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, 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, 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. 30 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 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 cash flow ("CF") model whereby each loan’s cash flows are projected according to contractual terms and modified by prepayment rates and loss rates. Prepayment rates are sourced from the Company’s historical experience. Loss rates are calculated using the probability of default ("PD") and loss given default ("LGD") sourced from internal and peer historical experience, and adjusted for a forecast variable. The modified cash flows are then discounted at the loan's contractual interest rate. Application of historical prepayment rates lowers the ACL and may not be representative of realized prepayment rates. Historical loss experience and the impact of 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 CF 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 CF 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 may 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. 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 31 Table of Contents 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 The Company’s results of operations and financial position are heavily influenced by the interest rate environment. The Federal Reserve's interest rate cuts between September 2024 and September of 2025 eased deposit pricing pressure but remain at a level that allows adjustable rate loans to reprice higher than their previous rates. Also influential to the Company's results are a gain on the sale of an equity investment offset by a loss on the sale of securities in 2026, and a core system conversion completed during the second quarter of 2025, with core system conversion expense presented on the Consolidated Statements of Income. Expanded discussion of significant items for 2026 and 2025 is provided in subsequent sections. The following table presents the Company’s key performance indicators for the periods indicated: Three Months Ended June 30, 2026 2025 Net Income $ 5,029 $ 2,289 Return on average assets 1.10 % 0.51 % Adjusted return on average assets (1) 1.09 % 0.77 % Return on average equity 10.66 % 5.50 % Adjusted return on average equity (1) 10.64 % 8.37 % Basic net income income per common share $ 0.79 $ 0.36 Diluted net income income per common share (2) $ 0.79 $ 0.36 Net interest margin (1) 3.00 % 2.56 % Efficiency ratio (1) 58.40 % 63.83 % Six Months Ended June 30, Summary Key Performance Indicators 2026 2025 Net Income $ 10,010 $ 5,525 Return on average assets 1.10 % 0.61 % Adjusted return on average assets (1) 1.09 % 0.69 % Return on average equity 10.76 % 6.80 % Adjusted return on average equity (1) 10.65 % 7.69 % Basic net income per common share $ 1.57 $ 0.87 Diluted net income per common share (2) $ 1.57 $ 0.87 Net interest margin (1) 2.99 % 2.48 % Efficiency ratio (1) 59.17 % 64.87 % (1) See “Non-GAAP Financial Measures” below. (2) Average dilutive common shares were 3,241 and 3,013 for the three and six months ended June 30, 2026, and 2,665 and 2,325 for the three and six months ended June 30, 2025. Dilutive common shares stem from unvested restricted stock. Net income for the three and six months ended June 30, 2026 increased when compared with the comparable periods of 2025, due to net interest margin expansion and core conversion related expenses in 2025. The net interest margin as well as key noninterest income and expense items are discussed 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. 