NATIONAL BANKSHARES INC 10-Q

Item 1. Financial Statements Financial Information National Bankshares, Inc. Consolidated Balance Sheets (Unaudited) March 31, December 31, (in thousands, except share and per share data) 2024 2023 Assets Cash and due from banks $ 10,656 $ 12,967 Interest-bearing deposits 110,527 73,636 Total cash and cash equivalents 121,183 85,603 Securities available for sale, at fair value 609,968 618,601 Restricted stock, at cost 1,248 1,264 Mortgage loans held for sale - 406 Loans: Loans, net of unearned income and deferred fees and costs 863,548 856,646 Less allowance for credit losses ( 9,055 ) ( 9,094 ) Loans, net 854,493 847,552 Premises and equipment, net 11,214 11,109 Accrued interest receivable 6,478 6,313 Goodwill 5,848 5,848 Bank-owned life insurance 43,840 43,583 Other assets 34,934 34,091 Total assets $ 1,689,206 $ 1,655,370 Liabilities and Stockholders' Equity Noninterest-bearing demand deposits $ 283,870 $ 281,215 Interest-bearing demand deposits 838,450 821,661 Savings deposits 175,587 177,856 Time deposits 239,901 223,240 Total deposits 1,537,808 1,503,972 Accrued interest payable 2,514 1,416 Other liabilities 9,494 9,460 Total liabilities 1,549,816 1,514,848 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 5,893,782 (including 4,095 unvested) shares at March 31, 2024 and December 31, 2023 7,436 7,404 Retained earnings 200,158 197,984 Accumulated other comprehensive loss, net ( 68,204 ) ( 64,866 ) Total stockholders' equity 139,390 140,522 Total liabilities and stockholders' equity $ 1,689,206 $ 1,655,370 See accompanying notes to consolidated financial statements. 3 Table of Contents National Bankshares, Inc. Consolidated Statements of Income (Unaudited) Three Months Ended March 31, (in thousands, except share and per share data) 2024 2023 Interest Income Interest and fees on loans $ 10,277 $ 9,333 Interest on interest-bearing deposits 1,129 228 Interest on securities – taxable 4,276 4,118 Interest on securities – nontaxable 339 365 Total interest income 16,021 14,044 Interest Expense Interest on time deposits 2,552 359 Interest on other deposits 5,224 2,454 Interest on borrowings - 285 Total interest expense 7,776 3,098 Net interest income 8,245 10,946 (Recovery of) provision for credit losses ( 10 ) 2 Net interest income after (recovery of) provision for credit losses 8,255 10,944 Noninterest Income Service charges on deposit accounts 675 592 Other service charges and fees 46 53 Credit and debit card fees, net 374 467 Trust income 503 445 BOLI income 258 239 Gain on sale of mortgage loans 24 16 Other income 319 375 Realized securities gain, net - 12 Total noninterest income 2,199 2,199 Noninterest Expense Salaries and employee benefits 4,466 4,434 Occupancy, furniture and fixtures 539 542 Data processing and ATM 867 873 FDIC assessment 187 117 Net costs of other real estate owned - 11 Franchise taxes 350 375 Professional services 240 753 Merger-related expenses 484 - Other operating expenses 629 559 Total noninterest expense 7,762 7,664 Income before income taxes 2,692 5,479 Income tax expense 518 948 Net Income $ 2,174 $ 4,531 Basic earnings per common share $ 0.37 $ 0.77 Diluted earnings per common share $ 0.37 $ 0.77 Weighted average number of common shares outstanding, basic 5,889,687 5,889,687 Weighted average number of common shares outstanding, diluted 5,891,651 5,889,687 Dividends declared per common share $ - $ 1.00 See accompanying notes to consolidated financial statements. 4 Table of Contents National Bankshares, Inc. Consolidated Statements of Comprehensive (Loss) Income Three Months Ended March 31, 2024 and 2023 (Unaudited) March 31, (in thousands) 2024 2023 Net Income $ 2,174 $ 4,531 Other Comprehensive (Loss) Income, Net of Tax Unrealized holding (loss) gain on available for sale securities net of tax of ($887) and $ 3,121 for the periods ended March 31, 2024 and 2023, respectively ( 3,338 ) 11,738 Reclassification adjustment for gain included in net income, net of tax of ($3) in 2023 - ( 9 ) Other comprehensive (loss) income, net of tax ( 3,338 ) 11,729 Total Comprehensive (Loss) Income $ ( 1,164 ) $ 16,260 See accompanying notes to consolidated financial statements. 5 Table of Contents National Bankshares, Inc. Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) Three Months Ended March 31, 2024 and 2023 (in thousands except share data) Common Stock and Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Balances at December 31, 2022 $ 7,362 $ 199,091 $ ( 83,766 ) $ 122,687 Adoption of ASU 2016-13 - ( 2,014 ) - ( 2,014 ) Net income - 4,531 - 4,531 Cash dividends of $ 1.00 per share - ( 5,890 ) - ( 5,890 ) Other comprehensive income, net of tax of $ 3,118 - - 11,729 11,729 Balances at March 31, 2023 $ 7,362 $ 195,718 $ ( 72,037 ) $ 131,043 Balances at December 31, 2023 $ 7,404 $ 197,984 $ ( 64,866 ) $ 140,522 Net income - 2,174 - 2,174 Other comprehensive loss, net of tax of ($887) - - ( 3,338 ) ( 3,338 ) Stock based compensation 32 - - 32 Balances at March 31, 2024 $ 7,436 $ 200,158 $ ( 68,204 ) $ 139,390 See accompanying notes to consolidated financial statements. 