What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-13 compared with 2024-08-14 · 149 added, 146 removed, 413 unchanged (42% of the section changed)

2 unchanged sentences

The purpose of this discussion and analysis is to provide information about the financial condition and results of operations of the Company.

Please refer to the financial statements and other information included in this report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the "2023 Form 10-K") for an understanding of the following discussion and analysis.

Please refer to the financial statements and other information included in this report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”) for an understanding of the following discussion and analysis.

References in the following discussion and analysis to “we” or “us” refer to the Company unless the context indicates that the reference is to the Bank.

16 unchanged sentences

• deposit flows,

• competition,

• demand for financial services in the Company’s market,

22 unchanged sentences

NBI has two wholly-owned subsidiaries;

the National Bank of Blacksburg and National Bankshares Financial Services, Inc.

the National Bank of Blacksburg ("NBB") and National Bankshares Financial Services, Inc.

NBB is a community bank and does business as National Bank from 27 office locations and two loan production offices.

2 unchanged sentences

Income from NBFS is not significant at this time, nor is it expected to be so in the near future.

The Company expects construction of a new branch in Roanoke, Virginia to be completed during the latter half of 2024.

The full service branch will expand our already successful loan production office and enhance our service in the Roanoke Valley.

The Company expects construction of a new branch in Roanoke, Virginia to be completed during the fourth quarter of 2024.

The full service branch will expand our already successful loan production office and enhance our business opportunities in the Roanoke Valley.

Critical Accounting Policies

14 unchanged sentences

On June 1, 2024, the Company and the Bank acquired FCB, a Virginia chartered commercial bank headquartered in Waynesboro, Virginia.

FCB’s results of operations are included in the Company’s consolidated results since the Acquisition Date, and accordingly the Company’s second quarter and first half of 2024 results reflect increased levels of average balances, net interest income, and expense compared to the prior quarter and first half of 2024 results.

FCB’s balances and results of operations are included in the Company’s consolidated results beginning on the Acquisition Date.

The acquisition was made pursuant to an Agreement and Plan of Merger, dated January 23, 2024, by and among the Company, the Bank and FCB under which FCB merged with and into the Bank (the “FCB Merger Agreement”).

16 unchanged sentences

The following tables present the reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, for the periods indicated.

Three Months Ended June 30,

Net Interest Income, FTE

Three Months Ended September 30,

Net Interest Margin, FTE

Interest income (GAAP)

5 unchanged sentences

Net interest margin

Six Months Ended June 30,

Net Interest Income, FTE

Nine Months Ended September 30,

Net Interest Margin, FTE

Interest income (GAAP)

9 unchanged sentences

The components of the efficiency ratio calculation for the periods indicated are summarized in the following table.

Three Months Ended June 30,

Three Months Ended September 30,

Efficiency Ratio

Noninterest expense (GAAP)

merger-related expense

contract termination expense (1)

proxy-related expense (2)

1 unchanged sentence

Noninterest income (GAAP)

realized securities loss, net

gain on sale of investment (3)

gain on BOLI settlement

Adjusted noninterest income (non-GAAP)

Net interest income, FTE (non-GAAP)

1 unchanged sentence

Efficiency ratio

Six Months Ended June 30,

Nine Months Ended September 30,

Efficiency Ratio

Noninterest expense (GAAP)

18 unchanged sentences

The tables below present the reconciliation of adjusted annualized net income, which is not a measurement under GAAP, for the periods indicated.

Three Months Ended June 30,

Net (loss) income per GAAP

Three Months Ended September 30,

Annualized Net Income for Ratio Calculation

Net income per GAAP

items not annualized:

Realized securities loss, net of tax of $702 for the period ended June 30, 2023

Proxy-related expense, net of tax of $72 for the period ended June 30, 2023

Gain on sale of investment, net of tax of ($624) for the period ended June 30, 2023

Gain on BOLI settlement

ACL provision, net of tax of $271 for the period ended June 30, 2024 (1)

Merger-related expense, net of tax of $411 for the period ended June 30, 2024

Contract termination expense, net of tax of $36 for the period ended June 30, 2024

