What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2021-03-18 compared with 2020-03-11 · 562 added, 415 removed, 713 unchanged (58% of the section changed)

Market for Registrant ’ s Common Equity , Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Registrant ’

s Common Equity , Related Stockholder Matters and Issuer Purchases of Equity Securities

Common Stock Information and Dividends

National Bankshares, Inc.’s common stock is traded on the Nasdaq Capital Market under the symbol “NKSH.” As of December 31, 2019, there were 611 record stockholders of NBI common stock.

NBI’s primary source of funds for dividend payments is dividends from its bank subsidiary, NBB.

Bank dividend payments are restricted by regulators, as more fully disclosed in “Regulation, Supervision and Government Policy” contained in Part I, Item 1, “Business” and Note 10 of Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.

On May 15, 2019, NBI’s Board of Directors approved the repurchase of up to 1,000,000 shares of the Company’s common stock.

The authorization extends from June 1, 2019 to May 31, 2020.

During 2019, the Company repurchased 452,400 shares under a prior repurchase authorization and 16,000 shares under the repurchase program authorized in May 2019.

NBI’s common stock is traded on the Nasdaq Capital Market under the symbol “NKSH.”

As of December 31, 2020, there were 591 record stockholders of NBI common stock.

NBI’s primary source of funds for dividend payments is dividends from its bank subsidiary, NBB.

Bank dividend payments are restricted by regulators, as more fully disclosed in “Regulation, Supervision and Government Policy”

contained in Part I, Item 1, “Business”

and Note 10 of Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data”

of this Form 10-K.

On June 1, 2020, NBI’s Board of Directors approved the repurchase of up to 1,000,000 shares of the Company’s common stock.

The authorization extends from June 1, 2020 to May 31, 2021.

During 2020, the Company repurchased 57,554 shares.

The Company may yet repurchase 942,446 shares under the program.

Purchases of Equity Securities by the Issuer

During 2019, the Company repurchased 468,400 shares under prior repurchase authorizations.

Purchases of Equity Securities by the Issuer  

Share repurchase activity during the fourth quarter of 2020 was as follows:

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Under the Program (1)

October 1, 2019 – October 31, 2019

November 1, 2019 – November 30, 2019

December 1, 2019 – December 31, 2019

October 1, 2020 –

October 31, 2020

November 1, 2020 –

November 30, 2020

December 1, 2020 –

December 31, 2020

Total during fourth quarter 2020

(1) In May 2018, the Company announced the Board of Directors had authorized a 100,000 share repurchase program.

In November 2018, the Company announced that the Board of Directors increased its authorization to repurchase up to 250,000 shares.

In February 2019, the Company announced that the Board of Directors increased its authorization to repurchase up to 1,000,000 shares, with an expiration date of May 31, 2019.

In May 2019, the Company renewed authorization to repurchase up to 1,000,000 shares, with an expiration date of May 31, 2020.

The Company’s share repurchase program does not obligate it to acquire any specific number of shares, or any shares at all.

During the year ended December 31, 2019, the Company repurchased 468,400 shares.

(1) On June 1, 2020, the Company announced the Board of Directors had authorized the repurchase of up to 1,000,000 shares under its share repurchase program.

The authorization expires May 31, 2021.

The Company’s share repurchase program does not obligate it to acquire any specific number of shares or any shares at all.

Stock Performance Graph

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Total deposits

Stockholders’ equity

Stockholders’

Selected Balance Sheet Daily Averages:

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Total deposits

Stockholders’ equity

Stockholders’

Selected Ratios:

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The efficiency ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency.

Such information is not prepared in accordance with U.S.

generally accepted accounting principles (GAAP) and should not be viewed as a substitute for GAAP.

See “Non-GAAP Financial Measures” included in Item 7 of this Form 10-K.

Management ’ s Discussion and Analysis of Financial Condition and Results of Operation s

Such information is not prepared in accordance with GAAP and should not be viewed as a substitute for GAAP.

See “Non-GAAP Financial Measures”

included in Item 7 of this Form 10-K.

Management ’

s Discussion and Analysis of Financial Condition and Results of Operation s

$ in thousands, except per share data.

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

The discussion should be read in conjunction with the material presented in Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K.

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

The discussion should be read in conjunction with the material presented in Item 8, “Financial Statements and Supplementary Data,”

of this Form 10-K.

Subsequent events have been considered through the date of this Form 10-K.

Cautionary Statement Regarding Forward-Looking Statements

We make forward-looking statements in this Form 10-K that are subject to significant risks and uncertainties.

These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals, and are based upon our management’s views and assumptions as of the date of this report.

The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements.

We make forward-looking statements in this Form 10-K that are subject to significant risks and uncertainties. 

The words “believes,”

“expects,”

“may,”

“will,”

“should,”

“projects,”

“contemplates,”

“anticipates,”

“forecasts,”

“intends,”

or other similar words or terms are intended to identify forward-looking statements.

These forward-looking statements are based upon or are affected by factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements.

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Government, including policies of the U.S.

Treasury, the Office of the Comptroller of the Currency, the Federal Reserve, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation, and the impact of any policies or programs implemented pursuant to financial reform legislation,

unanticipated increases in the level of unemployment in the Company’s market,

Treasury, the OCC, the Federal Reserve, the CFPB and the FDIC, and the impact of any policies or programs implemented pursuant to financial reform legislation,

unanticipated increases in the level of unemployment in the Company’s market,

the quality or composition of the loan and/or investment portfolios,

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deposit flows,

demand for financial services in the Company’s market,

the real estate market in the Company’s market,

demand for financial services in the Company’s market,

the real estate market in the Company’s market,

laws, regulations and policies impacting financial institutions,

technological risks and developments, and cyber-threats, attacks or events,

the Company’s technology initiatives,

steps the Company takes in response to the COVID-19 pandemic, the severity and duration of the pandemic, the uncertainty regarding new variants of COVID-19 that have emerged, the speed and efficacy of vaccine and treatment developments, the impact of loosening or tightening of government restrictions, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein,

performance by the Company's counterparties or vendors,

applicable accounting principles, policies and guidelines, and

business disruptions and/or impact due to the coronavirus or similar pandemic diseases.

business disruption and/or impact due to the coronavirus or similar pandemic diseases.

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.

This discussion and analysis should be read in conjunction with the description of our “Risk Factors”

of this Form 10-K.

Non-GAAP Financial Measures

The Company prepares financial information in accordance with accounting principles generally accepted in the United States (“GAAP”), with the exception of certain financial measures which are computed under a basis other than GAAP (“non-GAAP”).

Non-GAAP Financial Measures  

The Company prepares financial information in accordance with GAAP, with the exception of certain financial measures which are computed under a basis other than GAAP (“non-GAAP”).

These measures include the efficiency ratio, the net interest margin and the noninterest margin.

Management believes such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP.

Efficiency Ratio

The efficiency ratio is computed by dividing noninterest expense, excluding certain items management deems unusual or non-recurring, by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding certain items management deems unusual or non-recurring.

The tax rate used to calculate fully taxable equivalent basis is 21% in 2019 and 2018 and 35% in 2017.

The tax rate used to calculate fully taxable equivalent basis is 21%.

This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency.

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Noninterest expense

items deemed non-recurring:

Write-down of insurance receivable

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Noninterest income

items deemed non-recurring:

Recovery of insurance receivable

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Efficiency ratio

The net interest margin is calculated by dividing taxable equivalent net interest income by total average earning assets.

Net Interest Margin

The net interest margin is calculated by dividing taxable equivalent net interest income by total average interest-earning assets.

Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio.

Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense.

The tax rate utilized in calculating the tax benefit for 2019 and 2018 is 21% and for 2017 is 35%.

The tax rate utilized in calculating the tax benefit is 21%.

The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below.

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Total tax-equivalent net interest income

The noninterest margin is calculated by dividing noninterest expense (excluding the write-down of insurance receivable) less noninterest income (excluding realized securities gain/loss, net) by average year-to-date assets.

The reconciliation of adjusted noninterest income and adjusted noninterest expense, which are not measurements under GAAP, is reflected in the table below.

Noninterest Margin

The noninterest margin is calculated by dividing noninterest expense (excluding the write-down of insurance receivable) less noninterest income (excluding realized securities gain/loss, net) by average year-to-date assets.

The reconciliation of adjusted noninterest income and adjusted noninterest expense, which are not measurements under GAAP, is reflected in the table below.

$ in thousands

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Critical Accounting Policies

The Company’s financial statements are prepared in accordance with GAAP.

The Company’s consolidated financial statements are prepared in accordance with GAAP.

The financial information contained within our statements is, to a significant extent, financial information based on measures of the financial effects of transactions and events that have already occurred.

A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability.

Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change.

Allowance for Loan Losses

The allowance for loan losses is an estimate of probable losses inherent in our loan portfolio.

The allowance is funded by the provision for loan losses, reduced by charge-offs of loans and increased by recoveries of previously charged-off loans.

The determination of the allowance is based on two accounting principles, Accounting Standards Codification (“ASC”) Topic 450-20 (Contingencies) which requires that losses be accrued when occurrence is probable and the amount of the loss is reasonably estimable, and ASC Topic 310-10 (Receivables) which requires accrual of losses on impaired loans if the recorded investment exceeds fair value.

The determination of the allowance is based on two accounting principles, Accounting Standards Codification ("ASC") Topic 450-20 (Contingencies) which requires that losses be accrued when occurrence is probable and the amount of the loss is reasonably estimable, and ASC Topic 310-10 (Receivables) which requires accrual of losses on impaired loans if the recorded investment exceeds fair value.

Probable losses are accrued through two calculations, individual evaluation of impaired loans and collective evaluation of the remainder of the portfolio.

Impaired loans are larger non-homogeneous loans for which there is a probability that collection will not occur according to the loan terms, as well as loans whose terms have been modified in a troubled debt restructuring (“TDRs”).

Impaired loans are larger non-homogeneous loans for which there is a probability that collection will not occur according to the loan terms, as well as loans whose terms have been modified in a TDR.

Impaired loans that are not TDRs with an estimated impairment loss are placed on nonaccrual status.

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Impaired loans

Impaired loans are identified through the Company’s credit risk rating process.

Estimated loss for an impaired loan is the amount of recorded investment that exceeds the loan’s fair value.

Impaired loans are identified through the Company’s credit risk rating process.

Estimated loss for an impaired loan is the amount of recorded investment that exceeds the loan’s fair value.

Fair value of an impaired loan is measured by one of three methods:

the fair value of collateral (“collateral method”), the present value of future cash flows (“cash flow method”), or observable market price.

The Company applies the collateral method to collateral-dependent loans, loans for which foreclosure is imminent and to loans for which the fair value of collateral is a more reliable estimate of fair value.

The cash flow method is applied to loans that are not collateral dependent and for which cash flows may be estimated.

The Company bases collateral method fair valuation upon the “as-is” value of independent appraisals or evaluations.

The cash flow method is applied to loans that are not collateral dependent and for which cash flows may reasonably be estimated.

The Company bases collateral method fair valuation upon the “as-is”

value of independent appraisals or evaluations.

Valuations for impaired loans secured by residential 1-4 family properties with outstanding principal balances greater than $250 are based on an appraisal.

Appraisals are also used to value impaired loans secured by commercial real estate with outstanding principal balances greater than $500.

Collateral-method impaired loans secured by residential 1-4 family property with outstanding principal balances of $250 or less, or secured by commercial real estate with outstanding principal balances of $500 or less, are valued using an internal evaluation.

Appraisals and internal valuations provide an estimate of market value.

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Internal evaluations are prepared by third party providers and reviewed by employees of the Company who are independent of the loan origination, operation, management and collection functions.

Evaluations provide a property’s market value based on the property’s current physical condition and characteristics and the economic market conditions that affect the collateral’s market value.

Evaluations incorporate multiple sources of data to arrive at a property’s market value, including physical inspection, independent third-party automated tools, comparable sales analysis and local market information.

Updated appraisals or evaluations are ordered when the loan becomes impaired if the appraisal or evaluation on file is more than twenty-four months old.

Updated appraisals or evaluations are ordered when the loan becomes impaired if the appraisal or evaluation on file is more than 24 months old.

Appraisals and evaluations are reviewed for propriety and reasonableness and may be discounted if the Company determines that the value exceeds reasonable levels.

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Impaired loans with partial charge-offs are maintained as impaired until the remaining balance is satisfied.

Smaller homogeneous impaired loans that are not troubled debt restructurings and are not part of a larger impaired relationship are collectively evaluated.

Smaller homogeneous impaired loans with balances less than $250 that are not TDRs and are not part of a larger impaired relationship are collectively evaluated.

TDRs are impaired loans and are measured for impairment under the same valuation methods as other impaired loans.

TDRs are maintained in nonaccrual status until the loan has demonstrated reasonable assurance of repayment with at least six months of consecutive timely payment performance.

TDRs may be removed from TDR status, and therefore from individual evaluation, if the restructuring agreement specifies a contractual interest rate that is a market interest rate at the time of restructuring and the loan is in compliance with its modified terms one year after the restructure was completed.

Collectively evaluated loans

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Two loss rates for each class are calculated:

total net charge-offs for the class as a percentage of average class loan balance (“class loss rate”), and total net charge-offs for the class as a percentage of average classified loans in the class (“classified loss rate”).

