[Part I – Financial Information](index=4&type=section&id=Part%20I%20%E2%80%93%20Financial%20Information) [Financial Statements](index=4&type=section&id=Item%201.%20Financial%20Statements) Unaudited consolidated financial statements for National Bankshares, Inc. as of June 30, 2021, and for the three and six-month periods then ended are presented [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to **$1.66 billion** from **$1.52 billion** at year-end 2020, with deposits rising to **$1.45 billion** and equity decreasing to **$191.2 million** Consolidated Balance Sheets (in thousands) | (in thousands) | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | **Total Assets** | **$1,661,652** | **$1,519,673** | | Cash and interest-bearing deposits | $164,521 | $133,872 | | Securities available for sale | $617,756 | $546,742 | | Loans, net | $797,117 | $760,318 | | **Total Liabilities** | **$1,470,417** | **$1,319,066** | | Total deposits | $1,449,624 | $1,297,143 | | **Total Stockholders' Equity** | **$191,235** | **$200,607** | [Consolidated Statements of Income](index=5&type=section&id=Consolidated%20Statements%20of%20Income) Net income increased significantly in Q2 2021 to **$4.6 million** and for the six-month period to **$9.4 million**, driven by reduced loan loss provisions and higher net interest income Consolidated Statements of Income (Three Months Ended June 30) | (in thousands, except per share data) | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net interest income | $10,063 | $9,152 | | Provision for loan losses | $4 | $1,352 | | Noninterest income | $1,941 | $1,745 | | Noninterest expense | $6,447 | $6,077 | | **Net Income** | **$4,613** | **$2,982** | | **Fully diluted EPS** | **$0.74** | **$0.46** | Consolidated Statements of Income (Six Months Ended June 30) | (in thousands, except per share data) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net interest income | $20,090 | $18,744 | | Provision for loan losses | $54 | $1,831 | | Noninterest income | $4,275 | $3,880 | | Noninterest expense | $12,983 | $12,544 | | **Net Income** | **$9,379** | **$6,961** | | **Fully diluted EPS** | **$1.49** | **$1.07** | [Consolidated Statements of Cash Flows](index=10&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities was **$11.2 million**, while investing activities used **$149.4 million**, and financing activities provided **$138.8 million**, primarily from deposit growth Consolidated Statements of Cash Flows (Six Months Ended June 30) | (in thousands) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $11,209 | $6,422 | | Net cash used in investing activities | ($149,351) | ($98,904) | | Net cash provided by financing activities | $138,808 | $95,507 | | **Net change in cash and due from banks** | **$666** | **$3,025** | [Notes to Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Detailed notes cover accounting policies, COVID-19 impacts on lending, PPP loans, loan portfolio breakdowns, allowance for loan losses, securities, and fair value measurements - The company participated in the Paycheck Protection Program (PPP), providing **1,259 loans** totaling **$83.0 million** since April 2020. As of June 30, 2021, **$29.9 million** in PPP loans remained outstanding[39](index=39&type=chunk) - The company is preparing for the adoption of ASU 2016-13 (CECL) for credit losses, effective for fiscal years beginning after December 15, 2022, with management refining assumptions using multiple models[50](index=50&type=chunk) Loan Portfolio (in thousands) | Loan Portfolio (in thousands) | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Real estate construction | $48,569 | $42,266 | | Consumer real estate | $196,214 | $181,782 | | Commercial real estate | $404,636 | $393,115 | | Commercial non real estate | $73,522 | $78,771 | | **Total Loans, net** | **$805,194** | **$768,799** | Nonperforming Assets (in thousands) | Nonperforming Assets (in thousands) | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Nonperforming loans | $3,822 | $3,685 | | Other real estate owned, net | $1,007 | $1,553 | | **Total nonperforming assets** | **$4,829** | **$5,238** | | Ratio of nonperforming assets to loans + OREO | 0.60% | 0.68% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=40&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses improved financial performance in H1 2021, driven by higher net interest income and lower loan loss provisions, alongside stable asset quality, strengthened liquidity, and robust capital levels [Performance Summary](index=48&type=section&id=Performance%20Summary) Key performance metrics improved in H1 2021, with ROA increasing to **1.18%**, ROE to **9.63%**, and the efficiency ratio improving to **53.26%**, despite net interest margin compression to **2.80%** Performance Ratios | Performance Ratios | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Return on average assets | 1.18% | 1.01% | | Return on average equity | 9.63% | 7.15% | | Basic and fully diluted EPS | $1.49 | $1.07 | | Net interest margin | 2.80% | 3.05% | | Efficiency ratio | 53.26% | 55.24% | [Asset Quality](index=50&type=section&id=Asset%20Quality) Asset quality remained strong with nonperforming assets decreasing to **0.60%**, and the provision for loan losses significantly lower at **$54 thousand** for H1 2021, reflecting improved portfolio performance Asset Quality Indicators | Asset Quality Indicators | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Nonperforming loans (in thousands) | $3,822 | $3,685 | | Allowance for loan losses to loans | 1.00% | 1.10% | | Allowance for loan losses to loans (ex-PPP) | 1.04% | 1.16% | | Ratio of nonperforming assets to loans + OREO | 0.60% | 0.68% | - The provision for loan losses was only **$54 thousand** for the first six months of 2021, a steep decline from **$1.83 million** in the first half of 2020, which was elevated due to the initial economic impact of the COVID-19 pandemic[239](index=239&type=chunk)[290](index=290&type=chunk) [Net Interest Income](index=55&type=section&id=Net%20Interest%20Income) Net interest income increased to **$20.6 million** for H1 2021, but the net interest margin compressed to **2.80%** due to loan refinancing and lower yields, partially offset by PPP loan income - The net interest margin declined to **2.80%** for the first six months of 2021 from **3.05%** in 2020, primarily due to loan refinancing and lower yields on securities in the low interest rate environment[288](index=288&type=chunk) - PPP loans contributed positively, adding **$198 thousand** in interest and **$894 thousand** in fee recognition during the first six months of 2021; excluding PPP loans, the net interest margin would have been lower at **2.66%**[289](index=289&type=chunk) [Noninterest Income and Expense](index=57&type=section&id=Noninterest%20Income%20and%20Expense) Noninterest income increased to **$4.3 million** driven by card fees, while noninterest expense rose to **$13.0 million** due to higher salaries, pension costs, and FDIC assessments - Credit and debit card fees (net) increased **31.9%** to **$913 thousand** for the six months ended June 30, 2021, compared to the same period in 2020[291](index=291&type=chunk)[293](index=293&type=chunk) - Salaries and employee benefits expense increased by **6.6%** for the six-month period, largely due to a **$248 thousand** increase in the service component of net periodic pension cost[298](index=298&type=chunk)[299](index=299&type=chunk) - FDIC assessment expense increased significantly to **$176 thousand** for the first half of 2021 from **$40 thousand** in 2020, as small bank assessment credits were fully utilized[301](index=301&type=chunk) [Liquidity and Capital Resources](index=60&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity remained strong with **11.76%** deposit growth, while total stockholders' equity decreased to **$191.2 million** due to **$9.4 million** in share repurchases and **$4.3 million** in dividends, though regulatory capital ratios remain robust - Total deposits grew by **$152.5 million (11.76%)** since December 31, 2020, largely due to government stimulus funds, strengthening the company's liquidity position[309](index=309&type=chunk) - The company repurchased **261,962 shares** for **$9.4 million** in the first six months of 2021, with a new **1,000,000 share** repurchase program authorized effective June 1, 2021[317](index=317&type=chunk) NBB Regulatory Capital Ratios | NBB Regulatory Capital Ratios | June 30, 2021 | Minimum with Buffer | | :--- | :--- | :--- | | Common Equity Tier I Capital Ratio | 18.69% | 7.00% | | Tier I Capital Ratio | 18.69% | 8.50% | | Total Capital Ratio | 19.54% | 10.50% | | Leverage Ratio | 11.54% | 4.00% | [Quantitative and Qualitative Disclosures About Market Risk](index=62&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Interest rate risk remains the company's primary market risk, with no significant changes reported since the 2020 Form 10-K disclosures - The company's primary market risk is interest rate risk, and there have been no significant changes to this risk exposure since the disclosures in the 2020 Form 10-K[326](index=326&type=chunk) [Controls and Procedures](index=62&type=section&id=Item%204.%20Controls%20and%20Procedures) Disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during Q2 2021 - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021[327](index=327&type=chunk) - No material changes to the company's internal control over financial reporting occurred during the three months ended June 30, 2021[328](index=328&type=chunk) [Part II – Other Information](index=62&type=section&id=Part%20II%20%E2%80%93%20Other%20Information) [Legal Proceedings](index=62&type=section&id=Item%201.%20Legal%20Proceedings) No pending or threatened legal proceedings are expected to materially impact the company's financial condition - There are no pending or threatened legal proceedings that management believes may materially impact the company's financial condition[331](index=331&type=chunk) [Risk Factors](index=62&type=section&id=Item%201A.%20Risk%20Factors) For information on risk factors, the company refers to its previously filed 2020 Annual Report on Form 10-K - For information on risk factors, the company refers to its previously filed 2020 Annual Report on Form 10-K[332](index=332&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=63&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q2 2021, the company repurchased **150,130 shares** at an average price of **$35.48**, and authorized a new **1,000,000 share** repurchase program Common Stock Repurchases (Q2 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2021 | 88,530 | $35.81 | | May 2021 | 61,600 | $35.61 | | June 2021 | - | - | | **Total Q2 2021** | **150,130** | **$35.48** | - A new **1,000,000 share** repurchase program was authorized by the Board of Directors, effective from June 1, 2021, to May 31, 2022[334](index=334&type=chunk) [Defaults Upon Senior Securities](index=63&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - None[335](index=335&type=chunk) [Mine Safety Disclosures](index=63&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[336](index=336&type=chunk) [Other Information](index=63&type=section&id=Item%205.%20Other%20Information) The company reported no other information for this item - None[337](index=337&type=chunk) [Exhibits](index=64&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the Form 10-Q, including CEO/CFO certifications and iXBRL financial data

