Note 1 - General	3 Months Ended
Mar. 31, 2020
Notes to Financial Statements
Organization, Consolidation and Presentation of Financial Statements Disclosure [Text Block]	Note 1: General The consolidated financial statements of National Bankshares, Inc. (“NBI”) and its wholly-owned subsidiaries, The National Bank of Blacksburg (the “Bank” or “NBB”) and National Bankshares Financial Services, Inc. (“NBFS”) (collectively, the “Company”), conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the banking industry. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of management, all adjustments consisting of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the three month period ended March 31, 2020 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 2019 Form 10 -K. The Company posts all reports required to be filed under the Securities Exchange Act of 1934 on its web site at www.nationalbankshares.com . Risks and Uncertainties The outbreak of COVID- 19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization declared COVID- 19 to be a global pandemic and almost all public commerce and related business activities have been, to varying degrees, curtailed in order to reduce the rate of new infections. The pandemic and efforts to reduce its spread have caused significant disruptions in the U.S. economy and negatively impacted banking and other financial activity in the Company’s market. The Company’s employees have, at this time, avoided any confirmed infection however an outbreak amongst employees could create widespread business continuity issues for the Company. The Congress of the United States, along with the President of the United States and the Federal Reserve have taken historic actions. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 and provides $2 trillion to cushion the economic fallout. The CARES Act employs various measures in an attempt to prevent a severe economic downturn, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. Certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID- 19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent that the impact COVID- 19 will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware. Financial position and results of operations The Company’s fee income may be reduced. In keeping with guidance from regulators, the Company is actively working with COVID- 19 affected customers and may waive various fees related to deposit and lending activities. The Company is continuously monitoring the situation and expects to continue to work with affected customers throughout the crisis in order to preserve its customer base. The Company will resume normal practices related to fees when the crisis eases. At this time, the Company is unable to project the materiality of such an impact, but recognize the economic impact on fee income will extend to future periods. The Company’s interest income in the short term will be reduced due to COVID- 19. In keeping with guidance from regulators, the Company is actively working with COVID- 19 affected borrowers to defer payments, interest, and fees. For certain real estate secured loans, payment extensions result in reversal of previously accrued interest, immediately reducing interest income. Interest begins accruing again at the next payment date and the reversed interest will be recognized at the end of the loan term. Accrued interest on other loans is not reversed when the payment is extended. If eventual credit losses are identified on any loan that has received a payment extension, interest and fee income accrued pursuant to U.S. GAAP accounting would be reversed at the time the loss is identified. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes economic impact may affect its borrowers’ ability to repay in future periods. Capital and Liquidity While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID- 19, its reported and regulatory capital ratios could be adversely impacted by further credit losses. The Company maintains access to multiple sources of liquidity. Wholesale funding markets are currently available to the Company, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time it becomes necessary for the Company to access wholesale funding, the Company’s net interest margin could be adversely affected. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding. Asset valuation Currently, the Company does not expect COVID- 19 to affect its ability to account timely for the assets on its balance sheet; however if the impact of the pandemic worsens, valuation procedures in future periods could be negatively affected. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances, such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with U.S. GAAP. COVID- 19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances prescribed by U.S. GAAP, require the Company to perform a goodwill impairment test. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Processes, controls and business continuity plan In response to the pandemic, the Company deployed its business continuity plan, including a remote working strategy for certain employees. The Company does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy. No material operational or internal control challenges or risks have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID- 19. The Company does not currently face any material resource constraint through the implementation of its business continuity plans. Lending operations and accommodations to borrowers In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company is providing a payment deferral program for its borrowers who are adversely affected by the pandemic. Depending on the demonstrated need of the borrower, the Company has provided payment deferrals for 30 or 60 days. As of April 30, 2020, the Company has deferred payment on 221 loans with aggregate outstanding loan balances of $85,883. Additionally, 9 loans totaling $19,700 received other modifications to provide short-term payment relief. In accordance with interagency guidance issued in March 2020, these short term deferrals are not considered troubled debt restructurings (“TDRs”). With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources through the program. PPP loans have a two -year term and earn interest at 1%. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of April 30, 2020, the Company has input to the SBA system 717 loans totaling $56.1 million. Of these, 575 loans have completed approval procedures and 516 loans totaling $48.2 million have been funded. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan loss through additional loan loss expense. Credit The Company is working with customers directly affected by COVID- 19, providing short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the COVID- 19 pandemic, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for loan losses and record additional loan loss expense. It is possible that the Company’s asset quality measures could worsen at future measurement periods if effects of the COVID- 19 pandemic are prolonged. Accounting Standards Adopted as of January 1, 20 20 ASU No. 201 7 - 0 4 , “ Intangibles – Goodwill and Other (Topic 350 ) ” In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017 - 04, “Intangibles – Goodwill and Other (Topic 350 ): Simplifying the Test for Goodwill Impairment.” The amendments in this ASU eliminate Step 2 from the goodwill impairment test. Step 2 measured goodwill impairment by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, annual or interim goodwill impairment testing will compare the fair value of a reporting unit with its carrying amount. The ASU still provides the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted ASU 2017 - 04 on January 1, 2020 under the prospective application approach as required by the ASU. The Company plans to perform its annual test for impairment during the fourth quarter of 2020. The adoption of ASU 2017 - 04 did not have a material impact on the Company’s consolidated financial statements. ASU No. 201 8 - 13 , “ Fair Value Measurement (Topic 820 ): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. ” In August 2018, the FASB issued ASU 2018 - 13, “Fair Value Measurement (Topic 820 ): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The Company adopted ASU 2018 - 13 as of January 1, 2020. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. The adoption of ASU 2018 - 13 did not have a material impact on the Company’s consolidated financial statements. Interagency Statement on Loan Modifications In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification 310 - 40, “Receivables – Troubled Debt Restructurings by Creditors,” (“ASC 310 - 40” ), a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID- 19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.

