NATIONAL BANKSHARES INC 10-K

Item 8 . Financial Statements and Supplementary Data   Consolidated Balance Sheets   December 31,   $ in thousands, except share and per share data   2020     2019   Assets                 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     1,279       1,220   Mortgage loans held for sale     866       905   Loans:                 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   Total loans     770,027       734,027   Less unearned income and deferred fees and costs     ( 1,228 )     ( 576 ) Loans, net of unearned income and deferred fees and costs     768,799       733,451   Less allowance for loan losses     ( 8,481 )     ( 6,863 ) Loans, net     760,318       726,588   Premises and equipment, net     10,035       8,919   Accrued interest receivable     5,028       4,285   Other real estate owned, net     1,553       1,612   Goodwill     5,848       5,848   Bank-owned life insurance (BOLI)     36,444       35,567   Other assets     17,688       14,459   Total assets   $ 1,519,673     $ 1,321,837   Liabilities and Stockholders’ Equity                 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     56       144   Other liabilities     21,867       18,214   Total liabilities     1,319,066       1,138,111   Commitments and contingencies                     Stockholders’ equity:                 Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding     -       -   Common stock, $ 1.25 par value. Authorized 10,000,000 shares; issued and outstanding, 6,432,020 shares in 2020 and 6,489,574 in 2019     8,040       8,112   Retained earnings     189,547       184,120   Accumulated other comprehensive income (loss), net     3,020       ( 8,506 ) Total stockholders’ equity     200,607       183,726   Total liabilities and stockholders’ equity   $ 1,519,673     $ 1,321,837     The accompanying notes are an integral part of these consolidated financial statements.   52 Table of Contents     Consolidated Statements of Income   Years ended December 31,   $ in thousands, except per share data   2020     2019     2018   Interest Income                         Interest and fees on loans   $ 34,523     $ 33,869     $ 31,333   Interest on interest-bearing deposits     276       1,523       672   Interest and dividends on securities – taxable     7,383       6,725       6,856   Interest on securities – nontaxable     1,826       3,030       4,363   Total interest income     44,008       45,147       43,224                             Interest Expense                         Interest on deposits     5,837       7,380       4,883   Interest on borrowings     -       -       164   Total interest expense     5,837       7,380       5,047   Net interest income     38,171       37,767       38,177   Provision for (recovery of) loan losses     1,991       126       ( 81 ) Net interest income after provision for (recovery of) loan losses     36,180       37,641       38,258                             Noninterest Income                         Service charges on deposit accounts     1,966       2,453       2,678   Other service charges and fees     162       198       132   Credit and debit card fees, net     1,400       1,398       1,431   Trust income     1,662       1,622       1,565   BOLI income     877       910       901   Gain on sale of mortgage loans     676       297       199   Other income     1,093       1,346       806   Realized securities gains, net     108       566       17   Total noninterest income     7,944       8,790       7,729                             Noninterest Expense                         Salaries and employee benefits     14,674       14,920       14,506   Occupancy, furniture and fixtures     1,795       1,866       1,845   Data processing and ATM     3,088       3,171       2,784   FDIC assessment     198       167       359   Intangible assets amortization     -       -       50   Net costs of other real estate owned     39       47       553   Franchise taxes     1,340       1,333       1,278   Write-down of insurance receivable     -       -       2,010   Other operating expenses     3,836       4,250       3,891   Total noninterest expense     24,970       25,754       27,276   Income before income taxes     19,154       20,677       18,711   Income tax expense     3,077       3,211       2,560   Net income   $ 16,077     $ 17,466     $ 16,151   Basic net income per common share   $ 2.48     $ 2.65     $ 2.32   Fully diluted net income per common share   $ 2.48     $ 2.65     $ 2.32     The accompanying notes are an integral part of these consolidated financial statements.   53 Table of Contents     Consolidated Statements of Comprehensive Income   Years ended December 31,   $ in thousands, except per share data   2020     2019     2018   Net Income   $ 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       5,595       ( 2,246 ) Reclassification adjustment for gain included in net income, net of tax of ($23) in 2020, ($119) in 2019 and ($4) in 2018     ( 85 )     ( 447 )     ( 13 ) Transfer from held to maturity to available for sale securities, net of tax of $ 237 in 2018     -       -       891   Net pension loss arising during the period, net of tax of ($393) in 2020, ($394) in 2019 and ($249) in 2018     ( 1,478 )     ( 1,482 )     ( 936 ) 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     ( 87 )     ( 87 )     ( 86 ) Other comprehensive income (loss), net of tax of $ 3,063 in 2020, $ 950 in 2018 and ($635) in 2018     11,526       3,579       ( 2,390 ) 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 share and per share data   Common Stock     Retained Earnings     Accumulated Other Comprehensive Income (Loss)     Total   Balance at December 31, 201 7   $ 8,698     $ 185,893     $ ( 9,695 )   $ 184,896   Net income     -       16,151       -       16,151   Other comprehensive loss, net of tax of ($635)     -       -       ( 2,390 )     ( 2,390 ) Cash dividend ($ 1.21 per share)     -       ( 8,419 )     -       ( 8,419 ) Balance at December 31, 201 8   $ 8,698     $ 193,625     $ ( 12,085 )   $ 190,238   Net income     -       17,466       -       17,466   Other comprehensive income, net of tax of $ 950     -       -       3,579       3,579   Cash dividend ($ 1.39 per share)     -       ( 9,032 )     -       ( 9,032 ) Stock repurchase ( 468,400 shares)     ( 586 )     ( 17,939 )     -       ( 18,525 ) Balance at Decembe r 31, 201 9   $ 8,112     $ 184,120     $ ( 8,506 )   $ 183,726   Net income     -       16,077       -       16,077   Other comprehensive income, net of tax of $ 3,063     -       -       11,526       11,526   Cash dividend ($ 1.39 per share)     -       ( 9,000 )     -       ( 9,000 ) Stock repurchase ( 57,554 shares)     ( 72 )     ( 1,650 )     -       ( 1,722 ) 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.   54 Table of Contents     Consolidated Statements of Cash Flows   Years e nded December 31,   $ in thousands   2020     2019     2018   Cash Flows from Operating Activities                         Net income   $ 16,077     $ 17,466     $ 16,151   Adjustment to reconcile net income to net cash provided by operating activities:                         Provision for (recovery of) loan losses     1,991       126       ( 81 ) Deferred income tax expense (benefit)     282       529       ( 382 ) Depreciation of premises and equipment     708       739       766   Amortization of intangibles     -       -       50   Amortization of premiums and accretion of discounts, net     1,455       212       58   Loss (gain) on disposal of fixed assets     ( 2 )     5       -   Gain on calls and sales of securities available for sale, net     ( 108 )     ( 566 )     ( 17 ) Loss (gain) and write-down on other real estate owned     ( 13 )     5       489   Loss on sale of repossessed assets     1       4       8   Income on investment in BOLI     ( 877 )     ( 910 )     ( 901 ) Gain on sale of mortgage loans held for sale     ( 676 )     ( 297 )     ( 199 ) Origination of mortgage loans held for sale     ( 39,647 )     ( 21,032 )     ( 12,626 ) Sale of mortgage loans held for sale     40,362       20,496       13,013   Contribution to defined benefit plan     ( 5,000 )     -       -   Net