Part I – Financial Information [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents National Bankshares, Inc.'s unaudited consolidated financial statements for Q1 2021, along with detailed notes on accounting policies and financial components [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) As of March 31, 2021, total assets grew to $1.57 billion from $1.52 billion at year-end 2020, funded by increased deposits, while stockholders' equity decreased to $189.1 million Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | **Total Assets** | **$1,568,210** | **$1,519,673** | | Loans, net | $770,824 | $760,318 | | Securities available for sale | $571,359 | $546,742 | | **Total Liabilities** | **$1,379,141** | **$1,319,066** | | Total deposits | $1,358,588 | $1,297,143 | | **Total Stockholders' Equity** | **$189,069** | **$200,607** | [Consolidated Statements of Income](index=4&type=section&id=Consolidated%20Statements%20of%20Income) For Q1 2021, net income increased by 19.8% to $4.77 million, driven by higher net interest and noninterest income, and a substantially lower provision for loan losses Q1 2021 vs Q1 2020 Income Statement (in thousands, except EPS) | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Interest Income | $10,027 | $9,592 | | Provision for loan losses | $50 | $479 | | Noninterest Income | $2,334 | $2,135 | | Noninterest Expense | $6,536 | $6,467 | | **Net Income** | **$4,766** | **$3,979** | | **Fully diluted EPS** | **$0.74** | **$0.61** | [Consolidated Statements of Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) The company reported a total comprehensive loss of $7.55 million for Q1 2021, primarily due to a significant unrealized holding loss on available-for-sale securities Comprehensive Income (Loss) Summary (in thousands) | Component | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Income | $4,766 | $3,979 | | Other comprehensive income (loss), net of tax | ($12,313) | $3,854 | | **Total Comprehensive Income (Loss)** | **($7,547)** | **$7,833** | [Consolidated Statements of Changes in Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Stockholders%27%20Equity) Stockholders' equity decreased from $200.6 million to $189.1 million in Q1 2021, primarily due to an other comprehensive loss and share repurchases, partially offset by net income - Key drivers for the change in stockholders' equity in Q1 2021 were net income of **$4.77 million**, common stock repurchases of **$3.99 million (111,832 shares)**, and an other comprehensive loss of **$12.31 million**[19](index=19&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For Q1 2021, net cash provided by operating activities was $6.8 million, with investing activities using $64.7 million, largely funded by $57.5 million from financing activities Cash Flow Summary (in thousands) | Activity | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $6,753 | $5,213 | | Net cash provided by (used in) investing activities | ($64,677) | $8,471 | | Net cash provided by (used in) financing activities | $57,454 | ($11,570) | | **Net change in cash and due from banks** | **($470)** | **$2,114** | [Notes to Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations of the company's accounting policies and financial statement components, including COVID-19 risks and CECL adoption - The company highlights the continued risks and uncertainties from the **COVID-19 pandemic**, which could adversely affect its business, financial condition, and results of operations, particularly in areas like interest income, lending, and credit quality[28](index=28&type=chunk)[29](index=29&type=chunk)[30](index=30&type=chunk) - The company is preparing for the adoption of the **Current Expected Credit Losses (CECL) methodology (ASU 2016-13)**, which will be effective for fiscal years beginning after **December 15, 2022**[42](index=42&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=41&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management analyzes the company's Q1 2021 financial condition and operations, covering profitability, asset quality, liquidity, and capital resources Key Performance Ratios (Annualized) | Ratio | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Return on average assets | 1.19% | 1.16% | | Return on average equity | 9.30% | 8.03% | | Net interest margin | 2.89% | 3.20% | | Efficiency ratio | 53.87% | 55.67% | - The company participated in the SBA Paycheck Protection Program (**PPP**), holding **$43.6 million** in **PPP loans** as of March 31, 2021. These loans positively impacted net interest income[228](index=228&type=chunk)[291](index=291&type=chunk) - In response to the **COVID-19 pandemic**, the company provided modifications to **39 loans totaling $34.2 million** in Q1 2021. These were not designated as **Troubled Debt Restructurings (TDRs)** per regulatory guidance[276](index=276&type=chunk)[278](index=278&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=62&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company identifies interest rate risk as its most significant market risk, with no material changes since the 2020 Form 10-K disclosures - The company's primary market risk is **interest rate risk**, and there have been **no significant changes** to its exposure since the end of **2020**[329](index=329&type=chunk) [Controls and Procedures](index=62&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management concluded that the company's disclosure controls and procedures were **effective** as of the end of the reporting period[330](index=330&type=chunk) - **No material changes** were made to the company's internal control over financial reporting during the first quarter of 2021[332](index=332&type=chunk) Part II – Other Information [Legal Proceedings](index=64&type=section&id=Item%201.