6 Table of Contents National Bankshares, Inc. Consolidated Statements of Cash Flows Three Months Ended March 31, 2024 and 2023 (Unaudited) March 31, March 31, (in thousands) 2024 2023 Cash Flows from Operating Activities Net income $ 2,174 $ 4,531 Adjustments to reconcile net income to net cash provided by operating activities: (Recovery of) provision for credit losses ( 10 ) 2 Depreciation of premises and equipment 210 163 Amortization of premiums and accretion of discounts, net 259 253 Gain on sale of securities available for sale, net - ( 12 ) Loss on disposal of repossessed assets - 5 Increase in cash value of bank-owned life insurance ( 258 ) ( 239 ) Origination of mortgage loans held for sale ( 1,023 ) ( 1,239 ) Proceeds from sale of mortgage loans held for sale 1,453 1,255 Gain on sale of mortgage loans held for sale ( 24 ) ( 16 ) Equity based compensation expense 32 - Net change in: Accrued interest receivable ( 165 ) ( 6 ) Other assets 44 200 Accrued interest payable 1,098 208 Other liabilities 50 ( 772 ) Net cash provided by operating activities 3,840 4,333 Cash Flows from Investing Activities Proceeds from calls, principal payments, sales and maturities of securities available for sale 4,149 20,411 Net change in restricted stock 16 12 Purchase of loan participations ( 5,609 ) ( 2,280 ) Collection of loan participations 610 3,126 Loan originations and principal collections, net ( 2,012 ) ( 5,166 ) Proceeds from sale of repossessed assets - 9 Recoveries on loans charged off 65 173 Purchases of premises and equipment ( 315 ) ( 223 ) Net cash (used in) provided by investing activities ( 3,096 ) 16,062 Cash Flows from Financing Activities Net change in time deposits 16,661 57,942 Net change in other deposits 17,175 ( 89,215 ) Cash dividends paid - ( 5,890 ) Net cash provided by (used in) financing activities 33,836 ( 37,163 ) (Continued) 7 Table of Contents Net change in cash and cash equivalents 34,580 ( 16,768 ) Cash and cash equivalents at beginning of period 86,603 71,429 Cash and cash equivalents at end of period $ 121,183 $ 54,661 Supplemental Disclosures of Cash Flow Information Interest paid on deposits and borrowings $ 6,678 $ 2,890 Income taxes paid 260 1,015 Supplemental Disclosure of Noncash Activities Loans charged against the allowance for credit losses $ 109 $ 92 Loans transferred to repossessed assets - 7 Unrealized holding (loss) gain on securities available for sale ( 4,225 ) 14,847 See accompanying notes to consolidated financial statements. 8 Table of Contents National Bankshares, Inc. Notes to Consolidated Financial Statements March 31, 2024 (Unaudited) $ in thousands, except per share data Note 1: General and Summary of Significant Accounting Policies 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. All significant intercompany accounts and transactions between the Company and its subsidiaries have been eliminated. 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. Application of the principles of GAAP and practices within the banking industry requires management to make estimates, assumptions, and judgements that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgements are based on information available as of the date of the financial statement; accordingly, as this information changes, the financial statements may reflect different estimates, assumptions, and judgments. Certain policies inherently rely more extensively on the use of estimates, assumptions, and judgments and as such may have a greater possibility of producing results that could be materially different than originally reported. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance of credit losses on loans. The results of operations for the three month period ended March 31, 2024 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, 2023 ( “2023 Form 10 -K”). The Company’s significant accounting policies followed in preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the 2023 Form 10 -K. There have been no significant changes to the application of significant accounting policies since December 31, 2023. All amounts and disclosures included in this quarterly report as of December 31, 2023, were derived from the Company’s audited consolidated financial statements. The Company posts all reports required to be filed under the Securities Exchange Act of 1934 on its web site at www.nationalbankshares.com . Certain items in the prior period financial statements have been reclassified to conform to the current presentation. These reclassifications had no effect on prior year net income or stockholders’ equity. 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 ASU 2023 - 09 In December 2023, the FASB issued ASU 2023 - 09, “Income Taxes (Topic 740 ): Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis. Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received). Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. This ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted. The amendments should be applied on a prospective basis; however, retrospective application is permitted. The Company does not expect the adoption of ASU 2023 - 09 to have a material impact on its consolidated financial statements. 