change in:                         Accrued interest receivable     ( 743 )     875       137   Other assets     ( 132 )     ( 1,340 )     2,899   Accrued interest payable     ( 88 )     55       27   Other liabilities     203       2,465       404   Net cash provided by operating activities     13,793       18,832       19,796                             Cash Flows from Investing Activities                         Net change in interest-bearing deposits     ( 43,844 )     ( 33,390 )     7,742   Proceeds from repayments of mortgage-backed securities     18,068       1,089       224   Proceeds from calls, sales and maturities of securities available for sale     126,840       348,032       50,438   Proceeds from calls and maturities of securities held to maturity     -       -       6,430   Purchases of securities available for sale     ( 241,164 )     ( 352,505 )     ( 25,323 ) Net change in restricted stock     ( 59 )     -       ( 20 ) Purchases of loan participations     ( 11,404 )     ( 673 )     ( 7,853 ) Collections of loan participations     207       4,262       970   Loan originations and principal collections, net     ( 24,875 )     ( 28,388 )     ( 35,591 ) Proceeds from disposal of other real estate owned     72       591       276   Proceeds from disposal of repossessed assets     30       53       34   Recoveries on loans charged off     347       267       235   Additions to premises and equipment     ( 1,824 )     ( 1,032 )     ( 1,191 ) Proceeds from sale of premises and equipment     2       16       -   Net cash used in investing activities     ( 177,604 )     ( 61,678 )     ( 3,629 )             (continued)   55 Table of Contents   Cash Flows from Financing Activities                         Net change in time deposits     ( 38,446 )     26,229       ( 13,085 ) Net change in other deposits     215,836       41,582       5,293   Cash dividends paid     ( 9,000 )     ( 9,032 )     ( 8,419 ) Shares repurchased     ( 1,722 )     ( 18,525 )     -   Net cash provided by (used in) financing activities     166,668       40,254       ( 16,211 )                           Net change in cash and due from banks     2,857       ( 2,592 )     ( 44 ) Cash and due from banks at beginning of year     10,290       12,882       12,926   Cash and due from banks at end of year   $ 13,147     $ 10,290     $ 12,882                             Supplemental Disclosures of Cash Flow Information                         Interest paid on deposits and borrowed funds   $ 5,925     $ 7,325     $ 5,020   Income taxes paid     3,860       2,544       1,778                             Supplemental Disclosures of Noncash Activities                         Loans charged against the allowance for loan losses   $ 720     $ 920     $ 689   Loans transferred to other real estate owned     -       156       -   Loans transferred to repossessed assets     4       71       55   Unrealized gain (loss) on securities available for sale     16,570       6,515       ( 2,858 ) Unrealized net gain on securities transferred from HTM to AFS     -       -       1,128   Fair value of securities transferred from held to maturity to available for sale     -       -       119,790   Minimum pension liability adjustment     ( 1,981 )     ( 1,986 )     ( 1,295 ) Increase in operating lease right-of-use asset during the period     24       1,837       -   Increase in operating lease liability during the period     24       1,837       -     The accompanying notes are an integral part of these consolidated financial statements.   56 Table of Contents   Notes to Consolidated Financial Statements $ in thousands, except per share data.     Note 1: Summary of Significant Accounting Policies The consolidated financial statements include the accounts of National Bankshares, Inc. and its wholly-owned subsidiaries, the National Bank of Blacksburg, and National Bankshares Financial Services, Inc. All intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to GAAP and to general practices within the banking industry. The following is a summary of significant accounting policies. Subsequent events have been considered through the date of this Form 10 -K.   Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and amounts due from banks.   Interest-Bearing Deposits The Company invests over-night funds in interest-bearing deposits at other banks, including the FHLB, the Federal Reserve and other entities. Interest-bearing deposits are carried at cost.   Securities 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. 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 . The unrealized gain/loss on the re-designated securities is included in accumulated other comprehensive income, net of deferred tax. The Company follows the accounting guidance related to recognition and presentation of OTTI. The guidance specifies that if (a) an entity does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that the entity will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired, unless there is a credit loss. When criteria (a) and (b) are met, the entity will recognize the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive income. 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. Equity securities without readily-determinable fair values are recorded as other assets at cost less impairment, if any, and adjusted for changes resulting from observable price changes in orderly transactions for identical or similar investment of the same issuer.   Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value on an individual loan basis. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The Company releases mortgage servicing rights when loans are sold on the secondary market.   Loans The Company, through its banking subsidiary, provides mortgage, commercial, and consumer loans to customers. 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: real estate construction, consumer real estate, commercial real estate, commercial non-real estate, public sector and IDA, and consumer non-real estate. Each segment is subject to certain risks that influence pricing, loan structures, approval requirements, reserves, and ongoing credit management. 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.   57 Table of Contents   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. 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. Commercial non-real estate loans are secured by collateral other than real estate, or are unsecured. Credit risk for commercial non-real estate loans is subject to economic conditions, generally monitored by local business bankruptcy trends, interest rates, borrower repayment ability and collateral value (if secured). Public sector and IDA loans are extended to municipalities and related entities. 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. All consumer non-real estate loans are analyzed for debt-to-income ratios and previous credit history, as well as for general risks for the portfolio, including local unemployment rates, personal bankruptcy rates and interest rates. 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, 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. Unearned income on dealer-originated loans and loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Purchase premium or discount is recognized as an adjustment of the related loan yield using the interest method. The Company considers multiple factors when determining whether to discontinue accrual of interest on individual loans. Generally loans are placed in nonaccrual status when collection of interest and/or full principal is considered doubtful. 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 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. Any interest payments received on nonaccrual loans of all classes are credited to the principal balance of the loan. Loans of all classes that have not been restructured and that have been designated nonaccrual are returned to accrual status when all the principal and interest amounts contractually due are current; future payments are reasonably assured; and for loans that financed the sale of OREO property, loan-to-value thresholds are met. Loans that have been restructured that have been designated nonaccrual may return to accrual status after six months of timely repayment performance. 