NATIONAL BANKSHARES INC 10-Q

nksh20230630_10q.htm     Table of Contents   UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.   20549   FORM 10-Q   ☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 ( d )  OF THE SECURITIES EXCHANGE ACT   OF 1934 For the quarterly period ended June 30, 2023 ☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 ( d )  OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________   Commission File Number 0-15204 NATIONAL BANKSHARES, INC. (Exact name of registrant as specified in its charter)     Virginia (State or other jurisdiction of incorporation or organization) 54-1375874 (I.R.S. Employer Identification No.)   101 Hubbard Street Blacksburg , Virginia 24062-9002 (Address of principal executive offices) (Zip Code)   ( 540 ) 951-6300 (Registrant’s telephone number, including area code)   (Not applicable) (Former name, former address and former fiscal year, if changed since last report)   Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $1.25 per share NKSH Nasdaq Capital Market   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒ Yes    ☐ No   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes    ☐ No   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.   Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer  ☒ Smaller reporting company  ☒ Emerging growth company  ☐                          If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒   Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.   Outstanding shares of common stock at August 9, 2023 5,891,739     Table of Contents       NATIONAL BANKSHARES, INC. Form 10-Q Index   Part I –  Financial Information Page       Item 1 Financial Statements 3         Consolidated Balance Sheets, June 30, 2023 (Unaudited) and December 31, 202 2 3         Consolidated Statements of Income for the Three Months Ended June 30, 2023 and 2022 (Unaudited) 4         Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended June 30, 2023 and 2022 (Unaudited) 5         Consolidated Statements of Income for the Six Months Ended June 30, 2023 and 2022 (Unaudited) 6         Consolidated Statements of Comprehensive Income (Loss) for the Six Months Ended June 30, 2023 and 2022 (Unaudited) 7         Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended June 30, 2023 and 2022 (Unaudited) 8         Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2023 and 2022 (Unaudited) 8         Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 (Unaudited) 9         Notes to Consolidated Financial Statements (Unaudited) 11       Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 33       Item 3 Quantitative and Qualitative Disclosures About Market Risk 47       Item 4 Controls and Procedures 47       Part II –  Other Information         Item 1 Legal Proceedings 47       Item 1A Risk Factors 48       Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 48       Item 3 Defaults Upon Senior Securities 48       Item 4 Mine Safety Disclosures 48       Item 5 Other Information 48       Item 6 Exhibits 48       Signatures 49   2 Table of Contents       Part I Item 1. Financial Statements Financial Information   National Bankshares, Inc. Consolidated Balance Sheets       (Unaudited)               June 30,     December 31,   (in thousands, except share and per share data)   2023     2022   Assets                 Cash and due from banks   $ 14,815     $ 12,403   Interest-bearing deposits     55,241       59,026   Securities available for sale, at fair value     614,178       656,852   Restricted stock, at cost     929       941   Loans:                 Loans, net of unearned income and deferred fees and costs     846,541       852,744   Less allowance for credit losses     ( 10,626 )     ( 8,225 ) Loans, net     835,915       844,519   Premises and equipment, net     11,044       10,371   Accrued interest receivable     5,718       6,001   Other real estate owned, net     662       662   Goodwill     5,848       5,848   Bank-owned life insurance     43,081       43,312   Other assets     38,110       37,616   Total assets   $ 1,625,541     $ 1,677,551                     Liabilities and Stockholders' Equity                 Noninterest-bearing demand deposits   $ 300,713     $ 327,713   Interest-bearing demand deposits     841,382       933,269   Savings deposits     197,958       214,114   Time deposits     146,979       67,629   Total deposits     1,487,032       1,542,725   Accrued interest payable     260       106   Other liabilities     9,805       12,033   Total liabilities     1,497,097       1,554,864   Commitments and contingencies                 Stockholders' Equity                 Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding     -       -   Common stock of $1.25 par value and additional paid in capital. Authorized 10,000,000 shares; issued and outstanding 5,891,739 (including 2,052 unvested) shares at June 30, 2023 and 5,889,687 at December 31, 2022     7,367       7,362   Retained earnings     195,320       199,091   Accumulated other comprehensive loss, net     ( 74,243 )     ( 83,766 ) Total stockholders' equity     128,444       122,687   Total liabilities and stockholders' equity   $ 1,625,541     $ 1,677,551     See accompanying notes to consolidated financial statements.   3 Table of Contents       National Bankshares, Inc. Consolidated Statements of Income (Unaudited)       Three Months Ended June 30,   (in thousands, except share and per share data)   2023     2022   Interest Income                 Interest and fees on loans   $ 9,644     $ 8,324   Interest on interest-bearing deposits     540       202   Interest on securities – taxable     4,066       2,949   Interest on securities – nontaxable     347       447   Total interest income     14,597       11,922                     Interest Expense                 Interest on time deposits     1,054       37   Interest on other deposits     4,314       610   Interest on borrowings     12       -   Total interest expense     5,380       647   Net interest income     9,217       11,275   Provision for credit losses     10       310   Net interest income after provision for credit losses     9,207       10,965                     Noninterest Income                 Service charges on deposit accounts     637       603   Other service charges and fees     49       51   Credit and debit card fees, net     414       535   Trust income     481       439   BOLI income     1,279       241   Gain on sale of investment     2,971       -   Gain on sale of mortgage loans     55       35   Loss on sale of securities     ( 3,344 )     -   Other income     249       208   Total noninterest income     2,791       2,112                     Noninterest Expense                 Salaries and employee benefits     4,465       4,011   Occupancy, furniture and fixtures     411       464   Data processing and ATM     879       793   FDIC assessment     254       111   Net costs of other real estate owned     4       -   Franchise taxes     358       371   Professional services     551       214   Other operating expenses     635       347   Total noninterest expense     7,557       6,311   Income before income taxes     4,441       6,766   Income tax expense     540       1,192   Net Income   $ 3,901     $ 5,574   Basic net income per common share   $ 0.66     $ 0.93   Diluted net income per common share   $ 0.66     $ 0.93   Weighted average number of common shares outstanding, basic     5,889,687       6,004,425   Weighted average number of common shares outstanding, diluted     5,890,048       6,004,425   Dividends declared per common share   $ 0.73     $ 0.72     See accompanying notes to consolidated financial statements.   4 Table of Contents       National Bankshares, Inc. Consolidated Statements of Comprehensive Income (Loss) Three Months Ended June 30, 2023 and 2022 (Unaudited)       June 30,   (in thousands)   2023     2022   Net Income   $ 3,901     $ 5,574                     Other Comprehensive Loss, Net of Tax                 Unrealized holding loss on available for sale securities net of tax of ($ 1,289 ) and ($ 6,617 ) for the periods ended June 30, 2023 and June 30, 2022, respectively     ( 4,848 )     ( 24,893 ) Reclassification adjustment for loss included in net income, net of tax of ($ 702 ) in 2023     2,642       -   Other comprehensive loss, net of tax     ( 2,206 )     ( 24,893 ) Total Comprehensive Income (Loss)   $ 1,695     $ ( 19,319 )   See accompanying notes to consolidated financial statements.   5 Table of Contents       National Bankshares, Inc. Consolidated Statements of Income (Unaudited)       Six Months Ended June 30,   (in thousands, except share and per share data)   2023     2022   Interest Income                 Interest and fees on loans   $ 18,977     $ 16,424   Interest on interest-bearing deposits     768       251   Interest on securities – taxable     8,184       5,422   Interest on securities – nontaxable     712       875   Total interest income     28,641       22,972                     Interest Expense                 Interest on time deposits     1,413       74   Interest on other deposits     6,768       1,228   Interest on borrowings     297       -   Total interest expense     8,478       1,302   Net interest income     20,163       21,670   Provision for credit losses     12       444   Net interest income after provision for credit losses     20,151       21,226                     Noninterest Income                 Service charges on deposit accounts     1,229       1,165   Other service charges and fees     102       106   Credit and debit card fees, net     881       975   Trust income     926       882   BOLI income     1,518       479   Gain on sale of investment     2,971       -   Gain on sale of mortgage loans     71       96   Loss on sale of securities     ( 3,332 )     -   Other income     624       700   Total noninterest income     4,990       4,403                     Noninterest Expense                 Salaries and employee benefits     8,899       7,989   Occupancy, furniture and fixtures     953       956   Data processing and ATM     1,752       1,580   FDIC assessment     371       222   Net costs of other real estate owned     15       10   Franchise taxes     733       733   Professional services     1,304       439   Other operating expenses     1,194       995   Total noninterest expense     15,221       12,924   Income before income taxes     9,920       12,705   Income tax expense     1,488       2,245   Net Income   $ 8,432     $ 10,460   Basic net income per common share   $ 1.43     $ 1.74   Fully diluted net income per common share   $ 1.43     $ 1.74   Weighted average number of common shares outstanding, basic     5,889,687       6,025,709   Weighted average number of common shares outstanding, diluted     5,889,868       6,025,709   Dividends declared per common share   $ 1.73     $ 0.72     6 Table of Contents       National Bankshares, Inc. Consolidated Statements of Comprehensive Income (Loss) Six Months Ended June 30, 2023 and 2022 (Unaudited)       June 30,   (in thousands)   2023     2022   Net Income   $ 8,432     $ 10,460                     Other Comprehensive Income (Loss), Net of Tax                 Unrealized holding gain (loss) on available for sale securities net of tax of $ 1,831 and ($ 15,609 ) for the periods ended June 30, 2023 and June 30, 2022, respectively     6,891       ( 58,719 ) Reclassification adjustment for loss included in net income, net of tax of $ 700 in 2023     2,632       -   Other comprehensive income (loss), net of tax     9,523       ( 58,719 ) Total Comprehensive Income (Loss)   $ 17,955     $ ( 48,259 )   See accompanying notes to consolidated financial statements.   7 Table of Contents       National Bankshares, Inc. Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) Three Months Ended June 30, 2023 and 2022   (in thousands except per share and share data)   Common Stock and Additional Paid-in Capital     Retained Earnings     Accumulated Other Comprehensive Loss     Total   Balances at March 31, 2022   $ 7,528     $ 191,645     $ ( 37,884 )   $ 161,289   Net income     -       5,574       -       5,574   Common stock repurchased, 41,977 shares     ( 52 )     ( 1,354 )     -       ( 1,406 ) Cash dividends of $ 0.72 per share     -       ( 4,324 )     -       ( 4,324 ) Other comprehensive loss, net of tax of ($ 6,617 )     -       -       ( 24,893 )     ( 24,893 ) Balances at June 30, 2022   $ 7,476     $ 191,541     $ ( 62,777 )   $ 136,240                                     Balances at March 31, 2023   $ 7,362     $ 195,718     $ ( 72,037 )   $ 131,043   Net income     -       3,901       -       3,901   Cash dividends of $ 0.73 per share     -       ( 4,299 )     -       ( 4,299 ) Other comprehensive loss, net of tax of ($ 587 )     -       -       ( 2,206 )     ( 2,206 ) Stock based compensation     5       -       -       5   Balances at June 30, 2023   $ 7,367     $ 195,320     $ ( 74,243 )   $ 128,444     See accompanying notes to consolidated financial statements.     Six Months Ended June 30, 2023 and 2022   (in thousands except per share and share data)   Common Stock and Additional Paid-in Capital     Retained Earnings     Accumulated Other Comprehensive Loss     Total   Balances at December 31, 2021   $ 7,580     $ 188,229     $ ( 4,058 )   $ 191,751   Net income     -       10,460       -       10,460   Common stock repurchased, 83,162 shares     ( 104 )     ( 2,824 )     -       ( 2,928 ) Cash dividends of $ 0.72 per share     -       ( 4,324 )     -       ( 4,324 ) Other comprehensive loss, net of tax of ($ 15,609 )     -       -       ( 58,719 )     ( 58,719 ) Balances at June 30, 2022   $ 7,476     $ 191,541     $ ( 62,777 )   $ 136,240                                     Balances at December 31, 2022   $ 7,362     $ 199,091     $ ( 83,766 )   $ 122,687   Adoption of ASU 2016-13     -       ( 2,014 )     -       ( 2,014 ) Net income     -       8,432       -       8,432   Cash dividends of $ 1.73 per share     -       ( 10,189 )     -       ( 10,189 ) Other comprehensive income, net of tax of $ 2,531     -       -       9,523       9,523   Stock based compensation     5       -       -       5   Balances at June 30, 2023   $ 7,367     $ 195,320     $ ( 74,243 )   $ 128,444     See accompanying notes to the consolidated financial statements.   8 Table of Contents       National Bankshares, Inc. Consolidated Statements of Cash Flows Six Months Ended June 30, 2023 and 2022 (Unaudited)       June 30,     June 30,   (in thousands)   2023     2022   Cash Flows from Operating Activities                 Net income   $ 8,432     $ 10,460   Adjustments to reconcile net income to net cash provided by operating activities:                 Provision for credit losses     12       444   Depreciation of bank premises and equipment     338       298   Amortization of premiums and accretion of discounts, net     524       660   Loss on sales of securities available for sale, net     3,332       -   Loss on sales of repossessed assets     5       -   Increase in cash value of bank-owned life insurance     ( 481 )     ( 479 ) Gain on BOLI settlement     ( 1,037 )     -   Origination of mortgage loans held for sale     ( 5,251 )     ( 4,342 ) Proceeds from sale of mortgage loans held for sale     5,322       4,565   Gain on sale of mortgage loans held for sale     ( 71 )     ( 96 ) Equity based compensation expense     5       -   Net change in:                 Accrued interest receivable     283       ( 402 ) Other assets     ( 748 )     ( 741 ) Accrued interest payable     154       ( 2 ) Other liabilities     ( 2,435 )     ( 317 ) Net cash provided by operating activities     8,384       10,048                     Cash Flows from Investing Activities                 Proceeds from calls, principal payments, sales and maturities of securities available for sale     50,872       24,182   Purchase of securities available for sale     -       ( 95,341 ) Net change in restricted stock     12       ( 96 ) Purchase of loan participations     ( 3,630 )     ( 10,801 ) Collection of loan participations     5,146       4,437   Loan originations and principal collections, net     4,520       ( 39,337 ) Proceeds from sale of repossessed assets     9       -   Recoveries on loans charged off     207       86   Proceeds from sale and purchases of premises and equipment, net     ( 1,011 )     ( 349 ) Net cash provided by (used in) investing activities     56,125       ( 117,219 )                   Cash Flows from Financing Activities                 Net change in time deposits     79,350       1,997   Net change in other deposits     ( 135,043 )     81,247   Common stock repurchased     -       ( 2,928 ) Cash dividends paid     ( 10,189 )     ( 4,324 ) Net cash (used in) provided by financing activities     ( 65,882 )     75,992   Net change in cash and due from banks     ( 1,373 )     ( 31,179 ) Cash and due from banks at beginning of period     71,429       138,789   Cash and due from banks at end of period   $ 70,056     $ 107,610               (Continued)     9 Table of Contents     Supplemental Disclosures of Cash Flow Information                 Interest paid on deposits   $ 8,324     $ 1,304   Income taxes paid     3,847       2,184                     Supplemental Disclosure of Noncash Activities                 Loans charged against the allowance for credit losses   $ 160     $ 135   Loans transferred to repossessed assets     7       -   Unrealized holding gain (loss) on securities available for sale     12,054       ( 74,328 ) Lease liabilities arising from obtaining right-of-use assets     -       25     See accompanying notes to consolidated financial statements.   