9 Table of Contents Recently Adopted Accounting Standards ASU 2022 - 03 In June 2022, the Financial Accounting Standards Board (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. ASU 2022 - 03 was effective for the Company on January 1, 2024. The adoption of ASU 2022 - 03 did not have a material impact on the Company’s consolidated financial statements. 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. March 31, 2024 December 31, 2023 Real estate construction $ 61,486 $ 55,379 Consumer real estate 244,946 241,564 Commercial real estate 414,615 419,130 Commercial non real estate 41,835 41,555 Public sector and IDA 59,742 60,551 Consumer non real estate 41,467 38,996 Gross loans $ 864,091 $ 857,175 Less unearned income and deferred fees and costs ( 543 ) ( 529 ) Loans, net of unearned income and deferred fees and costs $ 863,548 $ 856,646 Allowance for credit losses on loans ( 9,055 ) ( 9,094 ) Total loans, net $ 854,493 $ 847,552 The amortized cost of loans excludes accrued interest receivable of $ 3,035 at March 31, 2024 and $ 3,032 at December 31, 2023. 10 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. March 31, 2024 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 $ 11,603 $ - $ - $ - $ 11,603 $ - Construction, other 49,883 - - - 49,883 - Consumer Real Estate Equity line 17,404 112 - - 17,516 - Residential closed-end first liens 129,086 598 121 - 129,805 121 Residential closed-end junior liens 4,932 11 - - 4,943 - Investor-owned residential real estate 92,605 77 - - 92,682 - Commercial Real Estate Multifamily residential real estate 118,309 - - - 118,309 - Commercial real estate owner-occupied 112,302 147 - 2,381 114,830 225 Commercial real estate, other 181,476 - - - 181,476 - Commercial Non Real Estate Commercial and industrial 41,564 22 39 210 41,835 39 Public Sector and IDA States and political subdivisions 59,742 - - - 59,742 - Consumer Non-Real Estate Credit cards 4,664 1 1 - 4,666 1 Automobile 12,817 104 - - 12,921 - Other consumer loans 23,762 117 1 - 23,880 1 Total $ 860,149 $ 1,189 $ 162 $ 2,591 $ 864,091 $ 387 11 Table of Contents December 31, 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 $ 13,442 $ - $ - $ - $ 13,442 $ - Construction, other 41,916 21 - - 41,937 - Consumer Real Estate Equity line 17,178 104 - - 17,282 - Residential closed-end first liens 124,886 662 131 - 125,679 131 Residential closed-end junior liens 5,027 12 - - 5,039 - Investor-owned residential real estate 93,564 - - - 93,564 - Commercial Real Estate Multifamily residential real estate 119,052 195 - - 119,247 - Commercial real estate owner-occupied 114,477 336 - 2,408 117,221 231 Commercial real estate, other 182,662 - - - 182,662 - Commercial Non-Real Estate Commercial and industrial 41,249 57 28 221 41,555 28 Public Sector and IDA States and political subdivisions 60,551 - - - 60,551 - Consumer Non-Real Estate Credit cards 4,648 17 3 - 4,668 3 Automobile 12,126 135 - - 12,261 - Other consumer loans 21,934 107 26 - 22,067 26 Total $ 852,712 $ 1,646 $ 188 $ 2,629 $ 857,175 $ 419 The following table presents nonaccrual loans, by loan class, as of the dates indicated: March 31, 2024 December 31, 2023 With No Allowance With an Allowance Total With No Allowance With an Allowance Total Commercial Real Estate Commercial real estate owner-occupied $ 2,156 $ 225 $ 2,381 $ 2,177 $ 231 $ 2,408 Commercial Non Real Estate Commercial and industrial - 210 210 - 221 221 Total $ 2,156 $ 435 $ 2,591 $ 2,177 $ 452 $ 2,629 During the three months ended March 31, 2024, no accrued interest receivable was reversed against interest income. 12 Table of Contents Allowance for Credit Losses on Loans (ACLL) 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 Three Months Ended March 31, 2024 Real Estate Construction Consumer Real Estate Commercial Real Estate Commercial Non Real Estate Public Sector and IDA Consumer Non Real Estate Unallocated Total Balance, December 31, 2023 $ 408 $ 3,162 $ 3,576 $ 682 $ 333 $ 583 $ 350 $ 9,094 Charge-offs - - - - - ( 109 ) - ( 109 ) Recoveries - - 16 2 - 47 - 65 Provision for (recovery of) credit losses ( 59 ) ( 194 ) 264 ( 37 ) ( 12 ) 12 31 5 Balance, March 31, 2024 $ 349 $ 2,968 $ 3,856 $ 647 $ 321 $ 533 $ 381 $ 9,055 Activity in the Allowance for Credit Losses on Loans for the Three Months Ended March 31, 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, December 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 - - - ( 12 ) - ( 80 ) - ( 92 ) Recoveries - 102 12 2 - 57 - 173 Provision for (recovery of) credit losses 22 ( 260 ) 20 58 ( 10 ) - 172 2 Balance, March 31, 2023 $ 451 $ 3,302 $ 4,374 $ 1,194 $ 294 $ 555 $ 480 $ 10,650 Activity in the Allowance for Credit Losses on Loans for the Year Ended December 31, 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, December 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 ) - ( 214 ) - ( 247 ) - ( 478 ) Recoveries - 103 45 6 - 129 - 283 Provision for (recovery of) for credit losses ( 21 ) ( 384 ) ( 811 ) ( 256 ) 29 123 42 ( 1,278 ) Balance, December 31, 2023 $ 408 $ 3,162 $ 3,576 $ 682 $ 333 $ 583 $ 350 $ 9,094 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 by Segment and Evaluation Method March 31, 2024 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 $ - $ 74 $ 362 $ 129 $ - $ 3 $ - $ 568 Collectively