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. Credit card payments not received within 30 days after the statement date, real estate loan payments not received within the payment cycle and all other non-real estate secured loans for which payment is not made within the required payment cycle are considered 30 days past due. Management closely monitors past due loans in timeframes of 30 - 89 days past due and 90 or more days past due.   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. When management determines that a loan balance or portion of a loan balance is not collectible, the loss is charged against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management evaluates the allowance each quarter through a methodology that estimates losses on individual impaired loans and evaluates the effect of numerous factors on the credit risk of groups of homogeneous loans. Specific allowances are established for individually-evaluated impaired loans based on the excess of the loan balance relative to the fair value of the loan. Impaired loans are designated as such when current information indicates that it is probable that the Company will be unable to collect principal or interest when due according to the contractual terms of the loan agreement. Loan relationships exceeding $ 250 in nonaccrual status or that are significantly past due, or for which a credit review identified weaknesses that indicate principal and interest will not be collected according to the loan terms, as well as TDRs, are designated impaired. This policy is applicable to all loan classes.   58 Table of Contents   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. 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. Impaired loans for which collection of interest or principal is in doubt are placed in nonaccrual status. For collateral-dependent impaired loans, the amount of recorded investment that exceeds the fair value is charged off. General allowances are established for collectively evaluated loans. Collectively evaluated loans are grouped into classes based on similar characteristics. 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. Additionally, losses on consumer real estate and consumer non-real estate loans are typically charged off no later than when the loans are 120 - 180 days past due, and losses on loans secured by residential real estate or by commercial real estate are charged off by the time the loans reach 180 days past due, in compliance with regulatory guidelines. Accordingly, secured loans may be charged down to the estimated value of the collateral, with previously accrued unpaid interest reversed. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects.   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. TDR loans are individually measured for impairment. TDRs may be removed from TDR status, and therefore from individual evaluation, if the restructuring agreement specifies a contractual interest rate that is a market interest rate at the time of restructuring and the loan is in compliance with its modified terms one year after the restructure was completed.   Rate Lock Commitments The Company enters into commitments to originate mortgage loans in which the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 30 to 60 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, by committing to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Company is not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity. The market value of rate lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments and best effort contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the changes in the value of the underlying assets while taking into consideration the probability that the rate lock commitments will close. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss occurs on the rate lock commitments.   Premises and Equipment Land is carried at cost. Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is charged to expense over the estimated useful lives of the assets on the straight-line basis. Depreciable lives include 40 years for premises, 3 - 10 years for furniture and equipment, and 3 years for computer software. Costs of maintenance and repairs are charged to expense as incurred and improvements are capitalized.   Other Real Estate Owned Real estate acquired through or in lieu of foreclosure is held for sale and is initially recorded at fair value less estimated costs to sell at the date of foreclosure, establishing the cost basis of the asset. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other operating expenses.   Goodwill The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. Goodwill is subject to at least an annual assessment for impairment by applying a fair value based test. The Company performs its annual analysis as of September 30 of each fiscal year. The impairment test incorporated data as of September 30, 2020.   59 Table of Contents   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. 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. 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. The Company amortized on a straight-line basis intangible assets arising from branch purchase transactions over their useful lives, determined by the Company to be 10 to 12 years. Prior to becoming fully amortized, core deposit intangibles were subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used. The impairment testing showed that the expected cash flows of the intangible assets exceeded the carrying value.   Pension Plan The Company recognizes the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognizes changes in that funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit plan is measured as the difference between plan assets at fair value and the projected benefit obligation.   Income Taxes Income tax accounting guidance results in two components of income tax expense: current and deferred. 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. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. 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. 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 Company recognizes interest and penalties on income taxes as a component of income tax expense.   60 Table of Contents   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. Trust income is recognized on the accrual basis.   Earnings Per Common Share Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. The following shows the weighted average number of shares used in computing earnings per common share for the years indicated.       2020     2019     2018   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.   Loss Contingencies 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 consolidated financial statements.   Advertising The Company charges advertising costs to expenses as incurred. 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 The Company accounts for revenue associated with financial instruments, including loans and securities via the accrual method. The Company recognizes noninterest income when it satisfies commitments to customers. Please refer to Note 18: Revenue Recognition.   Use of Estimates In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. 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 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.   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. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. 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. The Company is currently assessing the impact that ASU 2016 - 13 will have 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.   61 Table of Contents   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; ( 2 ) development, governance, and documentation of a systematic methodology; ( 3 ) documenting the results of a systematic methodology; and ( 4 ) validating a systematic methodology. 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” definitions. 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: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. 