Proxy-related expense, net of tax of $0 for the period ended September 30, 2023

ACL recovery, net of tax of $84 for the period ended September 30, 2023

Merger-related expense, net of tax of $6 for the period ended September 30, 2024

Total non-annualized items

7 unchanged sentences

Adjusted return on average equity (non-GAAP)

Six Months Ended June 30,

Nine Months Ended September 30,

Net income per GAAP

items not annualized:

Partnership income net of tax of ($35) and ($44) for the periods ended June 30, 2024 and 2023, respectively

Realized securities gain, net of tax of $700 for the period ended June 30, 2023

Proxy-related expense, net of tax of $165 for the period ended June 30, 2023

Gain on sale of investment, net of tax of ($624) for the period ended June 30, 2023

Partnership income net of tax of ($35) and ($44) for the periods ended September 30, 2024 and 2023, respectively

Realized securities gain, net of tax of $700 for the period ended September 30, 2023

Proxy-related expense, net of tax of $165 for the period ended September 30, 2023

Gain on sale of investment, net of tax of ($624) for the period ended September 30, 2023

Gain on BOLI settlement

ACL provision, net of tax of $271 for the period ended June 30, 2024 (1)

Merger-related expense, net of tax of $411 for the period ended June 30, 2024

Contract termination expense, net of tax of $36 for the period ended June 30, 2024

ACL provision (recovery), net of tax of $271 and ($82) for the periods ended September 30, 2024 and 2023, respectively(1)

Merger-related expense, net of tax of $417 for the period ended September 30, 2024

Contract termination expense, net of tax of $36 for the period ended September 30, 2024

Total non-annualized items

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(1) Upon acquisition of FCB, the Company recorded a provision for credit losses of $1,290 to establish an ACL for non-PCD loans.

After the acquisition date, credit risk for FCB non-PCD loans is recognized according to the company's normal ACL and provision processes.

As of the reporting dates, the Company did not expect to record a provision or recovery of similar magnitude for the remainder of 2024 or 2023.

Performance Summary

The following table presents the Company’s key performance indicators for the periods indicated.

Three Months Ended June 30,

Three Months Ended September 30,

Return on average assets

2 unchanged sentences

Adjusted return on average equity (1)

Basic net (loss) income per common share

Fully diluted net (loss) income per common share (2)

Basic net income per common share

Fully diluted net income per common share (2)

Net interest margin (1)

Efficiency ratio (1)

Six Months Ended

June 30, 2024

Six Months Ended

June 30, 2023

Twelve Months Ended

December 31, 2023

Nine Months Ended

September 30, 2024

Nine Months Ended

September 30, 2023

Twelve Months Ended December 31, 2023

Return on average assets

7 unchanged sentences

(1) See “Non-GAAP Financial Measures” above.

As of June 30, 2024, the Company had 4,839 unvested shares of restricted stock outstanding with a one year vesting period.

Net income for the three and six months ended June 30, 2024 decreased when compared with the comparable periods of 2023, due to net interest margin compression, merger related expenses and contract termination expense.

(2) As of September 30, 2024, the Company had 4,379 unvested shares of restricted stock outstanding with a one year vesting period.

Net income for the three and nine months ended September 30, 2024 decreased when compared with the comparable period of 2023, due to net interest margin compression, merger related expenses and contract termination expense.

The net interest margin as well as key noninterest income and expense items are discussed below.

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The following tables show interest‑earning assets and interest‑bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net interest margin for the periods indicated.

Three Months Ended June 30,

Three Months Ended September 30,

Interest-earning assets:

12 unchanged sentences

Net interest margin

Six Months Ended June 30,

Nine Months Ended September 30,

Interest-earning assets:

13 unchanged sentences

(1) Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a Federal income tax rate of 21%.

Included in interest income are loan fees of $55 and $66 for the three months ended June 30, 2024 and 2023, respectively.

Included in interest income are loan fees of $103 and $106 for the six months ended June 30, 2024 and 2023, respectively.

(2) Included in interest income are loan fees of $44 and $56 for the three months ended September 30, 2024 and 2023, respectively.