%20Legal%20Proceedings) The company reports no pending or threatened legal proceedings expected to materially impact its financial condition - There are **no material pending or threatened legal proceedings** against the company[335](index=335&type=chunk) [Risk Factors](index=64&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K and forward-looking statements - For a discussion of risk factors, the report refers to the company's **2020 Form 10-K**[336](index=336&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=64&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During Q1 2021, the company repurchased 111,832 shares of common stock at an average price of $35.69 per share under its authorized program Share Repurchase Activity (Q1 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jan 2021 | 0 | --- | | Feb 2021 | 25,900 | $33.22 | | Mar 2021 | 85,932 | $36.43 | | **Total** | **111,832** | **$35.69** | [Defaults Upon Senior Securities](index=64&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - **None**[338](index=338&type=chunk) [Mine Safety Disclosures](index=64&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - **Not applicable**[339](index=339&type=chunk) [Other Information](index=64&type=section&id=Item%205.%20Other%20Information) The company reported no other information for this item - **None**[340](index=340&type=chunk) [Exhibits](index=64&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO, and financial data formatted in iXBRL

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2020 ☐ 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 ...

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 September 30, 2020 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ NATIONAL BANKSHARES, INC. (Exact name of registrant as specified in its charter) Commission File Number 0-15204 Virginia 54-1375 ...

For the transition period from ________ to ________ NATIONAL BANKSHARES, INC. 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, 2020 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Table of Contents (Exact name of registrant as specified in its charter) Commission File Number 0-15204 Virginia (State or ot ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2020 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ NATIONAL BANKSHARES, INC. (Exact name of registrant as specified in its charter) Commission File Number 0-15204 Virginia (State ...

Part I [Business](index=4&type=section&id=Item%201.%20Business) National Bankshares, Inc, a financial holding company, operates a community bank in southwest Virginia, deriving primary revenue from loan interest and fees - National Bankshares, Inc is a financial holding company whose main operation is its wholly-owned community bank subsidiary, the National Bank of Blacksburg (NBB), originally chartered in 1891[10](index=10&type=chunk)[11](index=11&type=chunk) - NBB is a community-oriented bank offering a full range of retail and commercial banking services through twenty-four branch offices in southwest Virginia and one loan production office in Roanoke, Virginia[12](index=12&type=chunk) Operating Revenue Composition (2017-2019) | Class of Service | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Interest and Fees on Loans | 62.79% | 61.49% | 61.22% | | Interest on Investments | 18.09% | 22.02% | 21.55% | | Noninterest Income | 16.30% | 15.17% | 15.62% | - The company's market area in southwest Virginia has a diverse economic base including education (Virginia Tech, Radford University), manufacturing, agriculture, tourism, and healthcare[32](index=32&type=chunk)[33](index=33&type=chunk) - The company has experienced two cybersecurity incidents and has implemented measures to mitigate risk, including limiting certain online transactions and requiring assurances from key vendors[37](index=37&type=chunk) - As a result of the EGRRCPA in 2018, the company, with consolidated assets under **$3 billion**, qualifies as a small bank holding company and is no longer subject to regulatory capital requirements on a consolidated basis since **August 2018**[45](index=45&type=chunk)[51](index=51&type=chunk) [Risk Factors](index=17&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks from economic downturns, interest rate fluctuations, cybersecurity threats, competition, and regulatory changes - Economic downturns could lead to **higher loan delinquencies and defaults**, negatively impacting financial results, and a decline in the local real estate market would also deteriorate the value of loan collateral[80](index=80&type=chunk)[82](index=82&type=chunk) - The company's information systems are vulnerable to security breaches, having