What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-14 compared with 2024-11-13 · 117 added, 260 removed, 302 unchanged (56% 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 (“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 2024 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.

5 unchanged sentences

These factors include, but are not limited to, effects of or changes in:

• interest rates,

• inflation and changes in interest rates that may reduce our margins or reduce the fair value of financial instruments,

• the ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company’s or banking industry’s reputation becomes damaged,

14 unchanged sentences

• the Company’s technology initiatives,

• geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S.

• geopolitical conditions, including trade restrictions and tariffs, and acts or threats of terrorism and/or military conflicts, or actions taken by the U.S.

or other governments in response to acts or threats of terrorism and/or military conflicts,

4 unchanged sentences

• risks associated with mergers, acquisitions, and other expansion activities.

On June 1, 2024, the Company and the Bank acquired Frontier Community Bank (“FCB”).

In addition to the factors described above, the Company’s operations, performance, business strategy and results may be affected by the following factors:

• the businesses of the Company and Frontier may not be integrated successfully after the merger or such integration may be more difficult, time-consuming or more costly than expected;

• the cost savings and synergies contemplated by the merger may not be fully realized or realized within the expected timeframe;

• revenues following the merger may be lower than expected;

• customer and employee relationships and business operations may be disrupted by the merger.

These risks and uncertainties should be considered in evaluating the forward-looking statements contained in this report.

We caution readers not to place undue reliance on those statements, which speak only as of the date of this report.

This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A of the 2023 Form 10-K.

This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A of the Company's 2024 Form 10-K.

NBI is a financial holding company that was organized in 1986 under the laws of Virginia and is registered under the Bank Holding Company Act of 1956.

2 unchanged sentences

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.

NBB is a community bank and does business as National Bank from 28 office locations and one loan production office.

NBB is the source of nearly all of the Company’s revenue.

1 unchanged sentence

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 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

8 unchanged sentences

The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed.

For information on the allowance for credit losses, goodwill and the pension plan, please refer to the Company’s 2023 Form 10-K, Note 1:

For information on the Company's critical accounting policies, please refer to the Company’s 2024 Form 10-K, Note 1:

Summary of Significant Accounting Policies.

For information on policies governing core deposit intangibles and loans acquired in a business combination, please refer to Note 1:

General and Summary of Significant Accounting Policies of this Form 10-Q report.

Acquisition of Frontier Community Bank

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

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”).

Pursuant to the terms of the FCB Merger Agreement, at the effective time of the acquisition, each share of FCB common stock was converted into either $14.48 in cash or 0.4250 shares of the Company’s common stock, with FCB shareholders having the ability to elect the merger consideration to be received, subject to the allocation and proration procedures set forth in the FCB Merger Agreement.

The Company issued 464,855 shares of common stock and paid $2,050 to former FCB shareholders in the acquisition.

As a result of the transaction, the Bank expanded its operations into the Waynesboro, Staunton and Lynchburg, Virginia markets.

Please refer to Note 2:

Business Combination in Part I, Item 1 of this report for additional information of the acquisition of FCB.

FCB’s balances and results of operations are included in the Company’s consolidated results beginning on June 1, 2024.

Non-GAAP Financial Measures

5 unchanged sentences

Net Interest Margin

The Company uses the net interest margin to measure profit on interest generating activities, as a percentage of total interest-earning assets.

The Company uses the net interest margin (non-GAAP) to measure profitability of interest generating activities, as a percentage of total interest-earning assets.

The Company’s net interest margin is calculated on a fully taxable equivalent (“FTE”) basis.

2 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 September 30,

Net Interest Margin, FTE

Interest income (GAAP)

FTE adjustment

Interest income, FTE (non-GAAP)

Interest expense (GAAP)

Net interest income, FTE (non-GAAP)

Average balance of interest-earning assets

Net interest margin

Nine Months Ended September 30,

Three Months Ended March 31,

Net Interest Margin, FTE

5 unchanged sentences

Average balance of interest-earning assets

Net interest margin

Net interest margin (non-GAAP)

Efficiency Ratio

2 unchanged sentences

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

Three Months Ended September 30,

Efficiency Ratio

Noninterest expense (GAAP)

merger-related expense

proxy-related expense (2)

Adjusted noninterest expense (non-GAAP)

Noninterest income (GAAP)

Net interest income, FTE (non-GAAP)

Total income for efficiency ratio (non-GAAP)

Efficiency ratio

Nine Months Ended September 30,

Three Months Ended March 31,

Efficiency Ratio

1 unchanged sentence

merger-related expense

contract termination expense (1)

proxy-related expense (2)

conversion expense (1)

Adjusted noninterest expense (non-GAAP)

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)

Total income for efficiency ratio (non-GAAP)

Efficiency ratio

(1) Contract termination expense was recorded to reflect the Company’s notification to a vendor that it intends to end its relationship in 2025.