(3) Included in interest income are loan fees of $147 and $162 for the nine months ended September 30, 2024 and 2023, respectively.

(4) Nonaccrual loans are included in average balances for yield computations.

2 unchanged sentences

(7) Includes restricted stock.

Interest income and the yield on earning assets continues to grow in response to the Federal Reserve’s interest rate increases between March 2022 and July 2023.

Many of the Company’s loans are adjustable with repricing dates in the future.

If rates remain at the current level or do not decrease substantially, the Company expects that repricing will continue to contribute to improved interest income.

The competitive pressure for deposits that first began affecting the Company in the first quarter of 2023 and increased throughout 2023 has moderated, but continues to contribute to higher cost of funds and compressed net interest margin when results for the three and six months ended June 30, 2024 are compared with the same periods of 2023.

The Company continuously monitors its deposit base and funding costs.

Further information on the Company’s funds management and deposit strategy is discussed under the Deposits section below.

In September, 2024, the Federal Reserve cut its target interest rate by 50 basis points.

This cut had an immediate impact on deposits with pricing based on the prime interest rate.

Competitive pressure for deposits began in 2023 and continues to contribute to higher cost of funds and compressed net interest margin when results for the three and nine months ended September 30, 2024 are compared with the same periods of 2023.

However, the Company expects the interest rate cut to benefit deposit costs during the fourth quarter of 2024.

While the interest rate cut is expected to reduce deposit costs, current interest rates are still at a level that will allow interest income and the yield on earning assets to grow as adjustable loans reach repricing dates.

Noninterest Income

Three Months Ended June 30,

Three Months Ended September 30,

Percent Change

Service charges on deposits

Service charges on deposit accounts

Other service charges and fees

Credit and debit card fees, net

Gain on sale of investment

Gain on sale of mortgage loans

Realized securities loss, net

Total noninterest income

Six Months Ended June 30,

Nine Months Ended September 30,

Percent Change

Service charges on deposits

Service charges on deposit accounts

Other service charges and fees

4 unchanged sentences

Total noninterest income

Service charges on deposit accounts increased when the three and six months ended June 30, 2024 are compared with the comparable periods of 2023, due to changes in fee structure.

Other service charges and fees decreased when the three and six months ended June 30, 2024 are compared with the comparable periods of 2023, due to lower fees associated with letters of credit.

Credit and debit card fees, net, increased when the three months ended June 30, 2024 are compared with the comparable period of 2023, due an increase in customer use.

When the six months ended June 30, 2024 and June 30, 2023 are compared, credit and debit card fees, net, decreased due to higher processing expense.

Trust income increased due to higher volume, when the three and six months ended June 30, 2024 are compared with the comparable periods of 2023.

BOLI income decreased when compared over the same periods due to the settlement of a policy in the second quarter of 2023.

Service charges on deposit accounts increased when the three and nine months ended September 30, 2024 are compared with the comparable periods of 2023, due to changes in fee structure.

Other service charges and fees decreased when the three and nine months ended September 30, 2024 are compared with the comparable periods of 2023, due to lower fees associated with letters of credit and one time fee income received in 2023.

Credit and debit card fees, net, decreased when the three and nine months ended September 30, 2024 are compared with the comparable periods of 2023, due to higher processing fees.

Trust income increased due to higher volume, when the three and nine months ended September 30, 2024 are compared with the comparable periods of 2023.

BOLI income increased when the three month period ended September 30, 2024 is compared with the comparable period of 2023 due to income from the BOLI policies acquired with the FCB merger.

BOLI income decreased when the nine month period ended September 30, 2024 is compared with the comparable period of 2023 due to the settlement of a policy in the second quarter of 2023.

The Company recorded a gain on the sale of an investment and a loss on the sale of securities during the second quarter of 2023.

The sale of securities is discussed in more detail under the Securities section below.

Other income includes revenue from investment and insurance sales, adjustments to partnership basis and other miscellaneous components.

1 unchanged sentence

These areas fluctuate with market conditions and competitive factors.

The Company also recorded a gain on the sale of an investment and a loss on the sale of securities during the second quarter of 2023.