evaluated 349 2,894 3,494 518 321 530 381 8,487 Total $ 349 $ 2,968 $ 3,856 $ 647 $ 321 $ 533 $ 381 $ 9,055 13 Table of Contents Allowance for Credit Losses on Loans by Segment and Evaluation Method December 31, 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 $ - $ 74 $ 367 $ 126 $ - $ 5 $ - $ 572 Collectively evaluated 408 3,088 3,209 556 333 578 350 8,522 Total $ 408 $ 3,162 $ 3,576 $ 682 $ 333 $ 583 $ 350 $ 9,094 The following tables present information about individually evaluated loans and collectively evaluated loans by portfolio segment as of the dates indicated. Loans by Segment and Evaluation Method as of March 31, 2024 Real Estate Construction Consumer Real Estate Commercial Real Estate Commercial Non-Real Estate Public Sector and IDA Consumer Non-Real Estate Total Individually evaluated $ 280 $ 1,237 $ 8,777 $ 237 $ - $ 34 $ 10,565 Collectively evaluated 61,206 243,709 405,838 41,598 59,742 41,433 853,526 Total $ 61,486 $ 244,946 $ 414,615 $ 41,835 $ 59,742 $ 41,467 $ 864,091 Loans by Segment and Evaluation Method as of December 31, 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 $ 286 $ 1,183 $ 8,805 $ 227 $ - $ 43 $ 10,544 Collectively evaluated 55,093 240,381 410,325 41,328 60,551 38,953 846,631 Total $ 55,379 $ 241,564 $ 419,130 $ 41,555 $ 60,551 $ 38,996 $ 857,175 Collateral Dependent Loans Loans are collateral dependent when repayment is expected substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. Collateral dependent loans are individually evaluated. The Company measures the ACL on collateral dependent loans based upon the fair value of the collateral, as permitted by ASU 2016 - 13. Fair value of the collateral is adjusted for liquidation costs/discounts. If the fair value of the collateral falls below the amortized cost of the loan, the shortfall is recognized in the ACLL. If the fair value of the collateral exceeds the amortized cost, no ACL is required. As of March 31, 2024, five of the Company’s individually evaluated loans were collateral dependent. As of December 31, 2023, three of the Company’s individually evaluated loans were collateral dependent. All collateral dependent loans were secured by real estate as of March 31, 2024 and December 31, 2023. The following table details the amortized cost of the collateral dependent loans as of the date indicated: March 31, 2024 December 31, 2023 Balance Related Allowance Balance Related Allowance Consumer Real Estate Residential closed-end first lien $ 121 $ - $ 7 - Commercial Real Estate Commercial real estate, owner occupied 2,156 - 2,177 - Total Loans $ 2,277 $ - $ 2,184 $ - 14 Table of Contents 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. Loans rated pass have acceptable credit quality. Loans rated special mention have potential weakness due to challenging economic or financial conditions. Loans rated classified have well-defined weaknesses that heighten the risk of default. The tables below present the loan portfolio by amortized cost basis, year of origination, loan class, credit quality, and charge-offs as of the dates indicated. Revolving Term Loans Amortized Cost Basis by Origination Year Loans Converted March 31, 2024 Prior 2020 2021 2022 2023 2024 Revolving to Term Total Construction, residential Pass $ - $ - $ - $ 1,216 $ 6,251 $ 219 $ 3,917 $ - $ 11,603 Construction, other Pass $ 3,748 $ 1,280 $ 9,211 $ 21,615 $ 5,596 $ 4,960 $ 3,193 $ - $ 49,603 Classified - - 280 - - - - - 280 Total $ 3,748 $ 1,280 $ 9,491 $ 21,615 $ 5,596 $ 4,960 $ 3,193 $ - $ 49,883 Equity lines Pass $ 76 $ - $ - $ - $ - $ - $ 17,303 $ 47 $ 17,426 Classified - - - - - - 90 - 90 Total $ 76 $ - $ - $ - $ - $ - $ 17,393 $ 47 $ 17,516 Residential closed-end first liens Pass $ 37,144 $ 14,707 $ 30,734 $ 30,468 $ 12,135 $ 4,170 $ - $ - $ 129,358 Classified 447 - - - - - - - 447 Total $ 37,591 $ 14,707 $ 30,734 $ 30,468 $ 12,135 $ 4,170 $ - $ - $ 129,805 Residential closed-end junior liens Pass $ 1,602 $ - $ 169 $ 1,379 $ 1,343 $ 450 $ - $ - $ 4,943 Investor-owned residential real estate Pass $ 28,964 $ 23,228 $ 18,699 $ 13,248 $ 4,586 $ 1,323 $ 1,934 $ - $ 91,982 Classified 700 - - - - - - - 700 Total $ 29,664 $ 23,228 $ 18,699 $ 13,248 $ 4,586 $ 1,323 $ 1,934 $ - $ 92,682 Multifamily residential real estate Pass $ 41,102 $ 2,130 $ 40,354 $ 25,647 $ 8,894 $ 62 $ 120 $ - $ 118,309 Commercial real estate, owner occupied Pass $ 51,271 $ 23,144 $ 4,425 $ 16,640 $ 8,027 $ 120 $ 2,426 $ - $ 106,053 Special mention 6,396 - - - - - - - 6,396 Classified 2,381 - - - - - - - 2,381 Total $ 60,048 $ 23,144 $ 4,425 $ 16,640 $ 8,027 $ 120 $ 2,426 $ - $ 114,830 Commercial real estate, other Pass $ 89,181 $ 18,902 $ 35,780 $ 22,476 $ 13,216 $ 1,215 $ 706 $ - $ 181,476 Commercial and industrial Pass $ 6,338 $ 944 $ 12,299 $ 6,475 $ 6,164 $ 2,139 $ 7,239 $ - $ 41,598 Classified 210 - - 7 - - 20 - 237 Total $ 6,548 $ 944 $ 12,299 $ 6,482 $ 6,164 $ 2,139 $ 7,259 $ - $ 41,835 Public sector and IDA Pass $ 20,432 $ 231 $ 26,375 $ 6,242 $ 6,462 $ - $ - $ - $ 59,742 Credit cards Pass $ - $ - $ - $ - $ - $ - $ 4,666 $ - $ 4,666 YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ 22 $ - $ 22 Automobile Pass $ 182 $ 437 $ 1,388 $ 2,375 $ 6,448 $ 2,091 $ - $ - $ 12,921 Other