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 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.   62 Table of Contents   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.   63 Table of Contents   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.   64 Table of Contents   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. government. Should those circumstances change, the Company could be required to establish additional allowance for loan loss through provision for loan loss charged to earnings.   Credit The Company is working with customers directly affected by COVID- 19, providing short-term assistance in accordance with regulator guidelines. As a result of the current economic environment caused by the COVID- 19 pandemic, the Company is engaging in more frequent communication with borrowers to better understand their situation and the challenges faced, allowing it to respond proactively as needs and issues arise. Should economic conditions worsen, the Company could experience further increases in its required allowance for loan 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.     Note 2 : Restriction on Cash 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.     Note 3 : Securities The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, as of the dates indicated, follows:       December 31, 2020   Available for sale:   Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair Value   U.S. Government agencies and corporations   $ 86,859     $ 4,477     $ 173     $ 91,163   States and political subdivisions     196,435       7,778       252       203,961   Mortgage-backed securities     244,780       4,473       78       249,175   Corporate debt securities     2,001       442       -       2,443   Total securities available for sale   $ 530,075     $ 17,170     $ 503     $ 546,742         December 31, 2019   Available for sale:   Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair Value   U.S. Government agencies and corporations   $ 119,903     $ 1,995     $ 775     $ 121,123   States and political subdivisions     88,092       791       644       88,239   Mortgage-backed securities     223,173       45       1,435       221,783   Corporate debt securities     3,998       120       -       4,118   Total securities available for sale   $ 435,166     $ 2,951     $ 2,854     $ 435,263     65 Table of Contents   The amortized cost and fair value of single maturity securities available for sale at December 31, 2020, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities included in these totals are categorized by final maturity at December 31, 2020.       December 31, 20 20   Available for sale:   Amortized Cost     Fair Value   Due in one year or less   $ 4,002     $ 4,048   Due after one year through five years     5,605       5,787   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:       December 31, 2020       Less Than 12 Months     12 Months or More       Fair Value     Unrealized Loss     Fair Value     Unrealized Loss   U.S. Government agencies and corporations   $ 28,798     $ 173     $ -     $ -   State and political subdivisions     32,353       249       635       3   Mortgage-backed securities     8,816       76       4,060       2   Total temporarily impaired securities   $ 69,967     $ 498     $ 4,695     $ 5         December 31, 2019       Less Than 12 Months     12 Months or More       Fair Value     Unrealized Loss     Fair Value     Unrealized Loss   U.S. Government agencies and corporations   $ 53,244     $ 738     $ 38,962     $ 37   State and political subdivisions     35,934       596       591       48   Mortgage-backed securities     181,279       1,435       -       -   Total temporarily impaired securities   $ 270,457     $ 2,769     $ 39,553     $ 85     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, 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. States and political subdivisions. 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. The contractual terms of the investment do not permit the issuer to settle the security at a price less than the cost basis of the investment. 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 The Company holds restricted stock of $ 1,279 as of December 31, 2020 and $ 1,220 as of December 31, 2019. Restricted stock is reported separately from available for sale securities and held to maturity securities. 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. The stock is held by member institutions only and is not actively traded.   66 Table of Contents   Redemption of FHLB stock is subject to certain limitations and conditions. 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 $ 558,703 at December 31, 2020. 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. Management regularly monitors the credit quality of the investment portfolio. Changes in ratings are noted and follow-up research on the issuer is undertaken when warranted. Management intends to carefully monitor any changes in bond quality.   Pledged Securities 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. 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. Information pertaining to realized gains and losses on sold and called securities follows:       For the year ended December 31, 2020       Proceeds     Book Value     Gross Gain     Gross Loss     Net Gain   Available for sale   $ 126,840     $ 126,732     $ 110     $ 2     $ 108         For the year ended December 31, 201 9       Proceeds     Book Value     Gross Gain     Gross Loss     Net Gain   Available for sale   $ 348,032     $ 347,466     $ 1,157     $ 591     $ 566         For the year ended December 31, 201 8       Proceeds     Book Value     Gross Gain     Gross Loss     Net Gain   Available for sale   $ 17,287     $ 17,270     $ 17     $ -     $ 17   Held to maturity     6,430       6,430       -       -       -     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.     Note 4 : Related Party Transactions In the ordinary course of business, the Company, through its banking subsidiary, has granted loans to related parties, including executive officers and directors of NBI and its subsidiaries. Total funded credit extended to related parties amounted to $ 15,519 at December 31, 2020 and $ 15,118 at December 31, 2019. 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.     Note 5: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans The allowance for loan losses methodology incorporates individual evaluation of impaired loans and collective evaluation of groups of non-impaired loans. 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.   67 Table of Contents   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. Impaired loans that are not TDRs and for which fair value measurement indicates an impairment loss are designated nonaccrual. A restructured loan that maintains current status for at least six months may be in accrual status. Please refer to Note 1: Summary of Significant Accounting Policies for additional information on evaluation of impaired loans and associated specific reserves, and policies regarding nonaccruals, past due status and charge-offs. TDRs impact the estimation of the appropriate level of the allowance for loan losses. 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 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. TDRs, as well as all impaired loans, that are determined to be collateral dependent are charged down to fair value. Deficiencies indicated by impairment measurements for TDRs that are not collateral dependent may be accrued in the allowance for loan losses or charged off if deemed uncollectible.   Collectively Evaluated Loans 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.   Portfolio Segments and Classes The segments and classes used in determining the allowance for loan losses are as follows.   Real Estate Construction Commercial Non-Real Estate   Construction, residential Commercial and Industrial   Construction, other       Public Sector and IDA   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. Class loss rates are calculated as the net charge-offs for the class as a percentage of average class balance. The Company averages loss rates for the most recent eight quarters to determine the historical loss rate for each class. 