experienced **two cyber-intrusions in May 2016 and January 2017** where customer information was compromised[95](index=95&type=chunk)[97](index=97&type=chunk) - The company has incurred costs for forensic investigations, legal expenses, and system upgrades following past cyber-attacks and anticipates that future attacks are probable, which could result in additional costs[100](index=100&type=chunk) - The upcoming **Current Expected Credit Losses (CECL)** accounting standard, effective January 1, 2023 for the company, is expected to significantly impact required credit reserves and will incur costs for implementation[106](index=106&type=chunk) - The recent **coronavirus outbreak** is identified as a risk that could negatively impact employees and customers, potentially leading to increased loan delinquencies, defaults, and disruptions to operations[112](index=112&type=chunk)[113](index=113&type=chunk) [Unresolved Staff Comments](index=24&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[115](index=115&type=chunk) [Properties](index=24&type=section&id=Item%202.%20Properties) The company's banking subsidiary owns its headquarters and seventeen branch offices, while leasing six branches and one loan production office - NBB owns its headquarters, main office, and 17 branch offices, while leasing 6 branch locations and a loan production office[116](index=116&type=chunk) [Legal Proceedings](index=24&type=section&id=Item%203.%20Legal%20Proceedings) The company and its subsidiaries are not currently involved in any material pending legal proceedings - The company is not involved in any material pending legal proceedings[117](index=117&type=chunk) [Mine Safety Disclosures](index=24&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company's operations - Not applicable[118](index=118&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=24&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's stock trades on Nasdaq under "NKSH" with an active share repurchase program, and its five-year return outperformed the Nasdaq Bank Index - The company's common stock is traded on the Nasdaq Capital Market under the symbol **"NKSH"**[119](index=119&type=chunk) - A share repurchase program authorized the buyback of up to **1,000,000 shares**, valid from June 1, 2019, to May 31, 2020; in 2019, the company repurchased **468,400 shares**[121](index=121&type=chunk)[123](index=123&type=chunk) Stock Performance Comparison (2014-2019) | Index | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | **NATIONAL BANKSHARES, INC.** | $100 | $121 | $153 | $165 | $136 | $173 | | **NASDAQ COMPOSITE INDEX** | $100 | $107 | $117 | $151 | $147 | $201 | | **NASDAQ BANK INDEX** | $100 | $108 | $150 | $158 | $133 | $167 | [Selected Financial Data](index=26&type=section&id=Item%206.%20Selected%20Financial%20Data) The company's five-year financial data shows total assets reaching $1.32 billion and net income of $17.5 million for the year ended December 31, 2019 Selected Financial Data (2015-2019) | ($ in thousands, except per share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Net income** | $17,466 | $16,151 | $14,092 | $14,942 | $15,833 | | **Diluted net income per share** | $2.65 | $2.32 | $2.03 | $2.15 | $2.28 | | **Cash dividends declared per share** | $1.39 | $1.21 | $1.17 | $1.16 | $1.14 | | **Total assets** | $1,321,837 | $1,256,032 | $1,256,757 | $1,233,942 | $1,203,519 | | **Total deposits** | $1,119,753 | $1,051,942 | $1,059,734 | $1,043,442 | $1,018,859 | | **Stockholders' equity** | $183,726 | $190,238 | $184,896 | $178,263 | $172,114 | | **Return on average assets** | 1.39% | 1.29% | 1.14% | 1.24% | 1.37% | | **Return on average equity** | 9.87% | 8.65% | 7.64% | 8.30% | 9.22% | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net income rose to $17.5 million in 2019, driven by higher noninterest income and lower expenses, despite a slight compression in net interest margin Key Performance Ratios (2018-2019) | Ratio | 2019 | 2018 | | :--- | :--- | :--- | | Return on average assets | 1.39% | 1.29% | | Return on average equity | 9.87% | 8.65% | | Basic net earnings per common share | $2.65 | $2.32 | | Net interest margin (Non-GAAP) | 3.29% | 3.36% | - Total assets grew by **$65.8 million (5.24%)** to **$1.32 billion** at year-end 2019, while deposits increased by **$67.8 million (6.45%)**[168](index=168&type=chunk)[240](index=240&type=chunk) Asset Quality Indicators (as of Dec 31) | ($ in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Nonperforming loans | $3,375 | $3,420 | | Other real estate owned | $1,612 | $2,052 | | Allowance for loan losses to loans | 0.94% | 1.04% | | Net charge-off ratio | 0.09% | 0.07% | - Net interest income decreased slightly to **$37.8 million** in 2019 from $38.2 million in 2018, with the net interest margin compressing from **3.36% to 3.29%**[172](index=172&type=chunk)[176](index=176&type=chunk) - Noninterest income increased to **$8.8 million** in 2019 from $7.7 million in 2018, largely due to a **$0.5 million** insurance recovery and **$0.6 million** in realized securities gains[199](index=199&type=chunk)[204](index=204&type=chunk)[205](index=205&type=chunk) - Noninterest expense decreased to **$25.8 million** in 2019 from $27.3 million in 2018, as the prior year included a **$2.0 million** write-down related to cybersecurity breaches[208](index=208&type=chunk)[216](index=216&type=chunk) - The company experienced two cybersecurity intrusions in May 2016 and January 2017, resulting