32 Table of Contents 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: Three Months Ended June 30, Net Interest Margin, FTE 2026 2025 Interest income (GAAP) $ 19,454 $ 18,536 Add: FTE adjustment 249 213 Interest income, FTE (non-GAAP) 19,703 18,749 Interest expense (GAAP) 6,404 7,546 Net interest income, FTE (non-GAAP) $ 13,299 $ 11,203 Average balance of interest-earning assets $ 1,777,146 $ 1,758,449 Net interest margin 3.00 % 2.56 % Six Months Ended June 30, Net Interest Margin, FTE 2026 2025 Interest income (GAAP) $ 38,395 $ 36,734 Add: FTE adjustment 506 421 Interest income, FTE (non-GAAP) 38,901 37,155 Interest expense (GAAP) 12,722 15,493 Net interest income, FTE (non-GAAP) $ 26,179 $ 21,662 Average balance of interest-earning assets $ 1,763,611 $ 1,762,525 Net interest margin (non-GAAP) 2.99 % 2.48 % 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. Three Months Ended June 30, Efficiency Ratio 2026 2025 Noninterest expense (GAAP) $ 9,302 $ 10,582 Less: core system conversion expense - (1,977 ) Adjusted noninterest expense (non-GAAP) $ 9,302 $ 8,605 Noninterest income (GAAP) $ 2,646 $ 2,279 Less: gain on sale of equity investment (6,566 ) - Less: loss on sale of securities, net 6,549 - Adjusted noninterest income (non-GAAP) 2,629 2,279 Net interest income, FTE (non-GAAP) 13,299 11,203 Total income for efficiency ratio (non-GAAP) $ 15,928 $ 13,482 Efficiency ratio 58.40 % 63.83 % 33 Table of Contents Six Months Ended June 30, Efficiency Ratio 2026 2025 Noninterest expense (GAAP) $ 18,630 $ 19,215 Less: core system conversion expense - (2,023 ) Adjusted noninterest expense (non-GAAP) $ 18,630 $ 17,192 Noninterest income (GAAP) $ 5,325 $ 4,839 Less: gain on sale of equity investment (6,566 ) - Less: loss on sale of securities, net 6,549 - Adjusted noninterest income (non-GAAP) 5,308 4,839 Net interest income, FTE (non-GAAP) 26,179 21,662 Total income for efficiency ratio (non-GAAP) $ 31,487 $ 26,501 Efficiency ratio (non-GAAP) 59.17 % 64.87 % Adjusted Return on Average Assets and Adjusted Return on Average Equity The adjusted return on average assets (non-GAAP) and adjusted return on average equity (non-GAAP) 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 June 30, Annualized Net Income for Ratio Calculation 2026 2025 Net income per GAAP $ 5,029 $ 2,289 Less: items not annualized: Partnership loss net of tax of $8 for the peiod ended June 30, 2025 - 31 Gain on sale of equity investment, net of tax of ($1,379) for the period ended June 30, 2026 (5,187 ) - Loss on sale of securities, net, net of tax of $1,375 for the period ended June 30, 2026 5,174 - Core system conversion expense, net of tax of $415 for the period ended June 30, 2025 - 1,562 Total non-annualized items (13 ) 1,593 Adjusted net income $ 5,016 $ 3,882 Adjusted net income, annualized $ 20,119 $ 15,571 Add: total non-annualized items 13 (1,593 ) Annualized net income for ratio calculation (non-GAAP) $ 20,132 $ 13,978 Return on average assets (GAAP) 1.10 % 0.51 % Adjusted return on average assets (non-GAAP) 1.09 % 0.77 % Return on average equity (GAAP) 10.66 % 5.50 % Adjusted return on average equity (non-GAAP) 10.64 % 8.37 % 34 Table of Contents Six Months Ended June 30, Annualized Net Income for Ratio Calculation 2026 2025 Net income per GAAP $ 10,010 $ 5,525 Less items not annualized: Partnership income net of tax of ($49) and ($44) for the periods ended June 30, 2026 and 2025, respectively (184 ) (166 ) Gain on sale of equity investment, net of tax of ($1,379) for the period ended June 30, 2026 (5,187 ) - Loss on sale of securities, net, net of tax of $1,375 for the period ended June 30, 2026 5,174 - Core system conversion expense, net of tax of $425 for the period ended June 30, 2025 - 1,598 Total non-annualized items (197 ) 1,432 Adjusted net income $ 9,813 $ 6,957 Adjusted net income, annualized $ 19,789 $ 14,029 Add: total non-annualized items 197 (1,432 ) Annualized net income for ratio calculation (non-GAAP) $ 19,986 $ 12,597 Return on average assets (GAAP) 1.10 % 0.61 % Adjusted return on average assets (non-GAAP) 1.09 % 0.69 % Return on average equity (GAAP) 10.76 % 6.80 % Adjusted return on average equity (non-GAAP) 10.65 % 7.69 % Net Interest Income The following tables present interest‑earning assets and interest‑bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net interest margin for the periods indicated. Three Months Ended June 30, 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) $ 1,007,549 $ 14,226 5.66 % $ 1,008,401 $ 13,618 5.42 % Taxable securities (5) 636,331 4,439 2.80 % 596,497 3,725 2.50 % Nontaxable securities (1)(5) 62,388 433 2.78 % 62,847 426 2.72 % Federal funds sold - - - 197 2 4.07 % Interest-bearing deposits 70,878 605 3.42 % 90,507 978 4.33 % Total interest-earning assets $ 1,777,146 $ 19,703 4.45 % $ 1,758,449 $ 18,749 4.28 % Interest-bearing liabilities: Interest-bearing demand deposits $ 869,047 $ 3,803 1.76 % $ 853,516 $ 4,440 2.09 % Savings deposits 141,382 53 0.15 % 143,470 48 0.13 % Time deposits (6) 311,990 2,541 3.27 % 330,906 3,058 3.71 % Borrowings 769 7 3.65 % - - - Total interest-bearing liabilities $ 1,323,188 $ 6,404 1.94 % $ 1,327,892 $ 7,546 2.28 % Net interest income and interest rate spread $ 13,299 2.51 % $ 11,203 2.00 % Net interest margin 3.00 % 2.56 % (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 $169 and $113 for the three months ended June 30, 2026 and 2025, respectively. Also included in interest income is accretion of discounts on acquired loans of $177 and $363 for the three months ended June 30, 2026 and 2025, respectively. (3) Nonaccrual loans are included in average balances for yield computations. (4) Includes loans held for sale. (5) Daily averages are shown at amortized cost. (6) Included in interest expense is amortization of premium on acquired time deposits of $16 and $43 for the three months ended June 30, 2026 and 2025, respectively. 35 Table of Contents Six Months Ended June 30, 2026 2025 ($ in thousands) Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Interest-earning assets: Loans (1)(2)(3)(4)(5) $ 1,001,538 $ 28,337 5.71 % $ 1,001,763 $ 26,696 5.37 % Taxable securities (5) 638,179 8,672 2.74 % 605,170 7,585 2.53 % Nontaxable securities (1)(5) 62,444 863 2.79 % 62,905 852 2.73 % Federal funds sold - - - 229 5 4.40 % Interest-bearing deposits 61,450 1,029 3.38 % 92,458 2,017 4.40 % Total interest-earning assets $ 1,763,611 $ 38,901 4.45 % $ 1,762,525 $ 37,155 4.25 % Interest-bearing liabilities: Interest-bearing demand deposits $ 862,165 $ 7,438 1.74 % $ 862,213 $ 9,023 2.11 % Savings deposits 142,904 105 0.15 % 143,727 101 0.14 % Time deposits (6) 313,860 5,172 3.32 % 336,085 6,369 3.82 % Borrowings 387 7 3.65 % - - - Total interest-bearing liabilities $ 1,319,316 $ 12,722 1.94 % $ 1,342,025 $ 15,493 2.33 % Net interest income and interest rate spread $ 26,179 2.51 % $ 21,662 1.92 % Net interest margin 2.99 % 2.48 % (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 $371 and $199 for the six months ended June 30, 2026 and 2025, respectively. Also included in interest income is accretion of discounts on acquired loans of $594 and $615 for the six months ended June 30, 2026 and 2025, respectively. (3) Nonaccrual loans are included in average balances for yield computations. (4) Includes loans held for sale. (5) Daily averages are shown at amortized cost. (6) Included in interest expense is amortization of premium on acquired time deposits of $34 and $101 for the six months ended June 30, 2026 and 2025, respectively. When the three and six months ended June 30, 2026 and 2025 are compared, improvement in the net interest margin stemmed from higher yields on loans and securities and lower cost of time deposits and interest bearing demand deposits, somewhat offset by lower yield on interest-bearing deposit assets. The Federal Reserve's interest rate cuts between September 2024 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 June 30, Change 2026 2025 Dollars Percent Service charges on deposits $ 690 $ 734 $ (44 ) (5.99 )% Other service charges and fees 69 73 (4 ) (5.48 )% Credit and debit card fees, net 544 366 178 48.63 % Trust income 667 578 89 15.40 % BOLI income 306 297 9 3.03 % Gain on sale of mortgage loans 75 54 21 38.89 % Other income 278 177 101 57.06 % Gain on sale of equity investment 6,566 - 6,566 NM Loss on sale of securities, net (6,549 ) - (6,549 ) NM Total noninterest income $ 2,646 $ 2,279 $ 367 16.10 % 36 Table of Contents Six Months Ended June 30, Change 2026 2025 Dollars Percent Service charges on deposits $ 1,339 $ 1,433 $ (94 ) (6.56 )% Other service charges and fees 211 156 55 35.26 % Credit and debit card fees, net 1,001 783 218 27.84 % Trust income 1,251 1,157 94 8.12 % BOLI income 607 589 18 3.06 % Gain on sale of mortgage loans 94 79 15 18.99 % Other income 805 642 163 25.39 % Gain on sale of equity investment 6,566 - 6,566 NM Loss on sale of securities, net (6,549 ) - (6,549 ) NM Total noninterest income $ 5,325 $ 4,839 $ 486 10.04 % When the three and six months ended June 30, 2026 are compared with the comparable periods of 2025, noninterest income