consumer Pass $ 367 $ 691 $ 1,673 $ 5,109 $ 10,180 $ 5,092 $ 734 $ - $ 23,846 Special Mention - - - - 15 11 - - 26 Classified - - - - - 8 - - 8 Total $ 367 $ 691 $ 1,673 $ 5,109 $ 10,195 $ 5,111 $ 734 $ - $ 23,880 YTD gross charge-offs $ - $ 4 $ - $ 13 $ 46 $ 24 $ - $ - $ 87 Total Loans Pass $ 280,407 $ 85,694 $ 181,107 $ 152,890 $ 89,302 $ 21,841 $ 42,238 $ 47 $ 853,526 Special Mention 6,396 - - - 15 11 - - 6,422 Classified 3,738 - 280 7 - 8 110 - 4,143 Total $ 290,541 $ 85,694 $ 181,387 $ 152,897 $ 89,317 $ 21,860 $ 42,348 $ 47 $ 864,091 YTD gross charge-offs $ - $ 4 $ - $ 13 $ 46 $ 24 $ 22 $ - $ 109 15 Table of Contents Revolving Term Loans Amortized Cost Basis by Origination Year Loans Converted December 31, 2023 Prior 2019 2020 2021 2022 2023 Revolving to Term Total Construction, residential Pass $ - $ - $ 246 $ 158 $ 3,275 $ 5,157 $ 4,606 $ - $ 13,442 Construction, other Pass $ 2,741 $ 1,094 $ 1,305 $ 12,671 $ 17,397 $ 4,884 $ 1,559 $ - $ 41,651 Classified - - - 286 - - - - 286 Total $ 2,741 $ 1,094 $ 1,305 $ 12,957 $ 17,397 $ 4,884 $ 1,559 $ - $ 41,937 Equity lines Pass $ 51 $ - $ - $ - $ - $ - $ 17,182 $ - $ 17,233 Classified - - - - - - 49 - 49 Total $ 51 $ - $ - $ - $ - $ - $ 17,231 $ - $ 17,282 Residential closed-end first liens Pass $ 32,404 $ 5,806 $ 14,634 $ 31,414 $ 29,787 $ 11,208 $ - $ - $ 125,253 Classified 426 - - - - - - - 426 Total $ 32,830 $ 5,806 $ 14,634 $ 31,414 $ 29,787 $ 11,208 $ - $ - $ 125,679 YTD gross charge-offs $ - $ - $ 17 $ - $ - $ - $ - $ - $ 17 Residential closed-end junior liens Pass $ 1,499 $ 116 $ - $ 172 $ 1,387 $ 1,850 $ - $ 15 $ 5,039 Investor-owned residential real estate Pass $ 24,556 $ 5,162 $ 23,649 $ 19,062 $ 14,166 $ 4,880 $ 1,283 $ 98 $ 92,856 Classified 708 - - - - - - - 708 Total $ 25,264 $ 5,162 $ 23,649 $ 19,062 $ 14,166 $ 4,880 $ 1,283 $ 98 $ 93,564 Multifamily residential real estate Pass $ 40,092 $ 1,806 $ 2,148 $ 40,544 $ 25,681 $ 8,850 $ 126 $ - $ 119,247 Commercial real estate, owner occupied Pass $ 41,573 $ 11,091 $ 23,407 $ 4,792 $ 16,720 $ 7,914 $ 2,919 $ - $ 108,416 Special mention 6,396 - - - - - - - 6,396 Classified 2,409 - - - - - - - 2,409 Total $ 50,378 $ 11,091 $ 23,407 $ 4,792 $ 16,720 $ 7,914 $ 2,919 $ - $ 117,221 Commercial real estate, other Pass $ 68,889 $ 21,841 $ 19,098 $ 36,157 $ 22,697 $ 13,279 $ 701 $ - $ 182,662 Commercial and industrial Pass $ 6,004 $ 438 $ 1,060 $ 12,667 $ 6,954 $ 6,938 $ 7,267 $ - $ 41,328 Classified 220 - - - 7 - - - 227 Total $ 6,224 $ 438 $ 1,060 $ 12,667 $ 6,961 $ 6,938 $ 7,267 $ - $ 41,555 YTD gross charge-offs $ - $ 12 $ - $ - $ - $ 12 $ 190 $ - $ 214 Public sector and IDA Pass $ 20,817 $ - $ 235 $ 26,702 $ 6,335 $ 6,462 $ - $ - $ 60,551 Credit cards Pass $ - $ - $ - $ - $ - $ - $ 4,668 $ - $ 4,668 YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ 39 $ - $ 39 Automobile Pass $ 78 $ 204 $ 563 $ 1,619 $ 2,750 $ 7,047 $ - $ - $ 12,261 YTD gross charge-offs $ - $ 3 $ - $ 1 $ 38 $ - $ - $ - $ 42 Other Consumer Pass $ 93 $ 334 $ 811 $ 1,943 $ 5,815 $ 12,356 $ 672 $ - $ 22,024 Special mention - - - - - 17 - - 17 Classified - - - - 11 15 - - 26 Total $ 93 $ 334 $ 811 $ 1,943 $ 5,826 $ 12,388 $ 672 $ - $ 22,067 YTD gross charge-offs $ - $ - $ - $ 19 $ 52 $ 95 $ - $ - $ 166 Total Loans Pass $ 238,797 $ 47,892 $ 87,156 $ 187,901 $ 152,964 $ 90,825 $ 40,983 $ 113 $ 846,631 Special mention 6,396 - - - - 17 - - 6,413 Classified 3,763 - - 286 18 15 49 - 4,131 Total $ 248,956 $ 47,892 $ 87,156 $ 188,187 $ 152,982 $ 90,857 $ 41,032 $ 113 $ 857,175 YTD gross charge-offs $ - $ 15 $ 17 $ 20 $ 90 $ 107 $ 229 $ - $ 478 16 Table of Contents Loan Modifications to Borrowers Experiencing Financial Difficulty The Company modifies loans for a variety of reasons. At the date of modification, the Company assesses 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. There were two loans modified for borrowers experiencing financial difficulty during the three months period ended March 31, 2024. There were no loans to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2023. The following table presents information about loans modified for borrowers experiencing financial difficulty during the three months and as of the date indicated. March 31, 2024 Amortized Cost Basis % of Class Type of Modification Financial Effect Commercial Real Estate Commercial real estate owner-occupied $ 6,396 5.57 % Interest only payments 6 months of interest only payments, re-amortization of the balance to contractual maturity. Commercial Non real estate Commercial and industrial $ 7 0.02 % Term extension Renewal of single-payment note for an additional 3 months. The Company closely monitors the performance of loans that are modified to borrowers experiencing financial difficulty. Both loans are in current status as of March 31, 2024. There were no loans to borrowers experiencing financial difficulty that had a payment default during the three months ended March 31, 2024 and 2023 and were modified in the twelve months prior to that default. Default is determined at 90 or more days past due, upon charge-off, or upon foreclosure. Modified loans in default are individually evaluated for the allowance for credit losses or if the modified loan is deemed