10 Table of Contents     National Bankshares, Inc. Notes to Consolidated Financial Statements June 30, 2023 (Unaudited)   $ in thousands, except per share data     Note 1: General   The consolidated financial statements of National Bankshares, Inc. (“NBI”) and its wholly-owned subsidiaries, The National Bank of Blacksburg (the “Bank” or “NBB”) and National Bankshares Financial Services, Inc. (“NBFS”) (collectively, the “Company”), conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of the Company’s management, all adjustments consisting of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial statements, have been included.  The results of operations for the three and six month periods ended June 30, 2023 are not necessarily indicative of results of operations for the full year or any other interim period.  The interim period consolidated financial statements and financial information included in this Form 10 -Q should be read in conjunction with the notes to consolidated financial statements included in the Company’s Annual Report on Form 10 -K for the year ended December 31, 2022 ( “2022 Form 10 -K”).  The Company posts all reports required to be filed under the Securities Exchange Act of 1934 on its web site at www.nationalbankshares.com.   Risks and Uncertainties The Company is closely monitoring risks that may impact its business, including high inflation, along with U.S. monetary policy maneuvers to reduce inflation. Inflation and U.S. monetary policy maneuvers to reduce it may impact the Company’s customers’ demand for banking services and ability to qualify for and/or repay loans. These risks could adversely affect the Company’s business, financial condition, results of operations, cash flows, credit risk, asset valuations and capital position.   Recent Accounting Pronouncements In July 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023 - 03, “Presentation of Financial Statements (Topic 205 ), Income Statement—Reporting Comprehensive Income (Topic 220 ), Distinguishing Liabilities from Equity (Topic 480 ), Equity (Topic 505 ), and Compensation—Stock Compensation (Topic 718 )”. This ASU amends the FASB Accounting Standards Codification for Securities and Exchange Commission (“SEC”) paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S- X: Income or Loss Applicable to Common Stock. ASU 2023 - 03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023 - 03 to have a material impact on its consolidated financial statements.   In March 2020, the FASB issued ASU  2020 - 04 “Reference Rate Reform (Topic 848 ): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the FASB issued ASU 2021 - 01 “Reference Rate Reform (Topic 848 ): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021 - 01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021 - 01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has a small number of participation loans that reference LIBOR. The Company is working with the primary banks to determine appropriate actions.   11 Table of Contents     In December 2022, the FASB issued ASU 2022 - 06, “Reference Rate Reform (Topic 848 ): Deferral of the Sunset Date of Topic 848”. ASU 2022 - 06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when LIBOR would cease being published. In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of LIBOR to June 30, 2023. To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective for all entities upon issuance. The Company is assessing ASU 2022 - 06 and its impact on the Company’s transition away from LIBOR.   In June 2022, the FASB issued ASU 2022 - 03, “Fair Value Measurement (Topic 820 ): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022 - 03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022 - 03 to have a material impact on its consolidated financial statements.   Recently Adopted Accounting Standards ASU 2016 - 13 On January 1, 2023, the Company adopted ASU 2016 - 13 “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments” and related ASUs. Prior to adoption, the Company followed applicable GAAP and used an incurred loss model to estimate an allowance for loan losses and a liability for credit risk on unfunded commitments. The Company also used a methodology to determine whether securities in an unrealized loss position were other-than-temporarily impaired and whether credit risk was present. ASU 2016 - 13 makes significant changes to the accounting for credit losses on financial instruments presented on an amortized cost basis and disclosures about them. The new current expected credit loss (“CECL”) impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers historical experience, current conditions and reasonable and supportable forecasts of future economic conditions. The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses. ASU 2016 - 13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard. The Company applied the standard’s provisions as a cumulative-effect adjustment of $ 2,014 , net of tax, to retained earnings as of January 1, 2023. On the adoption date, the allowance for credit losses (“ACL”) on loans increased from $ 8,225 to $ 10,567 and the ACL for unfunded commitments increased from $ 35 to $ 242 . Based upon the nature and characteristics of our securities portfolios (including issuer specific matters) at the adoption date, macroeconomic conditions and forecasts at that date, and other management judgments, adoption did not result in an ACL on securities available for sale. Results for reporting periods beginning after January 1, 2023 will be presented under Topic 326, while periods prior to January 1, 2023 will be reported in accordance with GAAP applicable for the time period. The following presents the Company’s policies governing determination of the ACL on its financial instruments.   ACL on Securities Available for Sale The Company evaluates securities available for sale that are in an unrealized loss position on the reporting date. Securities are analyzed to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit-related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the Consolidated Balance Sheets, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be subsequently reversed if conditions change. If the Company intends to sell an impaired security, or more likely than not will be required to sell such a security, before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis would be adjusted to fair value, there would be no ACL in this situation. In evaluating impairment, the Company considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’ financial condition, among other factors. If the Company determines a credit impairment, the ACL on securities available for sale would be established through a provision for credit losses on securities available for sale in the Consolidated Statements of Income. If the Company's management believes it has confirmed that the loss on a security is uncollectible, or when either of the criteria regarding intent or requirement to sell is met, the loss is charged against the ACL. Accrued interest receivable is excluded from the estimate of credit losses.   ACL on Loans (“ACLL”) The Company estimates the ACLL based on amortized cost basis, which is the amount at which the loan is originated, adjusted for net deferred fees or costs, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the measurement of the ACLL. Intrinsic to the Company’s policy on estimating the ACLL are policies regarding loan pools, nonaccruals, past due status, collateral valuation, charge-offs and risk ratings. Please refer to the Company’s 2022 Form 10 -K, Note 1: Summary of Significant Accounting Policies for additional information on these policies.   12 Table of Contents     The Company measures expected credit losses on loans on a collective (pool) basis, when the loans share similar risk characteristics, such as collateral type and intended use, repayment source, and (if applicable) the borrower’s business model. The Company has identified the following pools of loans with similar risk characteristics for measuring expected credit losses:     Real Estate Construction Construction, residential Construction, other   Consumer Real Estate Equity lines Residential closed-end first liens Residential closed-end junior liens Investor-owned residential real estate   Commercial Real Estate Multifamily real estate Commercial real estate, owner occupied Commercial real estate, other Commercial Non Real Estate Commercial and industrial   Public Sector and IDA Public sector and IDA   Consumer Non Real Estate Credit cards Automobile Other consumer loans   The Company’s methodologies for estimating the ACLL consider available relevant information about the collectability of cash flows, including historical losses, reasonable and supportable forecasts of economic conditions, and current economic and portfolio conditions. The difference between cash flow estimates and amortized cost is the ACLL.           The Company uses a discounted cash flow (“DCF”) method for all of its pools except for bankcards, which are measured using the historical loss rate adjusted for the forecast. For loans using the DCF method, cash flows are projected at the instrument level and discounted using the loan’s effective interest rate. Cash flows are generated using each loan’s payment attributes, adjusted for pool-level information on the probability of default (“PD”), loss given default and prepayment speeds. Default is defined as full or partial charge-off, nonaccrual status or past due 90 days or more. PDs for each pool are calculated using the Company’s historical data, modified by peer data, to ensure a full economic cycle is reflected in the estimate. PDs are then adjusted for the forecast. The Company designated national unemployment as its forecast variable. Multiple forecasts from reputable and independent third parties are sourced to inform the Company’s reasonable and supportable forecasting of current expected credit losses. The forecast is applied over a horizon selected by the Company's management at each reporting date, typically of one year and not to exceed two years, after which loss rates revert to long term historical loss experience on a straight line basis over a period determined by the Company's management, of up to three years. The forecast horizon and reversion period are applied consistently to the entire portfolio. The results of DCF calculations are modified by allocations for qualitative factors to account for changes in variables that may affect credit risk. The Company considers and allocates for changes in lending policies, management experience, economic conditions, loans past due, competitive, legal and regulatory environments and other factors. Qualitative factors are benchmarked to historical data and are adjusted based upon quantitative analysis. Loans that do not share risk characteristics are evaluated on an individual basis. The Company designates loans that have been determined to meet the regulatory definitions of “special mention” or “classified” (together known as “criticized”) as individually evaluated. The fair value of individually evaluated loans is measured using the fair value of collateral (“collateral method”) or the DCF method. The collateral method is applied to individually evaluated loans for which foreclosure is probable. The collateral method is also applied to individually evaluated loans when borrowers are experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral (“collateral dependent”). The ACLL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected to be from the operation of the collateral, the ACLL is calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected to be from the sale of the collateral, the ACLL is calculated as the amount by which the loan’s amortized cost basis exceeds the fair value of the underlying collateral less estimated cost to sell. The ACLL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan. The DCF method is applied to individually evaluated loans that do not meet the criteria for collateral method measurement. Cash flows are projected and discounted using the same method as for collectively evaluated loans, but the PD is increased to reflect increased risk, up to 100% for nonaccrual loans. Expected credit losses are reflected in the ACLL through a charge to provision for credit losses on the Consolidated Statements of Income. When the Company deems all or a portion of a loan to be uncollectible the appropriate amount is written off against the ACLL. The Company applies judgment to determine when a financial asset is deemed uncollectible; however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted. Subsequent recoveries, if any, are credited to the ACLL when received.   13 Table of Contents     ACL on Unfunded Commitments Financial instruments include off-balance sheet credit instruments such as undrawn portions of revolving lines of credit, commercial letters of credit, and loan commitments that have not yet been funded. The contractual amount of those instruments represents the Company’s exposure to credit loss in the event of nonperformance by the borrower. The Company records an ACL on unfunded commitments, unless the commitments to extend credit are unconditionally cancelable. The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the ACLL. The ACL on unfunded commitments is recorded as a liability on the Company’s Consolidated Balance Sheets, included in other liabilities, and is adjusted through the provision for credit loss expense in the Company’s Consolidated Statements of Income.   ASU 2022 - 02 On January 1, 2023, concurrent with its adoption of ASU 2016 - 13, the Company adopted ASU 2022 - 02, “Financial Instruments-Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures.” The amendments eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. Disclosures about periods prior to adoption will be presented under GAAP applicable for that period. Similar to its policy under previous GAAP, the Company continues to identify modifications to loans and to determine whether the borrower is experiencing financial difficulty. If the Company determines that the borrower is experiencing financial difficulty, the loan’s risk rating is evaluated to determine whether it falls within the regulatory definition of “criticized” and requires individual evaluation. Under previous GAAP, modifications to loans when the borrower was experiencing financial difficulty were designated as TDR and were individually evaluated for the duration of the loan. Under CECL, if a previously modified loan with financial difficulty is subsequently upgraded to a pass rating, it will no longer be individually evaluated.     Note 2: Loans and Allowance for Credit Losses   Loans   The following table presents the composition of the loan portfolio, excluding mortgage loans held for sale, as of the dates indicated.       June 30, 2023     December 31, 2022   Real estate construction   $ 56,984     $ 54,579   Consumer real estate     226,453       221,052   Commercial real estate     423,396       437,888   Commercial non real estate     56,079       57,652   Public sector and IDA     47,791       48,074   Consumer non real estate     36,236       33,948   Gross loans     846,939       853,193   Less unearned income and deferred fees and costs     ( 398 )     ( 449 ) Loans, net of unearned income and deferred fees and costs   $ 846,541     $ 852,744   Allowance for credit losses on loans     ( 10,626 )     ( 8,225 ) Total loans, net   $ 835,915     $ 844,519     Accrued interest receivable on loans, which is excluded from the amortized cost of loans, totaled $ 2,517  and $ 2,516  at June 30, 2023 and December  31, 2022, respectively.   14 Table of Contents     Past Due and Nonaccrual Loans   The following tables present the aging of past due loans, by loan pool, as of the dates indicated.       