(2) Included in professional services in the Consolidated Statements of Income.

(3) Sale of VISA Class B shares.

Efficiency ratio (non-GAAP)

(1) Conversion expense stems from an upcoming system upgrade that will provide greater efficiency and product offerings.

Adjusted Return on Average Assets and Adjusted Return on Average Equity

The adjusted return on average assets and adjusted return on average equity are measures of profitability, calculated by annualizing net income and dividing by average year-to-date assets or equity, respectively.

Larger nonrecurring income or expenses are not annualized, in order to reduce distortion within the ratios.

Significant income or expenses that are unusual or not expected to recur during the year are not annualized, in order to reduce distortion within the ratios.

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

Three Months Ended September 30,

Annualized Net Income for Ratio Calculation

Net income per GAAP

items not annualized:

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

Adjusted net income

Adjusted net income, annualized

total non-annualized items

Annualized net income for ratio calculation (non-GAAP)

Return on average assets (GAAP)

Adjusted return on average assets (non-GAAP)

Return on average equity (GAAP)

Adjusted return on average equity (non-GAAP)

Nine Months Ended September 30,

Three Months Ended March 31,

Net income per GAAP

items not annualized:

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 (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

Partnership income net of tax of ($52) and ($35) for the periods ended March 31, 2025

and 2024, respectively

Merger-related expense for the period ended March 31, 2024

Conversion expense, net of tax of $10 for the period ended March 31, 2025

Total non-annualized items

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Adjusted return on average equity (non-GAAP)

(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

Key to understanding the Company’s results of operations and financial position is the acquisition of FCB in 2024, the impact of the interest rate environment and the upcoming system conversion that will enhance efficiency and product offerings.

The acquisition of FCB on June 1, 2024 expanded the Company's footprint into desirable markets and increased its growth potential.

The acquisition added to the balance sheet $118,743 in loans, $129,717 in deposits and $14,299 in equity.The Company also recorded merger expenses detailed under Non-GAAP above.

Between March 2022 and July 2023, the Federal Reserve increased interest rates 525 basis points.

The rapidity and magnitude of the change was unprecedented and spurred intense competitive pressure for deposits, affected the fair value of the Company’s securities, and dampened loan demand.

The effects of the interest rate environment continued into 2024, however, the Federal Reserve's 100 basis point interest rate cut between September and December eased deposit pricing pressure beginning in the fourth quarter of 2024 and continued to positively influence results in 2025.

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

Three Months Ended September 30,

Return on average assets

Adjusted return on average assets (1)

Return on average equity

Adjusted return on average equity (1)

Basic net income per common share

Fully diluted net income per common share (2)

Net interest margin (1)

Efficiency ratio (1)

Nine Months Ended

September 30, 2024

Nine Months Ended

September 30, 2023

Twelve Months Ended December 31, 2023

Three Months Ended March 31,

Summary Key Performance Indicators

Return on average assets

3 unchanged sentences

Basic net income per common share

Fully diluted net income per common share (2)

Diluted net income per common share (2)

Net interest margin (1)

1 unchanged sentence

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

(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.

(2) Average dilutive common shares were 1,982 and 1,964 for the three months ended March 31, 2025 and 2024, respectively.

Dilutive common shares stem from unvested restricted stock.

Net income for the three months ended March 31, 2025 increased when compared with the comparable period of 2024, due to net interest margin expansion and merger related expenses in 2024.

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 September 30,

Interest-earning assets:

Loans (1)(2)(4)(5)(6)

Taxable securities (6)(7)

Nontaxable securities (1)(6)

Federal funds sold

Interest-bearing deposits

Total interest-earning assets

Interest-bearing liabilities:

Interest-bearing demand deposits

Savings deposits

Time deposits

Total interest-bearing liabilities

Net interest income and interest rate spread

Net interest margin

Nine Months Ended September 30,

Three Months Ended March 31,

Interest-earning assets:

10 unchanged sentences

Total interest-bearing liabilities

Net interest income and interest rate spread

Net interest income and interest

Net interest margin

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

(2) Included in interest income are loan fees of $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.