The sale of securities is discussed in more detail under the Securities section below.

Noninterest Expense

Three Months Ended June 30,

Three Months Ended September 30,

Percent Change

8 unchanged sentences

Merger-related expenses

Contract termination expenses

Other operating expenses

Total noninterest expense

Six Months Ended June 30,

Nine Months Ended September 30,

Percent Change

11 unchanged sentences

Total noninterest expense

Noninterest expense increased when the three and six months ended June 30, 2024 are compared with the comparable periods of 2023.

Key noninterest expense items include occupancy, furniture and fixtures, professional services, merger-related expenses, and contract termination expenses.

Occupancy, furniture and fixtures expense increased when compared with 2023 due to receipt of a one-time insurance reimbursement during 2023.

Professional services include legal and other expenses for the Company’s response to a threatened proxy contest from an activist shareholder during 2023, which amounted to $327 and $768 for the three and six months ended June 30, 2023, respectively.

Noninterest expense increased when the three and nine months ended September 30, 2024 are compared with the comparable periods of 2023.

Key noninterest expense changes include occupancy, furniture and fixtures, professional services, merger-related expenses, and contract termination expenses.

Occupancy, furniture and fixtures expense increased when compared with 2023 due to the addition of assets acquired in the FCB merger and the receipt of a one-time insurance reimbursement during 2023.

Professional services include legal and other expenses for the Company’s response to a proxy contest from an activist shareholder during 2023, which amounted to $786 for the nine months ended September 30, 2023.

During 2024, the Company recorded expenses associated with its acquisition of FCB, including executive and employee severance benefits and legal and consulting fees.

1 unchanged sentence

Included in various categories of noninterest expense are expenses to manage cybersecurity risk.

The cost of these measures was $94 for the three months ended June 30, 2024 and $150 for the three months ended June 30, 2023.

For the six months ended June 30, 2024, the total cybersecurity expense was $184 compared to $283 for the six months ended June 30, 2023.

The Company’s income tax benefit for the three months ended June 30, 2024 was $177.

For the three months ended June 30, 2023, the Company recorded an income tax expense of $540.

For the six months ended June 30, 2024, the Company’s income tax expense was $341 and effective tax rate was 15.44%.

For the six months ended June 30, 2023, the Company’s income tax expense was $1,488 and effective tax rate was 15.00%.

The cost of these measures was $92 for the three months ended September 30, 2024 and $141 for the three months ended September 30, 2023.

For the nine months ended September 30, 2024, the total cybersecurity expense was $276 compared to $424 for the nine months ended September 30, 2023.

The Company places high priority on cybersecurity.

The decrease in expense reflects renegotiation of contracts and licensing.

The Company’s income tax expense for the three months ended September 30, 2024 was $550.

For the three months ended September 30, 2023, the Company recorded an income tax expense of $617.

For the nine months ended September 30, 2024, the Company’s income tax expense was $891 and effective tax rate was 16.39%.

For the nine months ended September 30, 2023, the Company’s income tax expense was $2,105 and effective tax rate was 15.47%.

A significant portion of the merger related expense was not tax deductible, resulting in an increase to the Company’s effective tax rate for 2024.

2 unchanged sentences

Key indicators of the Company’s asset quality are presented in the following table.

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

December 31, 2023

4 unchanged sentences

Net charge-off ratio

Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned

Ratio of nonperforming assets to loans, net of unearned income and

deferred fees and costs, plus other real estate owned

Ratio of ACLL to nonperforming loans

1 unchanged sentence

Summary of Significant Accounting Policies.

The Company’s risk analysis as of June 30, 2024 determined an ACLL of $10,502, or 1.06% of loans net of unearned income and deferred fees and costs.

The Company’s risk analysis as of September 30, 2024 determined an ACLL of $10,328, or 1.03% of loans net of unearned income and deferred fees and costs.

This compares with an allowance of $9,094 as of December 31, 2023, or 1.06% of loans.

To determine the appropriate level of the ACLL, the Company considers credit risk for individually evaluated loans and for groups of loans evaluated collectively.