Classified loans are those with risk ratings that indicate credit quality is “substandard”, “doubtful” or “loss”.

Classified loans are those with risk ratings that indicate credit quality is “substandard”, “doubtful”

or “loss”.

Net charge-offs in both calculations include charge-offs and recoveries of classified and non-classified loans as well as those associated with impaired loans.

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Qualitative factors are evaluated and allocations are applied to each class.

Qualitative factors include delinquency rates, loan quality and concentrations, loan officers’ experience, changes in lending policies and changes in the loan review process.

Qualitative factors include delinquency rates, loan quality and concentrations, loan officers’

experience, changes in lending policies and changes in the loan review process.

Economic factors such as unemployment rates, bankruptcy rates and others are evaluated, with standard allocations applied consistently to relevant classes.

The Company accrues additional allocations for criticized loans within each class and for loans designated high risk.

Criticized loans include classified loans as well as loans rated “special mention”.

Criticized loans include classified loans as well as loans rated “special mention.”

Loans rated special mention indicate weakened credit quality but to a lesser degree than classified loans.

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Estimation of the allowance for loan losses

The estimation of the allowance involves analysis of internal and external variables, methodologies, assumptions and our judgment and experience.

Key judgments used in determining the allowance for loan losses include internal risk rating determinations, market and collateral values, discount rates, loss rates, and our view of current economic conditions.

These judgments are inherently subjective and our actual losses could be greater or less than the estimate.

The estimation of the allowance involves analysis of internal and external variables, methodologies, assumptions and management’s judgment and experience.

Key judgments used in determining the allowance for loan losses include internal risk rating determinations, market and collateral values, discount rates, loss rates, and management’s assessment of current economic conditions.

These judgments are inherently subjective and actual losses could be greater or less than the estimate.

Future estimates of the allowance could increase or decrease based on changes in the financial condition of individual borrowers, concentrations of various types of loans, economic conditions or the markets in which collateral may be sold.

The estimate of the allowance accrual determines the amount of provision expense and directly affects our financial results.

The estimate of the allowance for December 31, 2019 considered market and portfolio conditions during 2019 as well as net charge-offs in the eight quarters prior to the quarter ended December 31, 2019.

If the economy experiences a downturn, the ultimate amount of loss could vary from that estimate.

For additional discussion of the allowance, see Note 5 to the consolidated financial statements and “Asset Quality,” and “Provision and Allowance for Loan Losses.”

Goodwill is subject to at least an annual assessment for impairment by applying a fair value based test.

The Company performs impairment testing in the fourth quarter of each year.

The Company’s most recent impairment test was performed using data from September 30, 2019.

Accounting guidance provides the option of performing preliminary assessment of qualitative factors before performing more substantial testing for impairment.

The estimate of the allowance for December 31, 2020 considered market conditions as of December 31, 2020 where possible, and the most recent available information when data was not available as of December 31, 2020, portfolio conditions and levels of delinquencies at December 31, 2020, and net charge-offs in the eight quarters prior to the quarter ended December 31, 2020. 

Some of the available economic data lags the reporting date by one to three months. 

Delinquency levels at December 31, 2020 are lower than they might otherwise have been due to modifications granted to qualifying borrowers in accordance with regulatory guidance and the CARES Act, including loan payment extensions, interest only periods and rate reductions to borrowers. 

Past due status will not occur during the period in which a payment is extended. 

Providing an interest only period affords borrowers lower payments during the interest only period. 

When extension periods and interest only periods expire, there may be increases in past dues that will increase the requirement for the allowance for loan loss. 

Management used its best judgement and efforts in incorporating possible impacts as of December 31, 2020 in estimating the allowance for loan losses, but if the economy experiences a greater downturn than estimated, the ultimate amount of loss could vary from that estimate.

For additional discussion of the allowance, see Note 5 of the Notes to Consolidated Financial Statements and the subsections “Asset Quality,”

and “Provision and Allowance for Loan Losses”

 Goodwill

 Goodwill is subject to at least an annual assessment for impairment by applying a fair value based test.

The Company typically performs impairment testing in the fourth quarter of each year.

The Company’s most recent outsourced impairment test was performed using data from September 30, 2020.

Accounting guidance provides the option of performing preliminary assessment of qualitative factors to determine whether impairment testing is necessary.

The Company opted not to perform the preliminary assessment.

The Company’s goodwill impairment analysis considered three valuation techniques appropriate to the measurement.

The first technique uses the Company’s market capitalization as an estimate of fair value;

The Company’s goodwill impairment analysis considered three valuation techniques appropriate to the measurement. The first technique uses the Company’s market capitalization as an estimate of fair value;

the second technique estimates fair value using current market pricing multiples for companies comparable to the Company;

while the third technique uses current market pricing multiples for change-of-control transactions involving companies comparable to the Company.

Each measure indicated that the Company’s fair value exceeded its book value, validating that goodwill is not impaired.

Certain key judgments were used in the valuation measurement.

Goodwill is held by the Company’s bank subsidiary.

The bank subsidiary is 100% owned by the Company, and no market capitalization is available.

Because most of the Company’s assets are comprised of the subsidiary bank’s equity, the Company’s market capitalization was used to estimate the Bank’s market capitalization.

Other judgments include the assumption that the companies and transactions used as comparables for the second and third technique were appropriate to the estimate of the Company’s fair value, and that the comparable multiples are appropriate indicators of fair value, and compliant with accounting guidance.

Other Real Estate Owned (“OREO”)

while the third technique uses current market pricing multiples for change-of-control transactions involving companies comparable to the Company. 

Certain key judgments were used in the valuation measurement. Goodwill is held by the Company’s bank subsidiary. The bank subsidiary is 100% owned by the Company, and no market capitalization is available. Because most of the Company’s assets are comprised of the subsidiary bank’s equity, the Company’s market capitalization was used to estimate the Bank’s market capitalization. Other judgments include the assumption that the companies and transactions used as comparables for the second and third technique were appropriate to the estimate of the Company’s fair value, and that the comparable multiples are appropriate indicators of fair value, and compliant with accounting guidance.

The COVID-19 pandemic has caused significant stock market volatility which adversely impacted the Company’s stock price. 

As a result of this volatility and impact on the market, management determined that a triggering event occurred. 

Management performed an interim quantitative goodwill impairment analysis as of March 31, 2020 and June 30, 2020 and did not assess impairment.

Management contracted an outside expert to perform its regular annual impairment test during the fourth quarter using data at September 30, 2020. 

The analysis did not result in an impairment assessment.

Other Real Estate Owned (“OREO”)

Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at fair value of the property, less estimated disposal costs, if any.

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Accounting policy and treatment is consistent with accounting for impaired loans described above.

The Company’s actuary determines plan obligations and annual pension expense using a number of key assumptions.

Key assumptions may include the discount rate, the estimated return on plan assets and the anticipated rate of compensation increases.

Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may impact pension assets, liabilities or expense.

Other Than Temporary Impairment ("OTTI") of Securities

Impairment of securities occurs when the fair value of a security is less than its amortized cost.

For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis.

If, however, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security.

If there is no credit loss, there is no OTTI.

If there is a credit loss, OTTI exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income (loss).

The Company regularly reviews each investment security for OTTI based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the Company’s best estimate of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.

National Bankshares, Inc.

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Located in southwest Virginia, NBI has two wholly-owned subsidiaries, the National Bank of Blacksburg and National Bankshares Financial Services, Inc.

NBB, which does business as National Bank from twenty-five office locations and one loan production office, is a community bank.

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

NBB, which does business as National Bank from 25 office locations and one loan production office, is a community bank.

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

NBFS does business as National Bankshares Investment Services and National Bankshares Insurance Services.

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National Bankshares, Inc.

common stock is listed on the Nasdaq Capital Market and is traded under the symbol “NKSH.” National Bankshares, Inc.

has been included in the Russell Investments Russell 3000 and Russell 2000 Indexes since June 29, 2009.

common stock is listed on the Nasdaq Capital Market and is traded under the symbol “NKSH.”

The Company has been included in the Russell Investments Russell 3000 and Russell 2000 Indexes since June 29, 2009.

Performance Summary

The following table presents NBI’s key performance ratios for the years ending December 31, 2019 and December 31, 2018:

The Company’s performance for the year ended December 31, 2020 was impacted by the COVID-19 pandemic and efforts to contain it.

The Company worked with borrowers impacted by the pandemic to provide payment relief which resulted in reversal of accrued interest income on certain loans within the portfolio.

The Company also used available information to inform and quantify the increased risk in the allowance for loan losses, resulting in an increased provision expense.

Partially offsetting the adverse impact to income are fees collected from providing SBA PPP loans to qualifying customers and increased mortgage refinancing activity which fueled gains from the sale of mortgages.

The following table presents NBI’s key performance ratios for the years ending December 31, 2020, December 31, 2019 and December 31, 2018:

Year Ended December 31,

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Noninterest margin (2)

Net Interest Margin – Non-GAAP measure of year-to-date tax equivalent net interest income divided by year-to-date average interest-earning assets.

Please see “Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to GAAP.

Noninterest Margin – Non-GAAP measure of noninterest expense (excluding the insurance receivable write-down, provision for bad debts and income taxes) less noninterest income (excluding securities gains and losses) divided by average year-to-date assets.

Please see “Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to GAAP.

The key performance ratios provide a summary of the Company’s results and allow comparison with results from prior years and with current peer results.

The return on average assets for the year ended December 31, 2019 was 1.39%, an increase from 1.29% for the year ended December 31, 2018.

The return on average equity increased from 8.65% for the year ended December 31, 2018 to 9.87% for the year ended December 31, 2019.

The net interest margin decreased from 3.36% for the year ended December 31, 2018 to 3.29% for the year ended December 31, 2019.

The Federal Reserve interest rates were higher for most of 2019 compared with 2018, benefitting the yield on earning assets but increasing the cost of interest-bearing liabilities.

The noninterest margin increased from 1.40% to 1.44% over the same period, while basic net earnings per common share increased from $2.32 for the year ended December 31, 2018 to $2.65 for the year ended December 31, 2019.

NBI’s key growth indicators are shown in the following table:

The net interest margin is a non-GAAP financial measure.

Tax advantaged portions of net interest income are adjusted to their fully-taxable equivalent basis.

Net interest income on a fully-taxable equivalent basis is divided by average earning assets.

Please see “Non-GAAP Financial Measures”

for a reconciliation of non-GAAP measures to GAAP.

The noninterest margin is a non-GAAP financial measure.

Noninterest income is adjusted to exclude securities gains and losses, and exclude an insurance recovery in 2019.

Noninterest expense is not adjusted for 2020 or 2019 and in 2018 is adjusted to exclude a write down of insurance receivable.

Adjusted noninterest expense is reduced by adjusted noninterest income and divided by average year-to-date assets.

Please see “Non-GAAP Financial Measures”

for a reconciliation of non-GAAP measures to GAAP.

During the year ended December 31, 2020, the Company repurchased 57,554 shares under its publicly announced stock repurchase plan.

The repurchased shares reduced shareholders equity by $1,722 during 2020.

During the year ended December 31, 2019, the Company repurchased 468,400 shares under its publicly announced stock repurchase plan.

The repurchase reduced shareholders equity by $18,525 during 2019.

No shares were repurchased during 2018.

The key performance ratios provide a summary of the Company’s results and allow comparison with results from prior years and with current peer results. 

The return on average assets for the year ended December 31, 2020 was 1.15%, a decrease from 1.39% for the year ended December 31, 2019.

For the year ended December 31, 2018, return on average assets was 1.29%.

The return on average equity decreased from 9.87% for the year ended December 31, 2019 to 8.21% for the year ended December 31, 2020.

For the year ended December 31, 2018, the return on average equity was 8.65%.

The net interest margin decreased from 3.29% for the year ended December 31, 2019 to 2.98% for the year ended December 31, 2020. 

The net interest margin for the year ended December 31, 2018 was 3.36%.

The noninterest margin improved to 1.22% for the year ended December 31, 2020, from 1.44% for the year ended December 31, 2019. 

The noninterest margin for the year ended December 31, 2018 was 1.40%. 

Basic net earnings per common share decreased from $2.65 for the year ended December 31, 2019 to $2.48 for the year ended December 31, 2020. 

Basic net earnings per common share were $2.32 for the year ended December 31, 2018.

NBI’s key growth indicators are shown in the following table:

$ in thousands

Securities and restricted stock

Loans, net of unearned income and deferred fees and costs, and the allowance for loan losses

Securities, loans and total assets increased when amounts at December 31, 2019 are compared with amounts at December 31, 2018.

Customer deposits increased $67,811 or 6.45% from December 31, 2018, with increases mainly from interest-bearing demand deposits and certificates of deposit.

The liquidity provided by the increase of deposits supported growth in loans of $24,179 or 3.44% and growth in securities of $10,253 or 2.41%.

Securities and restricted stock, loans and total assets increased when amounts at December 31, 2020 are compared with amounts at December 31, 2019.

Customer deposits increased $177,390 or 15.84% from December 31, 2019, with increases mainly from interest-bearing demand deposits and noninterest-bearing deposits.