in total fund thefts of **$2.4 million**, partially offset by insurance recoveries[219](index=219&type=chunk)[220](index=220&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=57&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section refers to the Management's Discussion and Analysis for information regarding market risk - Information regarding market risk is provided in the "Interest Rate Sensitivity" and "Derivatives and Market Risk Exposure" sections of the MD&A[316](index=316&type=chunk) [Financial Statements and Supplementary Data](index=58&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section contains the company's audited consolidated financial statements, notes, and the independent auditor's unqualified opinion Consolidated Balance Sheet Highlights (as of Dec 31) | ($ in thousands) | 2019 | 2018 | | :--- | :--- | :--- | | Total Assets | $1,321,837 | $1,256,032 | | Loans, net | $726,588 | $702,409 | | Total Deposits | $1,119,753 | $1,051,942 | | Total Liabilities | $1,138,111 | $1,065,794 | | Total Stockholders' Equity | $183,726 | $190,238 | Consolidated Income Statement Highlights (Year Ended Dec 31) | ($ in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Interest Income | $37,767 | $38,177 | $37,135 | | Provision for (recovery of) loan losses | $126 | $(81) | $157 | | Noninterest Income | $8,790 | $7,729 | $7,636 | | Noninterest Expense | $25,754 | $27,276 | $24,229 | | Net Income | $17,466 | $16,151 | $14,092 | - The independent auditor, Yount, Hyde & Barbour, P.C., issued an **unqualified opinion** on the consolidated financial statements and on the effectiveness of the company's internal control over financial reporting as of December 31, 2019[562](index=562&type=chunk)[568](index=568&type=chunk) [Changes In and Disagreements With Accountants on Accounting and Financial Disclosure](index=109&type=section&id=Item%209.%20Changes%20In%20and%20Disagreements%20With%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants - None reported[575](index=575&type=chunk) [Controls and Procedures](index=109&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2019 - The company's principal executive officer and principal financial officer concluded that **disclosure controls and procedures were effective** as of December 31, 2019[575](index=575&type=chunk) - Management's assessment concluded that the company maintained **effective internal control over financial reporting** as of December 31, 2019, based on the COSO 2013 framework[580](index=580&type=chunk) [Other Information](index=110&type=section&id=Item%209B.%20Other%20Information) There is no other information to report in this section - None[582](index=582&type=chunk) Part III [Directors, Executive Officers and Corporate Governance](index=110&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors and corporate governance is incorporated by reference from the 2020 Proxy Statement, while executive officer information is in Part I - Required information is incorporated by reference to the Company's definitive Proxy Statement for the 2020 Annual Meeting of Stockholders[583](index=583&type=chunk) - Information about executive officers is included in Part I, Item 1 of this Form 10-K[583](index=583&type=chunk) [Executive Compensation](index=111&type=section&id=Item%2011.%20Executive%20Compensation) Required information on executive compensation is incorporated by reference from the company's 2020 Proxy Statement - Required information is incorporated by reference to the Company's Proxy Statement[587](index=587&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=111&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership information is incorporated by reference from the 2020 Proxy Statement, and the company has no equity compensation plans - Required information is incorporated by reference to the Company's Proxy Statement[588](index=588&type=chunk) - As of December 31, 2019, the Company **does not have any equity compensation plans** in effect[588](index=588&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=111&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on related party transactions and director independence is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference to the Company's Proxy Statement[589](index=589&type=chunk) [Principal Accounting Fees and Services](index=111&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding fees paid to the principal accountant is incorporated by reference from the 2020 Proxy Statement - Required information is incorporated by reference to the Company's Proxy Statement[590](index=590&type=chunk) Part IV [Exhibits, Financial Statement Schedules](index=112&type=section&id=Item%2015.%20Exhibits%2C%20Financial%20Statement%20Schedules) This section lists the financial statements and exhibits filed with the Form 10-K, including corporate governance and material contract documents - This item lists the consolidated financial statements included in Item 8 of the report[592](index=592&type=chunk) - A detailed list of exhibits filed with the Form 10-K is provided, including articles of incorporation, bylaws, and various management compensation agreements[593](index=593&type=chunk) [Form 10-K Summary](index=113&type=section&id=Item%2016.%20Form%2010-K%20Summary) This section is not applicable - Not applicable[595](index=595&type=chunk)