(2) Included in interest income are loan fees of $68 and $48 for the three months ended March 31, 2025 and 2024, respectively.

Also included in interest income is accretion of discounts on acquired loans of $251 for the three months ended March 31, 2025.

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

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(6) Includes restricted stock.

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.

(7) Included in interest expense is amortization of premium on acquired time deposits of $58 for the three months ended March 31, 2025.

When the three month periods ended March 31, 2025 and 2024 are compared, the yield on earning assets increased and the cost of interest bearing liabilities decreased, improving the net interest margin.

The Federal Reserve's interest rate cuts between September and December 2024 immediately reduced expense for deposits with pricing based on the prime interest rate.

Current interest rates are still at a level that will allow improved interest income as loans continue to reach repricing dates.

Noninterest Income

Three Months Ended September 30,

Percent Change

Service charges on deposit accounts

Other service charges and fees

Credit and debit card fees, net

Gain on sale of mortgage loans

Total noninterest income

Nine Months Ended September 30,

Percent Change

Service charges on deposit accounts

Three Months Ended March 31,

Service charges on deposits

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

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.

Service charges on deposit accounts increased when the three months ended March 31, 2025 are compared with the comparable period of 2024, due to higher levels of deposits.

Credit and debit card fees, net, increased when the three months ended March 31, 2025 are compared with the comparable period of 2024, due to transaction volume.

Trust income increased due to higher assets under management, when the three months ended March 31, 2025 are compared with the comparable period of 2024.

BOLI income increased when the three months ended March 31, 2025 is compared with the comparable period of 2024 due to income from policies acquired from FCB.

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

During 2023, the Company recognized an incentive payment from a vendor.

These areas fluctuate with market conditions and competitive factors.

Insurance income and a vendor incentive payment account for the increase when the three months ended March 31, 2025 is compared with the comparable period of 2024.

Noninterest Expense

Three Months Ended September 30,

Percent Change

Salaries and employee benefits

Occupancy, furniture and fixtures

Data processing and ATM

FDIC assessment

Intangible asset amortization

Net costs of other real estate owned

Franchise taxes

Professional services

Merger-related expenses

Other operating expenses

Total noninterest expense

Nine Months Ended September 30,

Percent Change

Three Months Ended March 31,

Salaries and employee benefits

3 unchanged sentences

Intangible asset amortization

Net costs of other real estate owned

Franchise taxes

1 unchanged sentence

Merger-related expenses

Contract termination expenses

Conversion expenses

Other operating expenses

Total noninterest expense

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.

During the second quarter of 2024, the Company recorded a contract termination expense when it gave formal notification to a vendor that it intends to end its relationship in 2025.

Noninterest expense increased when the three months ended March 31, 2025 are compared with the comparable period of 2024.

Salaries and employee benefits, which include payroll taxes, health insurance, contributions to the employee stock ownership plan and employee 401(k), pension expense, incentives and salary continuation increased when the three months ended March 31, 2025 is compared with the comparable period of 2024, reflecting the addition of FCB employees.

Occupancy, furniture and fixtures expense increased when the three months ended March 31, 2025 are compared with the comparable period of 2024 due to additional assets acquired from FCB and higher maintenance costs.

Data processing and ATM and FDIC assessment expenses increased when the three months ended March 31, 2025 are compared with the comparable period of 2024 due to expenses associated with the branches acquired from FCB and a larger assessment base.

Professional services include legal, audit and consulting expenses, which increased when the three months ended March 31, 2025 are compared with the comparable period of 2024 due to higher fees for the expanded asset base and system considerations associated with the FCB acquisition.

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

Conversion expense includes payments made to vendors in advance of the system upgrade planned for the second quarter of 2025.

Other operating expenses increased when the three months ended March 31, 2025 are compared with the comparable period of 2024.

The category of other operating expenses includes expense for marketing and business development, supplies, non-service pension cost and charitable donations, among others.

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

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 cost of these measures was $81 for the three months ended March 31, 2025 and $89 for the three months ended March 31, 2024.