Note

General

The consolidated financial statements of National Bankshares, Inc. (“NBI”) and its wholly-owned subsidiaries, The National Bank of Blacksburg (the “Bank” or “NBB”) and National Bankshares Financial Services, Inc. (“NBFS”) (collectively, the “Company”), conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the banking industry. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of management, all adjustments consisting of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the

three

month period ended

March 31, 2020

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

-Q should be read in conjunction with the notes to consolidated financial statements included in the Company’s

2019

Form

-K. The Company posts all reports required to be filed under the Securities Exchange Act of

1934

on its web site at

www.nationalbankshares.com

Risks and Uncertainties

The outbreak of COVID-

has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The World Health Organization declared COVID-

to be a global pandemic and almost all public commerce and related business activities have been, to varying degrees, curtailed in order to reduce the rate of new infections. The pandemic and efforts to reduce its spread have caused significant disruptions in the U.S. economy and negatively impacted banking and other financial activity in the Company’s market. The Company’s employees have, at this time, avoided any confirmed infection however an outbreak amongst employees could create widespread business continuity issues for the Company.

The Congress of the United States, along with the President of the United States and the Federal Reserve have taken historic actions. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of

March 2020

and provides

trillion to cushion the economic fallout. The CARES Act employs various measures in an attempt to prevent a severe economic downturn, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. Certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations.

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global response to contain COVID-

escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is

not

possible to know the full extent that the impact COVID-

will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations

The Company’s fee income

may

be reduced. In keeping with guidance from regulators, the Company is actively working with COVID-

affected customers and

may

waive various fees related to deposit and lending activities. The Company is continuously monitoring the situation and expects to continue to work with affected customers throughout the crisis in order to preserve its customer base. The Company will resume normal practices related to fees when the crisis eases. At this time, the Company is unable to project the materiality of such an impact, but recognize the economic impact on fee income will extend to future periods.

The Company’s interest income in the short term will be reduced due to COVID-

19.

In keeping with guidance from regulators, the Company is actively working with COVID-

affected borrowers to defer payments, interest, and fees. For certain real estate secured loans, payment extensions result in reversal of previously accrued interest, immediately reducing interest income. Interest begins accruing again at the next payment date and the reversed interest will be recognized at the end of the loan term. Accrued interest on other loans is

not

reversed when the payment is extended. If eventual credit losses are identified on any loan that has received a payment extension, interest and fee income accrued pursuant to U.S. GAAP accounting would be reversed at the time the loss is identified. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes economic impact

may

affect its borrowers’ ability to repay in future periods.