uncollectible, the loan, or a portion of the loan, is written off and the allowance for credit losses is adjusted accordingly. Residential Real Estate Loans In Process of Foreclosure As of March 31, 2024 the Company had three 1 - 4 family residential real estate loans totaling $ 126 in process of foreclosure. As of December 31, 2023, one 1 - 4 family residential real estate loan of $ 7 was in process of foreclosure. ACL on Unfunded Commitments The following tables present the balance and activity in the ACL for unfunded commitments for the three months ended March 31, 2024 and 2023: Allowance for Credit Losses on Unfunded Commitments Balance, December 31, 2023 $ 259 Recovery of credit losses ( 15 ) Balance, March 31, 2024 $ 244 Allowance for Credit Losses on Unfunded Commitments Balance, December 31, 2022 $ 35 Adoption of ASU 2016-13 207 Recovery of credit losses - Balance, March 31, 2023 $ 242 17 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: March 31, 2024 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. government agencies and corporations $ 352,961 $ - $ 44,972 $ 307,989 States and political subdivisions 179,343 - 31,344 147,999 Mortgage-backed securities 153,572 6 6,255 147,323 Corporate debt securities 6,505 - 817 5,688 U.S. treasury 997 - 28 969 Total securities available for sale $ 693,378 $ 6 $ 83,416 $ 609,968 December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. government agencies and corporations $ 353,904 $ - $ 42,060 $ 311,844 States and political subdivisions 179,507 - 29,614 149,893 Mortgage-backed securities 156,875 - 6,724 150,151 Corporate debt securities 6,504 - 754 5,750 U.S. treasury 996 - 33 963 Total securities available for sale $ 697,786 $ - $ 79,185 $ 618,601 No allowance for credit loss on securities available for sale was recorded as of March 31, 2024 or December 31, 2023. Accrued interest receivable on securities, included in accrued interest receivable on the Consolidated Balance Sheets, totaled $ 3,444 at March 31, 2024 and $ 3,281 at December 31, 2023. The deferred tax asset for the net unrealized loss on securities available for sale was $ 17,516 as of March 31, 2024 and $ 16,629 as of December 31, 2023. 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 March 31, 2024, 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. March 31, 2024 Amortized Cost Fair Value Available for Sale: Due in one year or less $ 13,749 $ 13,419 Due after one year through five years 180,902 166,926 Due after five years through ten years 273,587 232,336 Due after ten years 225,140 197,287 Total securities available for sale $ 693,378 $ 609,968 18 Table of Contents 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. March 31, 2024 Less Than 12 Months 12 Months or More Fair Value Unrealized Loss Fair Value Unrealized Loss U.S. government agencies and corporations $ - $ - $ 307,989 $ 44,972 State and political subdivisions 1,507 126 146,492 31,218 Mortgage-backed securities 583 1 135,492 6,254 Corporate debt securities - - 5,688 817 U.S. treasury - - 969 28 Total temporarily impaired securities $ 2,090 $ 127 $ 596,630 $ 83,289 December 31, 2023 Less Than 12 Months 12 Months or More Fair Value Unrealized Loss Fair Value Unrealized Loss U.S. government agencies and corporations $ - $ - $ 311,844 $ 42,060 State and political subdivisions 884 1 148,763 29,613 Mortgage-backed securities 1,616 26 147,922 6,698 Corporate debt securities - - 5,750 754 U.S. treasury - - 963 33 Total temporarily impaired securities $ 2,500 $ 27 $ 615,242 $ 79,158 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 March 31, 2024, the Company had 574 securities with a fair value of $ 598,720 in an unrealized loss position. The Company reviews securities in an unrealized loss position to evaluate credit risk. The Company considers payment history, risk ratings from external parties, financial statements for municipal and corporate securities, public statements from issuers and other available credible published sources in evaluating credit risk. No credit risk was found and no ACL on securities available for sale was recorded as of March 31, 2024. The unrealized losses are attributed to noncredit-related factors, including changes in interest rates and other market conditions. 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. 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 $ 506,896 at March 31, 2024. The Company’s management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at March 31, 2024, did not determine any impairment. Realized Securities Gains and Losses There were no sales of securities during 2024. During the first three months of 2023, the Company realized net securities gains of $ 12 on the sale of securities with an amortized cost basis of $ 17,987 . The sales were part of the Company’s interest rate risk management strategy. 19 Table of Contents Note 4: Defined Benefit Plan The following table presents components of Net Periodic Benefit Cost for the periods indicated: Pension Benefits Three Months Ended March 31, 2024 2023 Service cost $ 261 $ 203 Interest cost 302 273 Expected return on plan assets ( 608 ) ( 518 ) Amortization of prior service cost - - Recognized net actuarial loss 33 17 Net periodic benefit income $ ( 12 ) $ ( 25 ) 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 operating expense in the Consolidated Statements of Income. In April of 2024, the Company made a contribution of $ 3,000 to the defined benefit plan. 