To determine the

appropriate level of the ACLL, the Company considers credit risk for individually evaluated loans and for groups of loans evaluated collectively.

Individually Evaluated Loans

Individually evaluated loans were $13,471 as of June 30, 2024, a slight increase from $10,544 as of December 31, 2023.

As of June 30, 2024, four individually evaluated loans were collateral dependent but were adequately collateralized and did not result in an individual allocation.

Individually evaluated loans were $10,713 as of September 30, 2024, a slight increase from $10,544 as of December 31, 2023.

As of September 30, 2024, four individually evaluated loans were collateral dependent but were adequately collateralized and did not result in an individual allocation.

The remaining individually evaluated loans were measured using the discounted cash flow method, resulting in an allocation of $85.

Collectively Evaluated Loans

Collectively evaluated loans totaled $976,427, with an ACLL of $9,858 as of June 30, 2024.

At December 31, 2023, collectively evaluated loans totaled $846,631, with an allowance of $8,522.

Collectively evaluated loans totaled $991,528, with an ACLL of $10,243 as of September 30, 2024.

As of December 31, 2023, collectively evaluated loans totaled $846,631, with an allowance of $8,522.

Collectively evaluated loans are divided into classes based upon risk characteristics.

Utilizing historical loss information and peer data, the Company calculates a probability of default and loss given default for each class, which is adjusted for a reasonable and supportable forecast.

Utilizing historical loss information and peer data, the Company calculates probability of default and loss given default for each class, which is adjusted for a reasonable and supportable forecast.

Cash flow projections based on each loan’s contractual terms are modified by the adjusted probability of default and loss given default for its class.

2 unchanged sentences

The Company applies national unemployment forecasts to project cash flows.

The Company determined that 12 months represents a reasonable and supportable forecast period as of June 30, 2024, and set a period of 12 months to revert to historical losses on a straight-line basis.

The forecast applied at June 30, 2024 projects that unemployment will rise over the next 12 months, to a slightly higher level than the forecast applied as of December 31, 2023.

The higher unemployment forecast increased the required level of the ACLL when June 30, 2024 is compared with December 31, 2023.

The Company determined that 12 months represents a reasonable and supportable forecast period as of September 30, 2024, and set a period of 12 months to revert to historical losses on a straight-line basis.

The forecast applied as of September 30, 2024 projects that unemployment will rise over the next 12 months to a higher level than the forecast applied as of December 31, 2023.

The higher unemployment forecast increased the required level of the ACLL when September 30, 2024 is compared with December 31, 2023.

Qualitative Factors:

1 unchanged sentence

Higher bankruptcy filings indicate heightened credit risk and increase the ACLL, while lower bankruptcy filings have a beneficial impact on credit risk.

Compared with data available at December 31, 2023, business bankruptcy filings remained the same while personal bankruptcy filings increased slightly.

Compared with data available as of December 31, 2023, business and personal bankruptcies filings increased slightly.

Residential vacancy rates and housing inventory impact the Company’s residential construction customers and the consumer real estate market.

Higher levels increase credit risk.

The residential vacancy rate available at June 30, 2024 increased from the data incorporated into the December 31, 2023 calculation.

Housing data available as of June 30, 2024 showed higher inventory than at December 31, 2023, resulting in a higher allocation.

The residential vacancy rate available as of September 30, 2024 increased from the data incorporated into the December 31, 2023 calculation.

Housing data available as of September 30, 2024 showed higher inventory than as of December 31, 2023, resulting in a higher allocation.

Qualitative Factors:

2 unchanged sentences

Increases in past due loans indicate heightened credit risk.

Accruing loans past due 30-89 days were 0.25% of total loans at June 30, 2024, an increase from 0.19% at December 31, 2023.

Accruing loans past due 30-89 days were 0.33% of total loans as of September 30, 2024, an increase from 0.19% as of December 31, 2023.

Qualitative Factors:

2 unchanged sentences

The interest rate environment impacts variable rate loans.

The Federal Reserve’s interest rate increases between March 2022 and July 2023 have increased and are expected to continue to increase payments on the Company’s variable rate loans as they reach contractual repricing dates.