The liquidity provided by the increase of deposits supported growth in loans of $33,730 or 4.64% and growth in securities and restricted stock of $111,538 or 25.55%.

Asset Quality

Key indicators of NBI’s asset quality are presented in the following table:

$ in thousands

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Allowance for loan losses to loans (2)

Allowance for loan losses to loans, excluding SBA PPP loans (2)(3)

Net charge-off ratio

Nonperforming loans include nonaccrual loans plus restructured loans in nonaccrual status.

Accruing restructured loans are not included.

Nonperforming loans are nonaccrual loans and TDRs in nonaccrual status.

Accruing TDRs are not included.

Loans are net of unearned income and deferred fees and costs.

Measure is non-GAAP. 

Management considers this measure because PPP loans are guaranteed by the SBA and do not present credit risk and are not included in the calculation of the required level of the allowance for loan loss.

The Company monitors asset quality indicators in managing credit risk and in determining the allowance and provision for loan losses.

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This compares to $3,375 or 0.46% at December 31, 2019.

Loans past due 90 days or more and still accruing at year-end 2019 totaled $231, an increase from $35 at December 31, 2018.

The net charge-off ratio increased from 0.07% for the year ended December 31, 2018 to 0.09% for the year ended December 31, 2019, while OREO decreased $440 for the same period.

The Company’s risk analysis determined an allowance for loan losses of $6,863 at December 31, 2019, resulting in a provision for the year of $126.

This compares with an allowance for loan losses of $7,390 as of December 31, 2018, and a recovery of $81 for the year ended December 31, 2018.

The ratio of the allowance for loan losses to loans decreased to 0.94% at December 31, 2019, from 1.04% at December 31, 2018.

The methodology for determining the allowance for loan losses relies on historical charge-off trends, modified by trends in nonperforming loans and economic indicators.

More information about the level and calculation methodology of the allowance for loan losses is provided in “Provision and Allowance for Loan Losses”, “Balance Sheet – Loans – Risk Elements,” “Balance Sheet – Loans – Troubled Debt Restructurings,” as well as Notes 1 and 5 of the Notes to Consolidated Financial Statements.

Loans past due 90 days or more and still accruing at year-end 2020 totaled $17, a decrease from $231 at December 31, 2019.

The net charge-off ratio decreased from 0.09% for the year ended December 31, 2019 to 0.05% for the year ended December 31, 2020, while OREO decreased $59 for the same period.

The Company’s risk analysis determined an allowance for loan losses of $8,481 at December 31, 2020, resulting in a provision for the year of $1,991.

This compares with an allowance for loan losses of $6,863 as of December 31, 2019, and a provision of $126 for the year ended December 31, 2019.

The ratio of the allowance for loan losses to loans increased to 1.10% at December 31, 2020, from 0.94% at December 31, 2019.

Included in loans net of unearned income and deferred fees and costs are $35,992 in PPP loans. 

Because PPP loans are guaranteed by the SBA, they are not included in the calculation for the allowance for loan losses. 

If the PPP loans are removed from loans net of unearned income and deferred fees and costs, the allowance ratio is 1.16%.The methodology for determining the allowance for loan losses relies on historical charge-off trends, modified by trends in nonperforming loans and economic indicators.

More information about the level and calculation methodology of the allowance for loan losses is provided in the sections “Provision and Allowance for Loan Losses”, “Balance Sheet –

Loans –

Risk Elements”

and “Balance Sheet –

Loans –

Modifications and Troubled Debt Restructurings”

below as well as Notes 1 and 5 of the Notes to Consolidated Financial Statements.

Sufficient resources have been dedicated to working out problem assets, and exposure to loss is somewhat mitigated because most of the nonperforming loans are collateralized.

More information about nonaccrual and past due loans is provided in “Balance Sheet – Loans – Risk Elements” and Note 5 of the Notes to Consolidated Financial Statements.

The Company continues to monitor risk levels within the loan portfolio and expects that any further increase in the allowance for loan losses would be the result of the refinement of loss estimates and would not dramatically affect net income.

More information about nonaccrual and past due loans is provided in the section “Balance Sheet –

Loans –

Risk Elements”

below and Note 5 of the Notes to Consolidated Financial Statements.

The Company continues to carefully monitor risk levels within the loan portfolio and the evolving impact of the COVID-19 pandemic.

Net Interest Income

Net interest income was $37,767 for the year ended December 31, 2019, $38,177 for the year ended December 31, 2018 and $37,135 for the year ended December 31, 2017.

The net interest margin was 3.29% for 2019, 3.36% for 2018 and 3.45% for 2017.

Total interest income was $45,147 for the year ended December 31, 2019, $43,224 for the year ended December 31, 2018 and $41,260 for the year ended December 31, 2017.

Interest expense was $7,380 for the year ended December 31, 2019, $5,047 for the year ended December 31, 2018 and $4,125 for the year ended December 31, 2017.

Net interest income was $38,171, $37,767 and $38,177 for the years ended December 31, 2020, 2019 and 2018, respectively.

Total interest income was $44,008, $45,147 and $43,224 for the years ended December 31, 2020, 2019 and 2018, respectively.

Interest expense was $5,837, $7,380 and $5,047 for the years ended December 31, 2020, 2019 and 2018, respectively.

The amount of net interest income earned is affected by various factors, including changes in market interest rates due to the Federal Reserve's monetary policy, U.S.

fiscal policy, competitive pressure, the level and composition of the interest-earning assets and the composition of interest-bearing liabilities.

The Federal Reserve increased its target federal funds rate by 25 basis points in March, June, September and December, 2018 and then decreased the rate by 25 basis points in July, September, and October 2019, ending the year at a target of 1.75%.

Changes in the Federal Reserve’s target interest rate immediately impact the yield on the Company’s interest-bearing deposits in other banks, and have a slightly delayed impact on other interest-earning assets.

The Federal Reserve’s target interest rate also impacts the Company’s cost of interest-bearing liabilities.

The primary source of funds used to support the Company’s interest-earning assets is deposits.

Deposits are obtained in the Company’s market through traditional marketing techniques.

The cost of deposits is dependent on interest rate levels and competitive factors.

Increases in the Federal Reserve’s target interest rate may increase competitive pressure to raise deposit offering rates, while decreases in the Federal Reserve’s target interest rate allow reduced deposit offering rates.

Time deposits provide a measure of stability in the cost of funds, but partially delay the Company’s ability to respond to downward rate movements.

Also affecting interest income during the 12 months ended December 31, 2020, was interest and fee recognition associated with PPP loans, partially offset by interest deferred for certain COVID-19 related payment extensions.

Interest rates have decreased since 2018.

The Federal Reserve reduced its target federal funds rate by 75 basis points in 2019 and, in an effort to combat the economic impact of the COVID-19 pandemic, decreased the federal funds rate by 150 basis points in March 2020.

Changes in the Federal Reserve’s target interest rate immediately impact the yield on the Company’s interest-bearing deposits in other banks.

Rate decreases also result in reduced loan portfolio yield when customers refinance to lower rates or request and are granted rate reductions for competitive purposes.

Rate decreases also influence bond markets and result in higher numbers of calls on callable securities, with reinvestment opportunities at lower rates.

The primary source of funds used to support the Company’s interest-earning assets is deposits.

The Company also has access to other funding sources, including the FHLB.

Interest expense in 2019 was influenced by increased deposit offering rates in the latter part of 2018 that carried in to 2019 and were required to remain competitive in what was a rising interest rate environment.

Interest expense in 2018 included the cost of short-term borrowings to meet loan demand while anticipating maturity of securities and an increase in deposits that is typical during the fourth quarter.

Please refer to the section titled “Analysis of Changes In Interest Income and Interest Expense” for further information related to rate and volume changes.

Deposits, including noninterest-bearing demand deposits, interest-bearing deposits and interest-bearing time deposits are obtained in the Company’s markets through traditional marketing techniques.

When the interest rate environment changes, the Company can immediately change rates on interest-bearing deposits and change offering rates on new time deposits.

Existing time deposits commit the Company to the contractual rate for the length of the term.

Time deposits provide a measure of stability in the cost of funds, but partially delay the Company’s ability to respond to downward rate movements.

The Company closely monitors interest rate movements, statutory tax rate changes, competition and other influencing factors in order to manage the net interest margin.

The decreases in the Federal Reserve’s target interest rate allowed the Company to reduce deposit offering rates in 2019 and 2020.

The frequency and/or magnitude of future changes in market interest rates and legislative changes are difficult to predict and may have a greater short-term impact on net interest income than adjustments by management.

Please refer to the section titled “Analysis of Changes In Interest Income and Interest Expense”

for further information related to rate and volume changes.

Included in interest income are fees and costs associated with loan origination.

Fees received and costs incurred for loan origination are deferred and recognized as an adjustment to yield on a straight-line basis over the life of the loan.

If a loan pays off prior to maturity, the remaining deferred fees and costs are recognized on the date of payoff.

During 2020, the Company originated 813 PPP loans grossing $58,227.

The loans bear a contractual interest rate of 1%, bolstered by an origination fee determined by the size of the loan.

Loans that are forgiven or paid off prior to maturity result in recognition of the outstanding origination fee at the date of forgiveness or payoff.

As of December 31, 2020, 242 loans with original amounts totaling $21,324 had been forgiven or paid off.

Contractual interest earned on PPP loans totaled $387, while net fees recognized totaled $1,366.

As of December 31, 2020, gross PPP loans totaling $36,903 with net deferred fees of $911 remain on the balance sheet.

The net interest margin was 2.98%, 3.29% and 3.36% for the 12 months ended December 31, 2020, 2019 and 2018, respectively.

The net interest margin is a non-GAAP measure that incorporates the effect of tax-advantaged instruments, including qualifying investments and loans to municipalities.

For purposes of the net interest margin, interest income on tax-advantaged instruments is grossed up to reflect the value of lower tax expense.

The Tax Act became effective January 1, 2018 and decreased the Company’s tax rate from a marginal 35% in 2017 to a flat 21% in 2018 and 2019.

This decreased the value of tax-advantaged instruments when 2019 and 2018 are compared with 2017.

Management has the ability to respond over time to interest rate movements, statutory tax rate changes and other influencing factors to reduce volatility in the net interest margin.

However, the frequency and/or magnitude of changes in market interest rates and legislative changes are difficult to predict and may have a greater impact on net interest income than adjustments by management.

The Company’s statutory tax rate for 2018, 2019 and 2020 was 21%.

Detail of tax equivalent yields and the net interest margin is provided in the table below.

Analysis of Net Interest Earnings

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Interest-earning assets:

Loans, net of unearned income and deferred fees and costs (1)(2)(3)(4)

Loans (1)(2)(3)(4)

Taxable securities (5 ) (6 )

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Net yield on average interest-earning assets

Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a Federal income tax rate of 21% in 2018 and 2019 and 35% in 2017.

Loan fees included in total interest income are $99 in 2019, $115 in 2018 and $303 in 2017.

Loans are net of unearned income and deferred fees and costs.

Loans include loans held in portfolio and loans held for sale.

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

Net loan fees included in interest income are $1,441 in 2020, of which $1,366 was related to PPP loans, $99 in 2019 and $115 in 2018.

Nonaccrual loans are included in average balances for yield computations.

Includes loans held for sale.

Daily averages are shown at amortized cost.

Includes restricted stock.

The following table reconciles net interest income on a fully-taxable equivalent basis to net interest income on a GAAP basis for the years indicated.

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Analysis of Changes in Interest Income and Interest Expense

The Company’s primary source of revenue is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and other funds.

The Company’s net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities.

The following table sets forth, for the years indicated, a summary of the changes in interest income and interest expense resulting from changes in average asset and liability balances (volume) and changes in average interest rates (rate).

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Increase (decrease) in net interest income

Taxable equivalent basis using a Federal income tax rate of 21% in 2018 and 2019 and 35% in 2017.

Taxable equivalent basis using a Federal income tax rate of 21%.

Variances caused by the change in rate times the change in volume have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each.

Net interest income on a taxable-equivalent basis increased $123 when 2020 is compared with 2019.

Total interest income on a taxable equivalent basis decreased $1,420 and total interest expense decreased by $1,543.

Rate changes decreased net interest income by $2,683, offset by $2,806 from increased volume.

2020 over 2019:

Impact of Interest Rate Environment

The interest rate environment in 2020 was significantly lower than in 2019 due to the Federal Reserve’s decision to cut rates by 150 basis points in March 2020 in response to the pandemic. 

The lower rate environment decreased interest income on interest-bearing deposits by $1,380, on taxable securities by $1,261 and on loans by $1,680 (taxable equivalent) when 2020 is compared with 2019. 

The rate environment resulted in lower interest income on non-taxable securities of $409. 

Reinvestment opportunities for calls and maturities of higher-yielding securities were at lower yields during 2020.

In response to the Federal Reserve’s rate policies, the Company lowered customer deposit offering rates, resulting in a decrease of $2,047 in interest expense.

2020 over 2019:

Impact of Volume

The average balance of loans net of unearned income and deferred fees and costs grew $49,903, of which $36,875 were PPP loan originations.

The average balance of taxable securities grew $97,660 and the average balance of interest-bearing deposits grew $7,112 when 2020 is compared with 2019.

The average balance of nontaxable securities declined $26,757 when 2020 is compared with 2019.