June 30, 2023       Accruing Current Loans     Accruing Loans 30 – 89 Days Past Due     Accruing Loans 90 or More Days Past Due     Nonaccrual Loans     Total Loans     Accruing and Nonaccrual 90 or More Days Past Due   Real Estate Construction                                                 Construction, 1-4 family residential   $ 14,094     $ -     $ -     $ -     $ 14,094     $ -   Construction, other     42,890       -       -       -       42,890       -   Consumer Real Estate                                                 Equity line     15,312       50       -       -       15,362       -   Residential closed-end first liens     123,820       527       7       87       124,441       94   Residential closed-end junior liens     4,085       -       -       -       4,085       -   Investor-owned residential real estate     82,243       322       -       -       82,565       -   Commercial Real Estate                                                 Multifamily residential real estate     131,192       -       -       -       131,192       -   Commercial real estate owner-occupied     115,752       146       -       2,446       118,344       242   Commercial real estate, other     173,860       -       -       -       173,860       -   Commercial Non Real Estate                                                 Commercial and industrial     55,517       19       1       542       56,079       1   Public Sector and IDA                                                 States and political subdivisions     47,791       -       -       -       47,791       -   Consumer Non-Real Estate                                                 Credit cards     4,637       6       10       -       4,653       10   Automobile     11,539       34       -       -       11,573       -   Other consumer loans     19,902       105       3       -       20,010       3   Total   $ 842,634     $ 1,209     $ 21     $ 3,075     $ 846,939     $ 350     15 Table of Contents         December 31, 2022       Accruing Current Loans     Accruing Loans 30 – 89 Days Past Due     Accruing Loans 90 or More Days Past Due     Nonaccrual Loans     Total Loans     Accruing and Nonaccrual 90 or More Days Past Due   Real Estate Construction                                                 Construction, 1-4 family residential   $ 12,538     $ -     $ -     $ -     $ 12,538     $ -   Construction, other     42,041       -       -       -       42,041       -   Consumer Real Estate                                                 Equity line     15,010       16       -       -       15,026       -   Residential closed-end first liens     121,807       750       -       91       122,648       91   Residential closed-end junior liens     2,446       -       -       -       2,446       -   Investor-owned residential real estate     80,524       408       -       -       80,932       -   Commercial Real Estate                                                 Multifamily residential real estate     127,312       -       -       -       127,312       -   Commercial real estate owner-occupied     126,640       -       -       2,493       129,133       252   Commercial real estate, other     181,443       -       -       -       181,443       -   Commercial Non Real Estate                                                 Commercial and industrial     57,373       16       -       263       57,652       -   Public Sector and IDA                                                 States and political subdivisions     48,074       -       -       -       48,074       -   Consumer Non-Real Estate                                                 Credit cards     4,592       3       2       -       4,597       2   Automobile     9,833       102       -       -       9,935       -   Other consumer loans     19,317       93       6       -       19,416       6   Total   $ 848,950     $ 1,388     $ 8     $ 2,847     $ 853,193     $ 351     The following table presents nonaccrual loans, by loan class, as of the dates indicated:       CECL     Incurred Loss       June 30, 2023     December 31, 2022       Nonaccrual Loans     Nonaccrual Loans       With No Allowance     With an Allowance     Total           Consumer Real Estate                                 Residential closed-end first liens   $ -     $ 87     $ 87     $ 91   Commercial Real Estate                                 Commercial real estate owner-occupied     -       2,446       2,446       2,493   Commercial Non Real Estate                                 Commercial and industrial     -       542       542       263   Total   $ -     $ 3,075     $ 3,075     $ 2,847     During the three and six months ended June 30, 2023, no accrued interest receivable was reversed against interest income.   16 Table of Contents     The following table presents certain past due indicators as of the dates indicated.       June 30,     December 31,       2023     2022     2022   Ratio of ACLL to nonaccrual loans     345.56 %     270.86 %     288.90 % Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees and costs     0.00 %     0.00 %     0.00 %   Allowance for Credit Losses on Loans   The following tables present the activity in the ACLL by portfolio segment for the periods indicated:       Activity in the Allowance for Credit Losses on Loans for the Six Months Ended June 30, 2023       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non Real Estate     Unallocated     Total   Balance, Dec. 31, 2022   $ 450     $ 2,199     $ 3,642     $ 930     $ 319     $ 506     $ 179     $ 8,225   Adoption of ASU 2016-13     ( 21 )     1,261       700       216       ( 15 )     72       129       2,342   Charge-offs     -       ( 17 )     -       ( 11 )     -       ( 132 )     -       ( 160 ) Recoveries     -       102       25       3       -       77       -       207   Provision for (recovery of) credit losses     47       ( 180 )     ( 26 )     78       ( 3 )     70       26       12   Balance, June 30, 2023   $ 476     $ 3,365     $ 4,341     $ 1,216     $ 301     $ 593     $ 334     $ 10,626         Activity in the Allowance for Loan Losses for the Six Months Ended June 30, 2022       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non Real Estate     Unallocated     Total   Balance, Dec. 31, 2021   $ 422     $ 1,930     $ 3,121     $ 1,099     $ 297     $ 444     $ 361     $ 7,674   Charge-offs     -       -       -       ( 2 )     -       ( 133 )     -       ( 135 ) Recoveries     -       -       24       6       -       56       -       86   Provision for (recovery of) loan losses     285       189       325       ( 307 )     39       95       ( 182 )     444   Balance, June 30, 2022   $ 707     $ 2,119     $ 3,470     $ 796     $ 336     $ 462     $ 179     $ 8,069         Activity in the Allowance for Loan Losses for the Year Ended December 31, 2022       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non Real Estate     Unallocated     Total   Balance, Dec. 31, 2021   $ 422     $ 1,930     $ 3,121     $ 1,099     $ 297     $ 444     $ 361     $ 7,674   Charge-offs     -       ( 13 )     -       ( 2 )     -       ( 352 )     -       ( 367 ) Recoveries     -       29       49       11       -       123       -       212   Provision for (recovery of) loan losses     28       253       472       ( 178 )     22       291       ( 182 )     706   Balance, Dec. 31, 2022   $ 450     $ 2,199     $ 3,642     $ 930     $ 319     $ 506     $ 179     $ 8,225     17 Table of Contents     The following tables present information about the ACLL for individually evaluated loans and collectively evaluated loans by portfolio segment as of the dates indicated.       Allowance for Credit Losses on Loans as of June 30, 2023       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non Real Estate     Unallocated     Total   Individually evaluated   $ -     $ 80     $ 552     $ 307     $ -     $ 1     $ -     $ 940   Collectively evaluated     476       3,285       3,789       909       301       592       334       9,686   Total   $ 476     $ 3,365     $ 4,341     $ 1,216     $ 301     $ 593     $ 334     $ 10,626         Allowance for Loan Losses as of December 31, 2022       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non- Real Estate     Unallocated     Total   Individually evaluated   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -   Collectively evaluated     450       2,199       3,642       930       319       506       179       8,225   Total   $ 450     $ 2,199     $ 3,642     $ 930     $ 319     $ 506     $ 179     $ 8,225     The following tables present information about individually evaluated loans and collectively evaluated loans by portfolio segment as of the dates indicated.       Loans as of June 30, 2023       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non Real Estate     Total   Individually evaluated   $ 293     $ 1,029     $ 8,847     $ 548     $ -     $ 8     $ 10,725   Collectively evaluated     56,691       225,424       414,549       55,531       47,791       36,228       836,214   Total   $ 56,984     $ 226,453     $ 423,396     $ 56,079     $ 47,791     $ 36,236     $ 846,939         Loans as of December 31, 2022       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non- Real Estate     Total   Individually evaluated   $ -     $ 186     $ 2,583     $ 263     $ -     $ -     $ 3,032   Collectively evaluated     54,579       220,866       435,305       57,389       48,074       33,948       850,161   Total   $ 54,579     $ 221,052     $ 437,888     $ 57,652     $ 48,074     $ 33,948     $ 853,193     The following table presents ratios pertaining to the ACLL as of the dates and for the periods indicated.       As of and for the       Six Months Ended June 30,     Year Ended December 31,       2023     2022     2022   Ratio of ACLL to the end of period loans, net of unearned income and deferred fees and costs     1.26 %     0.95 %     0.96 % Ratio of net charge-offs (recoveries), annualized, to average loans, net of unearned income and deferred fees and costs     ( 0.01 )%     0.01 %     0.02 %   18 Table of Contents     In accordance with CECL, the Company identifies individually evaluated loans when their risk characteristics become different from their pool.  Under previous GAAP, the Company identified loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. When the Company determined that it was probable all principal and interest amounts due would not be collected in accordance with the contractual terms of the loan agreement, the loan was generally deemed impaired and individually evaluated. For further information on the impairment process under previous GAAP, please refer to the Company’s 2022 Form 10 -K. A summary of individually evaluated loans as of the date indicated follows.       Individually Evaluated Loans under Incurred Loss as of December 31, 2022       Principal Balance     Recorded Investment (1)     Recorded Investment (1) for Which There is No Related Allowance     Recorded Investment (1) for Which There is a Related Allowance     Related Allowance   Consumer Real Estate                                         Investor-owned residential real estate   $ 186     $ 186     $ 186     $ -     $ -   Commercial Real Estate                                         Commercial real estate, owner occupied     3,248       2,583       2,583       -       -   Commercial Non Real Estate                                         Commercial and industrial     285       263       263       -       -   Total   $ 3,719     $ 3,032     $ 3,032     $ -     $ -       ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   The following table shows the average recorded investment and interest income recognized for individually evaluated loans under the incurred loss model for the period indicated. Only classes with individually evaluated loans are presented.       For the Six Months Ended June 30, 2022       Average Recorded Investment (1)     Interest Income Recognized   Consumer Real Estate                 Investor-owned residential real estate   $ 189     $ 6   Commercial Real Estate                 Commercial real estate, owner occupied     2,626       3   Commercial real estate, other     2,719       34   Commercial Non-Real Estate                 Commercial and industrial     286       -   Total   $ 5,820     $ 43       ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   Collateral Dependent Loans   The Company reviews individually evaluated loans for collateral dependency. Collateral dependent loans are loans for which repayment is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Under ASU 2016 - 13, for collateral dependent loans, the Company has adopted the practical expedient to measure the allowance for credit losses based on the fair value of the collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan’s collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. As of June 30, 2023, one of the Company’s individually evaluated loans was considered collateral dependent.   The following table details the amortized cost of the collateral dependent loan as of the date indicated:       June 30, 2023   Consumer Real Estate       Residential closed-end first lien   $ 7   Total Loans   $ 7     Credit Quality   The Company categorizes loans by risk based on relevant information about the ability of borrowers to service their debt, including: collateral and financial information, historical payment experience, credit documentation and current economic trends, among other factors. At origination, each loan is assigned a risk rating. Ongoing analysis of the loan portfolio adjusts risk ratings on an individual loan basis to reflect updated information. General descriptions of risk ratings are as follows:   ● Pass: loans with acceptable credit quality are rated pass.   ● Special mention: loans with potential weaknesses due to challenging economic or financial conditions are rated special mention.   ● Classified: loans with well-defined weaknesses that heighten the risk of default are rated classified.   19 Table of Contents     The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated.       Term Loans Amortized Cost Basis by Origination Year                           Balance at June 30, 2023   Prior     2019     2020     2021     2022     2023     Revolving     Revolving Loans Converted  to Term     Total   Construction, residential                                                                         Pass   $ -     $ -     $ 233     $ 703     $ 4,294     $ 1,462     $ 7,402     $ -     $ 14,094   Classified     -       -       -       -       -       -       -       -       -   Total   $ -     $ -     $ 233     $ 703     $ 4,294     $ 1,462     $ 7,402     $ -     $ 14,094                                                                             Construction, other                                                                         Pass   $ 3,254     $ 1,201     $ 1,450     $ 24,570     $ 7,247     $ 3,560     $ 1,315     $ -     $ 42,597   Classified     -       -       -       293       -       -       -       -       293   Total   $ 3,254     $ 1,201     $ 1,450     $ 24,863     $ 7,247     $ 3,560     $ 1,315     $ -     $ 42,890                                                                             Equity lines                                                                         Pass   $ 55     $ -     $ -     $ -     $ -     $ -     $ 15,294     $ 13     $ 15,362   Classified     -       -       -       -       -       -       -       -       -   Total   $ 55     $ -     $ -     $ -     $ -     $ --     $ 15,294     $ 13     $ 15,362                                                                             Residential closed-end first liens                                                                   Pass   $ 34,228     $ 6,023     $ 14,971     $ 32,396     $ 29,086     $ 7,433     $ -     $ -     $ 124,137   Classified     304       -       -       -       -       -       -       -       304   Total   $ 34,532     $ 6,023     $ 14,971     $ 32,396     $ 29,086     $ 7,433     $ -     $ -     $ 124,441   YTD gross charge-offs   $ -     $ -     $ 17     $ -     $ -     $ -     $ -     $ -     $ 17                                                                             Residential closed-end junior liens                                                                   Pass   $ 1,847     $ 120     $ -     $ 178     $ 401     $ 1,539     $ -     $ -     $ 4,085   Classified     -       -       -       -       -       -       -       -       -   Total   $ 1,847     $ 120     $ -     $ 178     $ 401     $ 1,539     $ -     $ -     $ 4,085                                                                             Investor-owned residential real estate                                                                   Pass   $ 23,727     $ 5,308     $ 14,842     $ 20,230     $ 14,127     $ 2,210     $ 1,297     $ 99     $ 81,840   Classified     725       -       -       -       -       -       -       -       725   Total   $ 24,452     $ 5,308     $ 14,842     $ 20,230     $ 14,127     $ 2,210     $ 1,297     $ 99     $ 82,565                                                                             Multifamily residential real estate                                                                   Pass   $ 43,414     $ 1,839     $ 11,910     $ 41,134     $ 27,216     $ 5,679     $ -     $ -     $ 131,192   Classified     -       -       -       -       -       -       -       -       -   Total   $ 43,414     $ 1,839     $ 11,910     $ 41,134     $ 27,216     $ 5,679     $ -     $ -     $ 131,192                                                                             Commercial real estate, owner occupied                                                                   Pass   $ 45,878     $ 11,389     $ 23,909     $ 4,978     $ 16,843     $ 3,751     $ 2,749     $ -     $ 109,497   Special mention     6,396       -       -       -       -       -       -       -       6,396   Classified     2,451       -       -       -       -       -       -       -       2,451   Total   $ 54,725     $ 11,389     $ 23,909     $ 4,978     $ 16,843     $ 3,751     $ 2,749     $ -     $ 118,344                                                                             Commercial real estate, other                                                                   Pass   $ 71,694     $ 22,223     $ 19,489     $ 36,621     $ 22,906     $ 356     $ 571     $ -     $ 173,860   Classified     -       -       -       -       -       -       -       -       -   Total   $ 71,694     $ 22,223     $ 19,489     $ 36,621     $ 22,906     $ 356     $ 571     $ -     $ 173,860                                                                             Commercial and industrial                                                                         Pass   $ 6,519     $ 925     $ 9,708     $ 14,654     $ 7,935     $ 4,093     $ 11,697     $ -     $ 55,531   Classified     242       -       -       -       6       -       300       -       548   Total   $ 6,761     $ 925     $ 9,708     $ 14,654     $ 7,941     $ 4,093     $ 11,997     $ -     $ 56,079   YTD gross charge-offs   $ -     $ 11     $ -     $ -     $ -     $ -     $ -     $ -     $ 11                                                                             Public sector and IDA                                                                         Pass   $ 21,590     $ 33     $ 243     $ 18,259     $ 6,540     $ 1,126     $ -     $ -     $ 47,791   Classified     -       -       -       -       -       -       -       -       -   Total   $ 21,590     $ 33     $ 243     $ 18,259     $ 6,540     $ 1,126     $ -     $ -     $ 47,791                                                                             Credit cards                                                                         Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 4,653     $ -     $ 4,653   Classified     -       -       -       -       -       -       -       -       -   Total   $ -     $ -     $ -     $ -     $ -     $ -     $ 4,653     $ -     $ 4,653   YTD gross charge-offs   $ -     $ -     $ -     $ -     $ -     $ -     $ 19     $ -     $ 19                                                                             Automobile                                                                         Pass   $ 127     $ 397     $ 890     $ 2,153     $ 3,613     $ 4,385     $ -     $ -     $ 11,565   Classified     -       -       -       -       8       -       -       -       8   Total   $ 127     $ 397     $ 890     $ 2,153     $ 3,621     $ 4,385     $ -     $ -     $ 11,573   YTD gross charge-offs   $ -     $ -     $ -     $ 1     $ 31     $ -     $ -     $ -     $ 32                                                                             Other consumer                                                                         Pass   $ 150     $ 465     $ 1,118     $ 2,653     $ 7,773     $ 6,774     $ 1,077     $ -     $ 20,010   Classified     -       -       -       -       -       -       -       -       -   Total   $ 150     $ 465     $ 1,118     $ 2,653     $ 7,773     $ 6,774     $ 1,077     $ -     $ 20,010   YTD gross charge-offs   $ -     $ -     $ -     $ 17     $ 25     $ -     $ 39     $ -     $ 81                                                                             Total Loans                                                                         Pass   $ 252,483     $ 49,923     $ 98,763     $ 198,529     $ 147,981     $ 42,368     $ 46,055     $ 112     $ 836,214   Special Mention     6,396       -       -       -       -       -       -       -       6,396   Classified     3,722       -       -       293       14       -       300       -       4,329   Total   $ 262,601     $ 49,923     $ 98,763     $ 198,822     $ 147,995     $ 42,368     $ 46,355     $ 112     $ 846,939   YTD gross charge-offs   $ -     $ 11     $ 17     $ 18     $ 56     $ -     $ 58     $ -     $ 160     20 Table of Contents     The following table presents the recorded investment by loan pool and credit quality as of December 31, 2022.       December 31, 2022       Pass     Special Mention     Classified   Real Estate Construction                         Construction, 1-4 family residential   $ 12,538     $ -     $ -   Construction, other     41,741       -       300   Consumer Real Estate                         Equity lines     15,026       -       -   Residential closed-end first liens     122,187       -       461   Residential closed-end junior liens     2,446       -       -   Investor-owned residential real estate     80,143       -       603   Commercial Real Estate                         Multifamily residential real estate     127,312       -       -   Commercial real estate owner-occupied     126,550       -       -   Commercial real estate, other     181,443       -       -   Commercial Non Real Estate                         Commercial and industrial     57,381       -       8   Public Sector and IDA                         States and political subdivisions     48,074       -       -   Consumer Non-Real Estate                         Credit cards     4,597       -       -   Automobile     9,932       -       3   Other consumer     19,398       -       18   Total   $ 848,768     $ -     $ 1,393     Loan Modifications to Borrowers Experiencing Financial Difficulty   When the Company modifies a loan, an assessment is made to determine whether the borrower is experiencing financial difficulty. If the borrower is experiencing financial difficulty, the loan’s risk rating is evaluated and is typically changed to special mention or classified, which results in individual evaluation of the loan for the ACLL. The Company modified one loan to a borrower experiencing financial difficulty during the three and six month periods ended June 30, 2023. During the three and six month periods ended June 30, 2022, no loans were modified for borrowers experiencing financial difficulty.   The following table presents the amortized cost basis as of June 30, 2023 of the loan modified for a borrower experiencing financial difficulty.       Interest Only Payments     Amortized Cost Basis     % of Portfolio     Financial Effect Commercial Real Estate                     Commercial real estate owner-occupied   $ 6,396       5.40 %   6 months of interest only payments, after which remaining balance will be re-amortized to the contractual maturity date.   The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty. The commercial real estate owner-occupied loan is in current status as of June 30, 2023.   The Company analyzed its modified loan portfolio for loans that defaulted during the three and six month period ended June 30, 2023, and that were modified within 12 months prior to default. The Company designates three circumstances that indicate default: one or more payments that occur more than 90 days past the due date, charge-off, or foreclosure after the date of modification. Of the Company’s modifications at June 30, 2023, none of the defaulted modifications were modified within 12 months prior to default.   ACL on Unfunded Commitments   The following table presents the balance and activity in the ACL for unfunded commitments for the six months ended June 30, 2023:   Allowance for Credit Losses on Unfunded Commitments   Balance, December 31, 2022   $ 35   Adoption of ASU 2016-13     207   Recovery of credit losses     ( 9 ) Balance, June 30, 2023   $ 233     21 Table of Contents       Note 3: Securities   The amortized cost and estimated fair value of securities available for sale along with gross unrealized gains and losses as of the dates indicated are summarized as follows:       June 30, 2023       Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Allowance for Credit Losses     Fair Value   Available for Sale:                                         U.S. Treasuries   $ 994     $ -     $ 54     $ -     $ 940   U.S. Government agencies and corporations     353,788       -       48,887       -       304,901   States and political subdivisions     179,889       -       32,743       -       147,146   Mortgage-backed securities     164,015       -       8,427       -       155,588   Corporate debt securities     6,503       -       900       -       5,603   Total securities available for sale   $ 705,189     $ -     $ 91,011     $ -     $ 614,178         December 31, 2022       Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair Value   Available for Sale:                                 U.S. Treasuries   $ 992     $ -     $ 56     $ 936   U.S. Government agencies and corporations     391,538       39       55,002       336,575   States and political subdivisions     190,192       26       38,018       152,200   Mortgage-backed securities     170,694       22       9,239       161,477   Corporate debt securities     6,501       -       837       5,664   Total securities available for sale   $ 759,917     $ 87     $ 103,152     $ 656,852     No allowance for credit loss on securities available for sale was recorded as of June 30, 2023.   The deferred tax asset for the net unrealized loss on securities available for sale was $ 19,112 as of June 30, 2023 and $ 21,644 as of December 31, 2022. The deferred tax asset is included in other assets on the Consolidated Balance Sheets.   The amortized cost and fair value of single maturity securities available for sale at June 30, 2023, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities included in these totals are categorized by final maturity.       June 30, 2023       Amortized Cost     Fair Value   Available for Sale:                 Due in one year or less   $ 1,897     $ 1,868   Due after one year through five years     139,460       128,835   Due after five years through ten years     299,548       255,178   Due after ten years     264,284       228,297   Total securities available for sale   $ 705,189     $ 614,178     Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that the individual securities have been in a continuous loss position, as of the dates indicated, follows.   22 Table of Contents         June 30, 2023       Less Than 12 Months     12 Months or More       Fair Value     Unrealized Loss     Fair Value     Unrealized Loss   U.S. Treasuries   $ -     $ -     $ 940     $ 54   U.S. Government agencies and corporations     24,782       1,131       280,119       47,756   States and political subdivisions     2,070       35       144,831       32,708   Mortgage-backed securities     4,977       66       150,514       8,361   Corporate debt securities     -       -       5,603       900   Total available for sale securities   $ 31,829     $ 1,232     $ 582,007     $ 89,779         December 31, 2022       Less Than 12 Months     12 Months or More       Fair Value     Unrealized Loss     Fair Value     Unrealized Loss   U.S. Treasuries   $ 936     $ 56     $ -     $ -   U.S. Government agencies and corporations     144,574       12,699       190,950       42,303   States and political subdivisions     94,657       18,373       52,134       19,645   Mortgage-backed securities     144,198       7,326       15,165       1,913   Corporate debt securities     4,843       655       821       182   Total temporarily impaired securities   $ 389,208     $ 39,109     $ 259,070     $ 64,043     The Company evaluates securities available for sale that are in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to the extent to which the fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. At June 30, 2023, the Company had 578 securities with a fair value of $ 613,836 in an unrealized loss position. The Company does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the cost basis of the investments. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, the unrealized losses are attributed to noncredit-related factors, including changes in interest rates and other market conditions. No allowance for credit losses on securities available for sale was recorded as of June 30, 2023.   Restricted Stock. The Company holds restricted stock that is reported separately from available for sale securities. As a member of the Federal Reserve and the Federal Home Loan Bank of Atlanta (“FHLB”), NBB is required to maintain certain minimum investments in the common stock of those entities. Required levels of investment are based upon NBB’s capital and a percentage of qualifying assets. The Company purchases stock from or sells stock back to the correspondents based on their calculations. The stock is held by member institutions only and is not actively traded. Redemption of FHLB stock is subject to certain limitations and conditions. At its discretion, the FHLB may declare dividends on the stock. In addition to dividends, NBB also benefits from its membership with FHLB through eligibility to borrow from the FHLB, using as collateral NBB’s capital stock investment in the FHLB and qualifying NBB real estate mortgage loans totaling $ 633,617 at June 30, 2023. Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at June 30, 2023, did not determine any impairment.   Realized Securities Gains and Losses During the three months ended June 30, 2023, the Company strategically selected and sold securities with an amortized cost basis of $ 28,863 and realized a loss on the sale of $ 3,344 . Additionally, during the three months ended March 31, 2023, the Company sold securities with an amortized cost basis of $ 17,987 and recognized a net gain of $ 12 . The strategy for both sales prioritized enhancement of long-term earnings. Though not a primary objective, proceeds from the sales also bolstered liquidity. There were no sales of securities during 2022.   23 Table of Contents       Note 4: Defined Benefit Plan             The following tables present components of Net Periodic Benefit Cost for the periods indicated:       Pension Benefits       Three Months Ended June 30,       2023     2022   Service cost   $ 203     $ 324   Interest cost     273       204   Expected return on plan assets     ( 518 )     ( 629 ) Amortization of prior service cost     -       -   Recognized net actuarial loss     17       110   Net periodic benefit (income) cost   $ ( 25 )   $ 9         Pension Benefits       Six Months Ended June 30,       2023     2022   Service cost   $ 406     $ 648   Interest cost     546       408   Expected return on plan assets     ( 1,036 )     ( 1,258 ) Amortization of prior service cost     -       -   Recognized net actuarial loss     34       220   Net periodic benefit (income) cost   $ ( 50 )   $ 18     The service cost component of net periodic benefit cost is included in salaries and employee benefits expense in the Consolidated Statements of Income. All other components are included in other noninterest expense in the Consolidated Statements of Income. No contributions to the defined benefit plan have been made during 2023.     Note 5: Fair Value Measurements   Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of the observable inputs and minimize the use of the unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:   Level 1 –  Valuation is based on quoted prices in active markets for identical assets and liabilities.   Level 2 – Valuation is based on observable inputs including:   ● quoted prices in active markets for similar assets and liabilities,   ● quoted prices for identical or similar assets and liabilities in less active markets,   ● inputs other than quoted prices that are observable, and   ● model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.   Level 3 –  Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.   Fair value is best determined by quoted market prices. However, in cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from disclosure requirements. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:   24 Table of Contents     Financial Instruments Measured at Fair Value on a Recurring Basis   Securities Available for Sale Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1 ). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2 ). The carrying value of restricted Federal Reserve Bank of Richmond and FHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following tables. The following tables present the balances of financial assets measured at fair value on a recurring basis as of the dates indicated.   June 30, 2023           Fair Value Measurements Using   Description   Balance     Level 1     Level 2     Level 3   U.S. Treasuries   $ 940     $ -     $ 940     $ -   U.S. Government agencies and corporations     304,901       -       304,901       -   States and political subdivisions     147,146       -       147,146       -   Mortgage-backed securities     155,588       -       155,588       -   Corporate debt securities     5,603       -       5,603       -   Total securities available for sale   $ 614,178     $ -     $ 614,178     $ -     December 31, 2022           Fair Value Measurements Using   Description   Balance     Level 1     Level 2     Level 3   U.S. Treasuries   $ 936     $ -     $ 936     $ -   U.S. Government agencies and corporations     336,575       -       336,575       -   States and political subdivisions     152,200       -       152,200       -   Mortgage-backed securities     161,477       -       161,477       -   Corporate debt securities     5,664       -       5,664       -   Total securities available for sale   $ 656,852     $ -     $ 656,852     $ -     The Company’s securities portfolio is valued using Level 2 inputs. The Company relies on an independent third party vendor to provide market valuations. The inputs used to determine value include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two -sided markets, benchmark securities, bids, offers and reference data including market research publications. The third party vendor also monitors market indicators, industry activity and economic events as part of the valuation process. Central to the final valuation is the assumption that the indicators used are representative of the fair value of securities held within the Company’s portfolio. Level 2 inputs are subject to a certain degree of uncertainty and changes in these assumptions or methodologies in the future, if any, may impact securities fair value, deferred tax assets or liabilities, or expense.   