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. 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. Class historical loss rates are applied to non-classified loan balances at the reporting date, and classified historical loss rates are applied to classified balances at the reporting date.   Risk Factors 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. 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, 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.   68 Table of Contents   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. 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: Summary of Significant Accounting Policies for a discussion of risk factors pertinent to each class. 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. These risks are measured by market-area unemployment rates, bankruptcy rates, building market trends, and interest rates. 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, local housing market trends, and interest rates. 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. 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 and interest rate trends that would impact the businesses housed by the commercial real estate. Commercial non-real estate loans are secured by collateral other than real estate, or are unsecured. Credit risk for commercial non-real estate loans is subject to economic conditions, generally monitored by local business bankruptcy trends, and interest rates. 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. High risk loans include junior liens, interest only and high loan to value loans.   A detailed analysis showing the allowance roll-forward by portfolio segment and related loan balance by segment follows:       Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2020       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non-Real Estate     Public Sector and IDA     Consumer Non - Real Estate     Unallocated     Total   Balance, December 31, 2019   $ 400     $ 1,895     $ 2,559     $ 555     $ 478     $ 650     $ 326     $ 6,863   Charge-offs     -       ( 85 )     ( 15 )     ( 372 )     -       ( 248 )     -       ( 720 ) Recoveries     -       18       145       9       -       175       -       347   Provision for (recovery of) loan losses     103       337       1,164       478       ( 139 )     ( 22 )     70       1,991   Balance, December 31, 2020   $ 503     $ 2,165     $ 3,853     $ 670     $ 339     $ 555     $ 396     $ 8,481         Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 201 9       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non-Real Estate     Public Sector and IDA     Consumer Non - Real Estate     Unallocated     Total   Balance, December 31, 2018   $ 398     $ 2,049     $ 2,798     $ 602     $ 583     $ 750     $ 210     $ 7,390   Charge-offs     -       ( 192 )     ( 150 )     ( 47 )     -       ( 531 )     -       ( 920 ) Recoveries     -       -       49       1       -       217       -       267   Provision for (recovery of) loan losses     2       38       ( 138 )     ( 1 )     ( 105 )     214       116       126   Balance, December 31, 2019   $ 400     $ 1,895     $ 2,559     $ 555     $ 478     $ 650     $ 326     $ 6,863     69 Table of Contents       Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2018       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non - Real Estate     Public Sector and IDA     Consumer Non - Real Estate     Unallocated     Total   Balance, December 31, 2017   $ 337     $ 2,027     $ 3,044     $ 1,072     $ 419     $ 707     $ 319     $ 7,925   Charge-offs     -       ( 38 )     -       ( 107 )     -       ( 544 )     -       ( 689 ) Recoveries     -       3       49       22       -       161       -       235   Provision for (recovery of) loan losses     61       57       ( 295 )     ( 385 )     164       426       ( 109 )     ( 81 ) Balance, December 31, 2018   $ 398     $ 2,049     $ 2,798     $ 602     $ 583     $ 750     $ 210     $ 7,390         Allowance for Loan Losses by Segment and Evaluation Method as of       December 31, 2020       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non - Real Estate     Public Sector and IDA     Consumer Non - Real Estate     Unallocated     Total   Individually evaluated for impairment   $ -     $ 2     $ -     $ 73     $ -     $ -     $ -     $ 75   Collectively evaluated loans     503       2,163       3,853       597       339       555       396       8,406   Total   $ 503     $ 2,165     $ 3,853     $ 670     $ 339     $ 555     $ 396     $ 8,481         Loans by Segment and Evaluation Method as of       December 31, 2020       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non - Real Estate     Public Sector and IDA     Consumer Non - Real Estate     Unallocated     Total   Individually evaluated for impairment   $ -     $ 194     $ 3,856     $ 851     $ -     $ 2     $ -     $ 4,903   Collectively evaluated loans     42,266       181,588       389,259       77,920       40,983       33,108       -       765,124   Total   $ 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       December 31, 201 9       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non - Real Estate     Public Sector and IDA     Consumer Non - Real Estate     Unallocated     Total   Individually evaluated for impairment   $ -     $ 2     $ -     $ 108     $ -     $ -     $ -     $ 110   Collectively evaluated loans     400       1,893       2,559       447       478       650       326       6,753   Total   $ 400     $ 1,895     $ 2,559     $ 555     $ 478     $ 650     $ 326     $ 6,863     70 Table of Contents       Loans by Segment and Evaluation Method as of       December 31, 201 9       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non - Real Estate     Public Sector and IDA     Consumer Non - Real Estate     Unallocated     Total   Individually evaluated for impairment   $ -     $ 759     $ 3,608     $ 918     $ -     $ 4     $ -     $ 5,289   Collectively evaluated loans     42,303       180,713       361,765       45,658       63,764       34,535       -       728,738   Total   $ 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:       December 31,       2020     2019   Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees and costs (1)     1.10 %     0.94 % Ratio of net charge-offs to average loans, net of unearned income and deferred fees and costs     0.05 %     0.09 %   ( 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:       December 31,       2020     2019   Nonperforming assets:                 Nonaccrual loans   $ 846     $ 164   Restructured loans in nonaccrual     2,839       3,211   Total nonperforming loans     3,685       3,375   Other real estate owned, net     1,553       1,612   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     0.68 %     0.68 % Ratio of allowance for loan losses to nonperforming loans (1)     230.15 %     203.35 %     ( 1 ) The Company defines nonperforming loans as total nonaccrual and restructured loans that are nonaccrual. Loans 90 days past due and still accruing and accruing restructured loans are excluded.   71 Table of Contents   A summary of loans past due 90 days or more and impaired loans, as of the dates indicated, follows:       December 31,       2020     2019   Loans past due 90 days or more and still accruing   $ 17     $ 231   Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees and costs     0.00 %     0.03 % 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     1,045       1,115   Total impaired loans   $ 4,903     $ 5,289   Valuation allowance   $ ( 75 )   $ ( 110 ) 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   $ 54     $ 171   Amount of income recognized on a cash basis   $ -     $ -       ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   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       Principal Balance     (A) Total Recorded Investment (1)     Recorded Investment (1) in (A) for Which There is No Related Allowance     Recorded Investment (1) in (A) for Which There is a Related Allowance     Related Allowance   Consumer Real Estate (2)                                         Investor-owned residential real estate   $ 194     $ 194     $ -     $ 194     $ 2   Commercial Real Estate (2)                                         Commercial real estate, owner occupied     3,752       3,202       3,202       -       -   Commercial real estate, other     654       654       654       -       -   Commercial Non - Real Estate (2)                                         Commercial and Industrial     851       851       -       851       73   Consumer Non - Real Estate (2)                                         Automobile     2       2       2       -       -   Total   $ 5,453     $ 4,903     $ 3,858     $ 1,045     $ 75       ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   ( 2 ) Only classes with impaired loans are shown.   