The net increase in interest earning assets resulted in additional interest income of $3,310.

The average balance of savings and interest-bearing demand deposits grew by $82,848 when 2020 is compared with 2019, increasing interest expense by $571, partially offset by reduced expense of $67 associated with a lower average balance of time deposits.

2019 over 2018

Net interest income on a taxable-equivalent basis decreased $708 when 2019 is compared with 2018.

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Non-taxable securities generated lower taxable equivalent returns of $218 due to the loss of higher-yielding securities from sales, calls and maturities during 2019.

The Federal Reserve’s rate policies also gave rise to competitive pressures to boost customer deposit offering rates, resulting in an additional $2,465 in interest expense.

The average balance of loans grew $36,292 and the average balance of interest-bearing deposits grew $37,965 when 2019 is compared with 2018, providing additional interest income of $2,483.

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The average balance of savings and time deposits grew by $13,237 when 2019 is compared with 2018, increasing interest expense by $65, partially offset by reduced expense of $33 associated with a lower average balance of interest-bearing demand deposits.

When 2018 is compared with 2017, net interest income on a taxable-equivalent basis decreased $668.

Total interest income on a taxable equivalent basis increased $254 while total interest expense increased by $922.

A decline in the yield of interest-earning assets and an increase in the yield on interest-bearing liabilities decreased net interest income by $1,506, offset by increases due to volume of $838.

The Federal Reserve increased rates by 25 basis points in December 2017 and four times in 2018.

The rate increases had a direct and immediate effect on the Company’s interest-bearing deposits.

Interest income on interest-bearing deposits increased $377 due to rates, but declined by $496 due to reduced volume, for a net decrease of $119 when 2018 is compared with 2017.

Taxable securities also benefitted from the increased interest rate environment, as matured and called securities were invested at higher rates.

Interest income on taxable securities increased $1,145 when 2018 is compared with 2017, the result of an increase of $522 due to volume along with an increase of $623 due to rates.

Taxable equivalent interest income on loans increased $1,146 when 2018 and 2017 are compared, due to robust growth in the loan portfolio.

The average balance of loans increased from $653,756 in 2017 to $683,624 in 2018, increasing interest income by $1,389.

The increase due to volume was offset slightly by a decrease of $243 due to yield.

Taxable equivalent yields on tax-advantaged loans were negatively impacted by a decrease in the Company’s statutory tax rate from 35% in 2017 to 21% in 2018.

If the 35% rate were applicable during 2018, yields would have shown an increase.

Taxable-equivalent interest on non-taxable securities declined $1,482 due to rates and $436 due to volume.

The lower yields available upon reinvestment of called and matured securities negatively impacted income from securities during 2018.

Interest on time deposits declined $11 from 2017 to 2018, with a increase of $58 due to rates offset by a decline of $69 due to decreased volume.

See “Net Interest Income” for additional information related to interest income and expense.

See “Net Interest Income”

for additional information related to interest income and expense.

Interest Rate Sensitivity

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Noninterest Income

The following table presents the Company’s noninterest income for the years indicated.

$ in thousands

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Other service charges and fees

Credit card fees

Credit card fees, net

Bank-owned life insurance income

Realized securities gains

Gain on sale of mortgage loans

Realized securities gains, net

Total noninterest income

Service charges on deposit accounts totaled $1,966 for the year ended December 31, 2020.

This is a decrease of $225, or 8.40%, from $2,678 for the year ended December 31, 2018.

Service charges on deposit accounts increased $98, or 3.53%, from 2017 to 2018.

This is a decrease of $487, or 19.85%, from $2,453 for the year ended December 31, 2019, primarily due to a decline in nonsufficient funds and overdraft fee income.

Service charges on deposit accounts decreased $225, or 8.40%, from 2018 to 2019.

This income category is affected by the number of deposit accounts, the level of service charges and the number of checking account overdrafts.

The decreases in 2019 and 2018 were driven by a decrease in fees from a lower volume of customer non-sufficient funds and overdraft activity.

The COVID-19 pandemic continued and magnified a trend of increased vigilance and caution in deposit customer activity to avoid overdrafts and other fees.

Other service charges and fees include charges for official checks, income from the sale of checks to customers, safe deposit box rent, fees from letters of credit and income from commissions on the sale of credit life, accident and health insurance.

These fees were $198 for the year ended December 31, 2019, an increase of $66, or 50.00%, from $132 for 2018.

The increase stemmed from higher check charges and service charges on letters of credit.

The total for the year ended December 31, 2018 was $73 below the $205 posted for the year ended December 31, 2017, due to lower service charges on letters of credit and check charges.

Credit card fees for the year ended December 31, 2019, were $33 below the $1,431 reported for the year ended December 31, 2018.

From 2017 to 2018, credit card fees increased $226, or 18.76%.

These fees were $162 for the year ended December 31, 2020, a decrease of $36, or 18.18%, from $198 for 2019.

The decrease stemmed from lower check charges and service charges on letters of credit.

The total for the year ended December 31, 2019 was $66 above the $132 recorded for the year ended December 31, 2018, due to higher service charges on letters of credit and check charges.

Credit card fees for the year ended December 31, 2020, were $2 above the $1,398 reported for the year ended December 31, 2019.

From 2018 to 2019, credit card fees decreased $33, or 2.31%.

Credit card fees are presented net of certain processing expenses and are dependent on the volume of transactions.

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The mix of account types affected the level of trust fees in 2019 and 2020.

Noninterest income from bank-owned life insurance (“BOLI”) increased from $901 for the year ended December 31, 2018 to $910 for 2019.

Income from BOLI was affected by the performance of the variable rate policies, which has not varied significantly.

Income from bank-owned life insurance (“BOLI”) decreased from $910 for the year ended December 31, 2019 to $877 for 2020.

Income from BOLI was affected by the performance of the variable rate policies.

BOLI income for the year ended December 31, 2018 was $901.

The Company purchased an additional $10 million in BOLI in June 2017.

Gain on sale of mortgage loans increased $379 or 127.61% from $297 for the year ended December 31, 2019 to $676 for the year ended December 31, 2020. 

The Company originates consumer real estate mortgage loans to be kept in portfolio and to be sold on the secondary market under best efforts contracts. 

A robust housing market during 2020 and the Federal Reserve’s rate cuts in March 2020 spurred a high level of consumer real estate purchase activity and refinance activity. 

Many of these loans were sold on the secondary market.

The gain on sale of mortgage loans increased $98 or 49.25% from $199 for the year ended December 31, 2018 to $297 for the year ended December 31, 2019.

Other income is income from smaller balance accounts that cannot be classified in another category.

Some examples include gains on mortgage loans sold, net gains from the sale of fixed assets and revenue from investment and insurance sales.

When 2019 is compared to 2018, other income was $1,643, an increase of $638, or 63.48%.

This was largely the result of a recovery from an insurance receivable.

Other income for 2018 was $1,005, a decrease of $143, or 12.46%, when compared with $1,148 for the year ended December 31, 2017.

In December 2017, the Company realized a gain on the sale of its Marion branch office of $134.

Some examples include dividends and increases in the Company’s equity-method investments, net gains from the sale of fixed assets, and revenue from investment and insurance sales.

When 2020 is compared to 2019, other income decreased $253, or 18.80%.

Higher stock dividends and income recognized for increases in the value of the Company’s equity-method investments during 2020 were offset by a one-time insurance recovery received in 2019. 

Other income for 2019 was $1,346, an increase of $540, or 67.00%, when compared with $806 for the year ended December 31, 2018.

The increase was largely due to a one-time insurance recovery received in 2019.

During 2020, the Company realized net securities gains of $108, including net gains of $43 on the sale of securities and $65 on calls of securities.

During 2019, the Company realized net securities gains of $566, including net gains of $438 on the sale of securities and $128 on calls of securities.

The sales of securities were pursuant to a restructuring plan to manage interest rate risk.

During 2018, the $17 realized securities gain stemmed from the call of one security with a gain of $1 and the sale of another security for a gain of $16.

During 2017, the Company sold a small investment in community bank stock that resulted in a gain of $4 while all other net realized gains resulted from calls of securities.

Noninterest Expense

The following table presents the Company’s noninterest expense for the years indicated.

$ in thousands

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Salaries and employee benefits expense includes salaries, payroll taxes, health insurance, contributions to the employee stock ownership plan and employee 401(k), pension expense, incentives and salary continuation.

When 2020 is compared with 2019, salary and employee benefits expense decreased 1.65% or $246, from $14,920 for the year ended December 31, 2019 to $14,674 for 2020.

When 2019 is compared with 2018, salary and employee benefits expense increased $680, or 4.78%, from $14,240 for the year ended December 31, 2018 to $14,920 for 2019.

The increase was the result of normal staffing and compensation decisions.

Salary and benefits expense increased $836, or 6.12%, from $13,670 for the year ended December 31, 2017 to $14,506 for 2018.

When compared to 2017, the expense in 2018 was increased by health insurance reserve requirements, higher contribution for the employee stock ownership plan and greater pension expense.

In 2017, health insurance expense was reduced by a one-time $175 refund, while in 2018 the expense increased $240 for reserve requirements based on claims history.

The contribution to the employee stock ownership plan is determined by management based on overall Company performance, while the pension expense is determined by the Company’s actuarial calculations.

Occupancy, furniture and fixtures expense was $1,866 for the year ended December 31, 2019, an increase of $21, or 1.14%, from the prior year.

Occupancy, furniture and fixtures expense was $1,795 for the year ended December 31, 2020, a decrease of $71, or 3.80%, from the prior year.

When 2019 is compared with 2018, the expense increased $21 or 1.14%.

Data processing and ATM expense was $3,171 in 2019, $2,784 in 2018 and $2,280 in 2017.

The increase of $387 or 13.90% from 2018 to 2019 and $504 or 22.11% from 2017 to 2018 was due to increased maintenance expense associated with infrastructure upgrades.

Data processing and ATM expense was $3,088 in 2020, down 2.62% or $83 from $3,171 for 2019.

Data processing and ATM expense was $2,784 for 2018.

The increase of $387 or 13.90% from 2018 to 2019 was due to increased maintenance expense associated with infrastructure upgrades in 2019.

The Company is committed to maintaining up-to-date technology in a cost-effective manner.

When the years ended December 31, 2019 and December 31, 2018 are compared, the FDIC assessment expense decreased $192 or 53.48%.

When the years ended December 31, 2020 and December 31, 2019 are compared, the FDIC assessment expense increased $31 or 18.56%.

The total expense for 2020 was $198, which compares with $167 for 2019.

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During the third quarter of 2019, the FDIC notified the Bank that it was eligible to use small bank assessment credits.

The credits were applied to the Bank’s September 30, 2019 and December 31, 2019 assessments.

If the FDIC’s Deposit Insurance Fund Reserve Ratio maintains a certain ratio, the Bank may be able to use additional credits for future assessments.

The credits were applied to the Bank’s September 30, 2019, December 31, 2019, March 31, 2020 and June 30, 2020 assessments.

The FDIC assessment expense for the year ended December 31, 2019 decreased $192 from $359 for 2018.

Core deposit intangibles are the result of prior merger and acquisition activity and are amortized over a period of years.

Amortization of the Company’s intangible assets was completed in 2018.

This accounted for the decline in intangibles amortization expense of $50 when 2019 and 2018 are compared.

The expense for intangibles amortization decreased $18 from 2017 to 2018, due to certain core deposit intangibles becoming fully amortized.

Net costs of OREO decreased from $553 for the period ended December 31, 2018 to $47 for the year ended December 31, 2019.

From 2017 to 2018, net costs of OREO increased $348 from $205.

Amortization of the Company’s intangible assets was completed in 2018.

Net costs of OREO decreased from $47 for the year ended December 31, 2019 to $39 for the year ended December 31, 2020.

From 2018 to 2019, net costs of OREO decreased $506 from $553.

This expense category varies with the number of foreclosed properties owned by NBB and with the expense associated with each.

It includes write-downs on OREO plus other costs associated with carrying these properties, as well as net gains or losses on the sale of other real estate.

There were no write-downs on OREO in 2019.

This compares with $476 in 2018 and $113 in 2017.

Other real estate is initially accounted for at fair value less estimated costs to sell using current valuations, which include appraisals, real estate evaluations and realtor market opinions.

If new valuation information indicates a decline from the initial basis, the Company records a write-down.

There was one write-down on OREO in 2020 totaling $9.

There were no write-downs on OREO in 2019.

This compares with $476 in 2018.

Other costs for these properties in 2020 were $51, compared with $42 in 2019 and $64 in 2018.

The Company recorded a loss of $5 on the sale of OREO in 2019, a loss of $13 for 2018 and a loss of $12 for 2017.

The Company’s market area shows positive economic signs, and the national economy appears to show mixed economic signals.

There may be additional foreclosures in the future.

The Company recorded a gain of $21 on the sale of OREO in 2020, a loss of $5 for 2019 and a loss of $13 for 2018.

The COVID-19 pandemic has introduced significant uncertainty into credit quality and may result in additional foreclosures in the future.

The Company currently has loans of $1,344 in process of foreclosure.

Franchise taxes are based upon NBB’s total equity at the prior year-end, adjusted for real estate taxes and certain other items.