increased. Other service charges and fees increased when the six months ended June 30, 2026 are compared with the comparable periods of 2025, primarily due to a change in recognition method for safe deposit box rent. Credit and debit card fees, net, increased when the three and six months ended June 30, 2026 are compared with the comparable periods of 2025, due to improved terms for interchange fee income stemming from the the core system conversion in May of 2025. Trust income increased when the three and six months ended June 30, 2026 are compared with the comparable period of 2025 due to higher estate fee income in 2026. Gain on sale of mortgage loans increased when the three and six months ended June 30, 2026 are compared with the comparable periods of 2025, due to higher volume. Other income increased when the three and six months ended June 30, 2026 are compared with the comparable periods of 2025, due to higher commissions on securities sales and income from equity investments. During the second quarter of 2026, the Company recorded a gain on the sale of its equity interest in a community-bank insurance consortium. The Company also executed a plan to partially reposition the securities portfolio to enhance profitability and manage interest rate risk. Improvement in earnings as a result of the repositioning is expected to earn back the loss on sale of securities within 1.8 years, and will continue to add value after the recovery period. Noninterest Expense Three Months Ended June 30, Change 2026 2025 Dollars Percent Salaries and employee benefits $ 5,788 $ 5,211 $ 577 11.07 % Occupancy, furniture and fixtures 838 731 107 14.64 % Data processing 965 617 348 56.40 % FDIC assessment 207 210 (3 ) (1.43 )% Intangible asset amortization 84 95 (11 ) (11.58 )% Franchise taxes 351 358 (7 ) (1.96 )% Professional services 358 509 (151 ) (29.67 )% Core system conversion expense - 1,977 (1,977 ) NM Other operating expenses 711 874 (163 ) (18.65 )% Total noninterest expense $ 9,302 $ 10,582 $ (1,280 ) (12.10 )% Six Months Ended June 30, Change 2026 2025 Dollars Percent Salaries and employee benefits $ 11,622 $ 10,391 $ 1,231 11.85 % Occupancy, furniture and fixtures 1,722 1,470 252 17.14 % Data processing 1,893 1,600 293 18.31 % FDIC assessment 414 417 (3 ) (0.72 )% Intangible asset amortization 171 192 (21 ) (10.94 )% Franchise taxes 701 731 (30 ) (4.10 )% Professional services 731 808 (77 ) (9.53 )% Core system conversion expense - 2,023 (2,023 ) NM Other operating expenses 1,376 1,583 (207 ) (13.08 )% Total noninterest expense $ 18,630 $ 19,215 $ (585 ) (3.04 )% 37 Table of Contents Total noninterest expense decreased when the three and six months ended June 30, 2026 are compared with the comparable periods of 2025. During 2025, the Company recorded specific expense for the core system conversion, as well as associated marketing and mailing expense included in other noninterest expense. Salaries and employee benefits include payroll taxes, health insurance, contributions to the employee stock ownership plan and employee 401(k), pension expense, incentives and salary continuation. When the three and six months ended June 30, 2026 are compared with the comparable periods of 2025, the increase was driven by higher incentive and medical insurance expense. Occupancy, furniture and fixtures expense increased when the three and six months ended June 30, 2026 are compared with the comparable periods of 2025 due to depreciation and amortization of assets placed into service for the core system conversion in May 2025 and the Company's Roanoke and Lynchburg branch locations, opened in March 2025 and November 2025, respectively. Data processing expense increased when three and six months ended June 30, 2026 are compared with the comparable periods of 2025 due to higher maintenance and communications infrastructure expense, as well as expenses to manage cybersecurity risk. The cost of these measures was $151 for the three months ended June 30, 2026 and $100 for the three months ended June 30, 2025. For the six months ended June 30, 2026, total cybersecurity expense was $283 compared with $141 for the six months ended June 30, 2025. The Company places high priority on cybersecurity. Professional services include