72 Table of Contents       Impaired Loans as of December 31, 2019       Principal Balance     (A) Total Recorded Investment (1)     Recorded Investment (1) in (A) for Which There is No Related Allowance     Recorded Investment (1) in (A) for Which There is a Related Allowance     Related Allowance   Consumer Real Estate (2)                                         Residential equity lines   $ 100     $ 100     $ 100     $ -     $ -   Residential closed-end first liens     221       221       221       -       -   Investor-owned residential real estate     441       438       241       197       2   Commercial Real Estate (2)                                         Multifamily real estate     278       278       278       -       -   Commercial real estate, owner occupied     929       895       895       -       -   Commercial real estate, other     2,867       2,435       2,435       -       -   Commercial Non - Real Estate (2)                                         Commercial and Industrial     917       918       -       918       108   Consumer Non - Real Estate (2)                                         Automobile     4       4       4       -       -   Total   $ 5,757     $ 5,289     $ 4,174     $ 1,115     $ 110       ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   ( 2 ) Only classes with impaired loans are shown.       Average Investment and Interest Income for Impaired Loans For the Year Ended December 31, 2020       Average Recorded Investment (1)     Interest Income Recognized   Consumer Real Estate (2)                 Investor-owned residential real estate   $ 196     $ 13   Commercial Real Estate (2)                 Commercial real estate, owner occupied     3,217       19   Commercial real estate, other     790       -   Commercial Non -Real Estate (2)                 Commercial and Industrial     887       22   Consumer Non -Real Estate (2)                 Automobile     3       -   Total   $ 5,093     $ 54       ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   ( 2 ) Only classes with impaired loans are shown.   73 Table of Contents       Average Investment and Interest Income for Impaired Loans For the Year Ended December 31, 2019       Average Recorded Investment (1)     Interest Income Recognized   Consumer Real Estate (2)                 Residential equity lines   $ 98     $ 6   Residential closed-end first liens     225       11   Investor-owned residential real estate     439       17   Commercial Real Estate (2)                 Multifamily real estate     284       12   Commercial real estate, owner occupied     913       41   Commercial real estate, other     2,435       59   Commercial Non -Real Estate (2)                 Commercial and Industrial     962       25   Consumer Non -Real Estate (2)                 Automobile     3       -   Total   $ 5,359     $ 171       ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   ( 2 ) Only classes with impaired loans are shown.       Average Investment and Interest Income for Impaired Loans For the Year Ended December 31, 2018       Average Recorded Investment (1)     Interest Income Recognized   Consumer Real Estate (2)                 Residential closed-end first liens   $ 1,202     $ 41   Residential closed-end junior liens     159       9   Investor-owned residential real estate     808       23   Commercial Real Estate (2)                 Multifamily real estate     491       20   Commercial real estate, owner occupied     3,038       75   Commercial real estate, other     2,744       54   Commercial Non - Real Estate (2)                 Commercial and Industrial     1,326       27   Consumer Non -Real Estate (2)                 Automobile     20       1   Total   $ 9,788     $ 250       ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   ( 2 ) Only classes with impaired loans are shown.   74 Table of Contents   An analysis of past due and nonaccrual loans, as of the dates indicated, follows:   December 31, 2020                                     30 – 89 Days Past Due     90 or More Days Past Due     90 or More Days Past Due and Still Accruing     Nonaccruals (Including Impaired Nonaccruals)   Consumer Real Estate (1)                                 Residential closed-end first liens   $ 365     $ 62     $ -     $ 62   Investor-owned residential real estate     106       -       -       -   Commercial Real Estate (1)                                 Commercial real estate, owner occupied     15       571       -       2,941   Commercial real estate, other     -       654       -       654   Commercial Non - Real Estate (1)                                 Commercial and Industrial     730       27       -       28   Consumer Non - Real Estate (1)                                 Credit cards     7       3       3       -   Automobile     144       1       1       -   Other consumer loans     130       13       13       -   Total   $ 1,497     $ 1,331     $ 17     $ 3,685     December 31, 2019                                     30 – 89 Days Past Due     90 or More Days Past Due     90 or More Days Past Due and Still Accruing     Nonaccruals (Including Impaired Nonaccruals)   Real Estate Construction (1)                                 Construction, other   $ 19     $ -     $ -     $ -   Consumer Real Estate (1)                                 Residential closed-end first liens     499       210       188       22   Residential closed-end junior liens     83       -       -       -   Investor-owned residential real estate     -       264       -       264   Commercial Real Estate (1)                                 Multifamily real estate     94       -       -       -   Commercial real estate, owner occupied     -       287       -       514   Commercial real estate, other     -       -       -       2,435   Commercial Non - Real Estate (1)                                 Commercial and Industrial     45       153       17       136   Consumer Non - Real Estate (1)                                 Credit cards     4       -       -       -   Automobile     256       14       14       4   Other consumer loans     70       12       12       -   Total   $ 1,070     $ 940     $ 231     $ 3,375       ( 1 ) Only classes with past due or nonaccrual loans are presented   The estimate of credit risk for non-impaired loans is obtained by applying allocations for internal and external factors. 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. Determination of risk grades was completed for the portfolio as of December 31, 2020 and 2019.   75 Table of Contents   The following displays non-impaired gross loans by credit quality indicator as of the dates indicated:   December 31, 2020                       Pass     Special Mention (Excluding Impaired)       Classified (Excluding Impaired)   Real Estate Construction                         Construction, 1-4 family residential   $ 8,195     $ -     $ -   Construction, other     34,071       -       -   Consumer Real Estate                         Equity lines     13,903       -       -   Closed-end first liens     92,241       66       284   Closed-end junior liens     3,003       -       -   Investor-owned residential real estate     71,450       641       -   Commercial Real Estate                         Multifamily residential real estate     87,455       265       -   Commercial real estate owner-occupied     146,900       543       140   Commercial real estate, other     147,436       6,520       -   Commercial Non - Real Estate                         Commercial and Industrial     77,892       -       28   Public Sector and IDA                         States and political subdivisions     40,983       -       -   Consumer Non - Real Estate                         Credit cards     4,665       -       -   Automobile     12,024       -       6   Other consumer     16,398       -       15   Total   $ 756,616     $ 8,035     $ 473     76 Table of Contents   December 31, 201 9                             Pass     Special Mention (Excluding Impaired)       Classified (Excluding Impaired)   Real Estate Construction                         Construction, 1-4 family residential   $ 7,590     $ -     $ -   Construction, other     34,713       -       -   Consumer Real Estate                         Equity lines     16,435       -       -   Closed-end first liens     94,814       -       517   Closed-end junior liens     3,861       -       -   Investor-owned residential real estate     65,063       -       23   Commercial Real Estate                         Multifamily residential real estate     87,934       -       94   Commercial real estate owner-occupied     127,937       -       164   Commercial real estate, other     145,636       -       -   Commercial Non - Real Estate                         Commercial and Industrial     45,387       135       136   Public Sector and IDA                         States and political subdivisions     63,764       -       -   Consumer Non - Real Estate                         Credit cards     5,703       -       -   Automobile     14,810       -       19   Other consumer     13,995       -       8   Total   $ 727,642     $ 135     $ 961       Sales, Purchases and Reclassification of Loans The Company finances mortgages under “best efforts” contracts with mortgage purchasers. The mortgages are designated as held for sale upon initiation. There have been no major reclassifications from portfolio loans to held for sale. 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.   Troubled Debt Restructurings 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.   Note: Only classes with restructured loans are presented.       Restructurings that occurred during the year ended December 31, 201 9       Number of Contracts     Pre- Modification Outstanding Recorded Investment     Post- Modification Outstanding Recorded Investment (1)   Consumer Real Estate                         Equity lines     1     $ 100     $ 100   Total     1     $ 100     $ 100       ( 1 ) Post-modification outstanding recorded investment considers amounts immediately following the modification. Amounts do not reflect balances at the end of the period.   77 Table of Contents   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. The Company allowed the borrower to maintain full funding for more than a year, and extended the maturity date. The impairment analysis was based upon the fair value of collateral and did not result in a specific allocation.       Restructurings that occurred during the year ended December 31, 2018       Number of Contracts     Pre- Modification Outstanding Recorded Investment     Post- Modification Outstanding Recorded Investment (1)   Construction Real Estate                         Construction, other     2     $ 2,882     $ 2,882   Commercial Real Estate                         Commercial real estate, owner occupied     2       715       715   Consumer Real Estate                         Closed-end first liens     1       22       22   Investor-owned residential real estate     8       594       594   Total     13     $ 4,213     $ 4,213       ( 1 ) 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 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.   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 impairment measurements were based on the fair value of collateral and did not result in specific allocations. The other investor owned residential real estate restructure consolidated debt at a longer term, provided a rate reduction and capitalized interest. 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 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.   78 Table of Contents     Note 6: Premises and Equipment A summary of the cost and accumulated depreciation of premises and equipment as of the dates indicated, follows:       December 31,       2020     2019   Premises   $ 14,809     $ 13,331   Furniture and equipment     6,620       6,300   Premises and equipment   $ 21,429     $ 19,631   Accumulated depreciation     ( 11,394 )     ( 10,712 ) Premises and equipment, net   $ 10,035     $ 8,919     Depreciation expense for the years ended December 2020, 2019 and 2018 amounted to $ 708 , $ 739 and $ 766 , respectively.     Note 7 : Deposits 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. At December 31, 2020 the scheduled maturities of time deposits are as follows:   2021   $ 64,320   2022     18,905   2023     2,990   2024     274   2025     3,093   Thereafter     -   Total time deposits   $ 89,582     At December 31, 2020 and 2019, overdraft demand deposits reclassified to loans totaled $ 39 and $ 276 , respectively.     Note 8 : Employee Benefit Plans 401 (k) Plan 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. Contributions to the ESOP, which are not mandatory, are determined annually by the NBI Board of Directors. 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. The ESOP contains a put option which allows a withdrawing participant to require the Company or the ESOP, if the plan administrator agrees, to purchase his or her allocated shares if the shares are not readily tradable on an established market at the time of distribution.   Salary Continuation Plan 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. The plan is unfunded. However bank-owned life insurance has been acquired on the life of the key employees in amounts sufficient to discharge the obligations of the agreement.   79 Table of Contents   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. Information pertaining to activity in the plan during the years indicated, is as follows:       December 31,       2020     2019     2018   Change in benefit obligation                         Projected benefit obligation at beginning of year   $ 29,641     $ 23,688     $ 23,492   Service cost (1)     1,080       801       868   Interest cost     820       884       802   Actuarial loss (gain)     4,621       5,162       ( 423 ) Benefits paid     ( 1,310 )     ( 894 )     ( 1,051 ) 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     3,718       4,115       ( 591 ) Employer contribution     5,000       -       -   Benefits paid     ( 1,310 )     ( 894 )     ( 1,051 ) Fair value of plan assets at end of year   $ 32,415     $ 25,007     $ 21,786                             Funded status at the end of the year   $ ( 2,437 )   $ ( 4,634 )   $ ( 1,902 )                           Amounts recognized in the Consolidated Balance Sheet                         Deferred tax asset   $ 512     $ 973     $ 399   Other liabilities     ( 2,437 )     ( 4,634 )     ( 1,902 ) Total amounts recognized in the Consolidated Balance Sheet   $ ( 1,925 )   $ ( 3,661 )   $ ( 1,503 )                           Amounts recognized in accumulated other comprehensive (loss), net                         Net loss   $ ( 12,855 )   $ ( 10,983 )   $ ( 9,107 ) Prior service cost     11       120       230   Deferred tax asset     2,697       2,281       1,864   Amount recognized   $ ( 10,147 )   $ ( 8,582 )   $ ( 7,013 )                           Accrued/Prepaid benefit c ost, net                         Benefit obligation   $ ( 34,852 )   $ ( 29,641 )   $ ( 23,688 ) Fair value of assets     32,415       25,007       21,789   Unrecognized net actuarial loss     12,855       10,983       9,107   Unrecognized prior service cost     ( 11 )     ( 120 )     ( 230 ) Deferred tax liability     ( 2,185 )     ( 1,308 )     ( 1,465 ) Prepaid benefit cost included in other assets   $ 8,222     $ 4,921     $ 5,510   (continued)   80 Table of Contents     Components of net periodic benefit cost                         Service cost   $ 1,080     $ 801     $ 868   Interest cost     820       884       802   Expected return on plan assets     ( 1,679 )     ( 1,461 )     ( 1,601 ) Amortization of prior service cost     ( 110 )     ( 110 )     ( 110 ) Recognized net actuarial loss     710       632       585   Net periodic benefit cost   $ 821     $ 746     $ 544                             Other changes in plan assets and benefit obligations recognized in other comprehensive income                         Net loss   $ 1,871     $ 1,876     $ 1,184   Amortization of prior service cost     110       110       110   Deferred income tax benefit     ( 416 )     ( 417 )     ( 272 ) Total recognized   $ 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                         Discount rate used for net periodic pension cost     3.00 %     4.00 %     3.50 % Discount rate used for disclosure     2.25 %     3.00 %     4.00 % Expected return on plan assets     7.50 %     7.50 %     7.50 % Rate of compensation increase     3.00 %     3.00 %     3.00 %     ( 1 ) Cost is included in Salaries and Employee Benefits expense.   