Franchise taxes were $1,333 for the period ended December 31, 2019 and $1,278 for 2018, an increase of $55 or 4.30%.

Franchise tax expense decreased $37 in 2018 from $1,315 in 2017.

The write-down of insurance receivables totaled $2,010 for the year ended December 31, 2018.

Franchise taxes are based upon NBB’s total equity at the prior year-end, adjusted for real estate taxes and certain other items.

Franchise taxes were $1,340 for the year ended December 31, 2020 and $1,333 for 2019, an increase of $7 or 0.53%.

Franchise tax expense increased $55 in 2019 from $1,278 in 2018.

The write-down of insurance receivable totaled $2,010 for the year ended December 31, 2018.

The write-down is associated with the two cybersecurity breaches.

Please see additional information under the heading “Cybersecurity Risks and Incidents”.

The category of other operating expenses includes noninterest expense items such as professional services, stationery and supplies, telephone costs and charitable donations.

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This compares with $4,250 for 2019 and $4,157 for 2018.

The $616 decrease from 2017 to 2018 was due to a loss of $189 resulting from a wire fraud in 2017 and a decrease in expenses associated with consulting services related to the cybersecurity breaches and the non-servicing component of pension expense.

Cyber s ecurity Risks and Incidents

The Company treats cybersecurity risk seriously.

The Company has a program to identify, mitigate and manage its cybersecurity risks.

The Company considers cybersecurity risk to be one of the greatest risks to its business.

The Company has a program to identify, mitigate and manage its cybersecurity risk.

The program includes penetration testing and vulnerability assessment, technological defenses such as antivirus software, patch management, firewall management, email and web protections, an intrusion prevention system, a cybersecurity insurance policy which covers some but not all losses arising from cybersecurity breaches, as well as ongoing employee training.

The costs of these measures were $365 for the twelve months ended December 31, 2019, $345 for the twelve months ended December 31, 2018 and $277 for the twelve months ended December 31, 2017.

The costs of these measures were $379 for the 12 months ended December 31, 2020, $365 for the 12 months ended December 31, 2019 and $345 for the 12 months ended December 31, 2018.

These costs are included in various categories of noninterest expense.

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The theft of funds totaled $570 in the May 2016 attack and $1,838 in the January 2017 attack.

The Company recognized an estimated loss of $347 in 2016, and $2,010 in 2018, with a remaining insurance receivable of $50 at December 31, 2018.

The Company recognized an estimated loss of $347 in 2016, and $2,010 in 2018.

Costs for investigation, remediation, and legal consultation totaled $157 in 2019, $224 in 2018 and $407 in 2017.

The Company’s litigation against the insurance carrier was settled during the first quarter of 2019, subject to a non-disclosure agreement.

There has been no litigation against the Company to date associated with the breaches.

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Income tax expense for 2020 was $3,077 compared to $3,211 in 2019 and $2,560 in 2018.

During 2019 and 2018, the Company’s statutory tax rate was 21%;

during 2017, the Company’s marginal tax rate was 35%.

The decrease in the tax rate was due to the enactment on December 22, 2017 of the Tax Act, which became effective January 1, 2018.

The Company’s effective tax rates for 2019, 2018 and 2017 were 15.53%, 13.68% and 30.87%, respectively.

The expected income tax expense based on the Company’s statutory tax rate differs from the actual income tax expense due to tax exempt income on municipal securities and loans, and in 2017, the re-valuation of deferred tax assets from 35% to 21%.

GAAP requires deferred tax assets to be valued at the tax rate at which the Company expects to realize them.

As a result of the change in the Company’s tax rate, the Company recognized a revaluation adjustment of $1,560 in 2017, with a corresponding charge to income tax expense.

The Company’s statutory tax rate was 21% for such years.

The Company’s effective tax rates for 2020, 2019 and 2018 were 16.06%, 15.53% and 13.68%, respectively.

The expected income tax expense based on the Company’s statutory tax rate differs from the actual income tax expense due to tax exempt income on municipal securities and loans.

See Note 9 of the Notes to Consolidated Financial Statements for information relating to income taxes.

Effects of Inflation

The Company’s consolidated statements of income generally reflect the effects of inflation.

Since interest rates, loan demand and deposit levels are related to inflation, the resulting changes are included in net income.

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Provision and Allowance for Loan Losses

The Company’s risk analysis at December 31, 2019 determined an allowance for loan losses of $6,863 or 0.94% of loans net of unearned income and deferred fees and costs, a decrease from $7,390 or 1.04% at December 31, 2018.

The determination of the appropriate level for the allowance for loan losses resulted in a provision of $126 for the twelve months ended December 31, 2019, compared with a recovery for the twelve month period ended December 31, 2018 of $81.

To determine the appropriate level of the allowance for loan losses, the Company considers credit risk for certain loans designated as impaired and for non-impaired collectively evaluated loans.

Individually evaluated impaired loans totaled $5,289 on a gross basis and net of unearned income and deferred fees and costs, with specific allocations to the allowance for loan losses totaling $110 at December 31, 2019.

Individually evaluated impaired loans at December 31, 2018 were $6,820 on a gross basis as well as net of unearned income and deferred fees and costs, with specific allocations to the allowance for loan losses of $139.

The Company’s risk analysis at December 31, 2020 determined an allowance for loan losses of $8,481 or 1.10% of loans net of unearned income and deferred fees and costs.

Included in loans net of unearned income and deferred fees and costs are $35,992 in PPP loans.

Because PPP loans are guaranteed by the SBA, they are not included in the calculation for the allowance for loan losses.

If the PPP loans are removed from loans net of unearned income and deferred fees and costs, the allowance ratio is 1.16%.

The allowance at December 31, 2019 was $6,863 or 0.94% of loans net of unearned income and deferred fees and costs.

The determination of the appropriate level for the allowance for loan losses resulted in a provision of $1,991 for the 12 months ended December 31, 2020, compared with a provision of $126 for the 12 month period ended December 31, 2019.

To determine the appropriate level of the allowance for loan losses, the Company considers credit risk for certain loans designated as impaired and for non-impaired (“collectively evaluated”) loans.

Individually Evaluated Impaired Loans

Individually evaluated impaired loans totaled $4,903 gross and $4,905 net of unearned income and deferred fees and costs, with specific allocations to the allowance for loan losses totaling $75 at December 31, 2020.

Individually evaluated impaired loans at December 31, 2019 were $5,289 gross as well as net of unearned income and deferred fees and costs, with specific allocations to the allowance for loan losses of $110.

The specific allocation is determined based on criteria particular to each impaired loan.

Collectively evaluated loans totaled $728,738 on a gross basis and $728,162 net of unearned income and deferred fees and costs, with an allowance of $6,753 or 0.93% at December 31, 2019.

At December 31, 2018, collectively evaluated loans totaled $703,577 on a gross basis and $702,979 net of unearned income and deferred fees and costs, with an allowance of $7,251 or 1.03%.

For collectively evaluated loans, the Company applies to each loan class a historical net charge-off rate, adjusted for qualitative factors that influence credit risk.

Qualitative factors evaluated for impact to credit risk include economic measures, asset quality indicators, loan characteristics, and changes to internal Bank policies and management.

Net charge-off rates for each class are averaged over eight quarters (two years) to determine the historical net charge off rate applied to each class of collectively evaluated loans.

Net charge-offs for the twelve months ended December 31, 2019 were $653 or 0.09% of average loans, an increase from $454 or 0.07% for the twelve months ended December 31, 2018.

The eight-quarter average historical loss rate applied to the calculation was 0.08% for the period ended December 31, 2019 and 0.07% for the period ended December 31, 2018.

The impact of the COVID-19 pandemic continues to evolve and may lead to additional loans designated as impaired in future quarters.

Cash flow assumptions associated with impaired loans measured under the cash flow method may be impacted if borrowers are further distressed by the economic impacts of the pandemic, resulting in lower measurements and higher funding requirements for the allowance for loan losses.

Real estate activity in the Company’s market for the 12 months ended December 31, 2020 has been robust.

However, if the pandemic suppresses real estate activity, real estate values could decline, causing reduced collateral values for impaired loans measured under the collateral method and potential charge-offs.

Individually evaluated impaired loans include TDRs.

In the ordinary course of business, the Company grants modification requests when deemed appropriate.

Modifications may be granted for competitive reasons or to strengthen repayment prospects for borrowers who may or may not be experiencing financial difficulty.

The Company reviews all modifications to determine whether, at the time of the modification, the borrower is experiencing financial difficulty and whether the Company provided a concession that it would not otherwise consider.

Loans with modifications that meet these criteria are designated TDR.

When the COVID-19 pandemic began impacting the U.S., Congress passed the CARES Act and regulatory agencies provided guidance allowing banks to forego TDR designation for COVID-19 related accommodations to loans that met certain criteria.

In accordance with the guidance, the Company did not designate TDR status for modifications to loans impacted by the pandemic that met the criteria, but did implement additional tracking mechanisms to monitor all COVID-19 related modifications.

As the pandemic extends beyond December 31, 2020, some borrowers who received COVID-19 related modifications have requested subsequent accommodations.

When the Company grants subsequent modifications to a loan that received a COVID-19 modification, in accordance with accounting guidance, it must consider whether the totality of the accommodations along with the evaluation of borrower financial difficulty, results in TDR status.

Every modification is reviewed for TDR status and beginning in the third quarter of 2020, the Company implemented additional evaluation and documentation requirements for all COVID-19 related modifications to loans over $250,000.

While subsequent requests for COVID-19 related modifications have not yet resulted in additional TDRs, future subsequent requests may result in an increase in the number of the Company’s TDRs.

Collectively Evaluated Loans

Collectively evaluated loans totaled $765,124 gross and $763,894 net of unearned income and deferred fees and costs, with an allowance of $8,406 or 1.10% of loans net of unearned income and deferred fees and costs at December 31, 2020.

Excluding PPP loans, the collectively evaluated allowance ratio was 1.16% at December 31, 2020.

At December 31, 2019, collectively evaluated loans totaled $728,738 gross and $728,162 net of unearned income and deferred fees and costs, with an allowance of $6,753 or 0.93%.

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

In order to calculate the allowance for collectively evaluated loans, the Company applies to each loan class a historical net charge-off rate for the class, adjusted for qualitative factors that influence credit risk.

Qualitative factors evaluated for impact to credit risk include economic measures, asset quality indicators, loan characteristics, and changes to internal Company policies and changes in management.

Net Charge-Offs

Net charge-off rates for each class are averaged over eight quarters and applied to the class balance.

On a portfolio level, net charge-offs for the 12 months ended December 31, 2020 were $373 or 0.05% of average loans, compared with $653 or 0.09% for the 12 months ended December 31, 2019.

The 8-quarter average historical loss rate was 0.07% for December 31, 2020 and 0.08% for December 31, 2019.

Increases in the net charge-off rate increase the required allowance for collectively-evaluated loans, while decreases in the net charge-off rate decrease the required allowance for collectively-evaluated loans.

Economic factors influence credit risk and impact the allowance for loan loss.

Economic Factors

Economic factors influence credit risk and impact the allowance for loan loss. 

The Company considers economic indicators within its market area, including:

unemployment, personal bankruptcy filings, business bankruptcy filings, the interest rate environment, residential vacancy rates, housing inventory for sale, and the competitive environment.

Lower unemployment lowers credit risk and the allowance for loan losses, while higher unemployment increases credit risk.

Higher bankruptcy filings indicate heightened credit risk and increase the allowance for loan losses, while lower bankruptcy filings have a beneficial impact on credit risk.

The interest rate environment impacts variable rate loans.

As interest rates increase, the payment on variable rate loans increases, which may increase credit risk.

However the effect of gradual, measured interest rate changes does not affect credit risk as much as a volatile interest rate environment.

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

Higher levels increase credit risk.

Higher competition for loans increases credit risk, while lower competition decreases credit risk.

Within the Company’s market area, the number of personal bankruptcies increased from levels at December 31, 2018, indicating increased credit risk.

The competitive, legal and regulatory environments and the inventory of new and existing homes remained at similar levels to December 31, 2018.

Business bankruptcies, interest rates, residential vacancy rates and the unemployment rate decreased when compared with levels at December 31, 2018.

The Company assessed the decreases as positive indicators for credit risk, and reduced the risk allocation.

The Company considers other factors that impact credit risk, including the risk from changes in the legal and regulatory environments, changes to lending policies and loan review, and changes in management’s experience.

The legal and regulatory environment, lending policies, and management’s experience remained at similar levels to December 31, 2018.

Slight changes to the loan review system to align with regulatory guidance resulted in a slight increase in the allocation.

Asset quality indicators affect the level of the allowance for loan losses.

Accruing loans past due 30-89 days were 0.15% of total loans, net of unearned income and deferred fees and costs at December 31, 2019, a decrease from 0.23% at December 31, 2018.

unemployment, business and personal bankruptcy filings, the residential vacancy rate and the inventory of new and existing homes. 

The Company also assesses the interest rate, and competitive, legal and regulatory environments.

Lower unemployment lowers credit risk and the allowance for loan losses, while higher unemployment increases credit risk. 

Higher bankruptcy filings indicate heightened credit risk and increase the allowance for loan losses, while lower bankruptcy filings have a beneficial impact on credit risk. 