Higher payments may increase credit risk.

The Company allocates additional reserve each time the Federal Reserve increases rates.

After the rate increase has been in effect for one year, the allocation may be removed under the assumption that the impact of the change has become integrated to the portfolio.

As of June 30, 2024, the Company reduced its allocation from the December 31, 2023 allocation to reflect improvement in inflationary pressures.

The Federal Reserve’s substantial interest rate increases between March 2022 and July 2023 have increased and are expected to continue to increase payments on the Company’s variable rate loans as they reach contractual repricing dates, despite the Federal Reserve's recent reduction in their target rate.

The Company allocates additional reserve each time the Federal Reserve increases rates, under the expectation that higher payments may increase credit risk.

After the rate increase has been in effect for one year, the allocation may be removed if management deems that the impact of the change has become integrated to the portfolio.

As of September 30, 2024, the Company reduced its allocation from December 31, 2023 .

The competitive, legal and regulatory environments were evaluated for changes that would affect credit risk.

9 unchanged sentences

Unallocated Surplus

The unallocated surplus as of June 30, 2024 is $400, or 3.96% in excess of the calculated requirement.

The unallocated surplus as of September 30, 2024 is $83, or 0.81% in excess of the calculated requirement.

The unallocated surplus at December 31, 2023 was $350, or 4.00% in excess of the calculated requirement.

2 unchanged sentences

The Company augmented the calculated requirement with an unallocated surplus.

Based on analysis of historical indicators, asset quality and economic factors, management believes the level of ACLL is reasonable for the credit risk in the loan portfolio as of June 30, 2024.

Based on analysis of historical indicators, asset quality and economic factors, management believes the level of ACLL is reasonable for the credit risk in the loan portfolio as of September 30, 2024.

ACL on Unfunded Commitments

The ACL on unfunded commitments was $251, or 0.14% of unfunded commitments as of June 30, 2024.

The ACL on unfunded commitments was $241, or 0.14% of unfunded commitments as of September 30, 2024.

The ACL on unfunded commitments was $259, or 0.16% as of December 31, 2023.

1 unchanged sentence

The provision for credit losses represents charges to earnings necessary to maintain an adequate allowance.

The adequacy of the ACLL is reviewed quarterly and adjustments are made as considered necessary.

The Company recorded a provision for credit losses on loans of $1,307 and a recovery of credit losses on unfunded commitments of $15 for the six months ended June 30, 2024, compared with provision for credit losses on loans of $12 for the six months ended June 30, 2023 and a recovery of $9 for unfunded commitments.

The adequacy of the ACLL is reviewed quarterly and adjustments are made as determined necessary.

The Company recorded a provision for credit losses on loans of $5 and a recovery of credit losses on unfunded commitments of $10 for the three months ended September 30, 2024, compared with a recovery of credit losses on loans of $401 for the three months ended September 30, 2023 and a provision of $30 for unfunded commitments.

The Company recorded a provision for credit losses on loans of $1,312 and a recovery of credit losses on unfunded commitments of $25 for the nine months ended September 30, 2024, compared with a recovery of credit losses on loans of $389 for the nine months ended September 30, 2023 and a provision of $21 for unfunded commitments.

Upon acquisition of FCB in June 2024, the Company recorded a provision for credit losses of $1,290 to establish an allowance on non-PCD loans.

6 unchanged sentences

If a modification is made to a borrower experiencing financial difficulty, the loan’s risk rating is downgraded to special mention or classified, resulting in individual evaluation for the ACLL.

During the three months ended June 30, 2024, the Company modified one loan totaling $7 for a borrower who was experiencing financial difficultly.

During the six months ended June 30, 2024, the Company modified two loans totaling $6,403 for borrowers who were experiencing financial difficulty.

Both loans were individually evaluated for the ACLL in previous periods and as of June 30, 2024, using the discounted cash flow methodology.

During the three and six months ended June 30, 2023, the Company modified one loan totaling $6,396 for a borrower who was experiencing financial difficulty.