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. 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 Federal Home Loan Bank of Atlanta 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. Fair Value Measurement Using March 31, 2024 Balance Level 1 Level 2 Level 3 U.S. government agencies and corporations $ 307,989 $ - $ 307,989 $ - States and political subdivisions 147,999 - 147,999 - Mortgage-backed securities 147,323 - 147,323 - Corporate debt securities 5,688 - 5,688 - U.S. treasury 969 - 969 - Total securities available for sale $ 609,968 $ - $ 609,968 $ - 20 Table of Contents Fair Value Measurement Using December 31, 2023 Balance Level 1 Level 2 Level 3 U.S. government agencies and corporations $ 311,844 $ - $ 311,844 $ - States and political subdivisions 149,893 - 149,893 - Mortgage-backed securities 150,151 - 150,151 - Corporate debt securities 5,750 - 5,750 - U.S. treasury 963 - 963 - Total securities available for sale $ 618,601 $ - $ 618,601 $ - 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 Sale Commitment The Company originates consumer real estate loans which it intends to sell to a correspondent lender. Interest rate loan contracts and forward sale commitments 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 is 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 measures and reports best efforts commitments at fair value. Interest rate loan contracts and forward sale commitments 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. The Company had two rate lock commitments as of March 31, 2024, resulting in interest rate loan contracts and forward sales commitments. The interest rate lock commitments gave rise to an asset and the forward loan sales contracts gave rise to a liability. The Company had one rate lock commitment as of December 31, 2023, resulting in an interest rate loan contract and a forward sales commitment. The interest rate lock commitment gave rise to an asset and the forward loan sales contracts gave rise to a liability. The following tables present information on the interest rate loan contracts and forward sale commitments as of the date indicated: Fair Value Measurement Using March 31, 2024 Balance (Level 1) (Level 2) (Level 3) Interest rate loan contract $ 2 $ - $ - $ 2 Forward sale commitment $ ( 2 ) $ - $ - $ ( 2 ) 21 Table of Contents March 31, 2024 Valuation Technique Unobservable Input Range (Weighted Average) Interest rate loan contract Market approach Pull-through rate 100% (1) Forward sale commitment Market approach Pull-through rate 100% (1) Interest rate loan contract Market approach Current reference price 102.61% - 103.05% (102.76%) (2) Forward sale commitment Market approach Current reference price 102.61% - 103.05% (102.76%) (2) Fair Value Measurement Using December 31, 2023 Balance (Level 1) (Level 2) (Level 3) Interest rate loan contract $ 3 $ - $ - $ 3 Forward sale commitment $ ( 4 ) $ - $ - $ ( 4 ) December 31, 2023 Valuation Technique Unobservable Input Range (Weighted Average) Interest rate loan contract Market approach Pull-through rate 100% (1) Forward sale commitment Market approach Pull-through rate 100% (1) Interest rate loan contract Market approach Current reference price 102.64% (3) Forward sale commitment Market approach Current reference price 101.60% - 102.64% (101.98%) (2) ( 1 ) All contracts are valued using the same pull-through rate ( 2 ) Current reference prices were weighted by the relative amount of the loan ( 3 ) Comprised of only one loan. 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 March 31, 2024 or December 31, 2023. Collateral Dependent Loans Collateral dependent loans are measured on a non-recurring basis for the ACL. If the fair value of the collateral is lower than the loan’s amortized cost basis, the shortfall is recognized in the ACLL. When repayment is expected from the operation of the collateral, fair value is estimated as the present value of expected cash flows from the operation of the collateral. When repayment is expected from the sale of the collateral, fair value is estimated using measurement techniques discussed below and discounted by the 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 financial asset. For loans secured by real estate, fair value of collateral is determined by the “as-is” value of appraisals or third party evaluations that are less than 24 months of age. Appraisals are prepared by independent, licensed appraisers. Appraisals are based upon observable market data analyzed through an income or sales valuation approach. 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 March 31, 2024, three consumer real estate loan totaling $ 121 and two commercial real estate loans totaling $ 2,156 were collateral dependent. Valuations were based upon a third party evaluation (Level 2 ) and did not result in a specific allocation. 22 Table of Contents 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. The Company did not have any OREO as of March 31, 2024 or December 31, 2023. 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. Estimated Fair Value March 31, 2024 Carrying Amount Level 1 Level 2 Level 3 Financial assets: Cash and due from banks $ 10,656 $ 10,656 $ - $ - Interest-bearing deposits 110,527 110,527 - - Securities available for sale 609,968 - 609,968 - Restricted stock, at cost 1,248 - 1,248 - Loans, net 854,493 - - 790,540 Accrued interest receivable 6,478 - 6,478 - Bank-owned life insurance 43,840 - 43,840 - Interest rate loan contract 2 - - 2 Financial liabilities: Deposits $ 1,537,808 $ - $ 1,297,907 $ 241,538 Accrued interest payable 2,514 - 2,514 - Forward sale commitment 2 - - 2 Estimated Fair Value December 31, 2023 Carrying Amount Level 1 Level 2 Level 3 Financial assets: Cash and due from banks $ 12,967 $ 12,967 $ - $ - Interest-bearing deposits 73,636 73,636 - - Securities available for sale 618,601 - 618,601 - Restricted stock, at cost 1,264 - 1,264 - Mortgage loans held for sale 406 - 406 - Loans, net 847,552 - - 793,800 Accrued interest receivable 6,313 - 6,313 - Bank-owned life insurance 43,583 - 43,583 - Interest rate loan contract 3 - - 3 Financial liabilities: Deposits $ 1,503,972 $ - $ 1,280,732 $ 222,374 Accrued interest payable 1,416 - 1,416 - Forward sale commitment 4 - - 4 23 Table of Contents 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 December 31, 2022 $ ( 81,421 ) $ ( 2,345 ) $ ( 83,766 ) Unrealized holding gain on available for sale securities, net of tax of $ 3,121 11,738 - 11,738 Reclassification adjustment, net of tax of ($3) ( 9 ) - ( 9 ) Balance at March 31, 2023 $ ( 69,692 ) $ ( 2,345 ) $ ( 72,037 ) Balance at December 31, 2023 $ ( 62,556 ) $ ( 2,310 ) $ ( 64,866 ) Unrealized holding loss on available for sale securities, net of tax of ($887) ( 3,338 ) - ( 3,338 ) Balance at March 31, 2024 $ ( 65,894 ) $ ( 2,310 ) $ ( 68,204 ) 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. 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. 24 Table of Contents 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, annuities and other investments. Commissions from the sale of mutual funds, annuities 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. The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the periods indicated. Three Months March 31, Noninterest Income 2024 2023 In-scope of Topic 606: Service charges on deposit accounts $ 675 $ 592 Other service charges and fees 46 53 Credit and debit card fees, net 374 467 Trust income 503 445 Insurance and Investment (included within Other Income in the Consolidated Statements of Income) 305 285 Noninterest Income (in-scope of Topic 606) $ 1,903 $ 1,842 Noninterest Income (out-of-scope of Topic 606) 296 357 Total noninterest income $ 2,199 $ 2,199 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. 25 Table of Contents Options to Extend, Residual Value Guarantees, Restrictions and Covenants Of the Company’s six operating leases as of March 31, 2024, four leases offer the option to extend the lease term. 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: March 31, 2024 December 31, 2023 Lease liability $ 1,048 $ 1,127 Right-of-use asset $ 1,018 $ 1,096 Weighted average remaining lease term (in years) 4.22 4.39 Weighted average discount rate 3.28 % 3.29 % For the Three Months Ended March 31, Lease Expense 2024 2023 Operating lease expense $ 89 $ 92 Short-term lease expense 5 1 Total lease expense $ 94 $ 93 Cash paid for amounts included in lease liabilities $ 95 $ 94 Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period $ - $ - The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability: Undiscounted Cash Flow for the Period As of March 31, 2024 Twelve months ending March 31, 2025 $ 340 Twelve months ending March 31, 2026 234 Twelve months ending March 31, 2027 203 Twelve months ending March 31, 2028 188 Twelve months ending March 31, 2029 158 Thereafter - Total undiscounted cash flows $ 1,123 Less: discount ( 75 ) Lease liability $ 1,048 26 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 and December 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 March 31, 2024 follows: Shares Weighted-Average Grant Date Fair Value Nonvested at January 1, 2024 4,095 $ 30.73 Granted - - Nonvested at March 31, 2024 4,095 $ 30.73 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 $ 32 for the three months ended March 31, 2024. As of March 31, 2024, expense of $ 52 related to the nonvested RSAs is expected to be recognized over the coming 9 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 March 31, 2024 2023 Net Income (Numerator) Common Shares 1 (Denominator) Per Share Net Income (Numerator) Common Shares 1 (Denominator) Per Share Basic earnings per common share $ 2,174 5,889,687 $ 0.37 $ 4,531 5,889,687 $ 0.77 Dilutive shares for restricted stock awards: 1,964 - Diluted earnings per common share $ 2,174 5,891,651 $ 0.37 $ 4,531 5,889,687 $ 0.77 ( 1 ) Weighted average outstanding RSA grants are disregarded in the computation of diluted earnings per share if they are determined to be anti-dilutive. There were no anti-dilutive RSAs for the three month periods ended March 31, 2024 and March 31, 2023. 27 Table of Contents