Part I – Financial Information [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the unaudited consolidated financial statements for National Bankshares, Inc. as of and for the periods ended September 30, 2019, including balance sheets, statements of income, comprehensive income, changes in stockholders' equity, and cash flows, along with accompanying notes [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) As of September 30, 2019, total assets were **$1.27 billion**, a slight increase from **$1.26 billion** at December 31, 2018, driven by interest-bearing deposits and loans, offset by a decrease in securities available for sale | (in thousands) | (Unaudited) Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | **Total Assets** | **$1,272,721** | **$1,256,032** | | Loans, net | $715,025 | $702,409 | | Securities available for sale, at fair value | $334,150 | $425,010 | | Interest-bearing deposits | $135,490 | $43,491 | | **Total Liabilities** | **$1,084,733** | **$1,065,794** | | Total deposits | $1,068,027 | $1,051,942 | | **Total Stockholders' Equity** | **$187,988** | **$190,238** | [Consolidated Statements of Income](index=6&type=section&id=Consolidated%20Statements%20of%20Income) For Q3 2019, net income was **$4.25 million**, nearly flat year-over-year, while nine-month net income increased to **$12.69 million** from **$11.59 million**, driven by lower noninterest expenses | (in thousands, except per share data) | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net interest income | $9,423 | $9,700 | | Provision for loan losses | $95 | $223 | | Noninterest income | $2,098 | $1,914 | | Noninterest expense | $6,386 | $6,463 | | **Net Income** | **$4,252** | **$4,251** | | **Fully diluted net income per common share** | **$0.65** | **$0.61** | | (in thousands, except per share data) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- |\ | Net interest income | $28,147 | $28,684 | | Provision for loan losses | $350 | $93 | | Noninterest income | $6,443 | $5,805 | | Noninterest expense | $19,304 | $21,051 | | **Net Income** | **$12,689** | **$11,588** | | **Fully diluted net income per common share** | **$1.92** | **$1.67** | [Consolidated Statements of Cash Flows](index=13&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) For the nine months ended September 30, 2019, net cash provided by operating activities was **$12.4 million**, with net cash used in investing activities of **$4.2 million** and financing activities of **$6.8 million**, primarily due to common stock repurchases and dividends | (in thousands) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $12,361 | $14,245 | | Net cash used in investing activities | ($4,238) | ($9,044) | | Net cash used in financing activities | ($6,799) | ($6,594) | | **Net change in cash and due from banks** | **$1,324** | **($1,393)** | [Notes to Consolidated Financial Statements](index=15&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes provide detailed information on accounting policies and financial statement line items, including the adoption of new accounting standards for leases, loan portfolio analysis, and fair value measurements - The company adopted ASU No. **2016-02**, "Leases (Topic 842)" on January 1, 2019, using a prospective approach, resulting in the recognition of a right-of-use asset and a lease liability for leases with terms greater than 12 months, with no cumulative effect adjustment to retained earnings[36](index=36&type=chunk)[38](index=38&type=chunk) - The loan portfolio grew to **$722.3 million** as of September 30, 2019, from **$709.8 million** at year-end 2018, with commercial real estate representing the largest segment at **$360.5 million**[41](index=41&type=chunk) - Total troubled debt restructurings (TDRs) decreased to **$5.26 million** at September 30, 2019, from **$5.66 million** at December 31, 2018[95](index=95&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=44&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial condition and results of operations, highlighting key performance metrics, asset quality, balance sheet changes, and income statement trends, with nine-month net income rising to **$12.69 million** from **$11.59 million** year-over-year [Performance Summary](index=55&type=section&id=Performance%20Summary) For the nine months ended September 30, 2019, the company's performance improved year-over-year, with Return on Average Assets increasing to **1.34%** and Return on Average Equity rising to **9.13%**, despite a slight compression in net interest margin to **3.31%** | Performance Ratios | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--- | :--- | :--- | | Return on average assets | 1.34% | 1.28% | | Return on average equity | 9.13% | 8.61% | | Net interest margin | 3.31% | 3.37% | | Noninterest margin | 1.45% | 1.41% | [Asset Quality](index=57&type=section&id=Asset%20Quality) Asset quality remained stable as of September 30, 2019, with nonperforming loans increasing to **$4.1 million** from **$3.4 million** at year-end 2018, and the allowance for loan losses to total loans decreasing slightly to **1.01%** | Asset Quality Indicators | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Nonperforming loans | $4,076 | $3,420 | | Other real estate owned | $1,470 | $2,052 | | Allowance for loan losses to loans | 1.01% | 1.04% | | Ratio of nonperforming assets to loans + OREO | 0.77% | 0.77% | | Ratio of allowance for loan losses to nonperforming loans | 178.16% | 216.08% | - The allowance for loan losses decreased to **$7.26 million** (**1.01%** of loans) at Sep 30, 2019, from **$7.39 million** (**1.04%** of loans) at Dec 31, 