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.

During 2023, the Company recognized a gain on the settlement of a BOLI policy that was not taxable.

The Company’s income tax expense for the three months ended March 31, 2025 was $666 and effective tax rate was 17.07%.

For the three months ended March 31, 2024, the Company’s income tax expense was $518 and effective tax rate was 19.24%.

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

Asset Quality

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

September 30, 2024

September 30, 2023

December 31, 2023

Nonaccrual loans

Loans past due 90 days or more, and still accruing

Other real estate owned

ACLL to loans net of unearned income and deferred fees and costs

ACLL to loans net of deferred fees and costs

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 loans to loans, net of

deferred fees and costs

Ratio of ACLL to nonperforming loans

1 unchanged sentence

Summary of Significant Accounting Policies.

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.

The Company’s risk analysis as of March 31, 2025 determined an ACLL of $10,490, or 1.05% of loans net of deferred fees and costs.

This compares with an allowance of $10,262 as of December 31, 2024, or 1.04% 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 $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.

As of March 31, 2025, individually evaluated loans were $10,414.

Three 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 $76.

As of December 31, 2024, individually evaluated loans were $10,521.

Three 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 $80.

Collectively Evaluated Loans

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

Collectively evaluated loans totaled $993,491, with an ACLL of $10,414 as of March 31, 2025.

As of December 31, 2024, collectively evaluated loans totaled $978,092, with an allowance of $10,182.

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

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.

Utilizing historical loss information and peer data, the Company calculates probability of default ("PD") and loss given default ("LGD") 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 PD and LGD for its class.

Loan classes are allocated additional loss estimates based upon the Company’s analysis of qualitative factors including economic measures, asset quality indicators, loan characteristics, and changes to internal Company policies and management.

1 unchanged sentence

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 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.

The Company determined that 12 months represents a reasonable and supportable forecast period as of March 31, 2025, and set a period of 12 months to revert to historical losses on a straight-line basis.

The forecast applied as of March 31, 2025 projects that unemployment will be stable over the next 12 months at a lower level than the forecast applied as of December 31, 2024.

The lower unemployment forecast decreased the required level of the ACLL when March 31, 2025 is compared with December 31, 2024.

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 as of December 31, 2023, business and personal bankruptcies filings increased slightly.

Compared with data available as of December 31, 2024, business bankruptcy filings increased while personal bankruptcies filings decreased.

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 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.

The residential vacancy rate available as of March 31, 2025 was the same as the data incorporated into the December 31, 2024 calculation.

Housing data available as of March 31, 2025 showed higher inventory than as of December 31, 2024, 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 0.33% of total loans as of September 30, 2024, an increase from 0.19% as of December 31, 2023.

Accruing loans past due 30-89 days were 0.19% of total loans as of March 31, 2025, a decrease from 0.30% as of December 31, 2024.

Qualitative Factors:

5 unchanged sentences

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 .

As of March 31, 2025, the Company maintained its allocation from December 31, 2024.

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

4 unchanged sentences

Policies and procedures remain similar to those at December 31, 2024.

The Company added an allocation to account for absorption of FCB acquired loans and integration of FCB lenders.

The Company maintained an allocation to account for integration of FCB lenders.

Levels of high risk loans are considered in the determination of the level of the ACLL.

2 unchanged sentences

Unallocated Surplus

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

The unallocated surplus as of March 31, 2025 was $35, or 0.33% in excess of the calculated requirement.

The unallocated surplus at December 31, 2024 was $50, or 0.49% 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 September 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 March 31, 2025.

ACL on Unfunded Commitments

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

The ACL on unfunded commitments was $250, or 0.15% of unfunded commitments as of March 31, 2025.

The ACL on unfunded commitments was $251, or 0.14% as of December 31, 2024.

2 unchanged sentences

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.

The Company recorded a provision for credit losses on loans of $277 and a recovery of credit losses on unfunded commitments of $1 for the three months ended March 31, 2025, compared with a provision for credit losses on loans of $5 and a recovery of $15 for unfunded commitments for the three months ended March 31, 2024.

The increase in the provision for credit losses on loans was due to growth in the loan portfolio and softening economic factors.

Loan Modifications

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Modifications to commercial loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants.