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 interest rate environment impacts variable rate loans. 

If interest rates increase, the payment on variable rate loans increases, which may increase credit risk. 

Higher competition for loans increases credit risk, while lower competition decreases credit risk. 

The Company obtains the most current measurements available of economic indicators. 

However, some economic indicators lag the report date by one to three months. 

In periods of low volatility, lagging indicators are accepted as reasonably representative of current conditions. 

The COVID-19 pandemic began impacting the local and national economies in March 2020 and continues to shroud the economic situation in uncertainty and volatility. 

Methods implemented to slow the spread of the virus including social distancing and government mandates that restrict business activity have resulted in a vast reduction in economic activity. 

The situation continues to evolve and sources of economic indicators available as of December 31, 2020 may not fully reflect the current impact of the expanding pandemic.

To attempt to incorporate unprecedented impact to credit risk of the COVID-19 pandemic, the Company added a qualitative factor for unemployment filings, beginning with the March 31, 2020 calculation.

Data for the Company’s market area is not available on a timely basis, however national data is available on a timely basis and historical analysis shows a strong correlation between national and local unemployment filings. 

National unemployment claims escalated sharply beginning in the latter half of March 2020. 

Weekly claims peaked at the end of March and have fallen steadily since, but as of the end of December 2020, remain almost four times the pre-pandemic levels.

On a year to date basis, total unemployment claims exceed what would be expected from pre-pandemic levels by 650%.

The Company assessed this as a significant impact to credit risk and at December 31, 2020 provided 26 basis points to the allowance for loan losses.

The Company continues to monitor the most recently available economic indicators and their effect on credit risk. 

As of December 31, 2020, the unemployment rate for the Company’s market area was measured as of October 2020 and increased from the measurement available at December 31, 2019. 

The Company increased the allocation for unemployment rate. 

Business and personal bankruptcy filing data was available as of September 2020. 

Compared with data available at December 31, 2019, business bankruptcies were slightly lower and resulted in a slightly lower allocation.

Personal bankruptcies decreased, resulting in a lower allocation for credit risk. 

The residential vacancy rate was measured as of the third quarter of 2020 and improved from the data incorporated into the December 31, 2019 calculation, resulting in a lower allocation for credit risk. 

Housing inventory data was available as of December 31, 2020. 

Levels were similar to those at December 31, 2019, resulting in a similar assessment for credit risk.

Asset Quality Indicators

Asset quality indicators, including past due levels, nonaccrual levels and internal risk ratings, are evaluated at the class level.

As discussed above, the CARES Act and regulatory guidance encouraged banks to assist qualifying borrowers experiencing COVID-19 related difficulty.

The Company provided COVID-19 related accommodations to qualifying borrowers, without which, additional loans would be included in past due data at December 31, 2020.

The Company followed its normal risk rating practices and in keeping with the regulatory guidance, did not automatically downgrade the risk rating on loans that received COVID-19 accommodations.

Without the regulatory provision, additional loans would be included in criticized assets as of December 31, 2020.

Loans past due and loans designated nonaccrual indicate heightened credit risk.

Increases in past due and nonaccrual loans increase the required level of the allowance for loan losses and decreases in past due and nonaccrual loans reduce the required level of the allowance for loan losses.

Accruing loans past due 30-89 days were 0.19% of total loans, net of unearned income and deferred fees and costs at December 31, 2020, an increase from 0.15% at December 31, 2019.

Accruing loans past due 90 days or more were 0.00% of total loans, net of unearned income and deferred fees and costs at December 31, 2020, and 0.03% at December 31, 2019.

Nonaccrual loans at December 31, 2019 were 0.46% of total loans, net of unearned income and deferred fees and costs, a decrease from 0.48% at December 31, 2018.

Decreases in past due and nonaccrual loans reduce the required level of the allowance for loan losses, while increases in past due and nonaccrual loans increase the required level of the allowance for loan losses.

Levels of high risk loans are considered in the determination of the level of the allowance for loan loss.

High risk loans are defined by the Company as loans secured by junior liens, interest-only loans and loans with a high loan-to-value ratio.

A decrease in the level of high risk loans within a class decreases the required allocation for the loan class, and an increase in the level of high risk loans within a class increases the required allocation for the loan class.

Total high risk loans decreased $28,386 or 18.07% from the level at December 31, 2018, resulting in a decreased allocation.

Loans rated “special mention” and “classified” (together, “criticized assets”) indicate heightened credit risk.

Nonaccrual loans at December 31, 2020 were 0.48% of total loans, net of unearned income and deferred fees and costs, an increase from 0.46% at December 31, 2019.

Loans rated “special mention”

and “classified”

(together, “criticized assets”) indicate heightened credit risk.

Higher levels of criticized assets increase the required level of the allowance for collectively-evaluated loans, while lower levels of criticized assets reduce the required level of the allowance for collectively-evaluated loans.

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A classified loss rate is also applied to classified loans, calculated as net charge offs divided by classified loans.

During the third quarter of 2019, the Bank slightly revised the loan risk rating system to align with regulatory guidance.

After the revision, the “special mention” rating is no longer applied to consumer loans.

The allowance for loan losses includes a two basis point adjustment to account for the change.

Collectively evaluated loans rated “special mention” were $135 at December 31, 2019 and $1,455 at December 31, 2018.

Collectively evaluated loans rated “special mention”

were $8,035 at December 31, 2020, an increase from $135 at December 31, 2019.

The increase in loans rated special mention primarily came from downgrades to loans that received initial and subsequent COVID-19 related modifications.

Collectively evaluated loans rated classified were $473 at December 31, 2020 and $961 at December 31, 2019.

The calculation of the appropriate level for the allowance for loan losses incorporates analysis of multiple factors and requires management’s prudent and informed judgment.

The ratio of the allowance for loan losses to total loans, net of unearned income and deferred fees and costs at December 31, 2019 was 0.94%, a decrease from 1.04% at December 31, 2018.

Other Factors

The Company considers other factors that impact credit risk, including the interest rate environment, the competitive, legal and regulatory environments, changes in lending policies and loan review, changes in management, and high risk loans, as well as a factor added to measure the risk from loans that received a COVID-19 modification and then received a subsequent COVID-19 modification.

The interest rate environment is at a low level as of December 31, 2020, with the Federal Reserve’s fed funds target rate between 0.00% and 0.25%.

The target was set by the Federal Reserve in an attempt to soften the pandemic’s impact on the economy, and is lower than the target at December 31, 2019 by 150 basis points.

This provides variable rate loans with lower payments, reducing credit risk.

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

Competition remained at similar levels from December 31, 2019. 

The legal and regulatory environments have experienced some changes since December 31, 2019. 

At the beginning of the COVID-19 pandemic, Congress acted swiftly to provide benefits that supported many of the Company’s borrowers and allowed them to maintain their repayment ability. 

The Bank’s primary federal regulator issued guidance encouraging banks to aid qualifying borrowers suffering from COVID-19 induced hardship and providing some leeway to banks in TDR-designation requirements. 

However, ambiguity in regulatory guidance introduces uncertainty for future regulatory treatment of loans modified for COVID-19 related financial difficulty. 

The Company is not able to forecast the effects and so no change was assessed for legal and regulatory environments.

The Company considers the risk from changes to lending policies and loan review, and changes in management’s experience.

Each of these factors remained at similar levels to December 31, 2019.

Levels of high risk loans are considered in the determination of the level of the allowance for loan loss.

High risk loans are defined by the Company as loans secured by junior liens, interest only loans and loans with a high loan-to-value ratio.

Total high risk loans decreased $15,536 or 12.07% from the level at December 31, 2019, resulting in a decreased allocation.

Beginning with the December 31, 2020 calculation, the Company added a qualitative factor for loans with modifications related to COVID-19.

The loans captured in the analysis were granted COVID-19 related modifications subsequent to initial COVID-19 related modifications, have not yet emerged from the modification period and are flagged by credit review procedures for additional monitoring.

The allocation methodology considers the percent of captured loans to the total class balance, and allocates according to the maximum estimated loss.

Unallocated Surplus

In addition to funding the allowance for loan losses based upon data analysis, the Company has the option to fund an unallocated surplus in excess to the calculated requirement, based upon management judgement.

The Company’s policy permits an unallocated surplus of between 0% and 5% of the calculated requirement.

The unallocated surplus at December 31, 2020 is $395 or 4.9% in excess of the calculated requirement.

As of December 31, 2019, the unallocated surplus was $326 or 5.0%.

The surplus provides some mitigation of the uncertainty surrounding the impact of COVID-19.

The calculation of the appropriate level for the allowance for loan losses incorporates analysis of multiple factors and requires management’s prudent and informed judgment.

The ratio of the allowance for loan losses to total loans, net of unearned income and deferred fees and costs at December 31, 2020 was 1.10%, an increase from 0.94% at December 31, 2019.

The ratio of the allowance for collectively-evaluated loan losses to collectively-evaluated loans, net of unearned income and deferred fees and costs was 1.10%, compared with 0.93% at December 31, 2019.

Improvements that decreased the required level of the allowance for loan losses from December 31, 2018 included loans past due 30-89 days, loans rated special mention and classified, loans considered high risk, the interest rate environment, business bankruptcies, residential vacancy rate, the unemployment rate and nonaccrual loans.

Other indicators slightly offset the improvements, including a slight worsening in personal bankruptcy and loans past due 90 days.

Based on analysis of historical indicators, asset quality and economic factors, management believes the level of allowance for loan losses is reasonable for the credit risk in the loan portfolio.

Both ratios at December 31, 2020 are diluted by the presence of government-guaranteed PPP loans which do not add to credit risk. 

Excluding the PPP loans, the ratio of the allowance for loan losses to total loans, net of unearned income and deferred fees and costs at December 31, 2020 was 1.16%, and the ratio of the allowance for collectively-evaluated loan losses to collectively-evaluated loans, net of unearned income and deferred fees and costs was 1.15%.

The most recently available data showed improvements that decreased the required level of the allowance for loan losses from December 31, 2019 including the interest rate environment, loans considered high risk, personal bankruptcy filings and the residential vacancy rate. 

Other indicators offset the improvements, including a worsening in the unemployment rate, some asset quality indicators and loans receiving initial and subsequent modifications for COVID-19 related difficulty flagged for monitoring by credit review procedures. 

To attempt to capture the impact on credit risk of the COVID-19 pandemic, which continues to evolve, the Company added 26 basis points for unprecedented national unemployment filing data.

Because of lags in data and heightened uncertainty stemming from the pandemic, the Company also maintained its unallocated surplus at the maximum allowed by policy. 

Based on analysis of historical indicators, asset quality and economic factors, management believes the level of allowance for loan losses is reasonable for the credit risk in the loan portfolio as of December 31, 2020.

Please refer to Note 5:

Allowance for Loan Losses, Nonperforming Assets and Impaired Loans for further information on collectively evaluated loans, individually evaluated impaired loans and the unallocated portion of the allowance for loan losses.

Quarterly Results of Operations

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Net interest income

Provision for (recovery of) loan losses

Provision for loan losses

Noninterest income

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Balance Sheet

On December 31, 2019, the Company had total assets of $1,321,837, an increase of $65,805 or 5.24%, over total assets of $1,256,032 on December 31, 2018.

Total assets at December 31, 2018 were down by $725, or 0.06%, from $1,256,757 at December 31, 2017.

The Company’s loan categorization reflects its approach to loan portfolio management and includes six groups.

On December 31, 2020, total assets were $1,519,673, an increase of $197,836 or 14.97%, over total assets of $1,321,837 on December 31, 2019.

Total assets at December 31, 2019 increased $65,805 or 5.24%, from $1,256,032 at December 31, 2018.

The Company’s loan categorization reflects its approach to loan portfolio management and includes six groups.

Real estate construction loans include construction loans for residential and commercial properties, as well as land.

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Commercial non-real estate loans include agricultural loans, operating capital lines and loans secured by capital assets.

Public sector and industrial development authority (“IDA”) loans are extended to municipalities.

Consumer non-real estate loans include automobile loans, personal loans, credit cards and consumer overdrafts.

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Total loans, net

At December 31, 2020, includes PPP loans totaling $36,903.

At December 31, 2020, includes net deferred fees on PPP loans of $911.

Maturities and Interest Rate Sensitivities

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Loans with adjustable rates

Includes PPP loans totaling $36,903.

Risk Elements

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Accruing loans past due 90 days or more

At December 31, 2020, loans net of unearned income and deferred fees includes PPP loans of $35,992.

PPP loans are insured by the SBA and do not present credit risk.

Excluding PPP loans, the ratio would be 1.16%.

Nonperforming loans include nonaccrual loans and TDRs in nonaccrual status, but do not include accruing loans 90 days or more past due or accruing restructured loans.

TDRs are discussed in detail under the section titled “C.

Modifications and Troubled Debt Restructurings” below.

TDRs are discussed in detail under the section titled “C.

Modifications and Troubled Debt Restructurings”

Impaired loans, or loans for which management does not expect to collect at the original loan terms, but which may or may not be nonperforming, are presented in Note 5 of Notes to Consolidated Financial Statements.

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Impaired loans at December 31, 2019 and 2018 were $5,289 and $6,820, of which $3,211 and $3,420 were in nonaccrual status, respectively.

