that provide additional functionality and marketing opportunity, enabled by the core system conversion completed in 2025. During the first quarter of 2026, the Company implemented a treasury management suite for commercial and municipal deposit customers, with additional product releases planned throughout 2026. 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 22% of the Company’s deposits, have additional security from bonds pledged as collateral, in accordance with state regulation. Uninsured non-municipal deposits are approximately 20% of total deposits. As of March 31, 2026, the Company's largest deposit relationship was 5.15% of total deposits. Capital Resources March 31, December 31, Change 2026 2025 Dollars Percent Common stock and additional paid in capital $ 22,086 $ 22,024 $ 62 0.28 % Retained earnings 207,539 202,558 4,981 2.46 % Accumulated other comprehensive loss (42,227 ) (39,674 ) (2,553 ) (6.43 )% Total stockholders’ equity $ 187,398 $ 184,908 $ 2,490 1.35 % The increase in stockholders’ equity reflects net income for the three months ended March 31, 2026, partially offset by a decrease in market value of securities available for sale when March 31, 2026 is compared with December 31, 2025. 36 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. Capital ratios for NBB are shown in the following table. March 31, 2026 December 31, 2025 Regulatory Capital Minimum Ratios Regulatory Capital Minimum Ratios with Capital Conservation Buffer Common Equity Tier I Capital Ratio 16.61 % 16.16 % 4.50 % 7.00 % Tier I Capital Ratio 16.61 % 16.16 % 6.00 % 8.50 % Total Capital Ratio 17.46 % 17.02 % 8.00 % 10.50 % Leverage Ratio 10.69 % 10.42 % 4.00 % 4.00 % Liquidity Liquidity measures the Company’s ability to meet its financial commitments at a reasonable cost. Demands on the Company’s liquidity include funding additional loan demand and accepting withdrawals of existing deposits. The Company has diverse liquidity sources, including customer and purchased deposits, customer repayments of loan principal and interest, sales, calls and maturities of securities, Federal Reserve discount window borrowing, short-term borrowing, and FHLB advances. As of March 31, 2026, the Company had $303,165 of borrowing capacity from the FHLB and $184,437 of borrowing capacity at the Federal Reserve Bank discount window. As of March 31, 2026, the Company did not have purchased deposits, discount window borrowings or short-term borrowings. The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters. Portions of the securities portfolio are pledged to meet state requirements for public funds deposits. Discount window borrowings also require pledged securities. Increased/decreased liquidity from public funds deposits or discount window borrowings results in increased/decreased liquidity from pledging requirements. The Company monitors public funds pledging requirements and unpledged available for sale securities accessible for liquidity needs. Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve Bank discount window. As of March 31, 2026, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve Bank discount window. The Company monitors factors that may increase its liquidity needs. Some of these factors include deposit trends, large depositor activity, maturing deposit promotions, interest rate sensitivity, maturity and repricing timing gaps between assets and liabilities, the level of unfunded loan commitments and loan growth. As of March 31, 2026, the Company’s liquidity is sufficient to meet projected trends. To monitor and estimate liquidity levels, the Company performs stress testing under varying assumptions on credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows. The Company’s Contingency Funding Plan sets forth avenues for rectifying liquidity shortfalls. As of March 31, 2026, the analysis indicated adequate liquidity under the tested scenarios. The Company utilizes several other strategies to maintain sufficient liquidity. Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s internally-set target range. As of March 31, 2026, the loan to deposit ratio was 61.08%. 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. As of March 31, 2026, 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 March 31, 2026, the Company has no material commitments for long-term debt or for capital expenditures. Off-Balance Sheet Arrangements In the normal course of business, NBB extends lines of credit to its customers. Depending on their needs, customers may draw upon lines of credit at any time in any amount up to a pre-approved limit. 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. Amounts drawn upon these lines and letters of credit vary at any given time depending on the business needs of the customers. 37 Table of Contents 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 borrowing capacity, raising additional deposits, or selling securities available for sale 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. To date, no recourse provisions have ever been invoked. If the Company identified a factor or trend that indicated recourse risk, a loss reserve would be recorded. Contractual Obligations The Company had no finance lease or purchase obligations and no long-term debt at March 31, 2026. Item 3. Quantitative a nd Qualitative Disclosures About Market Risk Not applicable. Item 4. Controls an d Procedures The Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2026 to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2026, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Because of the inherent limitations in all control systems, the Company believes that no system of controls, no matter how well designed and operated, can provide absolute assurance that all control issues have been detected. Part I I - OTHER INFORMATION Item 1. Legal P roceedings There are no pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company. Item 1A. Ris k Factors Please refer to the “Risk Factors” previously disclosed in Item 1A of the Company's 2025 Form 10-K and the factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” in Part I. Item 2 of this Form 10-Q.