The Company reviews modifications to determine whether the borrower is experiencing financial difficulty, including indicators of default, bankruptcy, going concern, insufficient projected cash flows and inability to obtain financing from other sources.

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

The Company reviews each modification to determine whether the borrower is experiencing financial difficulty, including indicators of default, bankruptcy, going concern, insufficient projected cash flows and inability to obtain financing from other sources.

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 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.

During the three months ended March 31, 2025 and 2024, the Company modified loans in the normal course of business for borrowers who were not experiencing financial difficulty.

During the three months ended March 31, 2025, the Company modified 195 loans totaling $24,105.

During the three months ended March 31, 2024, the Company provided 216 modifications to loans totaling $22,322.

Key Assets and Liabilities

NBI’s key assets and liabilities and their change from December 31, 2024 are shown in the following table.

September 30, 2024

December 31, 2023

Interest-bearing deposits

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

September 30, 2024

December 31, 2023

Interest-bearing deposits

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

September 30, 2024

December 31, 2023

The Company's securities are designated as available for sale and as such, are reported at fair value.

The following table presents information on securities available for sale as of the dates indicated:

Amortized cost

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Securities available for sale, at fair value

Securities available for sale are presented at fair value as of each reporting date.

The unrealized loss in the Company’s investment portfolio is due to interest rate risk.

The fair value of bonds moves inversely to interest rate changes and expectations of interest rate changes.

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 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.

The Company’s analysis of the securities portfolio determined no identifiable credit risk as of March 31, 2025 and no ACL has been recorded.

Please refer to Note 1:

General and Summary of Significant Accounting Policies of the 2023 Form 10-K and Note 4:

General and Summary of Significant Accounting Policies of the Company's 2024 Form 10-K and Note 4:

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

September 30, 2024

December 31, 2023

Real estate construction

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Consumer non real estate

unearned income and deferred fees and costs

Loans, net of unearned income and deferred fees and costs

The increase from December 31, 2023 reflects the acquisition of FCB.

The higher interest rate environment continues to restrain loan demand.

deferred fees and costs

Loans, net of deferred fees and costs

The increase from December 31, 2024 is the result of organic growth.

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

September 30, 2024

December 31, 2023

Noninterest-bearing demand deposits

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Of the Company’s non-municipal deposits, approximately 23% are uninsured.

The Company acquired FHLB borrowings in the FCB merger, which were repaid upon completion of the merger.

Capital Resources

September 30, 2024

December 31, 2023

Common stock and additional paid in capital

2 unchanged sentences

Total stockholders’ equity

The increase in stockholders’ equity reflects the stock consideration issued to acquire FCB.

The Company paid dividends to shareholders in June 2024.

The increase in stockholders’ equity reflects a decrease in the unrealized losses on securities available for sale and net income during the three months ended March 31, 2025

The Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement, which exempts bank holding companies with less than $3 billion in assets from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements.

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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 September 30, 2024.

Capital ratios for NBB are shown in the following tables.

March 31, 2025

December 31, 2024

Regulatory Capital

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

As of March 31, 2025, the Company had $295,790 of borrowing capacity from the FHLB and the Company had $176,162 of unused capacity at the Federal Reserve Bank discount window.

As of March 31, 2025, 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.

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Regulatory capital levels determine the Company’s ability to use purchased deposits and 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.

As of March 31, 2025, 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 September 30, 2024, the Company’s liquidity is sufficient to meet projected trends.

As of March 31, 2025, 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 September 30, 2024, the analysis indicated adequate liquidity under the tested scenarios.

As of March 31, 2025, 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 September 30, 2024, the loan to deposit ratio was 62.49%.

As of March 31, 2025, the loan to deposit ratio was 60.52%.

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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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.

The Company estimates a potential loss reserve for recourse provisions that is not material as of March 31, 2025.

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 nine months ended September 30, 2024.

There were no material changes in off-balance sheet arrangements during the three months ended March 31, 2025.

Contractual Obligations

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

The Company had no finance lease or purchase obligations and no long-term debt at March 31, 2025.

Quantitative a nd Qualitative Disclosures About Market Risk

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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.

Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2025 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 March 31, 2025, 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

Part I I - OTHER INFORMATION

Legal P roceedings

1 unchanged sentence

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.

Please refer to the “Risk Factors” previously disclosed in Item 1A of the Company's 2024 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