The ratio of the allowance for loan losses to total nonperforming loans decreased from 216.08% in 2018 to 203.35% in 2019.

The ratio of the allowance for loan losses to total nonperforming loans increased from 203.35% in 2019 to 230.15% in 2020.

The Company believes the allowance for loan losses is adequate for the credit risk inherent in the loan portfolio.

Modifications and Troubled Debt Restructurings

In the ordinary course of business, the Company modifies loan terms on a case-by-case basis, including both consumer and commercial loans, for a variety of reasons.

Modifications to consumer loans generally involve short-term deferrals to accommodate specific, temporary circumstances.

The Company may grant extensions to borrowers who have demonstrated a willingness and ability to repay their loan but who are experiencing consequences of a specific unforeseen temporary hardship.

An extension defers monthly payments and requires a balloon payment at the original contractual maturity.

If the temporary event is not expected to impact a borrower’s ability to repay the debt, and if the Company expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay at contractual maturity, the modification is not designated a TDR.

Modifications and T roubled D ebt R estructuring s

Modifications

In the ordinary course of business the Company modifies loan terms on a case-by-case basis, including consumer and commercial loans, for a variety of reasons.

Modifications may include rate reductions, payment extensions of varying lengths of time, a change in amortization term or method or other arrangements.

Payment extensions allow borrowers temporary payment relief and result in extending the original contractual maturity by the number of months for which the extension was granted. 

The Company may grant payment extensions to borrowers who have demonstrated a willingness and ability to repay their loan but who are experiencing consequences of a specific unforeseen temporary hardship.

If the temporary event is not expected to impact a borrower’s ability to repay the debt, and if the Company expects to collect all amounts due including interest accrued at the contractual interest rate for the extension period at contractual maturity, the modification is not designated a TDR.

Modifications to consumer loans generally involve short-term payment extensions to accommodate specific, temporary circumstances. 

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

In the original underwriting, loan terms are established that represent the then-current and projected financial condition of the borrower.

If the modified terms are consistent with competitive market conditions and representative of terms the borrower could otherwise obtain in the open market, the modified loan is not categorized as a TDR.

The Company codes modifications to assist in identifying TDRs.

The majority of modifications were granted for competitive reasons and did not constitute TDRs.

A description of modifications that did not result in TDRs follows:

Modifications Made During the 12 Months Ended December 31, 2019

to Borrowers Not Experiencing Financial Difficulty

Number of Loans Modified

Total Amount Modified

Rate reductions for competitive purposes

Payment extensions for less than 3 months

Maturity date extensions of more than 3 months and up to 6 months

Maturity date extensions of more than 6 months and up to 12 months

Maturity date extensions of more than 12 months

Advances on non-revolving loans or recapitalization

Change in amortization term or method

Change or release of collateral

Renewal of expired Home Equity Line of Credit loans to additional 10 years

Renewal of single-payment notes

Total modifications that do not constitute TDRs

Modifications Made During the 12 Months Ended December 31, 2018

to Borrowers Not Experiencing Financial Difficulty

Number of Loans Modified

Total Amount Modified

Rate reductions for competitive purposes

Payment extensions for less than 3 months

Maturity date extensions of more than 3 months and up to 6 months

Maturity date extensions of more than 6 months and up to 12 months

Maturity date extensions of more than 12 months

Advances on non-revolving loans or recapitalization

Change in amortization term or method

Change or release of collateral

Renewal of expired Home Equity Line of Credit loans to additional 10 years

Renewal of single-payment notes

Total modifications that do not constitute TDRs

Modifications Made During the 12 Months Ended December 31, 201 7

to Borrowers Not Experiencing Financial Difficulty

Number of Loans Modified

Total Amount Modified

Rate reductions for competitive purposes

Payment extensions for less than 3 months

Maturity date extensions of more than 3 months and up to 6 months

Maturity date extensions of more than 6 months and up to 12 months

Maturity date extensions of more than 12 months

Advances on non-revolving loans or recapitalization

Change in amortization term or method

Renewal of expired Home Equity Line of Credit loans to additional 10 years

Renewal of single-payment notes

Total modifications that do not constitute TDRs

During the year ended December 31, 2020, the Company provided modifications for competitive purposes as well as for COVID-19 related difficulty.

For competitive purposes, the Company modified 1,047 loans totaling $152,681 during the year ended December 31, 2020.

The modifications were not TDRs and were not related to COVID-19. 

For the 12 months ended December 31, 2019, the Company provided non-TDR modifications for competitive reasons to 732 loans totaling $77,101. 

During the 12 months ended December 31, 2018, the Company provided modifications for competitive purposes to 758 loans totaling $53,337.

COVID-19 Modifications

The COVID-19 pandemic has negatively impacted a significant number of the Company’s borrowers, and is likely to continue to adversely impact some borrowers for the foreseeable future. 

During the 12 months ended December 31, 2020, the Company provided modifications related to COVID-19 financial difficulty. 

Modifications provided short-term payment relief and include payment extensions, interest only periods and rate reductions. 

The modifications met the requirements specified by the CARES Act and regulatory guidance and as such were not designated as TDRs. 

The Company followed its normal risk rating and nonaccrual designation procedures and did not automatically downgrade or designate as nonaccrual if the loan was modified for COVID-19 related difficulty under the CARES Act.

The following table provides information regarding COVID-19 related modifications.

Twelve Months Ended December 31, 2020

Modification s To Borrowers Impacted by the  

COVID-19 Pandemic

(in thousands)

Rate reductions (1)

Payment extensions ( 2 )

Maturity date extension

Interest-only period for amortizing loans ( 2 )

Rate reductions were granted to qualifying loans and are permanent for the remaining term of the loan.

Rate reductions were provided to alleviate COVID-19 hardship and also to remain competitive in the current low interest rate environment.

Payment extensions and interest-only periods granted to amortizing loans have a set expiration date.

A loan that received multiple modifications as part of one request, for instance, a rate reduction and a payment extension, is presented only under one modification category.

A loan that was modified pursuant to a first request and then was modified subsequently pursuant to a separate request is included for each of the requests.

For example, a loan that received a payment extension under a first request and a rate reduction under a second request is counted in the rate reduction category and again in the payment extension category.

Of the modifications presented in the table above, those pursuant to subsequent requests included 67 loans totaling $23,074 with payment extensions and 8 amortizing loans totaling $20,503 granted an interest-only period.

Subsequent requests for modifications are evaluated to determine whether the totality of the modifications and the borrower’s financial condition indicate TDR status.

As of December 31, 2020, the Company determined that loans granted subsequent modification requests continued to fall within the CARES Act parameters and did not designate any new TDRs.

To account for the possible increase in credit risk from commercial loans requiring subsequent modifications, the Company added an allocation to the allowance for loan losses at December 31, 2020.

Of the modifications presented in the table above, certain loans remain in their modification period as of December 31, 2020, including 12 loans totaling $7,769 with payment extensions and 12 loans totaling $33,176 in an interest only period.

Commercial loans that remain in their modification period as of December 31, 2020 include 3 loans totaling $6,626 with payment extensions and 12 loans totaling $32,309 in an interest only period

While the CARES Act and regulatory guidance provide that short-term relief to qualifying loans in response to the COVID-19 crisis does not automatically result in a TDR, adverse risk rating or nonaccrual status, the Company tracks all modifications and is monitoring outlooks for borrowers.

If the pandemic lasts longer than the period of relief provided by the modifications, the Company expects to continue to work with borrowers in order to bolster the prospect of full repayment in the future.

Subsequent concessions or borrower financial difficulty that impacts repayment prospects according to the loan terms may result in a loan being designated TDR, impaired and/or nonaccrual, and may result in a downgrade in the risk rating, based upon individual borrower circumstances and regulatory and accounting guidance.

The Company reviews every modification for TDR and risk rating indicators and in response to the high level of COVID-19 related modifications, implemented additional review and documentation requirements for modified loans over $250 to ensure that subsequent requests for COVID-19 related modifications were properly reviewed for TDR and credit risk indicators.

The allowance for loan losses incorporates analysis of commercial loans that received initial and subsequent modifications related to COVID-19 difficulty and measures TDRs for impairment and considers trends in past dues, nonaccruals and risk ratings as well as charge-offs.

An increase in TDRs may result in additional accruals to the allowance.

Increases in past dues, nonaccruals, adverse risk ratings and charge-offs will increase the allowance for collectively evaluated loans.

Nonaccrual loans do not accrue interest, which will decrease the Company’s net interest margin, as will concessions such as competitive rate decreases and payment extensions.

TDR Designation

Modifications of loan terms to borrowers experiencing financial difficulty are made in an attempt to protect as much of the Company’s investment in the loan as possible.

The Company has restructured loan terms for certain qualified financially distressed borrowers who have agreed to work in good faith and have demonstrated the ability to make the restructured payments.

The determination of whether a modification should be designated a TDR requires significant judgment after consideration of all facts and circumstances surrounding the transaction.

Modifications in which the borrower is experiencing financial difficulty and for which the Company makes a concession to the original contractual loan terms are designated TDRs.

Modifications of loan terms to borrowers experiencing financial difficulty are made in an attempt to protect as much of the Company’s investment in the loan as possible.

The determination of whether a modification should be accounted for as a TDR requires significant judgment after consideration of all facts and circumstances surrounding the transaction.

Subsequent modifications to loans that received a prior modification that was not designated TDR are evaluated to determine whether the totality of the modifications and the borrower’s financial status at the time of the subsequent modification indicate TDR status

Assuming all other TDR criteria are met, the Company considers one or a combination of the following concessions to the loan terms to indicate TDR status:

a reduction of the stated interest rate, an extension of the maturity date at an interest rate lower than the current market rate for a new loan with a similar term and similar risk, or forgiveness of principal or accrued interest.

TDR loans are individually evaluated for impairment for purposes of determining the allowance for loan losses.

TDR loans with at least six months of timely repayment history may accrue interest.

TDR loans that do not have six months of timely repayment performance are maintained on nonaccrual until the borrower demonstrates sustained repayment history under the restructured terms and continued repayment is not in doubt.

TDR loans may be removed from TDR status, and placed in the appropriate collectively evaluated pool, if the restructuring agreement specified a market interest rate at the time of restructuring and the loan is in compliance with modified terms for a period of at least one year after the restructuring was executed.

The Company’s TDRs amounted to $4,940 as of December 31, 2019 and $5,661 as of December 31, 2018.

a reduction of the stated interest rate, an extension of the maturity date at an interest rate lower than the current market rate for a new loan with a similar term and similar risk, restructuring an amortizing loan to interest only for a period, or forgiveness of principal or accrued interest.

All TDR loans are individually evaluated for impairment for purposes of determining the allowance for loan losses.

TDR loans that do not demonstrate current payments for at least six months are maintained on nonaccrual until the borrower demonstrates sustained repayment history under the restructured terms and continued repayment is not in doubt.

Otherwise, interest income is recognized using a cost recovery method.

The Company’s TDRs amounted to $4,249 as of December 31, 2020 and $4,940 as of December 31, 2019.

Accruing TDR loans amounted to $1,410 at December 31, 2020 compared to $1,729 at December 31, 2019.

Restructuring generally results in loans with lower payments or an extended maturity beyond that originally required, and are expected to have a lower risk of loss due to nonperformance than loans classified as nonperforming.

In 2019, the Company modified one loan in a TDR that, directly prior to restructuring, totaled $100, and currently has a balance of $100 at December 31, 2019.

Of the Company’s TDRs at December 31, 2019, seven loans, all part of one relationship defaulted within 12 months of being modified.

There were no new TDRs designated in 2020.

During 2020, there were no TDRs that defaulted within 12 months of being designated TDR.

In 2019, the Company modified one loan in a TDR that, directly prior to restructuring, totaled $100, and had a balance of $100 at December 31, 2019.

Of the Company’s TDRs at December 31, 2019, seven loans, all part of one relationship defaulted within 12 months of being modified.

The Company defines default as a delay in one payment of more than 90 days or foreclosure after the date of restructuring.

In 2018, the Company modified loans in a TDR that, directly prior to restructuring, totaled $4,213 and that had total principal balances of $3,800 as of December 31, 2018.

None of the Company’s restructured loans defaulted during the twelve months ended December 31, 2018.

Please refer to Note 5 for information on the effect of default on the allowance for loan losses.

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$ in thousands

TDR Delinquenc y Status as of December 31, 2019

TDR Delinquency Status as of December 31, 2020

Real estate construction

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$ in thousands

TDR Delinquency Status as of December 31, 2018

TDR Delinquenc y Status as of December 31, 2019

Real estate construction

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$ in thousands

Average loans, net of unearned income and deferred fees and costs

Average loans (1)

Allowance for loan losses at beginning of year

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Allowance for loan losses at end of year

Net charge-offs to average loans net of unearned income and deferred fees and costs

Net charge-offs to average loans (1)

Loans are presented net of unearned income and deferred fees and costs.

The Company charges off commercial real estate loans at the time that a loss is confirmed.

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$ in thousands

Percent of Loans to

Total Loans (1)

Real estate construction

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The amount of the individual impaired loan balance that exceeds the fair value is accrued in the allowance for loan losses.