Interest Rate Loan Contracts and Forward Contracts The Company originates consumer real estate loans which it intends to sell to a correspondent lender. Interest rate loan contracts and forward contracts result from originating loans held for sale and are derivatives reported at fair value. The Company enters interest rate lock commitments with customers who apply for a loan which the Company intends to sell to a correspondent lender. The interest rate loan contract ends when the loan closes or the customer withdraws their application. Fair value of the interest rate loan contract is based upon the correspondent lender’s pricing quotes at the report date. Fair value is adjusted for the estimated probability of the loan closing with the borrower. At the time the Company enters into an interest rate loan contract with a customer, it also enters into a best efforts forward sales commitment with the correspondent lender. If the loan has been closed and funded, the best efforts commitment converts to a mandatory forward sales commitment. Fair value is based on the gain or loss that would occur if the Company were to pair-off the transaction with the investor at the measurement date. This is a Level 3 input. The Company has elected to measure and report best efforts commitments at fair value. Interest rate loan contracts and forward contracts are valued based on quotes from the correspondent lender at the reporting date. Pricing changes daily and if a loan has not been sold to the correspondent by the next reporting date, the fair value may be different from that reported currently. Changes in fair value measurement impacts net income.   25 Table of Contents     At December 31, 2022, there were no interest rate loan contracts or forward contracts. The following table presents the Company’s interest rate loan contracts and forward contracts as of June 30, 2023:   June 30, 2023           Fair Value Measurements Using   Description   Balance     Level 1     Level 2     Level 3   Interest rate loan contracts   $ 1     $ -     $ -     $ 1   Forward contracts     ( 1 )     -       -       ( 1 )   June 30, 2023 Valuation Technique Unobservable Input   Range (Weighted Average)   Interest rate loan contracts Market approach Pull-through rate     100.00%   Forward contracts Market approach Pull-through rate     100.00%   Interest rate loan contracts Market approach Current reference price     100.87 %   Forward contracts Market approach Current reference price     100.87 %     Financial Instruments Measured at Fair Value on a Non-Recurring Basis Certain financial instruments are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the consolidated financial statements.   Loans Held for Sale Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of one -to- four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2 ). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale at June 30, 2023 or December 31, 2022.   Collateral Dependent Loans Loans the Company has identified as collateral dependent that do not share risk characteristics are individually evaluated on a non-recurring basis. For collateral dependent loans, the ACL is measured as the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. When repayment is expected from the operation of the collateral, credit losses are estimated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral. When repayment is expected from the sale of the collateral, credit losses are measured as the amount by which the amortized costs basis of the loan exceeds the fair value of the underlying collateral less estimated cost to sell. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset. For real estate loans, fair value of collateral is determined by the “as-is” value of appraisals that are less than 24 months of age and are prepared by independent, licensed appraisers. Appraisals are based upon observable market data analyzed through an income or sales valuation approach, and adjusted by estimated selling costs. Valuation falls within Level 2 categorization. The Company may further discount appraisals for marketing strategies, which results in Level 3 categorization. The value of business equipment is based upon an outside appraisal (Level 2 ) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3 ) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3 ). As of June 30, 2023, one consumer real estate loan with a balance of $ 7 was collateral dependent. The valuation was based upon a third party evaluation (Level 2 ) and did not result in a specific allocation. As of December 31, 2022, measurement of the Company’s impaired loans did not result in any specific allocations.   Other Real Estate Owned ( “ OREO ” ) Certain assets such as OREO are measured at fair value less cost to sell. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. The Company works with a realtor to determine the list price, which may be set at appraised value or at a different amount based on the realtor’s advice and management’s judgement of marketability. Discounts to appraisals for selling costs or for marketability result in a Level 3 estimate.   26 Table of Contents     The following table summarizes the Company’s OREO that was measured at fair value on a nonrecurring basis as of the dates indicated.   Date Description   Balance     Level 1     Level 2     Level 3   June 30, 2023 OREO, net of valuation allowance   $ 662     $ -     $ -     $ 662   December 31, 2022 OREO, net of valuation allowance     662       -       -       662     The following table presents information about OREO and Level 3 Fair Value Measurements as of the dates indicated.   Date Valuation Technique Unobservable Input   Range (Weighted Average)   June 30, 2023 Discounted appraised value Selling cost     7.00%   June 30, 2023 Discounted appraised value Discount for lack of marketability     34.72%                 December 31, 2022 Discounted appraised value Selling cost     7.00%   December 31, 2022 Discounted appraised value Discount for lack of marketability     34.72%     At June 30, 2023 and December 31, 2022, the Company held a single OREO property, measured using appraised value, discounted for marketability and selling cost. During 2022, the Company reduced the list price as part of a marketing strategy and recorded an additional discount for marketability. There is uncertainty in determining discounts to appraised value. If the final sale price is different from the list price, the amount of selling costs will also be different from those estimated. Future changes to marketability assumptions or updated appraisals may indicate a lower fair value, with a corresponding impact to net income. Ultimate proceeds from the sale of OREO property may be less than the estimated fair value, reducing net income.   Fair Value Summary The following presents the recorded amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of the dates indicated. Fair values are estimated using the exit price notion.       June 30, 2023       Recorded Amount     Level 1     Level 2     Level 3   Financial Assets:                                 Cash and due from banks   $ 14,815     $ 14,815     $ -     $ -   Interest-bearing deposits     55,241       55,241       -       -   Securities available for sale, at fair value     614,178       -       614,178       -   Restricted securities     929       -       929       -   Loans, net     835,915       -       -       785,779   Accrued interest receivable     5,718       -       5,718       -   Bank-owned life insurance     43,081       -       43,081       -   Interest rate loan contracts     1       -       -       1   Financial Liabilities:                                 Deposits   $ 1,487,032     $ -     $ 1,340,053     $ 145,244   Accrued interest payable     260       -       260       -   Forward loan contracts     1       -       -       1     27 Table of Contents         December 31, 2022       Recorded Amount     Level 1     Level 2     Level 3   Financial Assets:                                 Cash and due from banks   $ 12,403     $ 12,403     $ -     $ -   Interest-bearing deposits     59,026       59,026       -       -   Securities available for sale, at fair value     656,852       -       656,852       -   Restricted securities     941       -       941       -   Loans, net     844,519       -       -       781,749   Accrued interest receivable     6,001       -       6,001       -   Bank-owned life insurance     43,312       -       43,312       -   Financial Liabilities:                                 Deposits   $ 1,542,725     $ -     $ 1,475,096     $ 67,542   Accrued interest payable     106       -       106       -       Note 6: Components of Accumulated Other Comprehensive Loss   The following tables provide information about components of accumulated other comprehensive loss as of the dates indicated:       Net Unrealized Loss on Securities     Adjustments Related to Pension Benefits     Accumulated Other Comprehensive Loss   Balance at March 31, 2022   $ ( 30,972 )   $ ( 6,912 )   $ ( 37,884 ) Unrealized holding loss on available for sale securities, net of tax of ($ 6,617 )     ( 24,893 )     -       ( 24,893 ) Balance at June 30, 2022   $ ( 55,865 )   $ ( 6,912 )   $ ( 62,777 )                           Balance at March 31, 2023   $ ( 69,692 )   $ ( 2,345 )   $ ( 72,037 ) Unrealized holding loss on available for sale securities, net of tax of ($ 1,289 )     ( 4,848 )     -       ( 4,848 ) Reclassification adjustment, net of tax of $ 702     2,642       -       2,642   Balance at June 30, 2023   $ ( 71,898 )   $ ( 2,345 )   $ ( 74,243 )       Net Unrealized Gain (Loss) on Securities     Adjustments Related to Pension Benefits     Accumulated Other Comprehensive Loss   Balance at December 31, 2021   $ 2,854     $ ( 6,912 )   $ ( 4,058 ) Unrealized holding loss on available for sale securities, net of tax of ($ 15,609 )     ( 58,719 )     -       ( 58,719 ) Balance at June 30, 2022   $ ( 55,865 )   $ ( 6,912 )   $ ( 62,777 )                           Balance at December 31, 2022   $ ( 81,421 )   $ ( 2,345 )   $ ( 83,766 ) Unrealized holding gain on available for sale securities, net of tax of $ 1,831     6,891       -       6,891   Reclassification adjustment, net of tax of $ 700     2,632       -       2,632   Balance at June 30, 2023   $ ( 71,898 )   $ ( 2,345 )   $ ( 74,243 )     Note 7: Revenue Recognition   Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams such as service charges on deposit accounts, other service charges and fees, credit and debit card fees, trust income, and annuity and insurance commissions are recognized in accordance with Accounting Standards Codification ("ASC") Topic 606, “Revenue from Contracts with Customers”. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as financial guarantees, derivatives, and certain credit card fees are outside the scope of the guidance. Noninterest revenue streams within the scope of Topic 606 are discussed below.    28 Table of Contents     Service Charges on Deposit Accounts Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, ATM fees, wire transfer fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Wire transfer fees, overdraft and nonsufficient funds fees and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.   Other Service Charges and Fees Other service charges include safe deposit box rental fees, check ordering charges, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Check ordering charges are transactional based, and therefore the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.   Credit and Debit Card Fees Credit and debit card fees are primarily comprised of interchange fee income and merchant services income. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa and MasterCard. Merchant services income mainly represents commission fees based upon merchant processing volume. The Company’s performance obligation for interchange fee income and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. In compliance with Topic 606, credit and debit card fee income is presented net of associated expense.   Trust Income Trust income is primarily comprised of fees earned from the management and administration of trusts and estates and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Estate management fees are based upon the size of the estate. A partial fee is recognized half-way through the estate administration and the remainder of the fee is recognized when remaining assets are distributed and the estate is closed.   Insurance and Investment Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined.   OREO Gains and Losses The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.   29 Table of Contents     The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2023 and June 30, 2022.       Three Months Ended June 30,   Noninterest Income   2023     2022   In-scope of Topic 606:                 Service charges on deposit accounts   $ 637     $ 603   Other service charges and fees     49       51   Credit and debit card fees, net     414       535   Trust income     481       439   Insurance and Investment (included within Other Income on the Consolidated Statements of Income)     112       141   Noninterest Income (in-scope of Topic 606)   $ 1,693     $ 1,769   Noninterest Income (out-of-scope of Topic 606)     1,098       343   Total noninterest income   $ 2,791     $ 2,112         Six Months Ended June 30,   Noninterest Income   2023     2022   In-scope of Topic 606:                 Service charges on deposit accounts   $ 1,229     $ 1,165   Other service charges and fees     102       106   Credit and debit card fees, net     881       975   Trust income     926       882   Insurance and Investment (included within Other Income on the Consolidated Statements of Income)     397       348   Noninterest Income (in-scope of Topic 606)   $ 3,535     $ 3,476   Noninterest Income (out-of-scope of Topic 606)     1,455       927   Total noninterest income   $ 4,990     $ 4,403       Note 8: Leases The Company’s leases are recorded under ASC Topic 842, “Leases”. The Company examines its contracts to determine whether they are or contain a lease. A contract with a lease is further examined to determine whether the lease is a short-term, operating or finance lease. As permitted by ASC Topic 842, the Company elected not to capitalize short-term leases, defined by the standard as leases with terms of 12 months or less. The Company also elected the practical expedient not to separate non-lease components from lease components within a single contract. Right-of-use assets and lease liabilities are recognized for operating and finance leases. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease.    Lease payments Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred. Payments for leases with terms longer than 12 months are included in the determination of the lease liability. Payments may be fixed for the term of the lease or variable. Variable payments result when the lease agreement includes a clause providing for escalation of lease payments at specified dates. If the escalation factor is known, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability. If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability. One of the Company’s leases provides a known escalator that is included in the determination of the lease liability. The remaining leases do not have variable payments during the term of the lease.   30 Table of Contents     Options to Extend, Residual Value Guarantees, and Restrictions and Covenants Of the Company’s seven operating leases as of June 30, 2023, four leases offer the option to extend the lease term. Two of the leases have two options of five years each and one lease has two options of three years each. Another lease has one option to extend the term for an additional five years. The Company exercised a previous option to extend this lease in 2020. At the time of capitalization, the Company was not reasonably certain whether it would exercise the options and did not include the time period in the calculation of the lease liability. The lease agreements provide that the lease payment will increase at the exercise date based on the Consumer Price Index for All Urban Consumers (“CPI-U”). Because the CPI-U at the exercise date is unknown, the increase is not included in the cash flows determining the lease liability. None of the Company’s leases provide for residual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations. The contracts in which the Company is lessee are with parties external to the Company and not related parties.  The Company’s lease right of use asset is included in other assets and the lease liability is included in other liabilities.  