legal, audit and consulting expenses, which decreased when the three and six months ended June 30, 2026 are compared with the comparable periods of 2025 due to lower legal expense. Other operating expenses decreased when the three and six months ended June 30, 2026 are compared with the comparable periods of 2025 due to improvement in the non-service component of pension cost. The category of other operating expenses also includes expense for marketing and business development, supplies, and charitable donations, among others. Income Tax The Company’s income tax expense was $1,048 for the three months ended June 30, 2026 compared with $362 for the same period in 2025.The Company's income tax expense was $2,114 for the six months ended June 30, 2026 and effective tax rate was 17.44%. For the six months ended June 30, 2025, the Company’s income tax expense was $1,028 and effective tax rate was 15.69%. The effective tax rate increased due to comparable levels of nontaxable income while pre-tax earnings increased. Asset Quality Key indicators of the Company’s asset quality are presented in the following table. June 30, December 31, 2026 2025 Nonaccrual loans $ 335 $ 188 Loans past due 90 days or more, and still accruing 243 881 ACLL to loans net of deferred fees and costs 0.99 % 0.99 % Year-to-date net charge-offs as a percentage of average loans (1) 0.02 % 0.03 % Ratio of nonperforming loans to loans, net of deferred fees and costs 0.03 % 0.02 % Ratio of ACLL to nonperforming loans 2999.10 % 5261.70 % (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 June 30, 2026 determined an ACLL of $10,047, or 0.99% of loans net of deferred fees and costs. This compares with an allowance 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 loans evaluated collectively. Individually Evaluated Loans Individually evaluated loans were $10,030 as of June 30, 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 $138 as of June 30, 2026 and $106 as of December 31, 2025. Collectively Evaluated Loans 38 Table of Contents Collectively evaluated loans totaled $1,005,382, with an ACLL of $9,909 as of June 30, 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 June 30, 2026, and set a period of 12 months to revert to historical losses on a straight-line basis. The forecast applied as of June 30, 2026 projects that unemployment will slightly decrease over the next 12 months at a lower level than the forecast applied as of December 31, 2025. The lower unemployment forecast decreased the required level of the ACLL when June 30, 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 and personal bankruptcies filings decreased. Residential vacancy rates and housing inventory are used to measure 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 June 30, 2026 decreased compared to the data incorporated into the December 31, 2025 calculation, resulting in a lower allocation. Housing inventory increased when June 30, 2026 is compared with December 31, 2025, 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. Accruing loans past due 30-89 days were 0.30% of total loans as of June 30, 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 is deemed to decrease credit risk. The Company's evaluation found slightly lower competitive pressure when compared with December 31, 2025. The legal and regulatory environments 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. The Company considers changes in experience and leadership of lending and credit risk management. During the second quarter of 2026, the Company's Chief Lending Officer announced his resignation and the Company promoted a seasoned lender to the position. The new CLO's long tenure and alignment with the Company's credit risk appetite and lending culture do not indicate a measurable increase in credit risk. However, due to the unexpected nature of the change, the Company determined an allocation was appropriate to recognize uncertainty. The Company removed an allocation associated with lending staff obtained through a 2024 acquisition. The Company monitors local economic news and internal indicators to consider the presence of risk that may not be reflected in its standard analysis of qualitative factors. As of June 30, 2026, management identified elevated local unemployment data and collection activity, similar to December 31, 2025, as well as geopolitical concerns that impact inflation. The Company increased its allocation from December 31, 2025. Conclusion The estimate of the appropriate level for the ACLL requires management’s prudent and informed judgment. The Company's estimate is based on quantitative and qualitative analysis of historical indicators, asset quality and economic factors and represents a reasonable estimate of the credit risk in the loan portfolio as of June 30, 2026. 