The loan was individually evaluated using the discounted cash flow methodology for the ACLL as of June 30, 2023.

Please refer to Note 3:

Loans and Allowance for Credit Losses in Part I, Item 1 of this report for more information on loans modified for borrowers experiencing financial difficulty.

Modifications for Borrowers Who Were Not Experiencing Financial Difficulty

During the three and six months ended June 30, 2024 and 2023, the Company modified loans in the normal course of business for borrowers who were not experiencing financial difficulty.

During the three months ended June 30, 2024, the Company modified 216 loans totaling $21,704.

During the six months ended June 30, 2024, the Company modified 432 loans totaling $43,936.

During the three months ended June 30, 2023, the Company provided 194 modifications to loans totaling $11,528.

For the six months ended June 30, 2023, the Company provided 395 modifications to loans totaling $42,036.

During the three and nine months ended September 30, 2024 and 2023, the Company modified loans in the normal course of business for borrowers who were not experiencing financial difficulty.

During the three months ended September 30, 2024, the Company modified 205 loans totaling $42,969.

During the nine months ended September 30, 2024, the Company modified 637 loans totaling $86,905.

During the three months ended September 30, 2023, the Company provided 186 modifications to loans totaling $23,054.

For the nine months ended September 30, 2023, the Company provided 581 modifications to loans totaling $65,089.

Key Assets and Liabilities

NBI’s key assets and liabilities and their change from December 31, 2023 are shown in the following table.

June 30, 2024

September 30, 2024

December 31, 2023

Percent Change

Interest-bearing deposits

2 unchanged sentences

Year-to-date daily averages for the major balance sheet categories are as follows:

June 30, 2024

September 30, 2024

December 31, 2023

Percent Change

Interest-bearing deposits

8 unchanged sentences

Changes in securities, loans, deposits and stockholders’ equity are discussed below.

June 30, 2024

September 30, 2024

December 31, 2023

Percent Change

Amortized cost

4 unchanged sentences

Most of the Company’s securities were purchased during periods prior to the Federal Reserve’s interest rate increases that began in March of 2022.

The Company’s analysis of the securities portfolio determined no identifiable credit risk as of June 30, 2024 and no ACL has been recorded.

The Federal Reserve's cut to its target rate in September 2024 improved the unrealized loss on securities when September 30, 2024 is compared with December 31, 2023.

The Company’s analysis of the securities portfolio determined no identifiable credit risk as of September 30, 2024 and no ACL has been recorded.

Please refer to Note 1:

1 unchanged sentence

Securities in Part I, Item 1 of this report for additional information on the securities portfolio.

June 30, 2024

September 30, 2024

December 31, 2023

10 unchanged sentences

The Company is positioned to make every loan that meets its underwriting standards.

June 30, 2024

September 30, 2024

December 31, 2023

11 unchanged sentences

Capital Resources

June 30, 2024

September 30, 2024

December 31, 2023

8 unchanged sentences

Risk-based capital ratios are calculated in compliance with OCC rules based on the Basel III Capital Rules.

The Bank’s ratios are well above the required minimums as of June 30, 2024.

The Bank’s ratios are well above the required minimums as of September 30, 2024.

Capital ratios for NBB are shown in the following tables.

Capital Minimum

Regulatory Capital Minimum

Ratios with Capital

Conservation Buffer

Regulatory Capital

Minimum Ratios

Common Equity Tier I Capital Ratio

5 unchanged sentences

The Company has diverse liquidity sources, including customer and purchased deposits, customer repayments of loan principal and interest, sales, calls and maturities of securities, Federal Reserve discount window borrowing, short-term borrowing, and FHLB advances.

As of June 30, 2024, the Company had $297,917 of borrowing capacity from the FHLB and an unsecured federal funds line of credit with an unaffiliated bank of $10,000, with no amounts advanced against those lines.

Additionally, the Company had $180,278 of unused capacity at the Federal Reserve Bank discount window.

As of September 30, 2024, the Company had $293,379 of borrowing capacity from the FHLB and the Company had $178,582 of unused capacity at the Federal Reserve Bank discount window.