Management’s analysis of the loan portfolio and pertinent economic conditions resulted in a determination of the allowance for loan losses for collectively evaluated loans of $6,753 or 0.93% of such loans at December 31, 2019, $7,251 or 1.03% at December 31, 2018, and $7,748 or 1.18% at December 31, 2017.

Management’s analysis of the loan portfolio and pertinent economic conditions resulted in a determination of the allowance for loan losses for collectively evaluated loans of $8,406 or 1.10% of such loans at December 31, 2020, $6,753 or 0.93% at December 31, 2019, and $7,251 or 1.03% at December 31, 2018.

The allowance for collectively evaluated loans is determined by applying historical charge-off percentages, as well as additional accruals for internal and external credit risk factors to groups of collectively evaluated loans.

The Company applies the average of the most recent eight quarters of net charge-offs to calculate historical net charge-offs for the allowance.

The ratio increased from 2019 to 2020 due to declines in economic and credit risk factors as a result of responses to the pandemic.

The ratio decreased from 2018 to 2019 due to improvements in economic and credit risk factors.

The ratio decreased from 2017 to 2018 due to a decreased charge-off ratio, down from 0.08% for the twelve months ended December 31, 2017 to 0.07% for the year ended December 31, 2018.

Also contributing to the reduced allowance requirement were improved asset quality indicators, and favorable economic indicators.

The unallocated portion of the reserve was $396 at December 31, 2020, $326 at December 31, 2019 and $210 at December 31, 2018.

The unallocated portion of the reserve is the amount that exceeds the calculated requirement for the allowance for loan losses.

The Company’s policy permits an unallocated reserve of up to 5% in excess of the required level for the allowance for loan losses.

The total calculated allowance for loan losses of $6,863 at December 31, 2019, $7,390 as of December 31, 2018 and $7,925 as of December 31, 2017 indicated a provision of $126 for the twelve months ended December 31, 2019 and indicated a recovery of $81 for the twelve months ended December 31, 2018 and a provision of $157 for the twelve months ended December 31, 2017.

Please refer to the discussion under “Provision and Allowance for Loan Losses” for additional information on the determination of the allowance for loan loss.

The Company’s policy permits an unallocated reserve of up to 5% in excess of the required level for the allowance for loan losses.

The surplus provides some mitigation of the uncertainty surrounding the impact of COVID-19.

The total calculated allowance for loan losses of $8,481 at December 31, 2020, $6,863 as of December 31, 2019 and $7,390 as of December 31, 2018 indicated a provision of $1,991 for the 12 months ended December 31, 2020 and indicated a provision of $126 for the 12 months ended December 31, 2019 and a recovery of $81 for the 12 months ended December 31, 2018.

Please refer to the discussion under “Provision and Allowance for Loan Losses”

for additional information on the determination of the allowance for loan loss.

The fair value of securities available for sale was $546,742, an increase of $111,479 or 25.61% from December 31, 2019.

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The risk in financial markets affects the Company in the same way that it affects other institutional and individual investors.

The Company’s investment portfolio includes corporate bonds.

If, because of economic hardship, the corporate issuers were to default, there could be a delay in the payment of interest, or there could be a loss of principal and accrued interest.

To date, there have been no defaults in any of the corporate bonds held in the portfolio.

The Company’s investment portfolio also contains a large percentage of municipal bonds.

If economic forces reduce the ability of states and municipalities to make scheduled principal and interest payments on their outstanding indebtedness, or if their income from taxes and other sources declines significantly, states and municipalities could default on their bond obligations.

There have been no defaults among the municipal bonds in the Company’s investment portfolio.

The fair value of our bond portfolio is affected by interest rates.

There have been no defaults among the municipal bonds in the Company’s investment portfolio.

The fair value of our bond portfolio is affected by interest rates. 

The fair value of available for sale securities is reflected on the Company's balance sheet, while held to maturity securities are reported at amortized cost.

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Additional information about securities available for sale and securities held to maturity can be found in Note 3 of the Notes to Consolidated Financial Statements.

Maturities and Associated Yields

The following table presents the maturities for securities available for sale and held to maturity at their carrying values as of December 31, 2019 and weighted average yield for each range of maturities.

 Maturities and Associated Yields

The following table presents the maturities for securities available for sale and restricted stock at their carrying values as of December 31, 2020 and weighted average yield for each range of maturities.

$ in thousands

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Mortgage-backed securities

States and political subdivision – nontaxable (1)

States and political subdivision –

nontaxable (1)

Restricted stock:

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government agencies.

Certain holdings are required to be periodically subjected to the Federal Financial Institution Examination Council’s (FFIEC) high risk mortgage security test.

These tests address possible fluctuations in the average life and variances caused by the change in rate times the change in volume that have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each.

Except for U.S.

government agency securities, the Company has no securities with any issuer that exceeds 10% of stockholders’ equity.

government agency securities, the Company has no securities with any issuer that exceeds 10% of stockholders’

Total deposits increased by $177,390 or 15.84%, from $1,119,753 at December 31, 2019 to $1,297,143 at December 31, 2020.

While all deposit categories increased, the two greatest impacts came from growth of $26,955 in interest-bearing demand deposits and growth of $26,229 in time deposits.

During the fourth quarter of 2018, the Company raised its deposit offering rates in order to remain competitive during a rising rate environment.

When December 31, 2018 is compared with December 31, 2017, total deposits decreased $7,792, or 0.74%, from $1,059,734 at December 31, 2017, primarily due to a decline in time deposits.

The two greatest impacts came from growth of $119,811 in interest-bearing demand deposits and growth of $74,927 in noninterest-bearing deposits.

During the first quarter of 2020, the Company decreased its deposit offering rates as a result of the Federal Reserve decreases in the Fed Funds rate.

When December 31, 2019 is compared with December 31, 2018, total deposits increased $67,811, or 6.45%, from $1,051,942 at December 31, 2018, primarily due growth in interest-bearing demand deposits and time deposits.

Average Amounts of Deposits and Average Rates Paid

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Average total deposits

Time Deposits of $ 25 0 or More

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Management does not plan any future involvement in high risk derivative products.

The Company has investments in mortgage-backed securities, principally through the Government National Mortgage Association (“GNMA”) and Federal National Mortgage Association (“FNMA”), with a fair value of approximately $221,783.

The Company has investments in mortgage-backed securities, principally through the Government National Mortgage Association and Federal National Mortgage Association, with a fair value of approximately $249,175.

See Note 3 of Notes to Consolidated Financial Statements for additional information relating to securities.

The Company’s securities and loans are subject to credit and interest rate risk, and its deposits are subject to interest rate risk.

Management considers credit risk when a loan is granted and monitors credit risk after the loan is granted.

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While the asset/liability planning program is designed to protect the Company over the long term, it does not provide near-term protection from interest rate shocks, as interest rate sensitive assets and liabilities do not by their nature move up or down in tandem in response to changes in the overall rate environment.

The Company’s profitability in the near term may be temporarily negatively affected in a period of rapidly rising or rapidly falling rates, because it takes some time for the Company to change its rates to adjust to a new interest rate environment.

See Note 15 of Notes to Consolidated Financial Statements for information relating to fair value of financial instruments and comments concerning interest rate sensitivity.

Liquidity measures the Company’s ability to meet its financial commitments at a reasonable cost.

Demands on the Company’s liquidity include funding additional loan demand and accepting withdrawals of existing deposits.

Liquidity measures the Company’s ability to meet its financial commitments at a reasonable cost.

Demands on the Company’s liquidity include funding additional loan demand and accepting withdrawals of existing deposits.

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.

At December 31, 2019, the Bank did not have discount window borrowings, short-term borrowings, or FHLB advances.

To assure that short-term borrowing is readily available, the Company tests accessibility annually.

At December 31, 2020, the Bank did not have discount window borrowings, short-term borrowings, or FHLB advances.  To assure that short-term borrowing is readily available, the Company tests accessibility annually.

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

Prior to the second quarter of 2018, the securities portfolio was segregated into available for sale and held to maturity.

During the second quarter of 2018, the Company re-classified all its held to maturity securities to available for sale.

Portions of the securities portfolio are pledged to meet state requirements for public funds deposits.

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The Company monitors public funds pledging requirements and unpledged available for sale securities accessible for liquidity needs.

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

At December 31, 2020, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve discount window.

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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.

At December 31, 2019, the Company’s liquidity is sufficient to meet projected trends in these areas.

At December 31, 2020, the Company’s liquidity is sufficient to meet projected trends in these areas.

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.

At December 31, 2020, 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 own policy range of 65% to 75%.

At December 31, 2020, the loan to deposit ratio was 59.27%.

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In the normal course of business, we enter into certain contractual obligations, including obligations to make future payments on lease arrangements, contractual commitments with depositors, and service contracts.

The table below presents our significant contractual obligations as of December 31, 2019, except for pension and other postretirement benefit plans, which are included in Note 8, "Employee Benefit Plans," to the Consolidated Financial Statements in this Form 10-K.

The table below presents our significant contractual obligations as of December 31, 2020, except for pension and other postretirement benefit plans, which are included in Note 8, "Employee Benefit Plans," of Notes to Consolidated Financial Statements in this Form 10-K.

$ in thousands

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Includes contracts with a minimum annual payment of $100.

As of December 31, 2019, the Company was not aware of any other known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity.

As of December 31, 2019, the Company has no material commitments for long-term debt or for capital expenditures.

As of December 31, 2020, the Company was not aware of any other known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity.

As of December 31, 2020, the Company has no material commitments for long term debt or for capital expenditures.

Recent Accounting Pronouncements

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Capital Resources

Total stockholders’ equity at December 31, 2019 was $183,726, a decrease of $6,512, or 3.42%, from the $190,238 at December 31, 2018.

The largest component of 2019 stockholders’ equity was retained earnings of $184,120, which included net income of $17,466, offset by dividends of $9,032 and repurchase of shares of $17,939.

Total stockholders’ equity increased by $5,342 or 2.89%, from $184,896 on December 31, 2017 to $190,238 on December 31, 2018.

In August 2018, the Federal Reserve updated the Small Bank Holding Company Policy Statement, in compliance with EGRRCPA.

The statement, among other things, exempted bank holding companies that fall below a certain asset threshold from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements.

The interim final rule expanded the exemption to bank holding companies with consolidated total assets of less than $3 billion.

Prior to August 2018, the statement exempted bank holding companies with consolidated total assets of less than $1 billion.

As a result of the interim final rule, the Company qualified as of August 2018 as a small bank holding company and is no longer subject to regulatory capital requirements on a consolidated basis.

The Bank continues to be subject to various capital requirements administered by banking agencies.

Total stockholders’

equity at December 31, 2020 was $200,607, an increase of $16,881, or 9.19%, from the $183,726 at December 31, 2019.

The largest component of 2020 stockholders’

equity was retained earnings of $189,547, which included net income of $16,077, offset by dividends of $9,000 and repurchase of shares of $1,650.

Total stockholders’

equity decreased by $6,512 or 3.42%, from $190,238 on December 31, 2018 to $183,726 on December 31, 2019.

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.

National Bank of Blacksburg is subject to various capital requirements administered by banking agencies, including an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments.

Risk based capital ratios for the Bank are shown in the following tables.

December 31, 2020

Regulatory Capital

Minimum Ratios

Regulatory Capital Minimum

Ratios with Capital Conservati on Buffer

Common Equity Tier I Capital Ratio

Tier I Capital Ratio

Total Capital Ratio

Leverage Ratio

December 31, 2019

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Regulatory Capital Minimum

Ratios with Capital Conservati on Buffer

Common Equity Tier I Capital Ratio

Tier I Capital Ratio

Ratios with Capital Conservation Buffer

Total Capital Ratio

Tier I Capital Ratio

Common Equity Tier I Capital Ratio

Leverage Ratio

Risk-based capital ratios are calculated in compliance with FDIC rules based on Basel III Capital Requirements.

The Bank’s ratios are well above the required minimums at December 31, 2019 and December 31, 2018.

Banks are subject to an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments.

The implementation period for the capital conservation buffer began in 2016 and was fully phased in January 1, 2019, with .625% added each year and a final buffer of 2.5% in excess of regulatory capital minimum ratios.

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

The Bank’s ratios are well above the required minimums at December 31, 2020 and December 31, 2019.

Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements at December 31, 2019 are detailed in the table below.

The Company’s off-balance sheet arrangements at December 31, 2020 are detailed in the table below.

$ in thousands

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Operating leases

In the normal course of business the Company’s banking affiliate extends lines of credit to its customers.

Amounts drawn upon these lines vary at any given time depending on the business needs of the customers.

Standby letters of credit are also issued to the Bank’s customers.

There are two types of standby letters of credit.

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To date, no recourse provisions have been invoked.

Operating leases are for buildings used in the Company’s day-to-day operations.

Quantitative and Qualitative Disclosures About Market Risk

Information about market risk is set forth above in the “Interest Rate Sensitivity” and “Derivatives and Market Risk Exposure” sections of the Management’s Discussion and Analysis.

Information about market risk is set forth above in the “Interest Rate Sensitivity”

and “Derivatives and Market Risk Exposure”

sections of the Management’s Discussion and Analysis.

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-K

Item 5. Market for Registrant’s Common Equity