39 Table of Contents ACL on Unfunded Commitments The ACL on unfunded commitments was $282, or 0.16 % of unfunded commitments as of June 30, 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 provision for credit losses on loans of $260 and a recovery credit losses on unfunded commitments of $16 for the six months ended June 30, 2026, compared with a provision for credit losses on loans of $322 and a recovery of $10 for unfunded commitments for the six months ended June 30, 2025. For the three month period ended June 30, 2026, the Company recorded a provision for credit losses on loans of $323 and a recovery of credit losses on unfunded commitments of $6. For the three months ended June 30, 2025, the Company recorded a provision for credit losses on loans of $45 and a recovery of credit losses on unfunded commitments of $9. 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 and six months ended June 30, 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 June 30, 2026, the Company modified 57 loans totaling $11,908. During the six months ended June 30, 2026, the Company modified 127 loans totaling $39,896. During the three and six months ended June 30, 2025, the Company provided 173 modifications to loans totaling $17,750 and 368 modifications totaling $41,855, respectively. Key Assets and Liabilities NBI’s key assets and liabilities and their change from December 31, 2025 are shown in the following table. June 30, December 31, Change 2026 2025 Dollars Percent Interest-bearing deposits $ 45,709 $ 50,831 $ (5,122 ) (10.08 )% Securities available for sale, at fair value 652,660 654,377 (1,717 ) (0.26 )% Loans, net 1,004,607 989,418 15,189 1.54 % Total assets 1,832,700 1,824,506 8,194 0.45 % Deposits 1,629,456 1,626,933 2,523 0.16 % 40 Table of Contents Average Balances Year-to-date daily averages for the major balance sheet categories are as follows: June 30, December 31, Change 2026 2025 Dollars Percent Assets Interest-bearing deposits $ 61,450 $ 76,223 $ (14,773 ) (19.38 )% Securities available for sale, at fair value 648,555 603,869 44,686 7.40 % Loans, net 991,431 995,531 (4,100 ) (0.41 )% Total assets 1,830,367 1,809,631 20,736 1.15 % Liabilities and stockholders’ equity Noninterest-bearing demand deposits $ 311,382 $ 305,115 $ 6,267 2.05 % Interest-bearing demand deposits 862,165 842,479 19,686 2.34 % Savings deposits 142,904 142,547 357 0.25 % Time deposits 313,860 328,286 (14,426 ) (4.39 )% Stockholders’ equity 187,664 170,428 17,236 10.11 % Lower interest bearing deposit assets reflect strategic investment in securities available for sale. 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: June 30, December 31, Change 2026 2025 Dollars Percent Amortized cost $ 702,023 $ 706,229 $ (4,206 ) (0.60 )% Unrealized loss, net (49,363 ) (51,852 ) 2,489 4.80 % Securities available for sale, at fair value $ 652,660 $ 654,377 $ (1,717 ) (0.26 )% The Company repositioned a portion of the securities portfolio during the second quarter of 2026, selling securities with an amortized cost of $131,866 and weighted average yield of 1.80%, resulting in a loss of $6,549. The Company invested the proceeds in securities totalling $127,327 with a weighted average yield of 5.26%. 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. The Company’s analysis of the securities portfolio determined no identifiable credit risk as of June 30, 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 4: Securities in Part I, Item 1 of this report for additional information on the securities portfolio. Loans June 30, December 31, Change 2026 2025 Dollars Percent Real estate construction $ 72,220 $ 40,694 $ 31,526 77.47 % Consumer real estate 330,204 328,653 1,551 0.47 % Commercial real estate 456,181 467,783 (11,602 ) (2.48 )% Commercial non real estate 49,616 52,018 (2,402 ) (4.62 )% Public sector and IDA 62,124 63,677 (1,553 ) (2.44 )% Consumer non real estate 45,067 47,101 (2,034 ) (4.32 )% Less: deferred fees and costs (758 ) (616 ) (142 ) (23.05 )% Loans, net of deferred fees and costs $ 1,014,654 $ 999,310 $ 15,344 1.54 % The Company anticipated the increase in real estate construction loans, as projects underlying previously approved loans reached development phases for advances. The Company is positioned to make every loan that meets its underwriting standards. 41 Table of Contents Deposits June 30, December 31, Change 2026 2025 Dollars Percent Noninterest-bearing demand deposits $ 313,453 $ 313,022 $ 431 0.14 % Interest-bearing demand deposits 861,560 853,756 7,804 0.91 % Savings deposits 139,593 142,645 (3,052 ) (2.14 )% Time deposits 314,850 317,510 (2,660 ) (0.84 )% Total deposits $ 1,629,456 $ 1,626,933 $ 2,523 0.16 % 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 half of 2026, the Company implemented a treasury management suite for commercial and municipal deposit customers and a new account opening platform, 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. Of the Company’s non-municipal deposits, approximately 27% are uninsured. Capital Resources June 30, December 31, Change 2026 2025 Dollars Percent Common stock and additional paid in capital $ 22,149 $ 22,024 $ 125 0.57 % Retained earnings 207,789 202,558 5,231 2.58 % Accumulated other comprehensive loss (37,707 ) (39,674 ) 1,967 4.96 % Total stockholders’ equity $ 192,231 $ 184,908 $ 7,323 3.96 % The increase in stockholders’ equity reflects an improvement in the unrealized losses on securities available for sale, primarily due to the sale of securities discussed previously, and net income during the period. 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 $5 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 tables: June 30, 2026 December 31, 2025 Regulatory Capital Minimum Ratios Regulatory Capital Minimum Ratios with Capital Conservation Buffer Common Equity Tier I Capital Ratio 16.52 % 16.16 % 4.50 % 7.00 % Tier I Capital Ratio 16.52 % 16.16 % 6.00 % 8.50 % Total Capital Ratio 17.38 % 17.02 % 8.00 % 10.50 % Leverage Ratio 10.54 % 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 June 30, 2026, the Company had $300,885 of borrowing capacity from the FHLB and the Company had $127,215 of available capacity at the Federal Reserve Bank discount window. As of June 30, 2026, the Company did not have purchased deposits, discount window borrowings or short-term borrowings. 42 Table of Contents The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters. Portions of the securities portfolio are pledged to meet state requirements for public funds deposits. Discount window borrowings also require pledged securities. Increased/decreased liquidity from public funds deposits or discount window borrowings results in increased/decreased liquidity from pledging requirements. The Company monitors public funds pledging requirements and unpledged available for sale securities accessible for liquidity needs. Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve Bank discount window. As of June 30, 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 June 30, 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 June 30, 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 June 30, 2026, the loan to deposit ratio was 62.27%. 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 June 30, 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 June 30, 2026, the Company has no material commitments for long-term debt 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 payments to facilitate customer purchases and performance letters of credit that guarantee payment if the customer fails to complete 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. 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 June 30, 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 June 30, 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 June 30, 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. 43 Table of Contents 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.