Periodically during 2023, the Company accessed FHLB borrowings.

The advances were fully repaid, due to the success of the Company’s deposit strategy.

As of June 30, 2024, the Company did not have purchased deposits, discount window borrowings or short-term borrowings.

As of September 30, 2024, the Company did not have purchased deposits, discount window borrowings or short-term borrowings.

The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters.

4 unchanged sentences

Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve Bank discount window.

As of June 30, 2024, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve Bank discount window.

As of September 30, 2024, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve Bank discount window.

The Company monitors factors that may increase its liquidity needs.

Some of these factors include deposit trends, large depositor activity, maturing deposit promotions, interest rate sensitivity, maturity and repricing timing gaps between assets and liabilities, the level of unfunded loan commitments and loan growth.

As of June 30, 2024, the Company’s liquidity is sufficient to meet projected trends.

As of September 30, 2024, the Company’s liquidity is sufficient to meet projected trends.

To monitor and estimate liquidity levels, the Company performs stress testing under varying assumptions on credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows.

The Company’s Contingency Funding Plan sets forth avenues for rectifying liquidity shortfalls.

As of June 30, 2024, the analysis indicated adequate liquidity under the tested scenarios.

As of September 30, 2024, the analysis indicated adequate liquidity under the tested scenarios.

The Company utilizes several other strategies to maintain sufficient liquidity.

Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s internally-set target range.

As of June 30, 2024, the loan to deposit ratio was 60.14%.

As of September 30, 2024, the loan to deposit ratio was 62.49%.

The investment strategy takes into consideration the term of the investment, and securities in the available for sale portfolio are laddered based upon projected funding needs.

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In the event of a sudden and substantial draw on these lines, the Company would be able to access multiple options, including its lines of credit with correspondents, raising additional deposits, or selling securities available for sale or loans.

The Company estimates an ACL on unfunded loan commitments under the current expected credit losses ("CECL") model.

The Company estimates an ACL on unfunded loan commitments under the current expected credit losses model.

The Company sells mortgages on the secondary market.

1 unchanged sentence

Violation of the representations and warranties of the agreement would entitle the purchaser to recourse provisions.

The Company has determined that its risk in this area is not significant because of a low volume of secondary market mortgage loans and high underwriting standards.

The Company estimates a potential loss reserve for recourse provisions that is not material as of June 30, 2024.

The Company has determined that its risk in this area is not significant because of the low volume of secondary market mortgage loans and high underwriting standards.

The Company estimates a potential loss reserve for recourse provisions that is not material as of September 30, 2024.

To date, no recourse provisions have been invoked.

If funds were needed, the Company would access the same sources as noted above for funding lines and letters of credit.

There were no material changes in off-balance sheet arrangements during the three and six months ended June 30, 2024.

There were no material changes in off-balance sheet arrangements during the three and nine months ended September 30, 2024.

Contractual Obligations

The Company had no finance lease or purchase obligations and no long-term debt at June 30, 2024.

Quantitative and Qualitative Disclosures About Market Risk

The Company had no finance lease or purchase obligations and no long-term debt at September 30, 2024.

Quantitative a nd Qualitative Disclosures About Market Risk

Not applicable.

Controls an d Procedures

The Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report.

In conducting the evaluation of the effectiveness of its disclosure controls and procedures as of September 30, 2024, the Company has excluded the operations of FCB as permitted by the guidance issued by the Office of the Chief Accountant of the Securities and Exchange Commission (not to extend more than one year beyond the date of the acquisition or for more than one annual reporting period).

The merger was completed on June 1, 2024.

Business Combinations" for further discussion of the merger and its impact on the Company’s consolidated financial statements.

Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of September 30, 2024 to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time

periods specified by the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Because of the inherent limitations in all control systems, the Company believes that no system of controls, no matter how well designed and operated, can provide absolute assurance that all control issues have been detected.

Other Information

Legal P roceedings

There are no pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

Ris k Factors

Please refer to the “Risk Factors” previously disclosed in Item 1A of the 2023 Form 10-K and the factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” in Part I.

Item 2 of this Form 10-Q.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis