What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-18 compared with 2020-03-11 · 1093 added, 494 removed, 1168 unchanged (58% of the section changed)

3 unchanged sentences

Cash and due from banks

$ 13,147  

$ 10,290  

Interest-bearing deposits

120,725  

76,881  

Securities available for sale, at fair value

546,742  

435,263  

Restricted stock

1 unchanged sentence

Real estate construction loans

42,266  

42,303  

Consumer real estate loans

181,782  

181,472  

Commercial real estate loans

393,115  

365,373  

Commercial non-real estate loans

78,771  

46,576  

Public sector and IDA loans

40,983  

63,764  

Consumer non-real estate loans

33,110  

34,539  

770,027  

734,027  

Less unearned income and deferred fees and costs

Loans, net of unearned income and deferred fees and costs

768,799  

733,451  

Less allowance for loan losses

760,318  

726,588  

Premises and equipment, net

10,035  

Accrued interest receivable

1 unchanged sentence

Bank-owned life insurance (BOLI)

Liabilities and Stockholders’ Equity

36,444  

35,567  

17,688  

14,459  

$ 1,519,673  

$ 1,321,837  

Liabilities and Stockholders’

Noninterest-bearing demand deposits

$ 276,793  

$ 201,866  

Interest-bearing demand deposits

763,293  

643,482  

Savings deposits

167,475  

146,377  

Time deposits

89,582  

128,028  

Total deposits

1,297,143  

1,119,753  

Accrued interest payable

Other liabilities

21,867  

18,214  

Total liabilities

1,319,066  

1,138,111  

Commitments and contingencies

Stockholders’ equity:

Stockholders’

Preferred stock, no par value, 5,000,000 shares authorized;

4 unchanged sentences

Retained earnings

Accumulated other comprehensive loss, net

Total stockholders’ equity

Total liabilities and stockholders’ equity

189,547  

184,120  

Accumulated other comprehensive income (loss), net

Total stockholders’

200,607  

183,726  

Total liabilities and stockholders’

$ 1,519,673  

$ 1,321,837  

The accompanying notes are an integral part of these consolidated financial statements.

5 unchanged sentences

Interest on interest-bearing deposits

Interest and dividends on securities – taxable

Interest on securities – nontaxable

Interest and dividends on securities –

Interest on securities –

Total interest income

9 unchanged sentences

Other service charges and fees

Credit and debit card fees

Credit and debit card fees, net

Gain on sale of mortgage loans

Realized securities gains, net

19 unchanged sentences

$ in thousands, except per share data

$ 16,077  

$ 17,466  

$ 16,151  

Other Comprehensive Income ( Loss ) , Net of Tax

Unrealized holding gain (loss) on available for sale securities net of tax of $ 3,502 in 2020, $ 1,486 in 2019 and ($595) in 2018

13,176  

Reclassification adjustment for gain included in net income, net of tax of ($23) in 2020, ($119) in 2019 and ($4) in 2018

Transfer from held to maturity to available for sale securities, net of tax of $ 237 in 2018

Net pension gain (loss) arising during the period, net of tax of ($394) in 2019, ($249) in 2018 and $115 in 2017

Net pension loss arising during the period, net of tax of ($393) in 2020, ($394) in 2019 and ($249) in 2018

Less amortization of prior service cost included in net periodic pension cost, net of tax of ($23) in 2020, ($23) in 2019 and ($24) in 2018

Other comprehensive income (loss), net of tax of $ 3,063 in 2020, $ 950 in 2018 and ($635) in 2018

11,526  

Total Comprehensive Income

$ 27,603  

$ 21,045  

$ 13,761  

The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Statements of Changes in Stockholders’ Equity

$ in thousands, except per share data

Consolidated Statements of Changes in Stockholders’

$ in thousands, except share and per share data

Retained Earnings

Accumulated Other

Comprehensive (Loss)

Balance at December 31, 201 6

Other comprehensive income, net of tax of $369

Cash dividend ($1.17 per share)

Reclassification of stranded tax effects from change in tax rate

Accumulated Other Comprehensive Income (Loss)

Balance at December 31, 201 7

$ 8,698  

$ 185,893  

$ 184,896  

16,151  

Other comprehensive loss, net of tax of ($635)

1 unchanged sentence

Balance at December 31, 201 8

$ 8,698  

$ 193,625  

$ 190,238  

17,466  

Other comprehensive income, net of tax of $ 950

1 unchanged sentence

Stock repurchase ( 468,400 shares)

Balance at Decembe r 31, 201 9

$ 8,112  

$ 184,120  

$ 183,726  

16,077  

Other comprehensive income, net of tax of $ 3,063

11,526  

Cash dividend ($ 1.39 per share)

Stock repurchase ( 57,554 shares)

Balance at December 31, 20 20

$ 8,040  

$ 189,547  

$ 3,020  

$ 200,607  

The accompanying notes are an integral part of these consolidated financial statements.

6 unchanged sentences

Deferred income tax expense (benefit)

Re-valuation of deferred tax assets

Depreciation of premises and equipment

3 unchanged sentences

Gain on calls and sales of securities available for sale, net

Gain on calls of securities held to maturity, net

Loss and write-down on other real estate owned

Loss (gain) on sale of repossessed assets

Loss (gain) and write-down on other real estate owned

Loss on sale of repossessed assets

Income on investment in BOLI

14 unchanged sentences

Purchases of securities available for sale

Purchases of securities held to maturity

Net change in restricted stock

Purchase of BOLI

Purchases of loan participations

7 unchanged sentences

Net cash used in investing activities

 (continued)

Cash Flows from Financing Activities

13 unchanged sentences

Loans transferred to other real estate owned

Loans transferred to repossessed assets

Unrealized gain (loss) on securities available for sale

2 unchanged sentences

Minimum pension liability adjustment

Increase in the lease right-of-use asset upon adoption of ASU 2016-02

Increase in the lease liability upon adoption of ASU 2016-02

Increase in operating lease right-of-use asset during the period

Increase in operating lease liability during the period

The accompanying notes are an integral part of these consolidated financial statements.

13 unchanged sentences

Interest-bearing deposits are carried at cost.

Certain debt securities that management has the positive intent and ability to hold to maturity may be classified as “held to maturity” and recorded at amortized cost.

Certain debt securities that management has the positive intent and ability to hold to maturity may be classified as “held to maturity”

and recorded at amortized cost.

Trading securities are recorded at fair value with changes in fair value included in earnings.

Securities not classified as held to maturity or trading, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

Securities not classified as held to maturity or trading, are classified as “available for sale”

and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

The Company uses the interest method to recognize purchase premiums and discounts in interest income over the term of the securities.

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

During 2018, the Company’s held to maturity securities were re-designated as available for sale.

At the time of the transfer, the re-designated securities had a fair value of $ 119,790 and an unrealized net gain of $ 1,128 .

4 unchanged sentences

For held to maturity debt securities, the amount of an OTTI recorded in other comprehensive income for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

Equity securities with readily-determinable fair values are measured at fair value using the “exit price notion”.

Changes in fair value are recognized in net income.

6 unchanged sentences

A substantial portion of the loan portfolio is represented by mortgage loans, particularly commercial mortgages.

The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Company’s market area.

The Company’s loans are grouped into six segments:

The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Company’s market area.

The Company’s loans are grouped into six segments:

real estate construction, consumer real estate, commercial real estate, commercial non-real estate, public sector and IDA, and consumer non-real estate.

1 unchanged sentence

Real estate construction loans are subject to general risks from changing commercial building and housing market trends and economic conditions that may impact demand for completed properties and the costs of completion.

Completed properties that do not sell or become leased within originally expected timeframes may impact the borrower’s ability to service the debt.

These risks are measured by market-area unemployment rates, bankruptcy rates, housing and commercial building market trends, and interest rates.

Risks specific to the borrower are also evaluated, including previous repayment history, debt service ability, and current and projected loan-to value ratios for the collateral.

The credit quality of consumer real estate is subject to risks associated with the borrower’s repayment ability and collateral value, measured generally by analyzing local unemployment and bankruptcy trends, and local housing market trends and interest rates.

Risks specific to a borrower are determined by previous repayment history, loan-to-value ratios and debt-to-income ratios.

The commercial real estate segment includes loans secured by multifamily residential real estate, commercial real estate occupied by the owner/borrower, and commercial real estate leased to non-owners.

Commercial real estate includes loans secured by multifamily residential real estate, commercial real estate occupied by the owner/borrower, and commercial real estate leased to non-owners.

Loans in the commercial real estate segment are impacted by economic risks from changing commercial real estate markets, rental markets for multi-family housing and commercial buildings, business bankruptcy rates, local unemployment rates and interest rate trends that would impact the businesses housed by the commercial real estate.

2 unchanged sentences

Public sector and IDA loans are extended to municipalities and related entities.

Credit risk is based upon the entity’s ability to repay through either a direct obligation or assignment of specific revenues from an enterprise or other economic activity, and interest rate trends.

Credit risk stems from the entity’s ability to repay through either a direct obligation or assignment of specific revenues from an enterprise or other economic activity, and interest rate trends.

Consumer non-real estate includes credit cards, automobile and other consumer loans.

Credit cards and certain other consumer loans are unsecured, while collateral is obtained for automobile loans and other consumer loans.

Credit risk stems primarily from the borrower’s ability to repay.

If the loan is secured, the company analyzes loan-to-value ratios.

1 unchanged sentence

Risks from delinquency trends and characteristics such as second -lien position and interest-only status, as well as historical charge-off rates, are analyzed for all segments.

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, any purchase premium or discount, unearned income and deferred fees or costs.

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, any purchase premium or discount, unearned income and deferred fees or costs.

Interest income is accrued on the unpaid principal balance.

4 unchanged sentences

Interest accrual is discontinued at the time a commercial real estate loan or commercial non-real estate loan is 90 days delinquent unless the credit is well secured and in the process of collection.

Loans within all loan classes that are not restructured but that are impaired and have an associated impairment loss are placed on nonaccrual.

Restructured loans within all classes that allow the borrower to discontinue payments of principal or interest for more than 90 days are placed on nonaccrual unless the modification provides reasonable assurance of repayment performance and collateral value supports regular underwriting requirements.

Restructured loans within all classes that maintain current status for at least a six-month period, including history prior to restructuring, may be returned to accrual status.

Loans within all loan classes that are not TDRs but that are impaired and have an associated impairment loss are placed on nonaccrual.

TDRs within all classes that allow the borrower to discontinue payments of principal or interest for more than 90 days are placed on nonaccrual unless the modification provides reasonable assurance of repayment performance and collateral value supports regular underwriting requirements.

TDRs within all classes that maintain current status for at least a six -month period, including history prior to restructuring, may be returned to accrual status.

All interest accrued but not collected for loans of all classes that are placed on nonaccrual or for loans charged off is reversed against interest income.

5 unchanged sentences

The Company reviews nonaccrual loans on an individual loan basis to determine whether future payments are reasonably assured.

In order for this criteria to be satisfied, the Company’s evaluation must determine that the underlying cause of the original delinquency or weakness that indicated nonaccrual status has been resolved, such as receipt of new guarantees, increased cash flows that cover the debt service or other resolution.

A loan is considered past due when a payment of principal and/or interest is due but not paid.

2 unchanged sentences

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable losses inherent in the Company’s loan portfolio.

A provision for estimated losses is charged to earnings to establish and maintain the allowance for loan losses at a level reflective of the estimated credit risk.

7 unchanged sentences

Fair value of impaired loans is estimated in one of three ways:

(1) the estimated fair value (less selling costs) of the underlying collateral, (2) the present value of the loan’s expected future cash flows, or (3) the loan’s observable market value.

( 1 ) the estimated fair value (less selling costs) of the underlying collateral, ( 2 ) the present value of the loan’s expected future cash flows, or ( 3 ) the loan’s observable market value.

The amount of recorded investment (unpaid principal net of any interest payments made by the borrower during the nonaccrual period and net of any partial charge-offs, accrued interest and deferred fees and costs) in a non-collateral dependent impaired loan that exceeds the fair value is accrued as estimated loss in the allowance.

4 unchanged sentences

Factors considered in determining general allowances include net charge-off trends, internal risk ratings, delinquency and nonperforming rates, product mix, underwriting practices, industry trends and economic trends.

The Company’s charge-off policy meets or is more stringent than the minimum standards required by regulators.

When available information confirms that a specific loan or a portion thereof, within any loan class, is uncollectible the amount is charged off against the allowance for loan losses.

3 unchanged sentences

Troubled Debt Restructurings

In situations where, for economic or legal reasons related to a borrower’s financial condition, management grants a concession to the borrower that it would not otherwise consider, the related loan is classified a TDR.

These modified terms may include reduction of the interest rate, extension of the maturity date at an interest rate lower than the current market rate for a new loan with similar risk, forgiveness of principal or accrued interest or other actions intended to minimize the economic loss.

24 unchanged sentences

The Company performs its annual analysis as of September 30 of each fiscal year.

Accounting guidance permits preliminary assessment of qualitative factors to determine whether more substantial impairment testing is required.

The Company chose to bypass the preliminary assessment and utilized a two-step process for impairment testing of goodwill.

The first step tests for impairment, while the second step, if necessary, measures the impairment.

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

The impairment test incorporated data as of September 30, 2020.

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

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.

Each measure indicated that the Company’s fair value exceeded its book value.

No indicators of impairment for goodwill were identified during the years ended December 31, 2019, 2018 and 2017.

The Company’s intangible assets became fully amortized during 2018.

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.

Based upon data at September 30, 2020, the second test using market pricing multiples for companies comparable to NBI and the third test using current market pricing multiples for change-of control transactions involving companies comparable to NBI indicated fair value in excess of book value.

However, the market capitalization test, based upon the closing price of the Company’s common stock on September 30, 2020, indicated fair value below book value.

Market capitalization was measured at $ 164,381 , compared with book value of $ 202,194 .

Management monitored the Company’s share price during the fourth quarter of 2020.

The indicated market capitalization on December 31, 2020 was $ 201,387 , exceeding book value of $ 200,607 .

Management determined that the share price at September 30, 2020 fell below book value due to temporary market forces.

For this reason, and because two other tests did not indicate impairment, no impairment was assessed.

For the years ended December 31, 2019 and 2018, each measure indicated that the Company’s fair value exceeded its book value and no indicators of impairment for goodwill were identified.

The Company’s intangible assets became fully amortized during 2018.

Acquired intangible assets (such as core deposit intangibles) are recognized separately from goodwill if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over its useful life.

4 unchanged sentences

The funded status of a benefit plan is measured as the difference between plan assets at fair value and the projected benefit obligation.

Income tax accounting guidance results in two components of income tax expense:

Income tax accounting guidance results in two components of income tax expense:

current and deferred.

Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.

Current income tax expense reflects taxes to be paid for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues.

The Company determines deferred income taxes using the asset and liability (or balance sheet) method.

5 unchanged sentences

A tax position that meets the more-likely-than- not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.

The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

The determination of whether or not a tax position has met the more-likely-than- not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted in December, 2017 with an effective date of January 1, 2018.

Among other things, the Tax Act lowered the federal corporate income tax rate to 21% from the maximum rate prior to the passage of the Tax Act of 35%.

The change to the tax rate necessitated a re-measurement of deferred tax assets and deferred tax liabilities, including those accounted for in accumulated other comprehensive income, as of the date of enactment.

The re-measurement in 2017 resulted in a $1,560 reduction in the value of the Company’s net deferred tax asset and a corresponding incremental income tax expense of $1,560.

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”).

The Company early adopted this new standard for 2017.

In compliance with ASU 2018-01, the Company reclassified from AOCI to retained earnings stranded tax effects of $1,718.

The stranded tax effects were a result of recognizing in tax expense the re-measurement impact of items that are included in AOCI.

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

Trust Assets and Income

Assets (other than cash deposits) held by NBB's Trust Department in a fiduciary or agency capacity for customers are not included in the consolidated financial statements since such items are not assets of the Company.

Assets (other than cash deposits) held by NBB’s Trust Department in a fiduciary or agency capacity for customers are not included in the consolidated financial statements since such items are not assets of the Company.

Trust income is recognized on the accrual basis.

3 unchanged sentences

Average number of common shares outstanding

6,483,230  

6,580,659  

6,957,974  

As of December 31, 2020 and December 31, 2019, there were no potential common shares outstanding.

1 unchanged sentence

Loss contingencies, including claims and legal actions arising in the ordinary course of business are recorded as liabilities when the likelihood of loss is probable and reasonably estimated.

Management does not believe there are such matters that will have a material effect on the financial statements.

Management does not believe there are such matters that will have a material effect on the consolidated financial statements.

The Company charges advertising costs to expenses as incurred.

In 2019, the Company expensed $120, and expensed $106 and $148 in 2018 and 2017, respectively.

Advertising expenses were $ 99 for the year ended December 31, 2020, $ 120 for the year ended December 2019 and $ 106 for the year ended December 31, 2018.

Revenue Recognition

6 unchanged sentences

Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of other real estate owned, other-than-temporary impairments of securities, evaluation of impairment of goodwill, and pension obligations.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of OREO, evaluation of impairment of goodwill, and pension obligations.

Changing economic conditions, adverse economic prospects for borrowers, as well as regulatory agency action as a result of examination, could cause NBB to recognize additions to the allowance for loan losses and may also affect the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans.

Acco unting Standards Adopted in 2019

2016-02, “Leases (Topic 842)”

In February 2016, the FASB issued ASU No.

2016-02, “Leases (Topic 842).” Among other things, the standard requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

(1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis;

and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.

Under the new guidance, lessor accounting is largely unchanged.

For financial reporting purposes, the standard provides for a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.

The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented.

Lessees and lessors may not apply a full retrospective transition approach.

Subsequent to the issuance of ASU 2016-02, the FASB issued targeted updates to clarify specific implementation issues including ASU No.

2018-01, “Leases (Topic 842):

Land Easement Practical Expedient for Transition to Topic 842,” ASU No.

2018-10, “Codification Improvements to Topic 842, Leases,” ASU No.

2018-11, “Leases (Topic 842):

Targeted Improvements,” ASU No.

2018-20, “Leases (Topic 842):

Narrow-Scope Improvements for Lessors,” and ASU No.

2019-01 “Leases (Topic 842):

Codification Improvements.” One of the amendments in ASU 2018-11 provides an additional (and optional) transition method.

If elected, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with previous GAAP (Topic 840, Leases).

Upon adoption on January 1, 2019, the Company elected the prospective application approach provided by ASU 2018-11.

There was no cumulative effect adjustment at adoption.

The Company also elected certain practical expedients within the standard and did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases and did not reassess any initial direct costs for existing leases.

The Company evaluated its existing leases as of January 1, 2019 and recognized a right-of-use asset and lease liability for leases with a remaining term greater than 12 months.

The Company also recognized a right-of-use asset and lease liability for leases that commenced after January 1, 2019.

2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities”

In March 2017, the FASB issued ASU 2017‐08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310‐20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium.

Premiums on qualifying callable debt securities will be amortized to the earliest call date.

Discounts on purchased debt securities will continue to be accreted to maturity.

The ASU provided for adoption on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption.

The Company adopted the ASU on January 1, 2019.

Adoption did not have a material impact and no cumulative effect adjustment was recorded.

Reclassifications

Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation.

These reclassifications had no effect on the Company’s results of operations, financial position, or net cash flow.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU No.

2016-13, “Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

In June 2016, 

the FASB issued ASU No.

2016 - 13, “Financial Instruments –

Credit Losses (Topic 326 ):

Measurement of Credit Losses on Financial Instruments.” 

The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.

1 unchanged sentence

In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

For public business entities that meet the definition of a U.S.

Securities and Exchange Commission (SEC) filer, excluding smaller reporting companies, the standard is effective for fiscal years beginning after December 15, 2019, including interim periods in those fiscal years.

All other entities will be required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022.

The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.

Management is working to ensure readiness and compliance with the standard and has implemented coding of the loan portfolio to enable appropriate segregation and data integrity, analyzed correlations for forecasting, determined methodologies, and selected a vendor to provide a platform.

Management has prepared multiple concurrent models using the CECL methodology and will continue to refine assumptions that impact the calculation prior to the effective date.

In January 2017, the FASB issued ASU No.

2017-04, “Intangibles – Goodwill and Other (Topic 350):

Simplifying the Test for Goodwill Impairment.” The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test.

Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill.

Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.

An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.

Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019.

Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820):

Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty.

Certain disclosure requirements in Topic 820 are also removed or modified.

The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

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

Early adoption is permitted.

The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various Transition Resource Group (TRG) Meetings.

The effective date of each of the amendments depends on the adoption date of ASU 2016-1, ASU 2016-03, and ASU 2017-12.

The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated financial statements.

In May 2019, the FASB issued ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326):

Targeted Transition Relief.” The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326.

The fair value option election does not apply to held-to-maturity debt securities.

An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings.

The effective date and transition methodology for the amendments in ASU 2019-05 are the same as in ASU 2016-13.

The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.

In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” This ASU addresses issues raised by stakeholders during the implementation of ASU No.

2016-13, “Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments.” Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries.

“Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered.

While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets).

In response to this question, the ASU permits organizations to record expected recoveries on PCD assets.

In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities.

The ASU includes effective dates and transition requirements that vary depending on whether or not an entity has already adopted ASU 2016-13.

The FASB has issued multiple updates to ASU 2016 - 13 as codified in Topic 326, including ASUs 2019 - 04, 2019 - 05, 2019 - 10, 2019 - 11, 2020 - 02, and 2020 - 03.

These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. 

Smaller reporting companies who file with the SEC and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. 

The Company is currently assessing the impact that ASU 2016 - 13 will have on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance.

This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

Early adoption is permitted.

The Company is currently assessing the impact that ASU 2016 - 13 will have on its consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions.

ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting.

For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

Early adoption is permitted.

The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements.

The Company’

CECL Readiness Committee is working to 

address information requirements, determine methodology, research forecasts and ensure readiness and compliance with the standard.

The Company has begun calculating and refining concurrent models using CECL methodology. 

The Company will continue to fine tune assumptions prior to the effective date.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119.

SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses;

SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments –

Credit Losses.”

It covers topics including ( 1 ) measuring current expected credit losses;

( 2 ) development, governance, and documentation of a systematic methodology;

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and ( 4 ) validating a systematic methodology.

In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20):

Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

In December 2019, the FASB issued ASU 2019 - 12, “Income Taxes (Topic 740 ) –

Simplifying the Accounting for Income Taxes.”

The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’

application of certain income tax-related guidance.

This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects.

For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years.

Early adoption is permitted.

The Company is currently assessing the impact that ASU 2019 - 12 will have on its consolidated financial statements.

On March 12, 2020, the SEC amended its “accelerated filer”

and “large accelerated filer”

The amendments increase the threshold criteria for meeting these filer classifications and were effective on April 27, 2020.

Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date.

Prior to these changes, the Company was required to comply with section 404 (b) of the Sarbanes Oxley Act concerning auditor attestation over internal control over financial reporting as an “accelerated filer”

as it had more than $75 million in public float but less than $700 million at the end of the Company’s most recent second quarter. 

The rule revises the definition of “smaller reporting companies”

to include entities with public float of less than $700 million and less than $100 million in annual revenues. 

The Company meets this expanded category of small reporting company and will no longer be considered an accelerated filer. 

If the Company’s annual revenues exceed $100 million, its category will change back to “accelerated filer”. 

The classifications of “accelerated filer”

and “large accelerated filer”

require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (“ICFR”) and include the opinion on ICFR in its annual report on Form 10 -K. 

Non-accelerated filers also have additional time to file quarterly and annual financial statements. 

All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of internal control over financial reporting, but the external auditor attestation of internal control over financial reporting is not required for non-accelerated filers. 

As the Bank has total assets exceeding $1.0 billion, it remains subject to FDICIA, which requires an auditor attestation concerning internal controls over financial reporting. 

As such, other than the additional time provided to file quarterly and annual financial statements, this change does not significantly change the Company’s annual reporting and audit requirements.

In August 2018, the FASB issued ASU 2018 - 14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715 - 20 ):

Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” 

These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans.

Certain disclosure requirements have been deleted while the following disclosure requirements have been added:

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The amendments also clarify the disclosure requirements in paragraph 715 - 20 - 50 - 3, which state that the following information for defined benefit pension plans should be disclosed:

The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets.

The projected benefit obligation (“PBO”) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (“ABO”) and fair value of plan assets for plans with ABOs in excess of plan assets.

The amendments are effective for fiscal years ending after December 15, 2020.

Early adoption is permitted.

The Company does not expect the adoption of ASU 2018 - 14 to have a material impact on its consolidated financial statements.

Recently Adopted Accounting Developments

In January 2017, the FASB issued ASU 2017 - 04,  “Intangibles - Goodwill and Other (Topic 350 ) - Simplifying the Test for Goodwill Impairment”

(“ASU 2017 - 04”

). ASU 2017 - 04 simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two -step impairment test.

Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference.

The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.

The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount.

ASU 2017 - 04 was effective for the Company on January 1, 2020.

The adoption of ASU 2017 - 04 did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018 - 13,  “Fair Value Measurement (Topic 820 ) - Changes to the Disclosure Requirements for Fair Value Measurement”

(“ASU 2018 - 13”

ASU 2018 - 13 modifies the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures include the range and weighted average of significant unobservable inputs used to develop those fair value measurements.

For certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.

Certain disclosure requirements in Topic 820 were also removed or modified.

ASU 2018 - 13 was effective for the Company on January 1, 2020.

The adoption of ASU 2018 - 13 did not have a material impact on the Company’s consolidated financial statements.

In March 2020 ( revised in April 2020), various regulatory agencies, including the Federal Reserve, FDIC and the OCC issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID- 19.

The interagency statement was effective immediately and impacted accounting for loan modifications.

Under ASC 310 - 40, “Receivables –

Troubled Debt Restructurings by Creditors”

(“ASC 310 - 40”

), a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider.

The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID- 19 to borrowers who were current prior to any relief, are not to be considered TDRs.

This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant.

Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.  

In August 2020, a joint statement on additional loan modifications was issued. 

Among other things, the Interagency Statement addresses accounting and regulatory reporting considerations for loan modifications, including those accounted for under Section 4013 of the CARES Act. 

The CARES Act was signed into law on March 27, 2020 to help support individuals and businesses through loans, grants, tax changes and other types of relief. 

The most significant impacts of the CARES Act related to accounting for loan modifications and establishment of the PPP. 

On December 21, 2020, the Appropriations Act was passed. 

The Appropriations Act extends or modifies many of the relief programs first created by the CARES Act, including the PPP and treatment of certain loan modifications related to the COVID- 19 pandemic.  

The Company participated in the PPP and provided modifications that qualified under Section 4013 of the CARES act. 

Details on the Company’s modifications and PPP loans can be found in Note 5:

Allowance for Loan Losses, Nonperforming Assets and Impaired Loans and Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Risks and Uncertainties

The outbreak of COVID- 19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. 

The World Health Organization declared COVID- 19 to be a global pandemic and almost all public commerce and related business activities have been, to varying degrees, curtailed in order to reduce the rate of new infections.

The pandemic and efforts to reduce its spread have caused significant disruptions in the U.S.

economy and negatively impacted financial activity in the Company’s market. 

The Company’s employees have not experienced a high level of infection, however a large outbreak amongst employees could create widespread business continuity issues for the Company.

The Congress of the United States, along with the President of the United States and the Federal Reserve have taken historic actions.

Most notably, the CARES Act was signed into law at the end of March 2020 and provided $2 trillion to cushion the economic fallout.

The CARES Act employed various measures in an attempt to prevent a severe economic downturn, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors.

The package also included extensive emergency funding for hospitals and providers. 

Certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had and are expected to have a material impact on the Company’s operations. 

The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. 

If the global response to contain COVID- 19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows.

While it is not possible to know the full extent of the impact COVID- 19 will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations

The Company’s fee income has been negatively impacted during 2020 and may experience further declines.

Deposit customers have reduced instances of overdraft activity, reducing this fee source.

Additionally, the Company may waive various deposit and lending fees for customers impacted by the COVID- 19 pandemic.

The Company is continuously monitoring the situation and expects to continue to work with affected customers throughout the crisis in order to preserve its customer base.

The Company will resume normal practices related to fees when the crisis eases.

At this time, the Company is unable to project the materiality of such an impact, but recognizes the economic impact on fee income will extend to future periods.

The Company’s interest income has declined during 2020 and the Company expects that interest income may continue at a lower than normal level.

The decline stems from the low rate environment and accommodations the Company provided to qualifying borrowers experiencing pandemic related financial distress.

To ease the impact of the pandemic, the Federal Reserve cut rates in March 2020.

Low rates have resulted in lower pricing on new loans and a large increase in refinancing activity.

In keeping with guidance from regulators, the Company has actively worked with COVID- 19 affected borrowers to provide short-term payment relief, including providing payment extensions, interest-only periods and rate reductions.

For certain real estate secured loans, payment extensions result in reversal of previously accrued interest, immediately reducing interest income.

Interest begins accruing again at the next payment date and the reversed interest will be recognized at the end of the loan term.

Accrued interest on other loans is not reversed when the payment is extended.

If eventual credit losses are identified on any loan that has received a payment extension or interest only period, interest and fee income accrued pursuant to GAAP accounting would be reversed at the time the loss is identified.

In such a scenario, interest income in future periods could be negatively impacted.

At this time, the Company is unable to project the materiality of such an impact, but recognizes economic declines may affect its borrowers’

ability to repay in future periods.

Capital and Liquidity

While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID- 19, its reported and regulatory capital ratios could be adversely impacted by further credit losses.

The Company maintains access to multiple sources of liquidity.

Wholesale funding markets are currently available to the Company.

If the uncertainty caused by the COVID- 19 pandemic results in volatile or elevated funding costs for an extended period of time and if it becomes necessary for the Company to access wholesale funding, the Company’s net interest margin could be adversely affected.

Currently, depositors have responded to the pandemic by increasing deposits, however if an extended recession causes large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

Asset valuation

Currently, the Company does not expect COVID- 19 to affect its ability to account timely for the assets on its balance sheet;

however if the impact of the pandemic worsens, valuation procedures in future periods could be negatively affected.

While certain valuation assumptions and judgments will change to account for pandemic-related circumstances, such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

The Company tests goodwill for impairment annually, usually during the fourth quarter using September 30 information, unless facts and circumstances indicate the need for more frequent impairment testing.

Impairment testing considers three techniques.

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.

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.

Management contracted an independent third party expert to perform a quantitative goodwill impairment analysis as of September 30, 2020 during the fourth quarter 2020.

If in the future the pandemic or other adverse events cause a sustained decline in the Company’s stock price or the occurrence of what management deems to be a triggering event, under certain circumstances prescribed by GAAP, the Company will perform goodwill impairment testing as needed, which may be more frequently than annually.

In the event that testing indicates that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings.

Processes, controls and business continuity plan

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

The Company does not anticipate incurring additional material cost related to its continued deployment of the remote working strategy.

The Company has assessed the risks associated with the remote working strategy and implemented mitigation strategies.

No material operational or internal control challenges or risks have been identified to date.

The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID- 19.

The Company does not currently face any material resource constraint through the implementation of its business continuity plans.

Lending operations and accommodations to borrowers

In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company has provided modifications for its borrowers who are adversely affected by the pandemic. 

Depending on the demonstrated need of the borrower, the Company has provided payment extensions, granted periods of interest only payments to otherwise amortizing loans, and interest rate reductions. 

As of December 31, 2020, the Company has provided COVID- 19 related accommodations on 388 loans with aggregate outstanding loan balances of $ 182,829 . 

In accordance with the CARES Act and interagency guidance issued in March 2020 and revised in April 2020, these short term extensions are not considered TDRs. 

The Company is monitoring loans with payment extensions, with special attention to loans with payment extensions that exceed 90 days, as well as subsequent requests for modifications to determine whether changes in risk rates, accrual status or TDR status is warranted.

With the passage of the PPP, administered by the SBA, the Company is actively participating in assisting its customers through the program. 

Most of the PPP loans the Company made have a two -year term and earn interest at 1%.

Guidance issued by the SBA during the second wave of funding provided terms of up to five years. 

If borrowers request a change from two years to five years, the Company will likely grant the request. 

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

As of December 31, 2020, the Company holds $ 35,992 in PPP loans, net of deferred fees and costs. 

It is the Company’s understanding that loans funded through the PPP program are fully guaranteed by the U.S.

Should those circumstances change, the Company could be required to establish additional allowance for loan loss through provision for loan loss charged to earnings.

The Company is working with customers directly affected by COVID- 19, providing short-term assistance in accordance with regulator guidelines.

As a result of the current economic environment caused by the COVID- 19 pandemic, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise.

Should economic conditions worsen, the Company could experience further increases in its required allowance for loan loss and record additional loan loss expense.

It is possible that the Company’s asset quality measures could worsen at future measurement periods if effects of the COVID- 19 pandemic are prolonged.

Restriction on Cash

The Company’s subsidiary bank is a member of the Federal Reserve System.

The Federal Reserve does not require member banks to hold an average balance in order to purchase services from the Federal Reserve.

The Company’s subsidiary bank is a member of the Federal Reserve System.

The Federal Reserve does not currently require member banks to hold an average balance in order to purchase services from the Federal Reserve.

The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, as of the dates indicated, follows:

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Government agencies and corporations

$ 86,859  

$ 4,477  

$ 91,163  

States and political subdivisions

196,435  

203,961  

Mortgage-backed securities

244,780  

249,175  

Corporate debt securities

Total securities available for sale

$ 530,075  

$ 17,170  

$ 546,742  

December 31, 2019

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Government agencies and corporations

$ 119,903  

$ 1,995  

$ 121,123  

States and political subdivisions

88,092  

88,239  

Mortgage-backed securities

223,173  

221,783  

Corporate debt securities

Total securities available for sale

Prior to the second quarter of 2018, the Company designated securities in its portfolio as either available for sale or held to maturity.

During the second quarter of 2018, the Company re-designated all of its held to maturity securities to available for sale.

The securities were re-designated to provide opportunities to maximize asset utilization.

At the time of transfer, the securities had a fair value of $119,790 and an amortized cost of $118,662, resulting in an unrealized gain of $1,128 which was added to accumulated other comprehensive income at the date of re-designation.

$ 435,166  

$ 2,951  

$ 2,854  

$ 435,263  

The amortized cost and fair value of single maturity securities available for sale at December 31, 2020, by contractual maturity, are shown below.

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Available for sale:

Amortized Cost

Due in one year or less

$ 4,002  

$ 4,048  

Due after one year through five years

Due after five years through ten years

141,804  

146,716  

Due after ten years

378,664  

390,191  

Total securities available for sale

$ 530,075  

$ 546,742  

Information pertaining to securities with gross unrealized losses at December 31, 2020 and 2019 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

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Government agencies and corporations

$ 28,798  

State and political subdivisions

32,353  

Mortgage-backed securities

Total temporarily impaired securities

$ 69,967  

$ 4,695  

December 31, 2019

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Government agencies and corporations

$ 53,244  

$ 38,962  

State and political subdivisions

Corporate debt securities

35,934  

Mortgage-backed securities

181,279  

Total temporarily impaired securities

The Company had 166 securities with a fair value of $310,010 that were temporarily impaired at December 31, 2019.

$ 270,457  

$ 2,769  

$ 39,553  

The Company had 62 securities with a fair value of $ 74,662 that were temporarily impaired at December 31, 2020.  

The total unrealized loss on these securities was $ 503 .

Of the temporarily impaired total, 40 securities with a fair value of $39,553 and an unrealized loss of $85 have been in a continuous loss position for 12 months or more.

Of the temporarily impaired total, two securities with a fair value of $ 4,695 and an unrealized loss of $ 5 have been in a continuous loss position for 12 months or more.

The Company has determined that these securities are temporarily impaired at December 31, 2020 for the reasons set out below.

Government agencies.

The unrealized losses of $37 on U.S.

Government agency securities stemmed from 39 securities with a fair value of $38,962.

The unrealized losses were caused by interest rate and market fluctuations.

The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of the investments.

The Company is monitoring bond market trends to develop strategies to address unrealized losses.

Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company does not consider this investments to be other-than-temporarily impaired.

States and political subdivisions.

This category exhibits unrealized losses of $48 on 1 security with a fair value of $591.

This category exhibits unrealized losses of $ 3 on one security with a fair value of $ 635 .

The Company reviewed financial statements and cash flows for the security and determined that the unrealized loss is primarily the result of interest rate and market fluctuations and not associated with impaired financial status.

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Because the Company does not intend to sell the investment and it is not likely that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be at maturity, the Company does not consider the investment to be other-than-temporarily impaired.

Mortgage-backed securities.

This category exhibits unrealized losses of $ 2 on one security with a fair value of $ 4,060 .

The unrealized losses were caused by interest rate and market fluctuations.

The Company is monitoring bond market trends to develop strategies to address unrealized loss.

Because the Company does not intend to sell the investment and it is not likely that the Company will be required to sell the investment before recovery of its amortized costs basis, which may be at maturity, the Company does not consider this investment to be other-than-temporarily impaired.

Restricted Stock

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As a member of the Federal Reserve and the FHLB, NBB is required to maintain certain minimum investments in the common stock of those entities.

Required levels of investment are based upon NBB’s capital and a percentage of qualifying assets.

The Company purchases stock from or sells stock back to the correspondents based on their calculations.

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At its discretion, the FHLB may declare dividends on the stock.

In addition to dividends, NBB also benefits from its membership with FHLB through eligibility to borrow from the FHLB, using as collateral NBB’s capital stock investment in the FHLB and qualifying NBB real estate mortgage loans totaling $533,963 at December 31, 2019.

Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at December 31, 2020, management did not determine any impairment.

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Pledged Securities

At December 31, 2019 and 2018, securities with a carrying value of $220,299 and $196,062, respectively, were pledged to secure municipal deposits and for other purposes as required or permitted by law.

At December 31, 2020 

and 2019, securities with a carrying value of $ 251,048 and $ 220,999 , respectively, were pledged to secure municipal deposits and for other purposes as required or permitted by law.

Realized Securities Gains and Losses

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.

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.

The investment was classified as available for sale and had a book value of $189.

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 . 

All other net realized gains resulted from calls of securities.

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Available for sale

$ 126,840  

$ 126,732  

For the year ended December 31, 201 9

Available for sale

Held to maturity

$ 348,032  

$ 347,466  

$ 1,157  

For the year ended December 31, 201 8

Available for sale

$ 17,287  

$ 17,270  

Held to maturity

Prior to the second quarter of 2018, the Company designated securities in its portfolio as either available for sale or held to maturity.

During the second quarter of 2018, the Company re-designated all of its held to maturity securities to available for sale.

The securities were re-designated to provide opportunities to maximize asset utilization.

At the time of transfer, the securities had a fair value of $ 119,790 and an amortized cost of $ 118,662 , resulting in an unrealized gain of $ 1,128 which was added to accumulated other comprehensive income at the date of re-designation.

Related Party Transactions

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Total funded credit extended to related parties amounted to $ 15,519 at December 31, 2020 and $ 15,118 at December 31, 2019.

During 2019, there was a change in related party relationships that resulted in removal of loans with funded amounts at December 31, 2018 of $3,382.

During 2018, there was a change in related party relationships that resulted in removal of loans with funded amounts at December 31, 2017 of $782.

During 2020, total principal additions totaled $ 10,649 and principal payments were $ 10,248 .

During 2019, total principal additions were $ 6,152 and principal payments were $ 6,372 .

The Company held $ 16,140 in deposits for related parties as of December 31, 2020 and $ 7,176 as of December 31, 2019.

The Company leases to a director a small office space.

The lease payments totaled $ 5 in 2020 and $ 5 in 2019.

The Company has also contracted with a director's firm to prepare architectural plans for a new office in Roanoke, Virginia. 

The arrangement is at arms-length and the Company paid the director's firm $ 66 in 2020 and $ 28 in 2019.

Allowance for Loan Losses, Nonperforming Assets and Impaired Loans

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The Company performs ongoing analysis of the loan portfolio to determine credit quality and to identify impaired loans.

Credit quality is rated based on the loan’s payment history, the borrower’s current financial situation and value of the underlying collateral.

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts will not be collected when due according to the contractual terms of the loan agreement.

Impaired loans are those loans that have been modified in a TDR and larger, usually non-homogeneous loans that are in nonaccrual or exhibit payment history or financial status that indicate that collection probably will not occur when due according to the loan’s terms.

Generally, impaired loans are given risk ratings that indicate higher risk, such as “classified” or “special mention.” Impaired loans are individually evaluated to determine appropriate reserves and are measured at the lower of the invested amount or the fair value.

Generally, impaired loans are given risk ratings that indicate higher risk, such as “classified”

or “special mention.”

Impaired loans are individually evaluated to determine appropriate reserves and are measured at the lower of the invested amount or the fair value.

Impaired loans that are not TDRs and for which fair value measurement indicates an impairment loss are designated nonaccrual.

A TDR that maintains current status for at least six months may be in accrual status.

A restructured loan that maintains current status for at least six months may be in accrual status.

Please refer to Note 1:

2 unchanged sentences

If the restructuring included forgiveness of a portion of principal or accrued interest, the charge-off is included in the historical charge-off rates applied to the collective evaluation methodology.

Restructured loans are individually evaluated for impairment, and the amount of a TDR’s book value in excess of its fair value is accrued as a specific allocation in the allowance for loan losses.

Restructured loans are individually evaluated for impairment, and the amount of a restructured loan’s book value in excess of its fair value is accrued as a specific allocation in the allowance for loan losses.

If a TDR loan payment exceeds 90 days past due, it is examined to determine whether the late payment indicates collateral dependency or cash flows below those that were used in the fair value measurement.

3 unchanged sentences

The Company evaluated characteristics in the loan portfolio and determined major segments and smaller classes within each segment.

These characteristics include collateral type, repayment sources, and (if applicable) the borrower’s business model.

The methodology for calculating reserves for collectively evaluated loans is applied at the class level.

1 unchanged sentence

The segments and classes used in determining the allowance for loan losses are as follows.

Real Estate Construction

Construction, residential

Construction, other

Consumer Real Estate

Residential closed-end first liens

Residential closed-end junior liens

Investor-owned residential real estate

Commercial Real Estate

Multifamily real estate

Commercial real estate, owner-occupied

Commercial real estate, other

Commercial Non Real Estate

Commercial and Industrial

Public Sector and IDA

Real Estate Construction Commercial Non-Real Estate

Construction, residential Commercial and Industrial

Construction, other  

Public Sector and IDA

Consumer Non Real Estate

Consumer Real Estate State and political subdivisions

Equity lines  

Residential closed-end first liens Consumer Non-Real Estate

Residential closed-end junior liens Credit cards

Investor-owned residential real estate Automobile

Other consumer loans

Commercial Real Estate  

Multifamily real estate  

Commercial real estate, owner-occupied  

Commercial real estate, other  

Historical Loss Rates

The Company’s allowance methodology for collectively-evaluated loans applies historical loss rates by class to current class balances as part of the process of determining required reserves.

The Company’s allowance methodology for collectively evaluated loans applies historical loss rates by class to current class balances as part of the process of determining required reserves.

Class loss rates are calculated as the net charge-offs for the class as a percentage of average class balance.

1 unchanged sentence

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 of “substandard” or lower.

Classified loans are those with risk ratings of “substandard”

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.

1 unchanged sentence

In addition to historical loss rates, risk factors pertinent to credit risk for each class are analyzed to estimate reserves for collectively evaluated loans.

Factors include changes in national and local economic and business conditions, the nature and volume of classes within the portfolio, loan quality, loan officers’ experience, lending policies and the Company’s loan review system.

Factors include changes in national and local economic and business conditions, the nature and volume of classes within the portfolio, loan quality, loan officers’

experience, lending policies and the Company’s loan review system.

The analysis of certain factors results in standard allocations to all segments and classes.

These factors include the risk from changes in lending policies, loan officers’ average years of experience, unemployment levels, bankruptcy rates, interest rate environment, and competition/legal/regulatory environments.

These factors include the risk from changes in lending policies, loan officers’

average years of experience, and economic factors including unemployment levels, bankruptcy rates, interest rate environment, and competition/legal/regulatory environments.

Also applied to all segments and classes is an economic factor implemented to address COVID- 19 uncertainty:

national unemployment filings.

Typically the Company applies to the allowance calculation economic data specific to its market area.

However, historical analysis determined that local unemployment filings were closely correlated to national unemployment filings.

Since local data is not available timely, the Company elected to use national unemployment filings.

Factors analyzed for each class, with resultant allocations based upon the level of risk assessed for each class, include the risk from changes in loan review, levels of past due loans, levels of nonaccrual loans, current class balance as a percentage of total loans, and the percentage of high risk loans within the class.

Additionally, factors specific to each segment are analyzed and result in allocations to the segment.

The Company analyzes housing data for its impact to affected classes.

During the fourth quarter of 2020, the Company added a factor to analyze commercial loans modified under the CARES Act that received subsequent modifications that also qualified under the CARES act.

Please refer to Note 1:

2 unchanged sentences

These risks are measured by market-area unemployment rates, bankruptcy rates, building market trends, and interest rates.

2 unchanged sentences

Credit risk for commercial non-real estate loans is subject to economic conditions, generally monitored by local business bankruptcy trends, and interest rates.

Public sector and IDA loans are extended to municipalities and related entities.

Credit risk is based upon the entity’s ability to repay and interest rate trends.

Included in this segment are the SBA-guaranteed PPP loans, which are assumed to not be subject to credit risk.

Public sector and IDA loans are extended to municipalities and related entities.

Credit risk is based upon the entity’s ability to repay and interest rate trends.

Consumer non-real estate includes credit cards, automobile and other consumer loans.

Credit cards and certain other consumer loans are unsecured, while collateral is obtained for automobile loans and other consumer loans.

Credit risk stems primarily from the borrower’s ability to repay, measured by average unemployment, average personal bankruptcy rates and interest rates.

Factor allocations applied to each class are increased for loans rated special mention and increased to a greater extent for loans rated classified.

The Company allocates additional reserves for “high risk” loans.

The Company allocates additional reserves for “high risk”

High risk loans include junior liens, interest only and high loan to value loans.

2 unchanged sentences

Real Estate Construction

Consumer Non- Real Estate

Balance, December 31, 2019

$ 1,895  

$ 2,559  

$ 6,863  

Provision for (recovery of) loan losses

Balance, December 31, 2020

$ 2,165  

$ 3,853  

$ 8,481  

Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 201 9

Real Estate Construction

Consumer Non- Real Estate

Balance, December 31, 2018

$ 2,049  

$ 2,798  

$ 7,390  

Provision for (recovery of) loan losses

Balance, December 31, 2019

$ 1,895  

$ 2,559  

$ 6,863  

Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2018

Real Estate Construction

Consumer Non- Real Estate

Balance, December 31, 2017

Provision for (recovery of) loan losses

$ 2,027  

$ 3,044  

$ 1,072  

$ 7,925  

Provision for (recovery of) loan losses  

( 295 )  

( 385 )  

( 109 )  

Balance, December 31, 2018

$ 2,049  

$ 2,798  

$ 7,390  

Allowance for Loan Losses by Segment and Evaluation Method as of

1 unchanged sentence

Real Estate Construction

Consumer Non- Real Estate

Individually evaluated for impairment

Collectively evaluated for impairment

Collectively evaluated loans

$ 2,165  

$ 3,853  

$ 8,481  

Loans by Segment and Evaluation Method as of

1 unchanged sentence

Real Estate Construction

Consumer Non-Real Estate

Individually evaluated for impairment

Collectively evaluated for impairment

$ 3,856  

$ 4,903  

Collectively evaluated loans

42,266  

181,588  

389,259  

77,920  

40,983  

33,108  

765,124  

$ 42,266  

$ 181,782  

$ 393,115  

$ 78,771  

$ 40,983  

$ 33,110  

$ 770,027  

Allowance for Loan Losses by Segment and Evaluation Method as of

1 unchanged sentence

Real Estate Construction

Consumer Non-Real Estate

Individually evaluated for impairment

Collectively evaluated for impairment

Collectively evaluated loans

$ 1,895  

$ 2,559  

$ 6,863  

Loans by Segment and Evaluation Method as of

1 unchanged sentence

Real Estate Construction

Consumer Non-Real Estate

Individually evaluated for impairment

Collectively evaluated for impairment

$ 3,608  

$ 5,289  

Collectively evaluated loans

42,303  

180,713  

361,765  

45,658  

63,764  

34,535  

728,738  

$ 42,303  

$ 181,472  

$ 365,373  

$ 46,576  

$ 63,764  

$ 34,539  

$ 734,027  

A summary of ratios for the allowance for loan losses follows:

1 unchanged sentence

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

( 1 ) The ratio of the allowance for loan losses to the end of period loans, net of unearned income and deferred fees and costs at December 31, 2020 includes government-guaranteed SBA PPP loans, which do not require an allowance for loan losses.

Excluding the PPP loans, the ratio would be 1.16 %.

The Company currently has $ 110 in residential real estate OREO. 

As of December 31, 2020, $ 261 in loans secured by residential real estate are in process of foreclosure.

A summary of nonperforming assets, as of the dates indicated, follows:

5 unchanged sentences

Total nonperforming assets

$ 5,238  

$ 4,987  

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

6 unchanged sentences

Accruing restructured loans

$ 1,410  

$ 1,729  

Impaired loans:

Impaired loans with no valuation allowance

$ 3,858  

$ 4,174  

Impaired loans with a valuation allowance

Total impaired loans

$ 4,903  

$ 5,289  

Valuation allowance

Impaired loans, net of allowance

$ 4,828  

$ 5,179  

Average recorded investment in impaired loans (1)

$ 5,093  

$ 5,359  

Income recognized on impaired loans, after designation as impaired

2 unchanged sentences

No interest income was recognized on nonaccrual loans for the years ended December 31, 2020, 2019 or 2018.

Nonaccrual loans that meet the Company’s balance thresholds are designated as impaired.

A detailed analysis of investment in impaired loans, associated reserves and interest income recognized, by loan class follows:

Impaired Loans as of December 31, 2020

Recorded Investment (1)

Recorded Investment (1) in (A)

Investment (1)

Investment (1) in (A)

for Which There is

Recorded Investment (1) in

Investment (1) in

(A) for Which

There is a Related Allowance

There is a Related

Consumer Real Estate (2)

Residential equity lines

Residential closed-end first liens

Investor-owned residential real estate

Commercial Real Estate (2)

Multifamily real estate

Commercial real estate, owner occupied

3 unchanged sentences

Consumer Non - Real Estate (2)

$ 5,453  

$ 4,903  

$ 3,858  

$ 1,045  

Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.

1 unchanged sentence

Impaired Loans as of December 31, 2019

Recorded Investment (1)

Recorded Investment (1) in (A)

Investment (1)

Investment (1) in (A)

for Which There is

Recorded Investment (1) in

Investment (1) in

(A) for Which

There is a Related Allowance

There is a Related

Consumer Real Estate (2)

Residential equity lines

Residential closed-end first liens

Residential closed-end junior liens

Investor-owned residential real estate

6 unchanged sentences

Consumer Non - Real Estate (2)

$ 5,757  

$ 5,289  

$ 4,174  

$ 1,115  

( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.

8 unchanged sentences

Consumer Real Estate (2)

Residential equity lines

Residential closed-end first liens

Investor-owned residential real estate

Commercial Real Estate (2)

Multifamily real estate

Commercial real estate, owner occupied

3 unchanged sentences

Consumer Non -Real Estate (2)

$ 5,093  

Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.

8 unchanged sentences

Consumer Real Estate (2)

Residential equity lines

Residential closed-end first liens

Residential closed-end junior liens

Investor-owned residential real estate

6 unchanged sentences

Consumer Non -Real Estate (2)

$ 5,359  

Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.

7 unchanged sentences

Interest Income

Real Estate Construction (2)

Construction other

Consumer Real Estate (2)

Residential closed-end first liens

$ 1,202  

Residential closed-end junior liens

7 unchanged sentences

Consumer Non -Real Estate (2)

$ 9,788  

Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.

4 unchanged sentences

Days Past Due

Real Estate Construction (1)

Construction, other

Consumer Real Estate (1)

Residential closed-end first liens

Residential closed-end junior liens

Investor-owned residential real estate

Commercial Real Estate (1)

Multifamily real estate

Commercial real estate, owner occupied

4 unchanged sentences

Other consumer loans

$ 1,497  

$ 1,331  

$ 3,685  

December 31, 2019

1 unchanged sentence

Days Past Due

Real Estate Construction (1)

Construction, other

Consumer Real Estate (1)

10 unchanged sentences

Other consumer loans

$ 1,070  

$ 3,375  

Only classes with past due or nonaccrual loans are presented

1 unchanged sentence

The allocations are increased for loans that exhibit greater credit quality risk.

Credit quality indicators, which the Company terms risk grades, are assigned through the Company’s credit review function for larger loans and selective review of loans that fall below credit review thresholds.

Loans that do not indicate heightened risk are graded as “pass.” Loans that appear to have elevated credit risk because of frequent or persistent past due status, which is less than 75 days, or that show weakness in the borrower’s financial condition are risk graded “special mention.” 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.

Loans with frequent or persistent delinquency exceeding 75 days or that have a higher level of weakness in the borrower’s financial condition are graded “classified.” Classified loans have regulatory risk ratings of “substandard” and “doubtful.” Allocations are increased by 50% and by 100% for loans with grades of “special mention” and “classified,” respectively.

Loans that do not indicate heightened risk are graded as “pass.”

Loans that appear to have elevated credit risk because of frequent or persistent past due status, which is less than 75 days, or that show weakness in the borrower’s financial condition are risk graded “special mention.”

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.

Loans with frequent or persistent delinquency exceeding 75 days or that have a higher level of weakness in the borrower’s financial condition are graded “classified.”

Classified loans have regulatory risk ratings of “substandard”

and “doubtful.”

Allocations are increased by 50 % and by 100 % for loans with grades of “special mention”

and “classified,”

respectively.

Determination of risk grades was completed for the portfolio as of December 31, 2020 and 2019.

The following displays non-impaired gross loans by credit quality indicator as of the dates indicated:

December 31, 201 9

December 31, 2020  

Real Estate Construction

Construction, 1-4 family residential

$ 8,195  

Construction, other

34,071  

Consumer Real Estate

13,903  

Closed-end first liens

92,241  

Closed-end junior liens

Investor-owned residential real estate

71,450  

Commercial Real Estate

Multifamily residential real estate

87,455  

Commercial real estate owner-occupied

146,900  

Commercial real estate, other

147,436  

Commercial Non - Real Estate

Commercial and Industrial

77,892  

Public Sector and IDA

States and political subdivisions

40,983  

Consumer Non - Real Estate

12,024  

Other consumer

December 31, 2018

16,398  

$ 756,616  

$ 8,035  

December 31, 201 9  

Real Estate Construction

Construction, 1-4 family residential

$ 7,590  

Construction, other

34,713  

Consumer Real Estate

16,435  

Closed-end first liens

94,814  

Closed-end junior liens

Investor-owned residential real estate

65,063  

Commercial Real Estate

Multifamily residential real estate

87,934  

Commercial real estate owner-occupied

127,937  

Commercial real estate, other

145,636  

Commercial Non - Real Estate

Commercial and Industrial

45,387  

Public Sector and IDA

States and political subdivisions

63,764  

Consumer Non - Real Estate

14,810  

Other consumer

13,995  

$ 727,642  

Sales, Purchases and Reclassification of Loans

The Company finances mortgages under “best efforts” contracts with mortgage purchasers.

The Company finances mortgages under “best efforts”

contracts with mortgage purchasers.

The mortgages are designated as held for sale upon initiation.

1 unchanged sentence

Occasionally, the Company purchases or sells participations in loans.

All participation loans purchased met the Company’s normal underwriting standards at the time the participation was entered.

Participation loans are included in the appropriate portfolio balances to which the allowance methodology is applied.

1 unchanged sentence

From time to time the Company modifies loans in TDRs.

There were no new restructurings designated in 2020.

The following tables present restructurings by class that occurred during the years ended December 31, 2019 and 2018.

6 unchanged sentences

Amounts do not reflect balances at the end of the period.

The Company restructured 1 loan during the twelve month period ended December 31, 2019 to provide relief to the borrower without forgiving principal or interest.

The Company restructured one  loan during the 12 month period ended December 31, 2019 to provide relief to the borrower without forgiving principal or interest.

The loan covenants require that the balance be paid in full for a period of 30 days each year.

6 unchanged sentences

Construction, other

$ 2,882  

Commercial Real Estate

3 unchanged sentences

Investor-owned residential real estate

$ 4,213  

Post-modification outstanding recorded investment considers amounts immediately following the modification.

Amounts do not reflect balances at the end of the period.

The Company restructured 13 loans during the twelve month period ended December 31, 2018.

The Company restructured 13 loans during the year ended December 31, 2018. 

Each of the construction loans were restructured to extend the maturity and interest only period for each loan.

As of December 31, 2018, the loans were converted to permanent financing at market terms and were no longer considered TDR or individually evaluated for impairment.

Two commercial real estate loans were restructured to provide a 12-month interest-only period without reducing the interest rate.

Two commercial real estate loans were restructured to provide a 12 month interest-only period without reducing the interest rate.  

The impairment measurements were based upon the present value of cash flows and did not result in a specific allocation for either loan.

The investor owned residential real estate loans were restructured to provide payment relief.

Seven loans were restructured from amortizing to interest-only for a period of 12 months.

The investor owned residential real estate loans were restructured to provide payment relief. 

Seven loans were restructured from amortizing to interest-only for a period of 12 months. 

The impairment measurements were based on the fair value of collateral and did not result in specific allocations.

1 unchanged sentence

The impairment measurement was based upon the present value of cash flows and did not result in a specific allocation.

The loan’s nonaccrual status requires that all payments made during the nonaccrual period are credited fully to principal, reducing the book balance below the present value of cash flows.

One residential closed-end first lien loan was restructured to provide payment relief by restructuring from amortizing to interest-only for a period of 12 months.

The impairment measurement was based on the fair value of collateral and did not result in a specific allocation.

None of the restructures completed during the twelve months ended December 31, 2018 forgave principal or interest.

Restructurings that occurred during the year ended

December 31, 201 7

Investment (1)

Consumer Real Estate

Closed-end first lien

Commercial Real Estate

Commercial real estate, other

Commercial Non- Real Estate

Commercial and industrial

Co nsumer Non-Real Estate

Post-modification outstanding recorded investment considers amounts immediately following the modification.

Amounts do not reflect balances at the end of the period.

Each of the restructurings completed during the twelve months ended December 31, 2017 provided payment relief to the borrowers.

The consumer real estate loan was modified to provide payment relief by extending the term.

Impairment measurement was based on the present value of cash flows and did not result in a specific allocation.

The commercial real estate loan restructuring reduced debt service by lowering the interest rate slightly and changing the interest method from variable to fixed.

Interest was capitalized and the loan was re-amortized over a longer term.

Impairment measurement, based on the present value of cash flows, did not result in a specific allocation.

The loan’s nonaccrual status requires that all payments made during the nonaccrual period are credited fully to principal, reducing the book balance below the present value of cash flows.

The four commercial non-real estate loans were restructured to reduce monthly debt service by increasing the amortization period.

Three of the commercial non-real estate loans received rate reductions, and on one commercial non-real estate loan, the interest method was changed from variable to fixed.

Impairment measurement, based on the present value of cash flows, indicated a specific reserve for two of the commercial non-real estate loans.

The four automobile loans were restructured pursuant to Chapter 13 bankruptcy requirements, reducing the interest rate and re-amortizing over a longer term to provide monthly debt service relief.

One automobile loan restructuring included forgiveness of a small amount of principal to comply with the bankruptcy plan.

Impairment measurement for all the restructured automobile loans was based on the present value of cash flows method and resulted in small specific allocations for each loan which totaled $1.

Of the Company's TDRs at December 31, 2019, seven consumer real estate loans totaling $263, all part of one relationship, defaulted within 12 months of modification.

The impairment measurement is based upon the fair value of collateral, less estimated cost to sell, and resulted in no allocation.

All of the defaulted loans are in nonaccrual status while the Company is working with the borrowers to recover its investment.

Of the Company’s TDR’s that defaulted in 2018 and 2017, none were modified within 12 months prior to default.

The impairment measurement was based on the fair value of collateral and did not result in a specific allocation. 

None of the restructures completed during the 12 months ended December 31, 2018 forgave principal or interest.

Defaulted TDRs

Of the Company’s TDRs at December 31, 2020, none defaulted during 2020 within 12 months of modification.

Of the Company's TDRs at December 31, 2019, seven consumer real estate loans totaling $ 263 , all part of one relationship, defaulted during 2019 within 12 months of modification. 

The impairment measurement was based upon the fair value of collateral, less estimated cost to sell, and resulted in no allocation. 

All of the defaulted loans were in nonaccrual status at December 31, 2019 while the Company works with the borrowers to recover its investment. 

Of the Company’s TDR’s that defaulted during 2018, none were modified within 12 months prior to default.

The company defines default as one or more payments that occur more than 90 days past the due date, charge-off or foreclosure.

COVID- 19 Related Modifications

In accordance with regulatory guidance and provisions in the CARES Act to provide relief during the COVID- 19 pandemic, the Company has provided short-term concessions to borrowers who request assistance. 

Through December 31, 2020, the Company provided principal and/or interest extensions, interest only periods or rate reductions on 388 loans with balances totaling $ 182,829 for COVID- 19 related hardship.

Loans that qualified for COVID- 19 related modifications were not more than 30 days past due as of December 31, 2019. 

As such, they were not considered TDRs based on the relief provisions of the CARES Act and recent interagency regulatory guidance. 

The Company is monitoring loans with COVID- 19 related modifications. 

As of December 31, 2020, 75 loans totaling $ 43,576 received a COVID- 19 related modification and also received a subsequent COVID- 19 related modification. 

Of these, 17 loans totaling $ 39,402 were commercial loans and resulted in additional allocation to the allowance for loan loss, with 15 loans totaling $ 38,935 remaining within their modification period at December 31, 2020. 

When loans require subsequent modifications, the Company will consider the borrower’s financial status at the time of the request and the effect of all modifications, past and requested. 

If the borrower is deemed to be in financial difficulty that is not short-term and the impact of all modifications is considered to amount to a concession under GAAP and the modification does not qualify under the CARES Act or meet interagency thresholds to be excluded from TDR designation, the loan will be designated TDR.

The Company is also monitoring the population to determine whether other credit-related action should be taken, possibly including downgrading credit risk ratings, designating as nonaccrual or charge-off. 

Downgraded credit risk ratings, nonaccrual status and charge-offs result in increasing the requirement for the allowance for loan losses.

Premises and Equipment

5 unchanged sentences

Depreciation expense for the years ended December 2020, 2019 and 2018 amounted to $ 708 , $ 739 and $ 766 , respectively.

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

The aggregate amounts of time deposits in denominations of $250 or more at December 31, 2020 and 2019 were $ 13,177 and $ 22,412 , respectively.

3 unchanged sentences

Employee Benefit Plans

The Company has a Retirement Accumulation Plan qualifying under IRS Code Section 401(k), in which NBI, NBB and NBFS are participating employers.

The Company has a Retirement Accumulation Plan qualifying under Internal Revenue Code Section 401 (k), in which NBB and NBFS are participating employers.

Eligible participants may contribute up to 100 % of their total annual compensation to the plan, subject to certain limits based on federal tax laws.

Employee contributions are matched by the employer based on a percentage of an employee’s total annual compensation contributed to the plan.

For the years ended December 31, 2020, 2019 and 2018, the Company contributed $ 394 , $ 379 and $ 364 , respectively, to the plan.

Employee Stock Ownership Plan

The Company has a non-leveraged Employee Stock Ownership Plan (ESOP) which enables employees of NBI and its subsidiaries who have one year of service and who have attained the age of 21 prior to the plan’s January 1 and July 1 enrollment dates to own NBI common stock.

The Company has a non-leveraged Employee Stock Ownership Plan ("ESOP") which enables employees of NBI and its subsidiaries who have one year of service and who have attained the age of 21 prior to the plan’s January 1 and July 1 enrollment dates to own NBI common stock.

Contributions to the ESOP, which are not mandatory, are determined annually by the NBI Board of Directors.

Contribution expense amounted to $300, $300 and $200 in the years ended December 31, 2019, 2018 and 2017, respectively.

Contribution expense amounted to $ 300 in each of the years ended December 31, 2020, 2019 and 2018, respectively.

Dividends on ESOP shares are charged to retained earnings.

As of December 31, 2020, the number of shares held by the ESOP was 184,503 .

All shares held by the ESOP are treated as outstanding in computing the Company’s basic net income per share.

Upon reaching age 55 with 10 years of plan participation, a vested participant has the right to diversify 50 % of his or her allocated ESOP shares and NBI or the ESOP, with the agreement of the trustee, is obligated to purchase those shares.

2 unchanged sentences

The Company has a non-qualified Salary Continuation Plan for certain key officers.

The plan provides the participating officers with supplemental retirement income, payable for the greater of 15 years after retirement or the officer’s lifetime.

The expense accrued for the plans in 2020, 2019, and 2018, based on the present value of the retirement benefits, amounted to $ 304 , $ 270 , and $ 255 , respectively.

2 unchanged sentences

Defined Benefit Plan

The Company’s defined benefit pension plan covers substantially all employees.

The plan benefit formula is based upon the length of service of retired employees and a percentage of qualified W- 2 compensation during their final years of employment.

2 unchanged sentences

Projected benefit obligation at beginning of year

$ 29,641  

$ 23,688  

$ 23,492  

Service cost (1)

Interest cost

2 unchanged sentences

Projected benefit obligation at end of year

$ 34,852  

$ 29,641  

$ 23,688  

Change in plan assets

Fair value of plan assets at beginning of year

$ 25,007  

$ 21,786  

$ 23,428  

Actual return on plan assets

2 unchanged sentences

Fair value of plan assets at end of year

$ 32,415  

$ 25,007  

$ 21,786  

Funded status at the end of the year

10 unchanged sentences

Fair value of assets

32,415  

25,007  

21,789  

Unrecognized net actuarial loss

12,855  

10,983  

Unrecognized prior service cost

1 unchanged sentence

Prepaid benefit cost included in other assets

$ 8,222  

$ 4,921  

$ 5,510  

Components of net periodic benefit cost

$ 1,080  

Interest cost

3 unchanged sentences

Net periodic benefit cost

Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss)

Net (gain) loss

Other changes in plan assets and benefit obligations recognized in other comprehensive income

$ 1,871  

$ 1,876  

$ 1,184  

Amortization of prior service cost

Deferred income tax expense (benefit)

Deferred income tax benefit

Total recognized

Total recognized in net periodic benefit cost and other comprehensive income (loss)

$ 1,565  

$ 1,569  

$ 1,022  

Total recognized in net periodic benefit cost and other comprehensive income

$ 2,802  

$ 2,732  

$ 1,838  

Weighted average assumptions at end of the year

3 unchanged sentences

Rate of compensation increase

Cost is included in Salaries and Employee Benefits expense.

Long Term Rate of Return

19 unchanged sentences

There are no investments in hedge funds, private equity funds or real estate.

Fair value measurements of the pension plan’s assets at December 31, 2019 and December 31, 2018 are as follows:

Fair value measurements of the pension plan’s assets at December 31, 2020 and December 31, 2019 are presented below:

Fair Value Measurements at December 31, 2020

1 unchanged sentence

Quoted Prices in

Active Markets for Identical Assets

Active Markets for

Identical Assets

Observable Inputs

Unobservable Inputs

$ 4,336  

Equity securities:

15,129  

International companies

1 unchanged sentence

State and political subdivisions

Corporate bonds – investment grade (2)

Corporate bonds –

investment grade (2)

Total pension plan assets

$ 32,415  

$ 26,040  

$ 6,375  

This category comprises actively managed equity funds invested in large-cap and mid-cap U.S.

4 unchanged sentences

Quoted Prices in

Active Markets for Identical Assets

Active Markets for

Identical Assets

Observable Inputs

Unobservable Inputs

$ 4,350  

Equity securities:

11,098  

International companies

Equities mutual funds (1)

government agencies and corporations

State and political subdivisions

Corporate bonds – investment grade (2)

Corporate bonds –

investment grade (2)

Total pension plan assets

$ 25,007  

$ 19,125  

$ 5,882  

This category comprises actively managed equity funds invested in large-cap and mid-cap U.S.

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issuers from diverse industries.

The Company’s required minimum pension contribution for 2020 has not yet been determined.

The Company’s required minimum pension contribution for 2021 has not yet been determined.

Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows:

$ 5,235  

$ 1,436  

$ 1,823  

2026 - 2030  

$ 10,725  

The Company files United States federal income tax returns, and Virginia, West Virginia and North Carolina state income tax returns.

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Deferred expense (benefit)

Deferred tax adjustment for enacted change in tax rate

Total income tax expense

Income tax expense for 2017 includes a downward adjustment of net deferred tax assets in the amount of $1,560, recorded as a result of the enactment of the Tax Act on December 22, 2017.

The Company’s marginal tax rate prior to the enactment of the Act is 35%.

Effective January 1, 2018, the Company’s tax rate is 21%.

The following is a reconciliation of the “expected” income tax expense, computed by applying the U.S.

federal income tax rate of 21% to 2018 and 2019 income before tax expense and 35% to 2017 income before income tax expense, with the reported income tax expense:

The following is a reconciliation of the “expected”

income tax expense, computed by applying the U.S.

federal income tax rate of 21% to income before tax expense, with the reported income tax expense:

Years ended December 31,

Computed “expected” income tax expense

Tax impact of enacted change in tax rate

Computed “expected”

income tax expense

Tax-exempt interest income

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Allowance for loan losses and unearned fee income

$ 1,938  

$ 1,597  

Valuation allowance on other real estate owned

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Deferred compensation and other liabilities

Net unrealized loss on securities available for sale

Lease accounting

Total deferred tax assets

$ 6,303  

$ 5,392  

Deferred tax liabilities:

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Net unrealized gain on securities available for sale

Lease accounting

Discount accretion of securities

Total deferred tax liabilities

Net deferred tax assets

The Company has determined that a valuation allowance for the gross deferred tax assets is not necessary at December 31, 2019 and 2018.

Net deferred tax assets (liabilities)

$ 1,877  

The Company determined that a valuation allowance for the gross deferred tax assets is unnecessary at December 31, 2020 or 2019.

Restrictions on Dividends

The Company’s principal source of funds for dividend payments is dividends received from its subsidiary bank.

For the years ended December 31, 2020, 2019 and 2018, dividends received from the subsidiary bank were $ 22,000 , $ 28,556 and $ 9,419 , respectively.

Substantially all of NBI’s retained earnings are undistributed earnings of its sole banking subsidiary, which are restricted by various regulations administered by federal bank regulatory agencies.

Bank regulatory agencies restrict, unless prior approval is obtained, the total dividend payments of a bank in any calendar year to the bank’s retained net income of that year to date, as defined, combined with its retained net income of the preceding two years, less any required transfers to surplus.

At December 31, 2019, NBB’s retained net income, which was free of such restriction, amounted to approximately $3,347.

Substantially all of NBI’s retained earnings are undistributed earnings of its sole banking subsidiary, which are restricted by various regulations administered by federal bank regulatory agencies.

During 2020, the Bank applied to its primary regulator and was approved to dividend to NBI an amount in excess of the regulatory maximum.

The purpose in the excess dividend was to provide cash for stock repurchases.

At December 31, 2020, NBB had no retained net income free of restriction.

Because of the Bank’s highly capitalized position, the Company intends to request approval for additional dividends in 2021.

Minimum Regulatory Capital Requirement

Prior to 2018, the Company was subject to regulatory capital requirements on a consolidated basis.

When the Federal Reserve updated the Small Bank Holding Company Policy Statement, in compliance with The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 in August of 2018, the Company became exempt from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements.

NBB continues to be subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on NBI’s and NBB’s financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, NBB must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices.

Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is exempt from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements.

NBB is subject to various regulatory capital requirements administered by the federal banking agencies.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, NBB must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices.

The capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

The Bank is subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act (the “Basel III Capital Rules”) as applied by the Office of the Comptroller of the Currency.

The Basel III Capital Rules require the Bank to comply with minimum capital ratios plus a “capital conservation buffer” designed to absorb losses during periods of economic stress.

The implementation period for the capital conservation buffer began in 2016 and it was fully phased in on January 1, 2019.

The Bank is subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act (the “Basel III Capital Rules”) as applied by the Office of the Comptroller of the Currency.

The Basel III Capital Rules require the Bank to comply with minimum capital ratios plus a “capital conservation buffer”

designed to absorb losses during periods of economic stress.

The rules set forth minimum amounts and ratios for CET1 capital, Tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

NBB’s CET1 capital includes common stock and related surplus and retained earnings.

The Basel III Capital Rules provide an option to exclude components of accumulated other comprehensive income (loss) from CET1 capital.

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Tier 2 capital includes the allowance for loan losses.

NBB’s risk-weighted assets were $816,962 at December 31, 2019 and $816,660 as of December 31, 2018.

NBB’s risk-weighted assets were $ 932,364 at December 31, 2020 and $ 816,962 as of December 31, 2019.

Management believes, as of December 31, 2020 and 2019, that NBB met all capital adequacy requirements to which it is subject.

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To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, CET1 risk-based and Tier 1 leverage ratios, as set forth in the following tables.

There are no conditions or events since these notifications that management believes have changed NBB’s category.

NBB’s capital amounts and ratios as of December 31, 2019 and 2018 are presented in the following tables.

There are no conditions or events since these notifications that management believes have changed NBB’s category.

NBB’s capital amounts and ratios as of December 31, 2020 and 2019 are presented in the following tables.

Minimum Capital

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Total capital (to risk weighted assets)

$ 185,937  

$ 97,898  

$ 93,236  

Tier 1 capital (to risk weighted assets)

$ 177,409  

$ 79,251  

$ 74,589  

Common Equity Tier 1 capital (to risk weighted assets)

$ 177,409  

$ 65,265  

$ 60,604  

Tier 1 capital (to average assets)

$ 177,409  

$ 58,624  

$ 73,281  

Minimum Capital

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Total capital (to risk weighted assets)

$ 188,946  

$ 85,781  

$ 81,696  

Tier 1 capital (to risk weighted assets)

$ 182,044  

$ 69,442  

$ 65,357  

Common Equity Tier 1 capital (to risk weighted assets)

$ 182,044  

$ 57,187  

$ 53,103  

Tier 1 capital (to average assets)

Except with regard to NBB’s Tier 1 capital to average assets ratio, the minimum capital requirement includes the current phased-in portion of the Basel III Capital Rules, capital conservation buffer (2.50% for 2019 and 1.875% in 2018) which is added to the minimum capital requirements for capital adequacy purposes.

The capital conservation buffer was phased in through four equal annual installments of .0625% from 2016 to 2019, with full implementation in January 2019.

NBB’s capital conservation buffer consists of additional CET1 above regulatory minimum requirement.

$ 182,044  

$ 51,371  

$ 64,213  

Except with regard to NBB’s Tier 1 capital to average assets ratio, the minimum capital requirement includes the Basel III Capital Rules’

capital conservation buffer ( 2.50% ) which is added to the minimum capital requirements for capital adequacy purposes.

NBB’s capital conservation buffer consists of additional CET1 above regulatory minimum requirement.

Failure to maintain the prescribed levels would result in limitations on capital distributions and discretionary bonuses to executives.

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Interest-bearing deposits

10,027  

Investments in subsidiaries

189,667  

183,056  

Refundable income taxes

Liabilities and Stockholders’ Equity

$ 201,918  

$ 185,039  

Liabilities and Stockholders’

Other liabilities

Stockholders’ equity

Total liabilities and stockholders’ equity

$ 1,311  

$ 1,313  

Stockholders’

200,607  

183,726  

Total liabilities and stockholders’

$ 201,918  

$ 185,039  

Condensed Statements of Income

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Dividends from subsidiaries

Interest on securities – taxable

Realized securities gains, net

$ 22,000  

$ 28,556  

$ 9,419  

22,004  

28,574  

Other expenses

Income before income tax benefit and equity in undistributed net income of subsidiaries

20,825  

27,549  

Applicable income tax benefit

Income before equity in undistributed net income of subsidiaries

21,126  

27,815  

Equity (deficit) in undistributed net income of subsidiaries

$ 16,077  

$ 17,466  

$ 16,151  

Condensed Statements of Cash Flows

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Cash Flows f rom Operating Expenses

$ 16,077  

$ 17,466  

$ 16,151  

Adjustments to reconcile net income to net cash provided by operating activities:

Deficit (equity) in undistributed net income of subsidiaries

Gain on sale of securities

10,349  

Net change in refundable income taxes due from subsidiaries

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Net cash provided by operating activities

21,056  

27,836  

Cash Flows from Investing Activities

Net change in interest-bearing deposits

Maturities, sales and calls of securities available for sale

Capital distribution to subsidiary

Net cash (used in) provided by investing activities

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These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

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Commitments to extend credit

$ 178,341  

$ 158,859  

Standby letters of credit

13,474  

15,212  

Mortgage loans sold with potential recourse

40,362  

20,496  

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

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Therefore, the total commitment amounts do not necessarily represent future cash requirements.

The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit.

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In addition, the Company may have an obligation to repurchase a loan if the mortgagor defaults early in the loan term.

This potential default period is approximately twelve months after sale of a loan to the investor.

This potential default period is approximately 12 months after sale of a loan to the investor.

At December 31, 2020, the Company had locked-rate commitments to originate mortgage loans amounting to approximately $ 400 and loans held for sale of $ 866 .

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The Company maintains cash accounts in other commercial banks.

The Company had $14 in deposits with correspondent institutions at December 31, 2019 that was not insured by the Federal Deposit Insurance Corporation.

The Company had $ 18 in deposits with correspondent institutions at December 31, 2020 that were not insured by the Federal Deposit Insurance Corporation.

Concentrations of Credit Risk

The Company does a general banking business, serving the commercial and personal banking needs of its customers.

NBB’s primary service area is defined as the counties of Montgomery, Giles, Carroll, Grayson, Pulaski, Tazewell, Smyth, Wythe, Roanoke and Washington and the cities of Galax, Radford and Roanoke in southwest Virginia, and Mercer, Monroe and McDowell counties in West Virginia.

For loan purposes, the Company’s market also includes the Virginia cities of Salem and Bristol and counties of Botetourt and Craig, the southernmost tip of West Virginia adjacent to the counties of Giles, Buchanan, Russell and Bland, the North Carolina counties of Surry and Alleghany, and the Tennessee city of Bristol and counties of Washington and Sullivan.

Substantially all of NBB’s loans are made in its primary service area.

Additionally, the Company occasionally participates in loans in nearby higher growth metropolitan areas.

Loans outside of the primary service area are a small percentage of the loan portfolio, are appropriately underwritten and are not considered out of market exceptions.

The ultimate collectability of NBB’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, is influenced by the economic conditions of the market area.

The Company’s operating results are therefore closely correlated with the economic trends within this area.

Commercial real estate as of December 31, 2019 and 2018 represented approximately 50% of the loan portfolio, at $365,373 and $353,546, respectively.

Included in commercial real estate are loans for college housing and professional office buildings that comprised $181,705 and $184,203 as of December 31, 2019 and 2018, respectively, corresponding to approximately 25% of the loan portfolio at December 31, 2019 and 26% of the loan portfolio at December 31, 2018.

The ultimate collectability of NBB’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, is influenced by the economic conditions of the market area.

The Company’s operating results are therefore closely correlated with the economic trends within this area.

Commercial real estate as of December 31, 2020 and 2019 represented approximately 51 % and 50 %, respectively, of the loan portfolio, at $ 393,115 and $ 365,373 , respectively.

Included in commercial real estate are loans for college housing and professional office buildings that comprised $ 189,421 and $ 181,705 as of December 31, 2020 and 2019, respectively, corresponding to approximately 25 % of the loan portfolio at December 31, 2020 and December 31, 2019.

Loans secured by residential real estate were $ 181,782 , or approximately 24 % of the portfolio, and $ 181,472 , or 25 % of the portfolio at December 31, 2020 and 2019, respectively.

The Company has established operating policies relating to the credit process and collateral in loan originations.

Loans to purchase real and personal property are generally collateralized by the related property and with loan amounts established based on certain percentage limitations of the property’s total stated or appraised value.

Credit approval is primarily a function of cash flow, collateral and the evaluation of the creditworthiness of the individual borrower or project based on available financial information.

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These levels are:

Valuation is based on quoted prices in active markets for identical assets and liabilities.

Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

Fair value is best determined based upon quoted market prices.

However, in many instances, there are no quoted market prices for the Company’s various financial instruments.

Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2 – Valuation is based on observable inputs including:

quoted prices in active markets for similar assets and liabilities,

quoted prices for identical or similar assets and liabilities in less active markets,

inputs other than quoted prices that are observable, and

model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

 Level 3 – Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

Fair value is best determined by quoted market prices.

However, in many instances, there are no quoted market prices for the Company’s financial instruments.

In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.

Accordingly, fair value estimates may not be realized in an immediate settlement of the instrument.

Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from disclosure requirements.

Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

Financial Instruments Measured At Fair Value on a Recurring Basis

Securities A vailable for S ale

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Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2 ).

The carrying value of restricted Federal Reserve Bank of Richmond and FHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.

The carrying value of restricted Federal Reserve Bank of Richmond and Federal Home Loan Bank of Atlanta stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.

The following tables present the balances of financial assets measured at fair value on a recurring basis as of December 31, 2020 and 2019:

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Government agencies and corporations

$ 91,163  

States and political subdivisions

203,961  

Mortgage-backed securities

249,175  

Corporate debt securities

Total securities available for sale

$ 546,742  

Fair Value Measurements at December 31, 2019 Using

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Government agencies and corporations

$ 121,123  

States and political subdivisions

88,239  

Mortgage-backed securities

221,783  

Corporate debt securities

Total securities available for sale

$ 435,263  

The Company’s securities portfolio is valued using Level 2 inputs.

The Company relies on an independent third party vendor to provide market valuations.

The inputs used to determine value include:

benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two -sided markets, benchmark securities, bids, offers and reference data including market research publications.

The third party vendor also monitors market indicators, industry activity and economic events as part of the valuation process.

Central to the final valuation is the assumption that the indicators used are representative of the fair value of securities held within the Company’s portfolio.

Level 2 inputs are subject to a certain degree of uncertainty and changes in these assumptions or methodologies in the future, if any, may impact securities fair value, deferred tax assets or liabilities, or expense.

Interest Rate Loan Contracts and Forward Contracts

The Company originates consumer real estate loans which it intends to sell to a correspondent lender.

Interest rate loan contracts and forward contracts result from originating loans held for sale and are derivatives reported at fair value.

The Company enters interest rate lock commitments with customers who apply for a loan which it intends to sell to a correspondent lender.

The interest rate loan contract ends when the loan closes or the customer withdraws their application.

Fair value of the interest rate loan contracts is based upon the correspondent lender’s pricing quotes at the report date.

Fair value is adjusted for the estimated probability of the loan closing with the borrower.

At the time the Company enters into an interest rate loan contract with a customer, it also enters into a best efforts forward sales commitment with the correspondent lender.

If the loan has been closed and funded, the best efforts commitment converts to a mandatory forward sales commitment.

Fair value is based on the gain or loss that would occur if the Company were to pair-off the transaction with the investor at the measurement date.

This is a Level 3 input.

The Company has elected to measure and report best efforts commitments at fair value.

Interest rate loan contracts and forward contracts are valued based on quotes from the correspondent lender at the reporting date.

Pricing changes daily and if a loan has not been sold to the correspondent by the next reporting date, the fair value may be different from that reported currently.

Changes in fair value measurement impacts net income.

Fair Value Measurements at December 31, 2020 Using

Balance as of

December 31, 2020

Quoted Prices

Identical Assets

Unobservable Inputs

Interest rate loan contracts

Forward contracts

Fair Value Measurements at December 31, 2019 Using

Balance as of

Quoted Prices

Identical Assets

Unobservable Inputs

Interest rate loan contracts

Forward contracts

December 31, 2020

Valuation Technique

Unobservable Input

(Weighted Average)

Interest rate loan contracts

Market approach

Pull-through rate

87.02% (1)  

Forward contracts

Market approach

Pull-through rate

87.02% (1)  

Interest rate loan contracts

Market approach

Current reference price

101.91 % - 103.02 % (102.55%) (2)  

Forward contracts

Market approach

Current reference price

101.91 % - 103.19 % (102.67%) (2)  

Current reference prices were weighted by the relative amount of the loan

December 31, 2019

Valuation Technique

Unobservable Input

(Weighted Average)

Interest rate loan contracts

Market approach

Pull-through rate

90.00% (1)  

Forward contracts

Market approach

Pull-through rate

65.60% (1)  

Interest rate loan contracts

Market approach

Current reference price

101.49 % - 102.06 % (101.72%) (2)  

Forward contracts

Market approach

Current reference price

101.49 % - 103.28 % (101.91%) (2)  

All contracts are valued using the same pull-through rate

Current reference prices were weighted by the relative amount of the loan

Financial Instruments Measured at Fair Value on a Non-Recurring Basis

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP.

Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

     The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

Loans H eld for S ale

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No nonrecurring fair value adjustments were recorded on loans held for sale during the years ended December 31, 2020 and 2019.

Impaired Loans

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Impaired loans are measured at fair value on a nonrecurring basis.

If an individually-evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses.

If an individually evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses.

Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

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The observable market price of a loan is categorized as a Level 1 input.

The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a TDR.

The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a TDR.

Loans measured using the fair value of collateral method may be categorized in Level 2 or Level 3.

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Most collateral is real estate.

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

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.

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Valuations derived from internal evaluations are categorized as Level 3.

The value of business equipment is based upon an outside appraisal (Level 2) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3) if not considered significant.

The value of business equipment is based upon an outside appraisal (Level 2 ) if deemed significant, or the net book value on the applicable business’

financial statements (Level 3 ) if not considered significant.

Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3 ).

As of December 31, 2019 and December 31, 2018, the fair value measurements for impaired loans with specific allocations were primarily based upon the present value of expected future cash flows.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis as of the dates indicated.

As of December 31, 2020 and December 31, 2019, the fair value measurements for impaired loans with specific allocations were based upon the present value of expected future cash flows.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis as of the dates indicated.

Carrying value

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Identical Assets

Unobservable Inputs

December 31, 2020

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Discount rate

5.50 % - 6.50 % ( 5.78 %)  

December 31, 2019

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Discount rate

5.50 % - 6.50 % ( 5.77 %)  

Unobservable inputs were weighted by the relative fair value of the impaired loans.

At December 31, 2020 and December 31, 2019, the fair value measurements for impaired loans with specific allocations were based upon the present value of expected future cash flows. 

The loans at each date are TDRs and the discount rate is the contractual rate that was in effect prior to modification to TDR status. 

Inherent in the measurement of impaired loans using the present value of cash flows method are judgements and assumptions, including the appropriateness of the discount rate and the projections of cash flows. 

Cash flows in the future may differ from those used in the measurement. 

Future changes in cash flow assumptions, a change in the measurement basis from the present value of cash flows to the collateral method, or if the loans are fully or partially charged off may result in greater losses than estimated at the reporting dates. 

The impact of the COVID- 19 pandemic has not been fully realized and contributes a higher than normal level of uncertainty to the calculations. 

An increase in the impairment measurement or a charge-off would increase the provision for loan losses.

Other Real Estate Owned

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If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.

The following table summarizes the Company’s OREO that were measured at fair value on a nonrecurring basis as of the dates indicated.

Carrying Value

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Identical Assets

Unobservable Inputs

December 31, 2020

Other real estate owned net of valuation allowance

$ 1,553  

December 31, 2019

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Discounted appraised value

4.00% (2) –

9.23 % ( 4.54 %)  

0.00% (2) –

6.00 % ( 0.68 %)  

Other real estate owned

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Discount for lack of marketability and age of appraisal

The Company markets OREO both independently and with local realtors.

Properties marketed by realtors are discounted by selling costs.

Properties that the Company markets independently are not discounted by selling costs.

The following tables present the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2019 and December 31, 2018.

0.00 % - 7.66 % ( 0.62 %)  

0.00 % - 45.17 % ( 1.28 %)  

Discounts were weighted by the relative appraised value of the OREO properties.

The appraised value is discounted by selling costs if the OREO property is listed with a realtor and if the appraised value exceeds the list price, less estimated selling costs.

Selling costs do not discount the appraised value if the Company markets the OREO property independently or if the OREO property is listed with a realtor and the list price less estimated selling costs exceeds the appraised value.

At December 31, 2020 and December 31, 2019, OREO properties were measured using appraised value, and if applicable, discounted by selling costs, lack of marketability and age of appraisal.

Determining the discount to appraisals for selling cost and lack of marketability and age of the appraisal relies on certain key assumptions and judgements.

Discounts for selling costs and in some instances, marketability, result when the Company markets OREO properties via local realtors.

The Company works with the realtor to determine the list price, which may be set at appraised value or at a different amount based on the realtor’s advice and management’s judgement of marketability.

Selling costs for improved land generally are estimated at 6% of the list price, and for raw land at 10% of the list price.

If the final sale price is different from the list price, the amount of selling costs will also be different from those estimated.

Discounts for age may be applied if current appraisals cannot be obtained prior to reporting dates.

The most recent appraised value available may be discounted based upon management judgement.

There is uncertainty in determining discounts to appraised value.

Future changes to marketability assumptions or updated appraisals may indicate a lower fair value, with a corresponding impact to net income.

The current COVID- 19 pandemic and associated economic crisis may negatively affect the value of the Company’s OREO and may result in additional OREO properties.

Ultimate proceeds from the sale of OREO property may be less than the estimated fair value, reducing net income.

Fair Value Summary

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2020 and December 31, 2019.

For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.

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For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

Fair values are estimated under the exit price notion.

Fair values are estimated using the exit price notion.

December 31, 2020

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Cash and due from banks

$ 13,147  

Interest-bearing deposits

120,725  

546,742  

Restricted securities

Mortgage loans held for sale

760,318  

752,624  

Accrued interest receivable

Bank-owned life insurance

36,444  

Financial liabilities:

$ 1,297,143  

$ 1,207,561  

$ 89,681  

Accrued interest payable

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Cash and due from banks

$ 10,290  

Interest-bearing deposits

76,881  

435,263  

Restricted securities

Mortgage loans held for sale

726,588  

718,299  

Accrued interest receivable

Bank-owned life insurance

35,567  

Financial liabilities:

$ 1,119,753  

$ 991,725  

$ 128,011  

Accrued interest payable

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Net Unrealized

Gain (Loss) on

Gain (Loss) on Securities

Adjustments Related

to Pension Benefits

Accumulated Other Comprehensive

Accumulated Other

Comprehensive

Income (Loss)

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Unrealized holding loss on available for sale securities net of tax of ($595)

Transfer from held to maturity to available for sale securities, net of tax of $ 237

Reclassification adjustment, net of tax of ($4)

Net pension gain, net of tax of $115

Net pension loss, net of tax of ($249)

Less amortization of prior service cost included in net periodic pension cost, net of tax of ($24)

Reclassification of stranded tax effects from change in tax rate

Balance at December 31, 201 8

Unrealized holding gain on available for sale securities net of tax of $ 1,486

Transfer from held-to-maturity to available-for-sale securities, net of tax $237

Reclassification adjustment, net of tax of ($119)

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Balance at December 31, 201 9

Unrealized holding loss on available for sale securities net of tax of $1,486

Unrealized holding gain on available for sale securities net of tax of $ 3,502

13,176  

Reclassification adjustment, net of tax of ($23)

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Balance at December 31, 2020

$ 13,167  

$ 3,020  

The following table provides information regarding reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2020, 2019 and 2018:

Component of Accumulated Other Comprehensive Income (Loss)

Reclassification out of unrealized gains and losses on available-for-sale securities:

Reclassification out of unrealized gains on available for sale securities:

Realized securities gain, net

Income tax benefit

Realized gain on available-for-sale securities, net of tax, reclassified out of accumulated other comprehensive income (loss)

Realized gain on available for sale securities, net of tax, reclassified out of accumulated other comprehensive loss

Amortization of defined benefit pension items:

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Income tax benefit

Amortization of defined benefit pension items, net of tax, reclassified out of accumulated other comprehensive income (loss)

Amortization of defined benefit pension items, net of tax, reclassified out of accumulated other comprehensive loss

This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost.

(For additional information, see Note 8, Employee Benefit Plans.)

Intangible Assets and Goodwill

In accounting for goodwill and intangible assets, the Company conducts an impairment review at least annually and more frequently if certain impairment indicators are evident.

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

If the preliminary assessment indicates that it is more likely than not that fair value is below carrying value, a two-step test is employed to determine impairment.

The Company opted not to perform the preliminary assessment and employed the two-step test to determine impairment.

Based on testing for impairment of goodwill for 2019 and 2018 and testing for impairment of goodwill and intangible assets for 2017, there were no impairment charges.

Information concerning goodwill and intangible assets for years ended December 31, 2019 and 2018 is presented in the following table:

Gross Carrying Value

Accumulated Amortization

Net Carrying Value

December 31, 2019 and December 31, 2018

Amortizable core deposit intangibles

Unamortizable goodwill

Intangible assets and goodwill

In accounting for goodwill, the Company conducts an impairment review at least annually and more frequently if certain impairment indicators are evident.

Testing for 2020 and 2019 did not indicate impairment. 

As of December 31, 2020 and December 31, 2019, the gross carrying value of goodwill was $5,848.

There was no accumulated amortization or impairment.

Revenue Recognition

On January 1, 2018, the Company adopted ASU No.

2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606.

As stated in Note 1, Summary of Significant Accounting Policies, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue.

Results for reporting periods beginning after January 1, 2018 and comparative periods are presented in accordance with Topic 606.

Substantially all of the Company’s revenue is generated from contracts with customers.

Noninterest revenue streams such as service charges on deposit accounts, other service charges and fees, credit and debit card fees, trust income, and annuity and insurance commissions are recognized in accordance with ASC Topic 606, “Revenue from Contracts with Customers”.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities.

In addition, certain noninterest income streams such as financial guarantees, derivatives, and certain credit card fees are outside the scope of the guidance.

Topic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts, other service charges and fees, credit and debit card fees, trust income, and annuity and insurance commissions.

However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606.

Substantially all of the Company’s revenue is generated from contracts with customers.

Noninterest revenue streams within the scope of Topic 606 are discussed below.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, ATM fees, wire transfer fees and other deposit account related fees.

The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided.

Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, ATM fees, wire transfer fees, and other deposit account related fees.

The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided.

Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’

ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM.

Wire transfer fees, overdraft and nonsufficient funds fees and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

Other Service Charges and Fees

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The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

Check ordering charges are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

Check ordering charges are transactional based, and therefore the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

Credit and Debit Card Fees

debit card fees are primarily comprised of interchange fee income and, prior to mid-2017, merchant services income.

The Company sold servicing rights on its merchant services portfolio in mid-2017.

Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa.

Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.

The Company’s performance obligation for interchange fee income and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.

Credit and debit card fees are primarily comprised of interchange fee income and merchant services income.

Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa and MasterCard.

Merchant services income mainly represents commission fees based upon merchant processing volume.

Payment is typically received immediately or in the following month.

In compliance with Topic 606, credit and debit card fee income is presented net of associated expense.

Trust income is primarily comprised of fees earned from the management and administration of trusts and other customer assets.

The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate.

Payment is generally received a few days after month end through a direct charge to customers’ accounts.

Trust income is primarily comprised of fees earned from the management and administration of trusts and estates and other customer assets.

Payment is generally received a few days after month end through a direct charge to customers’

The Company does not earn performance-based incentives.

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Insurance income primarily consists of commissions received on insurance product sales.

The Company acts as an intermediary between the Company’s customer and the insurance carrier.

The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy.

The Company acts as an intermediary between the Company’s customer and the insurance carrier.

The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy.

Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue.

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Service charges on deposit accounts

$ 1,966  

$ 2,453  

$ 2,678  

Other service charges and fees

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Noninterest Income (in-scope of Topic 606)

$ 5,654  

$ 6,154  

$ 6,266  

Noninterest Income (out-of-scope of Topic 606)

Total noninterest income

On January 1, 2019, the Company adopted ASU No.

2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842.

The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842.

There was no cumulative effect adjustment at adoption.

Prior to adoption, all of the Company’s leases were classified as operating leases and remain operating leases at adoption.

As stated in to the Company’s 2018 Form 10-K, Note 1 Summary of Significant Accounting Policies, the implementation of the new standard resulted in recognition of a right-of-use asset and offsetting lease liability of $684 for leases existing at the date of adoption.

Contracts that commence subsequent to adoption are evaluated to determine whether they are or contain a lease in accordance with Topic 842.

The Company has elected the practical expedient provided by Topic 842 not to allocate consideration in a contract between lease and non-lease components.

The Company also elected, as provided by the standard, not to recognize right-of-use assets and lease liabilities for short-term leases, defined by the standard as leases with terms of 12 months or less.

Since adoption, the Company entered into new operating leases and recognized right-of-use assets and lease liabilities.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows.

Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease.

Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

$ 7,944  

$ 8,790  

$ 7,729  

The Company’s leases are recorded under ASC Topic 842, “Leases”.

The Company examines its contracts to determine whether they are or contain a lease.

A contract with a lease is further examined to determine whether the lease is a short-term, operating or finance lease.

As permitted by ASC Topic 842, the Company elected not to capitalize short-term leases, defined by the standard as leases with terms of 12 months or less.

The Company also elected the practical expedient not to separate non-lease components from lease components within a single contract.

Right-of-use assets and lease liabilities are recognized for operating and finance leases.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows.

Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. 

Lease payments

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If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability.

Two of the Company’s leases provide known escalators that are included in the determination of the lease liability.

One lease has an annual escalator based on the consumer price index-urban (“CPI-U”).

The remaining leases do not have variable payments during the term of the lease.

Options to Extend, Residual Value Guarantees, and Restrictions and Covenants

Of the Company’s six leases, three leases offer the option to extend the lease term.

Of the Company’s six operating leases, three leases offer the option to extend the lease term.

Each of the three leases provides two options of five years each.

For one of the leases, the Company is reasonably certain it will exercise one option of five years and has included the additional time and lease payments in the calculation of the lease liability.

The lease agreement provides that the lease payment will increase at the exercise date based on the consumer price index-urban (“CPI-U”).

The lease agreement provides that the lease payment will increase at the exercise date based on the CPI-U.

Because the CPI-U at the exercise date is unknown, the increase is not included in the cash flows determining the lease liability.

None of the Company’s leases provide for residual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The Company’s lease right of use asset is included in other assets and the lease liability is included in other liabilities.

None of the Company’s leases provide for residual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations.

      The Company’s lease right of use asset is included in other assets and the lease liability is included in other liabilities.

The following tables present information about leases:

December 31, 2020

December 31, 2019

Lease liability

$ 2,016  

$ 2,286  

Right-of-use asset

$ 1,998  

$ 2,277  

Weighted average remaining lease term (in years)

Weighted average discount rate

For the Years Ended December 31 ,

For the Year s Ended December 31 ,

Lease Expense

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Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period

$ 1,837  

The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability:

7 unchanged sentences

Total undiscounted cash flows

$ 2,249  

Lease liability

$ 2,016  

The contracts in which the Company is lessee are with parties external to the company and not related parties.

2 unchanged sentences

To the Stockholders and the Board of Directors

National Bankshares, Inc.

Blacksburg, Virginia

1 unchanged sentence

We have audited the accompanying consolidated balance sheets of National Bankshares, Inc.

and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements).

and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 11, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

2 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses –

Loans Collectively Evaluated for Impairment –

Qualitative Factors

Description of the Matter

As described in Note 1 (Summary of Significant Accounting Policies) and Note 5 (Allowance for Loan Losses, Nonperforming Assets and Impaired Loans) to the consolidated financial statements, the Company maintains an allowance for loan losses to provide for probable losses inherent in the loan portfolio. 

The Company’s allowance for loan losses has two basic components, the general allowance and the specific allowance.

At December 31, 2020, the general allowance represented $8,406,837 of the total allowance for loan losses of $8,481,537.

For loans that are not specifically identified for impairment, the general allowance uses historical loss experience along with various qualitative and risk factors to develop adjusted loss factors for each loan segment. 

The qualitative adjustments to the historical loss experience are established by applying a loss percentage at the class level identified by management based on their assessment of shared risk characteristics within groups of similar loans.

Qualitative risk factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio.

Management evaluates qualitative factors, primarily considering national and local economic and business trends and conditions;

the nature and volume of classes within the portfolio;

loan quality;

loan officers’

experience, lending policies;

competition/legal/regulatory environment;

high risk loans;

and the Company’s loan review system. 

The analysis of certain factors results in standard allocations to all segments and classes and other factors are analyzed for each class. 

Management exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses.

We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates. 

How We Addressed the Matter in Our Audit

The primary audit procedures we performed to address this critical audit matter included:

Obtain an understanding of controls over the evaluation of qualitative factors, including management's development and review of the data inputs used as the basis for the allocation factors and management's review and approval of the reasonableness of the assumptions used to develop the qualitative adjustments.

Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative factors, which included:

Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.

Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors, including evaluating the metrics, including the relevance of source data and assumptions.  

Evaluating the qualitative factors for directional consistency and for reasonableness.

Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.

/s/ YOUNT, HYDE & BARBOUR, P.C.

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March 17, 2021

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors

National Bankshares, Inc.

Blacksburg, Virginia

Opinion on the Internal Control over Financial Reporting

We have audited National Bankshares, Inc.

and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements of the Company, and our report dated March 11, 2020 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting .

Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ YOUNT, HYDE & BARBOUR, P.C.

Winchester, Virginia

March 11, 2020

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

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 8. Financial Statements and Supplementary Data