The following tables present information about leases as of the dates and for the periods indicated:       June 30, 2023     December 31, 2022   Lease liability   $ 1,284     $ 1,444   Right-of-use asset   $ 1,255     $ 1,415   Weighted average remaining lease term (in years)     4.76       5.14   Weighted average discount rate     3.29 %     3.29 %       For the Three Months Ended June 30,   Lease Expense   2023     2022   Operating lease expense   $ 92     $ 78   Short-term lease expense     -       -   Total lease expense   $ 92     $ 78   Cash paid for amounts included in lease liabilities   $ 92     $ 78   Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period   $ -     $ -         For the Six Months Ended June 30,   Lease Expense   2023     2022   Operating lease expense   $ 184     $ 154   Short-term lease expense     1       1   Total lease expense   $ 185     $ 155   Cash paid for amounts included in lease liabilities   $ 186     $ 156   Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period   $ -     $ 25     The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability as of June 30, 2023:   Undiscounted Cash Flow for the Period   As of June 30, 2023   Twelve months ending June 30, 2024   $ 353   Twelve months ending June 30, 2025     320   Twelve months ending June 30, 2026     221   Twelve months ending June 30, 2027     195   Twelve months ending June 30, 2028     189   Thereafter     111   Total undiscounted cash flows   $ 1,389   Less: discount     ( 105 ) Lease liability   $ 1,284     The contracts in which the Company is lessee are not with related parties.   31 Table of Contents       Note 9: Stock Based Compensation   The Company’s 2023 Stock Incentive Plan (“the Plan”) was approved by shareholders at the annual shareholder’s meeting on May 9, 2023. The Plan provides for the grant of various forms of stock-based compensation awards that may be settled in, or based upon the value of, the Company’s common stock. The maximum number of shares available for issuance under the Plan is 120,000 shares.  For further information on the Plan, refer to the Company’s Proxy Statement filed with the SEC on March 10, 2023 and the Company’s S- 8 filed with the SEC on June 7, 2023.   Restricted Stock Awards Under the Plan, part of the June 2023 semi-annual retainer for non-employee directors was paid in restricted stock awards (“RSAs”). A summary of changes in the Company’s nonvested RSAs under the Plan for the three months ended June 30, 2023 follows:       Shares     Weighted-Average Grant-Date Fair Value   Nonvested at April 1, 2023     -     $  -   Granted     2,052       30.70   Nonvested at June 30, 2023     2,052     $  30.70     The RSAs have a one year vesting period. Expense for the RSAs will be recognized over the vesting period based on the fair value of the stock at the issue date. Stock based compensation expense charged against income was $ 5 for the three and six months ended June 30, 2023. As of June 30, 2023, expense of $ 58 related to the nonvested RSAs is expected to be recognized over the coming 11 months.     Note 10: Earnings Per Share   The factors used in the earnings per share computation for the periods indicated are presented below:       For the Three Months Ended June 30,       2023     2022   $ in thousands, except share and per share amounts   Net Income (Numerator)     Common Shares 1 (Denominator)     Per Share     Net Income (Numerator)     Common Shares 1 (Denominator)     Per Share   Basic earnings per share   $ 3,901       5,889,687     $ 0.66     $ 5,574       6,004,425     $ 0.93   Restricted stock awards:             361                       -           Diluted earnings per share   $ 3,901       5,890,048     $ 0.66     $ 5,574       6,004,425     $ 0.93         For the Six Months Ended June 30,       2023     2022   $ in thousands, except share and per share amounts   Net Income (Numerator)     Common Shares 1 (Denominator)     Per Share     Net Income (Numerator)     Common Shares 1 (Denominator)     Per Share   Basic earnings per share   $ 8,432       5,889,687     $ 1.43     $ 10,460       6,025,709     $ 1.74   Restricted stock awards:             181                       -           Diluted earnings per share   $ 8,432       5,889,868     $ 1.43     $ 10,460       6,025,709     $ 1.74       ( 1 ) Weighted average outstanding   32 Table of Contents     Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations $ in thousands, except per share data   The purpose of this discussion and analysis is to provide information about the financial condition and results of operations of the Company.  Please refer to the financial statements and other information included in this report as well as the Company’s 2022 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 loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals, and are based upon our management’s views and assumptions as of the date of this report.  The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements. These forward-looking statements are based upon or are affected by factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. These factors include, but are not limited to, effects of or changes in:   ● interest rates,   ● national 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, the Board of Governors of the Federal Reserve System (the "Federal Reserve"), the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation, 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,   ● the sufficiency of the Company's allowance for credit losses,   ● demand for loan products,   ● deposit flows, including impact on liquidity,   ● competition,   ● demand for financial services in the Company’s market,   ● the real estate market conditions in the Company’s market,   ● laws, regulations and policies impacting financial institutions,   ● adverse developments in the financial industry generally, such as the recent bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer behavior,   ● technological risks and developments, and cyber-threats, attacks or events,   ● the Company’s technology initiatives,   ● geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts,   ● the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events,   ● the Company's ability to identify, attract, and retain experienced management, relationship managers, and support personnel, particularly in a competitive labor environment,   ● performance by the Company’s counterparties or vendors,   ● applicable accounting principles, policies and guidelines, and   ● the impact of the COVID-19 pandemic, including the adverse impact on our business and operations and on our customers. 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 most recently filed Form 10-K.   Cybersecurity   The Company considers cybersecurity risk to be one of the greatest risks to its business. We have deployed a multi-faceted approach to limit the risk and impact of unauthorized access to customer accounts and to information relevant to customer accounts. We use digital technology safeguards, internal policies and procedures, and employee training to reduce the exposure of our systems to cyber-intrusions. The Company also requires assurances from key vendors regarding their cybersecurity. We control functionalities of online and mobile banking to reduce risk. We do not offer online account openings or loan originations. We do not permit customers to submit address changes through online banking, and we limit the dollar amount of online banking transfers to other banks. We require a special vetting process for commercial customers who wish to originate ACH transfers and for customers who submit wire requests through online banking.             33 Table of Contents     Further, the Company has a program to identify, mitigate and manage its cybersecurity risks.  The program includes penetration testing and vulnerability assessment, technological defenses such as antivirus software, patch management, firewall management, email and web protections, an intrusion prevention system, a cybersecurity insurance policy which covers some but not all losses arising from cybersecurity breaches, as well as ongoing employee training.  The cost of these measures was $65 for the three months ended June 30, 2023 and $93 for the three months ended June 30, 2022. For the six months ended June 30, 2023 and June 30, 2022, the expense was $128 and $187 respectively. These costs are included in various categories of noninterest expense. However, it is not possible to fully eliminate exposure. The potential for financial and reputational losses due to cyber-breaches is increased by the possibility of human error, unknown system susceptibilities, and the rising sophistication of cyber-criminals to attack systems, disable safeguards and gain access to accounts and related information. We maintain insurance for these risks but insurance policies are subject to exceptions, exclusions and terms whose applications have not been widely interpreted in litigation. Accordingly, insurance can provide less than complete protection against the losses that result from cybersecurity breaches and pursuing recovery from insurers can result in significant expense. In addition, some risks such as reputational damage and loss of customer goodwill, which can result from cybersecurity breaches, cannot be insured against.   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 designated as critical those policies governing the allowance for credit losses, goodwill and the pension plan. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed.  Please refer to the Company’s 2022 Form 10-K, Note 1: Summary of Significant Accounting Policies for information on these and other accounting policies. For information on the Company’s policies on the ACLL beginning with adoption of CECL on January 1, 2023, please refer to Note 1: General.   Overview   National Bankshares, Inc. is a financial holding company that was organized in 1986 under the laws of Virginia and is registered under the Bank Holding Company Act of 1956. NBI common stock is listed on the Nasdaq Capital Market and is traded under the symbol “NKSH.” NBI has two wholly-owned subsidiaries, the National Bank of Blacksburg and National Bankshares Financial Services, Inc. NBB is a community bank and does business as National Bank from 24 office locations and three loan production offices. NBB is the source of nearly all of the Company’s revenue. NBFS does business as National Bankshares Investment Services and National Bankshares Insurance Services. Income from NBFS is not significant at this time, nor is it expected to be so in the near future. The Company is pleased to announce that construction on a new branch in Roanoke, Virginia will begin during the third quarter of 2023. The full service branch will expand our already successful Loan Production Office and enhance our service in the Roanoke Valley.   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-GAP measures may differ among companies and are supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP. Details on non-GAAP measures follow.   34 Table of Contents     Adjusted Return on Average Assets and Adjusted Return on Average Equity The adjusted return on average assets and adjusted return on average equity are measures of profitability, calculated by annualizing net income and dividing by average year-to-date assets or equity, respectively.  Larger nonrecurring income or expenses are not annualized, in order to reduce distortion within the ratios.  The tables below present the reconciliation of adjusted annualized net income, which is not a measurement under GAAP, for the three and six month periods ended June 30, 2023 and 2022.       Three Months Ended       June 30, 2023     June 30, 2022   Annualized Net Income                 Net income (GAAP)   $ 3,901     $ 5,574   Less: items deemed by management to be non-recurring:                 Loss on sale of securities, net of tax of $702 for the period ended June 30, 2023     2,642       -   Proxy contest-related expense, net of tax of $69 for the period ended June 30, 2023     258       -   Gain on sale of investment, net of tax of ($624) for the period ended June 30, 2023     (2,347 )         Gain on BOLI settlement     (1,037 )     -   Total non-recurring items     (484 )         Adjusted net income   $ 3,417     $ 5,574   Adjusted net income, annualized   $ 13,706     $ 22,357   Add: total non-recurring items     484       -   Annualized net income for ratio calculation (non-GAAP)   $ 14,190     $ 22,357                     Return on average assets (GAAP)     0.96 %     1.30 % Adjusted return on average assets (non-GAAP)     0.87 %     1.30 %                   Return on average equity (GAAP)     12.06 %     15.00 % Adjusted return on average equity (non-GAAP)     10.94 %     15.00 %       Six Months Ended       June 30, 2023     June 30, 2022   Annualized Net Income                 Net income (GAAP)   $ 8,432     $ 10,460   Less: items deemed by management to be non-recurring:                 Partnership income net of tax of ($44) and ($77) for the periods ended June 30, 2023 and 2022, respectively     (164 )     (290 ) Loss on sale of securities, net of tax of $700 for the period ended June 30, 2023     2,632       -   Proxy contest-related expense, net of tax of $161 for the period ended June 30, 2023     607       -   Gain on sale of investment, net of tax of ($624) for the period ended June 30, 2023     (2,347 )     -   Gain on BOLI settlement     (1,037 )     -   Total non-recurring items     (309 )     (290 ) Adjusted net income   $ 8,123     $ 10,170   Adjusted net income, annualized   $ 16,381     $ 20,509   Add: total non-recurring items     309       290   Annualized net income for ratio calculation (non-GAAP)   $ 16,690     $ 20,799                     Return on average assets (GAAP)     1.05 %     1.23 % Adjusted return on average assets (non-GAAP)     1.03 %     1.22 %                   Return on average equity (GAAP)     13.40 %     12.63 % Adjusted return on average equity (non-GAAP)     13.15 %     12.45 %   35 Table of Contents     Net Interest Margin The Company uses the net interest margin to measure profit on interest generating activities, as a percentage of total interest-earning assets. The Company’s net interest margin is calculated on a fully taxable equivalent (“FTE”) basis.  The portion of interest income that is nontaxable is grossed up to the tax equivalent by adding the tax benefit based on a tax rate of 21%. Annualized FTE net interest income is divided by total average earning assets to calculate the net interest margin. The following tables present the reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, for the periods indicated.       Three Months Ended       June 30, 2023     June 30, 2022   Net Interest Income, FTE                 Total interest income (GAAP)   $ 14,597     $ 11,922   FTE adjustment     209       230   Total interest income (non-GAAP)     14,806       12,152   Total interest expense (GAAP)     5,380       647   Net interest income, FTE (non-GAAP)   $ 9,426     $ 11,505   Average balance of interest-earning assets   $ 1,614,318     $ 1,676,001   Net interest margin     2.34 %     2.75 %       Six Months Ended     Twelve Months Ended       June 30, 2023     June 30, 2022     December 31, 2022   Net Interest Income, FTE                         Total interest income (GAAP)   $ 28,641     $ 22,972     $ 50,109   FTE adjustment     418       457       919   Total interest income (non-GAAP)     29,059       23,429       51,028   Total interest expense (GAAP)     8,478       1,302       3,083   Net interest income, FTE (non-GAAP)   $ 20,581     $ 22,127     $ 47,945   Average balance of interest-earning assets   $ 1,617,484     $ 1,649,631     $ 1,667,191   Net interest margin     2.57 %     2.70 %     2.88 %   Further detail on the net interest margin is provided under the Net Interest Income discussion.   36 Table of Contents     Efficiency Ratio The efficiency ratio is computed by dividing noninterest expense by the sum of FTE net interest income and noninterest income, excluding certain items the Company’s management deems unusual or non-recurring. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. The components of the efficiency ratio calculation for the periods indicated are summarized in the following table.       Three Months Ended       June 30, 2023     June 30, 2022   Noninterest Expense for Efficiency Ratio                 Noninterest expense (GAAP)   $ 7,557     $ 6,311   Less: proxy contest-related expense     (327 )     -   Noninterest expense for efficiency ratio (non-GAAP)   $ 7,230     $ 6,311                     Total Income for Efficiency Ratio                 Noninterest income (GAAP)   $ 2,791     $ 2,112   Less: Loss on sale of securities     3,344       -   Less: Gain on sale of investment     (2,971 )     -   Less: Gain on BOLI settlement     (1,037 )     -   Noninterest income (non-GAAP)     2,127       2,112   Net interest income, FTE (non-GAAP)     9,426       11,505   Total income for efficiency ratio (non-GAAP)   $ 11,553     $ 13,617                     Efficiency ratio     62.58 %     46.35 %       Six Months Ended     Twelve Months Ended       June 30, 2023     June 30, 2022     December 31, 2022   Noninterest Expense for Efficiency Ratio                         Noninterest expense (GAAP)   $ 15,221     $ 12,924     $ 26,958   Less: proxy contest-related expense     (768 )     -       -   Noninterest expense for efficiency ratio (non-GAAP)   $ 14,453     $ 12,924     $ 26,958                             Total Income for Efficiency Ratio                         Noninterest income (GAAP)   $ 4,990     $ 4,403     $ 12,401   Less: Loss on sale of securities     3,332       -       -   Less: Gain on sale of investment     (2,971 )     -       (3,823 ) Less: Gain on BOLI settlement     (1,037 )     -       -   Noninterest income (non-GAAP)     4,314       4,403       8,578   Net interest income, FTE (non-GAAP)     20,581       22,127       47,945   Total income for efficiency ratio (non-GAAP)   $ 24,895     $ 26,530     $ 56,523                             Efficiency ratio     58.06 %     48.71 %     47.69 %   37 Table of Contents     Performance Summary   The following tables presents the Company’s key performance indicators for the three and six months ended June 30, 2023 and June 30, 2022 and the year ended December 31, 2022. Income and expense items are annualized for the ratios, except for basic and fully diluted earnings per share.       Three Months Ended June 30,       2023     2022   Net Income   $ 3,901     $ 5,574   Return on average assets     0.96 %     1.30 % Adjusted return on average assets (1)     0.87 %     1.30 % Return on average equity     12.06 %     15.00 % Adjusted return on average equity (1) (2)     10.94 %     15.00 % Basic diluted earnings per share (2)   $ 0.66     $ 0.93   Fully diluted earnings per share (2) (4)   $ 0.66     $ 0.93   Net interest margin (1)     2.34 %     2.75 % Efficiency ratio (1)     62.58 %     46.35 %       Six Months Ended June 30, 2023     Six Months Ended June 30, 2022     Twelve Months Ended December 31, 2022   Net Income   $ 8,432     $ 10,460       25,932   Return on average assets     1.05 %     1.23 %     1.52 % Adjusted return on average assets (1)     1.03 %     1.22 %     1.52 % Return on average equity     13.40 %     12.63 %     17.81 % Adjusted return on average equity (1) (3)     13.15 %     12.45 %     17.81 % Basic earnings per share (3)   $ 1.43     $ 1.74     $ 4.33   Fully diluted earnings per share (3) (4)   $ 1.43     $ 1.74     $ 4.33   Net interest margin (1)     2.57 %     2.70 %     2.88 % Efficiency ratio (1)     58.06 %     48.71 %     47.69 %   (1) See “Non-GAAP Financial Measures” above. (2) During the three months ended June 30, 2022, the Company repurchased 41,977 shares under its publicly announced stock repurchase plan. The repurchase reduced stockholders equity by $1,406. (3) During the six months ended June 30, 2022, the Company repurchased 83,162 shares under its publicly announced stock repurchase plan. The repurchase reduced stockholders equity by $2,824. (4) During the second quarter of 2023, the Company granted 2,052 of restricted stock awards with a one year vesting period.   Net income for the three and six month periods ended June 30, 2023 decreased when compared with the three and six month periods ended June 30, 2022. Results for 2023 reflected the impact of the Federal Reserve’s interest rate increases as well as key noninterest income and expense items that are discussed below. Results for the year ended December 31, 2022 included pre-tax income of $3,823 from the sale of a private equity investment.   38 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 yield on average interest‑earning assets for the periods indicated.       Three Months Ended June 30,       2023     2022       Average Balance     Interest     Average Yield/Rate     Average Balance     Interest     Average Yield/Rate   Interest-earning assets:                                                 Loans (1)(2)(4)(5)   $ 853,119     $ 9,730       4.57 %   $ 833,270     $ 8,403       4.04 % Taxable securities (6)(7)     654,021       4,066       2.49 %     676,064       2,949       1.75 % Nontaxable securities (1)(6)     65,231       470       2.89 %     76,061       598       3.15 % Interest-bearing deposits     41,947       540       5.16 %     90,606       202       0.89 % Total interest-earning assets   $ 1,614,318     $ 14,806       3.68 %   $ 1,676,001     $ 12,152       2.91 % Interest-bearing liabilities:                                                 Interest-bearing demand deposits   $ 847,986     $ 4,115       1.95 %   $ 912,036     $ 573       0.25 % Savings deposits     199,606       199       0.40 %     219,464       37       0.07 % Time deposits     138,261       1,054       3.06 %     83,753       37       0.18 % Borrowings     954       12       5.05 %     -       -       -   Total interest-bearing liabilities   $ 1,186,807     $ 5,380       1.82 %   $ 1,215,253     $ 647       0.21 % Net interest income and interest rate spread           $ 9,426       1.86 %           $ 11,505       2.70 % Net yield on average interest‑earning assets                     2.34 %                     2.75 %       Six Months Ended June 30,       2023     2022       Average Balance     Interest     Average Yield/Rate     Average Balance     Interest     Average Yield/Rate   Interest-earning assets:                                                 Loans (1)(3)(4)(5)   $ 854,101     $ 19,144       4.52 %   $ 818,564     $ 16,584       4.09 % Taxable securities (6)(7)     666,214       8,184       2.48 %     652,319       5,422       1.68 % Nontaxable securities (1)(6)     66,277       963       2.93 %     76,383       1,172       3.09 % Interest-bearing deposits     30,892       768       5.01 %     102,365       251       0.49 % Total interest-earning assets   $ 1,617,484     $ 29,059       3.62 %   $ 1,649,631     $ 23,429       2.86 % Interest-bearing liabilities:                                                 Interest-bearing demand deposits   $ 852,264     $ 6,488       1.54 %   $ 899,502     $ 1,153       0.26 % Savings deposits     203,967       280       0.28 %     216,210       75       0.07 % Time deposits     115,093       1,413       2.48 %     80,887       74       0.18 % Borrowings     12,394       297       4.83 %     -       -       -   Total interest-bearing liabilities   $ 1,183,718     $ 8,478       1.44 %   $ 1,196,599     $ 1,302       0.22 % Net interest income and interest rate spread           $ 20,581       2.18 %           $ 22,127       2.64 % Net yield on average interest‑earning assets                     2.57 %                     2.70 %   (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 $66 and $25 for the three months ended June 30, 2023 and 2022, respectively. (3) Included interest income are loan fees of $106 and $113 for the six months ended June 30, 2023 and 2022, respectively. (4) Nonaccrual loans are included in average balances for yield computations. (5) Includes loans held for sale. (6) Daily averages are shown at amortized cost. (7) Includes restricted stock.   39 Table of Contents     The Federal Reserve raised its benchmark interest rate by 500 basis points between March 2022 and May 2023. Interest income in 2023 on interest bearing deposit assets, adjustable securities and new loans improved from 2022 due to the rate increases. Interest income on adjustable loans that repriced after March 2022 also expanded. Many of the Company’s loans are adjustable with repricing dates in the future. If rates remain at the current level or increase, repricing will continue to contribute to improved interest income. The rapidity and magnitude of the rate increases between March 2022 and May 2023 heightened competition for deposits that resulted in pricing increases during 2023 that compressed the net interest margin when compared with 2022. The Company continuously monitors its deposit base and funding costs. Further information on the Company’s funds management and deposit strategy is discussed under the Deposits section below.   Noninterest Income       Three Months Ended June 30,               2023     2022     Percent Change   Service charges on deposits   $ 637     $ 603       5.64 % Other service charges and fees     49       51       (3.92 )% Credit and debit card fees, net     414       535       (22.62 )% Trust income     481       439       9.57 % BOLI income     1,279       241       430.71 % Gain on sale of mortgage loans     55       35       57.14 % Gain on sale of investment     2,971       -       100.00 % Other income     249       208       19.71 % Loss on sale of securities     (3,344 )     -       (100.00 )% Total noninterest income   $ 2,791     $ 2,112       32.15 %       Six Months Ended June 30,               2023     2022     Percent Change   Service charges on deposits   $ 1,229     $ 1,165       5.49 % Other service charges and fees     102       106       (3.77 )% Credit and debit card fees, net     881       975       (9.64 )% Trust income     926       882       4.99 % BOLI income     1,518       479       216.91 % Gain on sale of mortgage loans     71       96       (26.04 )% Gain on sale of investment     2,971       -       100.00 % Other income     624       700       (10.86 )% Loss on sale of securities     (3,332 )     -       (100.00 )% Total noninterest income   $ 4,990     $ 4,403       13.33 %   Noninterest income for the three months ended June 30, 2023 improved from the three months ended June 30, 2022. During the second quarter of 2023, the Company recognized a gain of $2,971 on the sale of its VISA Class B securities, as well as a gain of $1,037 included in BOLI income above from the settlement of a Bank Owned Life Insurance policy.  The Company also sold securities during the second quarter and recorded a loss of $3,344.  The sale of securities is discussed in more detail under the Securities section below. Noninterest income for the first half of 2023 improved when compared with the first half of 2022, due primarily to the same factors discussed above.   40 Table of Contents     Noninterest Expense       Three Months Ended June 30,               2023     2022     Percent Change   Salaries and employee benefits   $ 4,465     $ 4,011       11.32 % Occupancy, furniture and fixtures     411       464       (11.42 )% Data processing and ATM     879       793       10.84 % FDIC assessment     254       111       128.83 % Net costs of other real estate owned     4       -       100.00 % Franchise taxes     358       371       (3.50 )% Professional services     551       214       157.48 % Other operating expenses     635       347       83.00 % Total noninterest expense   $ 7,557     $ 6,311       19.74 %       Six Months Ended June 30,               2023     2022     Percent Change   Salaries and employee benefits   $ 8,899     $ 7,989       11.39 % Occupancy, furniture and fixtures     953       956       (0.31 )% Data processing and ATM     1,752       1,580       10.89 % FDIC assessment     371       222       67.12 % Net costs of other real estate owned     15       10       50.00 % Franchise taxes     733       733       0.00 % Professional services     1,304       439       197.04 % Other operating expenses     1,194       995       20.00 % Total noninterest expense   $ 15,221     $ 12,924       17.77 %   Noninterest expense increased when the three and six months ended June 30, 2023 are compared with the same periods of 2022, due to higher expenses for salaries and employee benefits, Federal Deposit Insurance Corporation ("FDIC") deposit insurance assessment, professional services and pension non-service cost included in other operating expenses. The Company increased its base compensation during 2022 in order to attract and retain talent, which is reflected in 2023 salaries and employee benefits expense. FDIC insurance expense increased due to an increase in the FDIC’s general assessment rate from 2022 to 2023. Professional services include legal and other expenses for the Company’s response to a threatened proxy contest from an activist shareholder during 2023, which amounted to $327 and $768 for the three and six months ended June 30, 2023, respectively. The Company does not anticipate any further material expense for this matter. Pension non-service cost, which is included in other operating expense, increased $174 when six month periods ended June 30, 2023 and June 30, 2022 are compared. The expense is determined by actuarial calculations.   Income Tax   The Company’s effective tax rate was 12.16% and 17.62% for the three month periods ended June 30, 2023 and 2022, respectively. For the six months ended June 30, 2023 and 2022, the Company’s effective tax rate was 15.00% and 17.67%, respectively. The Company’s effective tax rate is lower than the statutory rate of 21% due to investments in tax-advantaged loans and securities, and in 2023, the gain from settlement of a BOLI policy.   41 Table of Contents     Asset Quality   Key indicators of the Company’s asset quality are presented in the following table.       June 30, 2023     June 30, 2022     December 31, 2022   Nonaccrual loans   $ 3,075     $ 2,979     $ 2,847   Loans past due 90 days or more, and still accruing     21       7       8   Other real estate owned     662       957       662   ACLL to loans net of unearned income and deferred fees and costs     1.26 %     0.95 %     0.96 % Net charge-off (recovery) ratio     (0.01 )%     0.01 %     0.02 % Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned     0.44 %     0.46 %     0.41 % Ratio of ACLL to nonperforming loans     345.56 %     270.86 %     288.90 %   The Company adopted the CECL model on January 1, 2023, resulting in an increase to the ACLL of $2,342, from $8,225 at December 31, 2022. For information on the Company’s policies on the ACLL, please refer to Note 1: General. Please refer to the Company’s 2022 Form 10-K, Note 1: Summary of Significant Accounting Policies for information on the Company’s application of previous GAAP in determining the allowance for loan losses. The Company’s risk analysis under the CECL model at June 30, 2023 determined an ACLL of $10,626, or 1.26% of loans net of unearned income and deferred fees and costs. This compares with an allowance of $8,225 as of December 31, 2022, or 0.96% of loans. The allowance for loan losses at June 30, 2022 was $8,069 or 0.95% 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 $10,725 as of June 30, 2023, an increase from $3,032 as of December 31, 2022. The increase was due to a change in the way that the Company identifies individually evaluated loans under CECL. Please refer to Note 1: General for information on the Company’s identification of individually evaluated loans. As of June 30, 2023, one individually evaluated loan was collateral dependent but was adequately collateralized and did not result in an individual allocation. The remaining individually evaluated loans were measured using the DCF method, resulting in an allocation of $940.   Collectively Evaluated Loans Collectively evaluated loans totaled $836,214, with an ACLL of $9,686 as of June 30, 2023. At December 31, 2022, collectively evaluated loans totaled $850,161, with an allowance of $8,225. Collectively evaluated loans are divided into pools based upon risk characteristics. Utilizing historical loss information, the Company calculates a probability of default and loss given default for each pool, which is adjusted for a reasonable and supportable forecast. Loan pools 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 To estimate cash flows, the Company adjusted its historical loss information with a forecast of the national unemployment rate. The forecast applied at June 30, 2023 projects that unemployment will rise over the next 12 months, which increases the loss estimate. The Company determined that 12 months represents a reasonable and supportable forecast period as of June 30, 2023, and set a period of 12 months to revert to historical losses on a straight-line basis.   Qualitative Factors: Economic The Company sources economic data pertinent to its market from the most recently available publications, including business and personal bankruptcy filings, the residential vacancy rate and the inventory of new and existing homes. Higher bankruptcy filings indicate heightened credit risk and increase the ACLL, while lower bankruptcy filings have a beneficial impact on credit risk. Compared with data available at December 31, 2022, business and personal bankruptcy filings increased.          Residential vacancy rates and housing inventory impact the Company’s residential construction customers and the consumer real estate market. Higher levels of residential vacancy rates and housing inventory increase credit risk. The residential vacancy rate available at June 30, 2023 improved from the data incorporated into the December 31, 2022 calculation, resulting in a lower allocation. Housing data available as of June 30, 2023 showed slightly lower inventory than at December 31, 2022, resulting in a lower allocation.   42 Table of Contents     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 0.14% of total loans at June 30, 2023, a decrease from 0.16% at December 31, 2022.   Qualitative Factors: Other Considerations The Company considers other factors that impact credit risk, including the interest rate environment, the competitive, legal and regulatory environments, changes in lending policies and loan review, changes in lending management, and high risk loans. The interest rate environment impacts variable rate loans. The Federal Reserve’s aggressive interest rate increases beginning in March 2022 have increased payments on certain adjustable rate loans, which may increase credit risk. The Company allocates additional reserve each time the Federal Reserve increases rates. After the rate increase has been in effect for one year, the allocation may be removed under the assumption that the impact of the change has become integrated to the portfolio. The competitive, legal and regulatory environments were evaluated for changes that would impact credit risk. Higher competition for loans increases credit risk, while lower competition decreases credit risk. Competition remained at similar levels to those at December 31, 2022. The legal and regulatory environments also remain in a similar posture to December 31, 2022. Lending policies, loan review procedures and management’s experience influence credit risk. Except for the adoption of CECL, policies, procedures and management remain similar to those at December 31, 2022. 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 7.46% from the level at December 31, 2022, resulting in an increased allocation.   Unallocated Surplus The unallocated surplus as of June 30, 2023 is $334, or 3.25% in excess of the calculated requirement. The unallocated surplus at December 31, 2022 was $179, or 2.23% in excess of the calculated requirement. The surplus provides some mitigation of current economic uncertainty that may impact credit risk.   Conclusion The calculation of the appropriate level for the ACLL incorporates analysis of multiple factors and requires management’s prudent and informed judgment. The Company augmented the calculated requirement with an unallocated surplus. Based on analysis of historical indicators, asset quality and economic factors, management believes the level of ACLL is reasonable for the credit risk in the loan portfolio as of June 30, 2023.   Provision for Credit Loss   The calculation of the ACLL resulted in a provision for credit losses of $10 for the three month period ended June 30, 2023, compared with a provision of $310 for the three month period ended June 30, 2022. The provision for the six month period ended June 30, 2023 was $12, compared with a provision $444 for the six months ended June 30, 2022. The provision for 2023 and 2022 reflect loan growth and changes in factors detailed in “Asset Quality” above.   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. If a modification is made to a borrower experiencing financial difficulty, the loan’s risk rating is downgraded to special mention or classified, resulting in individual evaluation for the ACL. During the three and six months ended June 30, 2023, the Company modified one loan totaling $6,396 for a borrower who was experiencing financial difficulty. The loan was individually evaluated for the ACLL as of June 30, 2023.   Modifications for Borrowers Who Were Not Experiencing Financial Difficulty During the three and six month periods ended June 30, 2023 and 2022, the Company modified loans for borrowers who were not experiencing financial difficulty. During the three months ended June 30, 2023, the Company modified 194 loans totaling $11,528. During the six months ended June 30, 2023, the Company modified 395 loans totaling $42,036. During the three months ended June 30, 2022, the Company provided 230 modifications to loans totaling $34,776. For the six months ended June 30, 2022, the Company provided 465 modifications to loans totaling $73,958.   43 Table of Contents     Other Real Estate Owned   As of June 30, 2023, OREO of $662 is comprised of one construction property. One loan secured by real estate of $7 was in process of foreclosure, which may increase OREO in future quarters. It is not possible to accurately predict the future total of OREO because property sold at foreclosure may be acquired by third parties and OREO properties are regularly marketed and sold. The Company continues to monitor risk levels within the loan portfolio. If the Company’s market experiences an economic downturn, real estate values could decline and foreclosure activity could increase. A decline in value may result in loss recognition for OREO, while an increase in foreclosures may increase the number of OREO properties.   Key Assets and Liabilities   NBI’s key assets and liabilities and their change from December 31, 2022 are shown in the following table.       June 30, 2023     December 31, 2022     Percent Change   Interest-bearing deposits   $ 55,241     $ 59,026       (6.41 ) % Securities available for sale, at fair value     614,178       656,852       (6.50 ) % Loans, net     835,915       844,519       (1.02 ) % Total assets     1,625,541       1,677,551       (3.10 ) % Deposits     1,487,032       1,542,725       (3.61 ) %   Average Balances   Year-to-date daily averages for the major balance sheet categories are as follows:   Assets   June 30, 2023     December 31, 2022     Percent Change   Interest-bearing deposits   $ 30,892     $ 88,963       (65.28 )% Securities available for sale, at fair value     637,313       683,183       (6.71 )% Loans, net of unearned income and deferred fees and costs and the allowance for credit losses     843,273       825,110       2.20 % Total assets     1,626,425       1,705,614       (4.64 )%                           Liabilities and stockholders ’ equity                         Noninterest-bearing demand deposits   $ 304,671     $ 338,269       (9.93 )% Interest-bearing demand deposits     852,264       910,989       (6.45 )% Savings deposits     203,967       216,414       (5.75 )% Time deposits     115,093       77,686       48.15 % Stockholders’ equity     126,883       145,641       (12.88 )%   Increased competition resulted in decreased customer deposits.  Lower customer deposits reduced the funds available for the Company to invest in interest bearing deposits. Securities available for sale decreased due to strategic sales. The decline in stockholders’ equity resulted from other comprehensive loss related to the securities available for sale portfolio. Changes in securities, loans and deposits are discussed below.   44 Table of Contents     Securities       June 30, 2023     December 31, 2022     Percent Change   Amortized cost   $ 705,189     $ 759,917       (7.20 )% Unrealized loss     (91,011 )     (103,065 )     11.70 % Securities available for sale, at fair value   $ 614,178     $ 656,852       (6.50 )%   As part of its interest rate risk management, the Company periodically evaluates its position in financial assets. During the first half of 2023, the Company strategically selected and sold securities with an amortized cost of $46,850, realizing a loss of $3,332. The strategy for the sales prioritized enhancement of long-term earnings. Though not a primary objective, proceeds from the sales also bolstered liquidity. Securities available for sale are presented at fair value as of each reporting date. Most of the Company’s securities were purchased during periods prior to the Federal Reserve’s interest rate increases that began in March of 2022. The fair value of bonds moves inversely to interest rate changes, as well as expectations of interest rate changes. The Company’s Asset Liability Management Committee is closely monitoring interest rate risk on all of the Company’s financial assets and liabilities. At this time, there are no credit risk concerns on securities available for sale and no associated ACL. Please refer to Note 1: General and Note 3: Securities for additional information.   Loans       June 30, 2023     December 31, 2022     Percent Change   Real estate construction   $ 56,984     $ 54,579       4.41 % Consumer real estate     226,453       221,052       2.44 % Commercial real estate     423,396       437,888       (3.31 )% Commercial non real estate     56,079       57,652       (2.73 )% Public sector and IDA     47,791       48,074       (0.59 )% Consumer non real estate     36,236       33,948       6.74 % Less: unearned income and deferred fees and costs     (398 )     (449 )     (11.36 )% Loans, net of unearned income and deferred fees and costs   $ 846,541     $ 852,744       (0.73 )%   Loans decreased slightly from December 31, 2022, as higher interest rates decreased demand. The Company is positioned to continue to make every loan that meets its underwriting standards.   Deposits       June 30, 2023     December 31, 2022     Percent Change   Noninterest-bearing demand deposits   $ 300,713     $ 327,713       (8.24 )% Interest-bearing demand deposits     841,382       933,269       (9.85 )% Saving deposits     197,958       214,114       (7.55 )% Time deposits     146,979       67,629       117.33 % Total deposits   $ 1,487,032     $ 1,542,725       (3.61 )%   Competition for deposits began impacting the Company during the fourth quarter of 2022 and has continued during 2023. The Company implemented competitive pricing on CDs, raised offering rates on other deposits and negotiated with depositors to strengthen the deposit base, at costs well below the cost of borrowing. 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 26% 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 22% are uninsured.   45 Table of Contents     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. During the first quarter of 2023, the Company accessed FHLB borrowings to reinforce liquidity. The advances were fully repaid, due to the success of the Company’s deposit strategy. As of June 30, 2023, the Company did not have purchased deposits, discount window borrowings or short-term borrowings. The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters. Portions of the securities portfolio are pledged to meet state requirements for public funds deposits. Discount window borrowings also require pledged securities. Increased/decreased liquidity from public funds deposits or discount window borrowings results in increased/decreased liquidity from pledging requirements. The Company monitors public funds pledging requirements and unpledged available for sale securities accessible for liquidity needs. Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve discount window. As of June 30, 2023, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve discount window. As of June 30, 2023, the Company had $400,149 of borrowing capacity from the FHLB and an unsecured federal funds line of credit with an unaffiliated bank of $10,000, with no amounts advanced against those lines. Additionally, the Company had $181,219 of unused capacity 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, 2023, 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, 2023, 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, 2023, the loan to deposit ratio was 56.93%. 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.   Capital Resources   Total stockholders’ equity at June 30, 2023 was $128,444, an increase of $5,756, or 4.69%, from the $122,687 at December 31, 2022.  The increase in stockholders’ equity reflects net income for the six months ended June 30, 2023 and improvement in the unrealized loss on securities available for sale, reduced by adoption of CECL at January 1, 2023, payment of a special one-time cash dividend and the Company’s normal semi-annual dividend. The Company’s stockholders approved a new equity compensation plan at the annual meeting held in May 2023. Under the plan, part of the June 2023 semi-annual retainer for non-employee directors was paid in a restricted stock grant. The equity compensation plan aims to align decision making with long-term value creation for the Company’s shareholders. The Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement, which exempts bank holding companies with less than $3 billion in assets from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements. NBB is subject to various capital requirements administered by banking agencies, including an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments. Risk-based capital ratios are calculated in compliance with OCC rules based on the Basel III Capital Rules. The Bank’s ratios are well above the required minimums as of June 30, 2023. Risk based capital ratios for NBB are shown in the following tables.       NBB     Regulatory Capital Minimum Ratios     Regulatory Capital Minimum Ratios with Capital Conservation Buffer   Common Equity Tier I Capital Ratio     17.58 %     4.50 %     7.00 % Tier I Capital Ratio     17.58 %     6.00 %     8.50 % Total Capital Ratio     18.58 %     8.00 %     10.50 % Leverage Ratio     11.30 %     4.00 %     4.00 %   46 Table of Contents     Off-Balance Sheet Arrangements   In the normal course of business, NBB extends lines of credit and letters of credit to its customers. Depending on their needs, customers may draw upon lines of credit at any time in any amount up to a pre-approved limit. Financial letters of credit guarantee payments to facilitate customer purchases. Performance letters of credit guarantee payment if the customer fails to complete a specific obligation. While it would be possible for customers to fully draw on approved lines of credit and for beneficiaries to call all letters of credit, historically this has not occurred. In the event of a sudden and substantial draw on these lines, the Company would be able to access multiple options, including its lines of credit with correspondents, raising additional deposits, or selling securities available for sale or loans. The Company estimates an ACL on unfunded loan commitments under the CECL model. The Company sells mortgages on the secondary market. Our agreement with the purchaser provides for strict underwriting and documentation requirements. Violation of the representations and warranties of the agreement would entitle the purchaser to recourse provisions. The Company has determined that its risk in this area is not significant because of a low volume of secondary market mortgage loans and high underwriting standards. The Company estimates a potential loss reserve for recourse provisions that is not material as of June 30, 2023. To date, no recourse provisions have been invoked. If funds were needed, the Company would access the same sources as noted above for funding lines and letters of credit. There were no material changes in off-balance sheet arrangements during the six months ended June 30, 2023.   Contractual Obligations   The Company had no finance lease or purchase obligations and no long-term debt at June 30, 2023.   Item 3.   Quantitative and Qualitative Disclosures About Market Risk   Not applicable.   Item 4.  Controls and Procedures   The Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of June 30, 2023 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, 2023, 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 II Other Information   Item 1.   Legal Proceedings   There are no pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.   47 Table of Contents     Item 1A. Risk Factors   Please refer to the “Risk Factors” previously disclosed in Item 1A of our 2022 Annual Report on Form 10-K and the factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” in Part I. Item 2 of this Form 10-Q.   Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds   None.   Item 3.  Defaults Upon Senior Securities   None.   Item 4.   Mine Safety Disclosures   Not applicable.                     Item 5.   Other Information   None.   Item 6.   Exhibits   Index of Exhibits   Exhibit No. Description     3(i) Amended and Restated Articles of Incorporation of National Bankshares, Inc.   (incorporated herein by reference to Exhibit 3.1 of the Form 8-K filed on March 16, 2006) 3(ii) Amended and Restated Bylaws of National Bankshares, Inc.   (incorporated herein by reference to Exhibit 3(ii) of the Form 8-K filed on January 11, 2023) 4 Specimen copy of certificate for National Bankshares, Inc. common stock   (incorporated herein by reference to Exhibit 4(a) of the Annual Report on Form 10-K for fiscal year ended December 31, 1993) 10 National Bankshares, Inc. 2023 Stock Incentive Plan   (incorporated by reference to Appendix A of the Proxy Statement for the Annual Meeting of Shareholders held on May 9, 2023, filed on March 24, 2023) +31(i) Section 302 Certification of Chief Executive Officer   Filed herewith +31(ii) Section 302 Certification of Chief Financial Officer   Filed herewith +32(i) 18 U.S.C. Section 1350 Certification of Chief Executive Officer   Filed herewith +32(ii) 18 U.S.C. Section 1350 Certification of Chief Financial Officer   Filed herewith +101 The following materials from National Bankshares, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2023 are formatted in iXBRL (Inline Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets at June 30, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three and six month periods ended June 30, 2023 and 2022; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and six month periods ended June 30, 2023 and 2022; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three and six month periods ended June 30, 2023 and 2022; (v) Consolidated Statements of Cash Flows for the six month periods ended June 30, 2023 and 2022; and (vi) Notes to Consolidated Financial Statements.   Filed herewith 104 Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)   Filed herewith   48 Table of Contents     Signatures   Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.     NATIONAL BANKSHARES, INC.       Date: August 9, 2023 /s/ F. Brad Denardo     By: F. Brad Denardo Chairman, President and Chief Executive Officer (Principal Executive Officer)             Date: August 9, 2023 /s/ Lora M. Jones     By: Lora M. Jones Treasurer and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer)   49