Capital and Liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-

19,

its reported and regulatory capital ratios could be adversely impacted by further credit losses.

The Company maintains access to multiple sources of liquidity. Wholesale funding markets are currently available to the Company, but rates for short term funding have recently been volatile. If funding costs are elevated for an extended period of time it becomes necessary for the Company to access wholesale funding, the Company’s net interest margin could be adversely affected. If an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

Asset valuation

Currently, the Company does

not

expect COVID-

to affect its ability to account timely for the assets on its balance sheet; however if the impact of the pandemic worsens, valuation procedures in future periods could be negatively affected. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances, such as widening credit spreads, the Company does

not

anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with U.S. GAAP.

COVID-

could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances prescribed by U.S. GAAP, require the Company to perform a goodwill impairment test. In the event that the Company concludes that all or a portion of its goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings.

Processes, controls and business continuity plan

In response to the pandemic, the Company deployed its business continuity plan, including a remote working strategy for certain employees. The Company does

not

anticipate incurring additional material cost related to its continued deployment of the remote working strategy.

material operational or internal control challenges or risks have been identified to date. The Company does

not

anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-

19.

The Company does

not

currently face any material resource constraint through the implementation of its business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company is providing a payment deferral program for its borrowers who are adversely affected by the pandemic. Depending on the demonstrated need of the borrower, the Company has provided payment deferrals for

days. As of

April 30, 2020,

the Company has deferred payment on

221

loans with aggregate outstanding loan balances of

$85,883.

Additionally,

loans totaling

$19,700

received other modifications to provide short-term payment relief. In accordance with interagency guidance issued in

March 2020,

these short term deferrals are

not

considered troubled debt restructurings (“TDRs”).

With the passage of the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”), the Company is actively participating in assisting its customers with applications for resources through the program. PPP loans have a

two

-year term and earn interest at

1%.

The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. As of

April 30, 2020,

the Company has input to the SBA system

717

loans totaling

$56.1

million. Of these,

575

loans have completed approval procedures and

516

loans totaling

$48.2

million have been funded. It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S. government. Should those circumstances change, the Company could be required to establish additional allowance for loan loss through additional loan loss expense.

Credit

The Company is working with customers directly affected by COVID-

19,

providing short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the COVID-

pandemic, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for loan losses and record additional loan loss expense. It is possible that the Company’s asset quality measures could worsen at future measurement periods if effects of the COVID-

pandemic are prolonged.

Accounting Standards Adopted

as of

January 1,

ASU

No.

201

“

Intangibles – Goodwill and Other (Topic

350

)

”

January 2017,

the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)

No.

2017

04,

“Intangibles – Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment.” The amendments in this ASU eliminate Step

from the goodwill impairment test. Step

measured goodwill impairment by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, annual or interim goodwill impairment testing will compare the fair value of a reporting unit with its carrying amount. The ASU still provides the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

The Company adopted ASU

2017

January 1, 2020

under the prospective application approach as required by the ASU. The Company plans to perform its annual test for impairment during the

fourth

quarter of

2020.

The adoption of ASU

2017

did

not

have a material impact on the Company’s consolidated financial statements.

ASU

No.

201

“

Fair Value Measurement (Topic

820

): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.

”

August 2018,

the FASB issued ASU

2018

13,

“Fair Value Measurement (Topic

820

): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic

820

to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level

fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic

820

are also removed or modified.

The Company adopted ASU

2018

as of

January 1, 2020.

Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. The adoption of ASU

2018

did

not

have a material impact on the Company’s consolidated financial statements.

Interagency Statement on Loan Modifications

March 2020,

various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation, (“the agencies”) issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by the Coronavirus. The interagency statement was effective immediately and impacted accounting for loan modifications. Under Accounting Standards Codification

310

40,

“Receivables – Troubled Debt Restructurings by Creditors,” (“ASC

310

40”

), a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would

not

otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-

to borrowers who were current prior to any relief, are

not

to be considered TDRs. This includes short-term (e.g.,

six

months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than

days past due on their contractual payments at the time a modification program is implemented. This interagency guidance is expected to have a material impact on the Company’s financial statements; however, this impact cannot be quantified at this time.