2018, influenced by improvements in certain loan ratings despite slight worsening in some economic indicators[239](index=239&type=chunk)[250](index=250&type=chunk) [Net Interest Income](index=61&type=section&id=Net%20Interest%20Income) For the nine months ended September 30, 2019, tax-equivalent net interest income was **$29.2 million**, a decrease from **$29.9 million** in the prior-year period, with the net interest margin compressing by **6 basis points** to **3.31%** due to higher deposit costs | (Nine Months Ended) | Sep 30, 2019 | Sep 30, 2018 | | :--- | :--- | :--- | | Average Yield on Earning Assets | 3.95% | 3.76% | | Average Rate on Interest-Bearing Liabilities | 0.87% | 0.54% | | **Interest Rate Spread** | **3.08%** | **3.22%** | | **Net Interest Margin** | **3.31%** | **3.37%** | - The cost of time deposits saw the most significant increase, rising **103 basis points** to **1.46%** for the nine months ended Sep 30, 2019, compared to the same period in 2018[272](index=272&type=chunk)[277](index=277&type=chunk) [Noninterest Income and Expense](index=65&type=section&id=Noninterest%20Income%20and%20Expense) For the nine months ended September 30, 2019, total noninterest income increased by **11.0%** to **$6.4 million**, while total noninterest expense decreased by **8.3%** to **$19.3 million**, primarily due to a prior-year write-down of an insurance receivable - Other income for the nine months ended Sep 30, 2019, increased by **$0.57 million**, or **70.8%**, primarily due to a **$0.54 million** recovery on a previously recognized insurance loss[279](index=279&type=chunk)[283](index=283&type=chunk) - Total noninterest expense for the nine months ended Sep 30, 2019, decreased by **$1.75 million**, largely because the comparable 2018 period included a **$2.01 million** write-down of an insurance receivable related to a cybersecurity breach[285](index=285&type=chunk)[292](index=292&type=chunk) - FDIC assessment expense decreased significantly due to the application of small bank assessment credits in Q3 2019[288](index=288&type=chunk) [Balance Sheet, Liquidity and Capital Resources](index=68&type=section&id=Balance%20Sheet%2C%20Liquidity%20and%20Capital%20Resources) Total assets grew **1.3%** to **$1.27 billion** from year-end 2018, with loans increasing **1.8%** to **$715 million** and deposits up **1.5%** to **$1.07 billion**, while stockholders' equity decreased to **$188.0 million** due to share repurchases - Loans, net of unearned income, increased by **1.76%** to **$722.3 million** at Sep 30, 2019, from Dec 31, 2018, with growth in real estate construction and consumer/commercial real estate loans[302](index=302&type=chunk) - Total deposits increased by **1.53%** to **$1.07 billion**, driven by growth in noninterest-bearing demand, savings, and time deposits, which offset a decrease in interest-bearing demand deposits[303](index=303&type=chunk) - The Company repurchased **468,400** shares during the first nine months of 2019, reducing stockholders' equity by **$18.5 million**, while the subsidiary bank's capital ratios remain well above regulatory minimums[310](index=310&type=chunk)[312](index=312&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=60&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company identifies interest rate risk as its most significant market risk and employs systems to measure exposure, with no significant changes to its market risk profile since the 2018 Form 10-K disclosures - The Company's primary market risk is interest rate risk, and there have been no significant changes to its risk exposure or management systems since the 2018 Form 10-K[321](index=321&type=chunk) [Controls and Procedures](index=60&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal control over financial reporting during the third quarter - The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective as of September 30, 2019[322](index=322&type=chunk) - No material changes were made to the company's internal control over financial reporting during the third quarter of 2019[323](index=323&type=chunk) Part II – Other Information [Legal Proceedings](index=62&type=section&id=Item%201.%20Legal%20Proceedings) The company reports that there are no pending or threatened legal proceedings expected to have a material impact on its financial condition - There are no pending or threatened legal proceedings that management believes may materially impact the company's financial condition[327](index=327&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=62&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) During the nine months ended September 30, 2019, the company repurchased a total of **468,400** shares at an average price of **$39.55** per share under its publicly announced repurchase program, which was renewed in May 2019 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | March 2019 | 452,400 | $39.78 | | August 2019 | 16,000 | $33.00 | | **Total YTD 2019** | **468,400** | **$39.55** | [Exhibits](index=62&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO and XBRL data files - Exhibits filed include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, and financial statements formatted in XBRL[334](index=334&type=chunk)[336](index=336&type=chunk)

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2019 [ ] 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 o ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 [ ] 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 ...