Long Term Rate of Return The Company, as plan sponsor, selects the expected long term rate-of-return-on-assets assumption in consultation with its investment advisors and actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience, which may not continue over the measurement period, but higher significance is placed on current forecasts of future long term economic conditions. Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, and solely for this purpose, the plan is assumed to continue in force and not terminate during the period during which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost). The Company, as plan sponsor, has adopted a Pension Administrative Committee Policy (the "Policy") for monitoring the investment management of its qualified plans. The Policy includes a statement of general investment principles and a listing of specific investment guidelines, to which the committee may make documented exceptions. The guidelines state that, unless otherwise indicated, all investments that are permitted under the prudent investor rule shall be permissible investments for the defined benefit pension plan. All plan assets are to be invested in marketable securities. Certain investments are prohibited, including commodities and future contracts, private placements, repurchase agreements, options and derivatives. The Policy establishes quality standards for fixed income investments and mutual funds included in the pension plan trust. The Policy also outlines diversification standards. The preferred target allocation for the assets of the defined benefit pension plan is 65 % in equity securities and 35 % in fixed income securities. Equity securities include investments in large-cap and mid-cap companies primarily located in the United States, although a small number of international large-cap companies are included. There are also investments in mutual funds holding the equities of large-cap and mid-cap U.S. companies. Fixed income securities include U.S. government agency securities and corporate bonds from companies representing diversified industries. There are no investments in hedge funds, private equity funds or real estate.   81 Table of Contents   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   Asset Category   Total     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Cash   $ 4,336     $ 4,336     $ -     $ -   Equity securities:                                 U. S. companies     15,129       15,129       -       -   International companies     2,735       2,735       -       -   Equities mutual funds (1)     3,840       3,840       -       -   State and political subdivisions     152       -       152       -   Corporate bonds – investment grade (2)     6,223       -       6,223       -   Total pension plan assets   $ 32,415     $ 26,040     $ 6,375     $ -       ( 1 ) This category comprises actively managed equity funds invested in large-cap and mid-cap U.S. companies.   ( 2 ) This category represents investment grade bonds of U.S. issuers from diverse industries.         Fair Value Measurements at December 31, 201 9   Asset Category   Total     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Cash   $ 4,350     $ 4,350     $ -     $ -   Equity securities:                                 U. S. companies     11,098       11,098       -       -   International companies     2,334       2,334       -       -   Equities mutual funds (1)     1,343       1,343       -       -   State and political subdivisions     202       -       202       -   Corporate bonds – investment grade (2)     5,680       -       5,680       -   Total pension plan assets   $ 25,007     $ 19,125     $ 5,882     $ -       ( 1 ) This category comprises actively managed equity funds invested in large-cap and mid-cap U.S. companies.   ( 2 ) This category represents investment grade bonds of U.S. issuers from diverse industries.   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:   2021     $ 5,235   2022     $ 1,436   2023     $ 992   2024     $ 1,823   2025     $ 839   2026 - 2030     $ 10,725     82 Table of Contents     Note 9 : Income Taxes The Company files United States federal income tax returns, and Virginia, West Virginia and North Carolina state income tax returns. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2017. Allocation of income tax expense between current and deferred portions is as follows:       Years ended December 31,       2020     2019     2018   Current   $ 2,795     $ 2,682     $ 2,942   Deferred expense (benefit)     282       529       ( 382 ) Total income tax expense   $ 3,077     $ 3,211     $ 2,560     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,       2020     2019     2018   Computed “expected” income tax expense   $ 4,021     $ 4,342     $ 3,929   Tax-exempt interest income     ( 798 )     ( 1,019 )     ( 1,255 ) Nondeductible interest expense     62       96       69   Other, net     ( 208 )     ( 208 )     ( 183 ) Reported income tax expense   $ 3,077     $ 3,211     $ 2,560     The components of net deferred tax assets, included in other assets, are as follows:       December 31,       2020     2019   Deferred tax assets:                 Allowance for loan losses and unearned fee income   $ 1,938     $ 1,597   Valuation allowance on other real estate owned     188       186   Defined benefit plan     2,697       2,281   Deferred compensation and other liabilities     866       848   Lease accounting     423       480   SBA fees     191       -   Total deferred tax assets   $ 6,303     $ 5,392                     Deferred tax liabilities:                 Fixed assets   $ ( 424 )   $ ( 438 ) Goodwill and deposit intangibles     ( 1,228 )     ( 1,228 ) Defined benefit plan, prepaid portion     ( 2,186 )     ( 1,308 ) Net unrealized gain on securities available for sale     ( 3,500 )     ( 20 ) Lease accounting     ( 419 )     ( 478 ) Discount accretion of securities     ( 15 )     ( 43 ) Total deferred tax liabilities     ( 7,772 )     ( 3,515 ) Net deferred tax assets (liabilities)   $ ( 1,469 )   $ 1,877     The Company determined that a valuation allowance for the gross deferred tax assets is unnecessary at December 31, 2020 or 2019.     Note 1 0 : 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. 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.   83 Table of Contents     Note 1 1 : Minimum Regulatory Capital Requirement 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. 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 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 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. Once made, the election is final and cannot be changed. NBB elected to exclude components of accumulated other comprehensive income from CET1 capital. Tier 1 Capital includes CET1 capital and additional Tier 1 capital components. At December 31, 2020 and 2019, NBB did not hold any additional Tier 1 capital beyond CET1 capital. Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes the allowance for loan losses. 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. As of December 31, 2020, the most recent notifications from the Office of the Comptroller of the Currency categorized NBB as well capitalized under the regulatory framework for prompt corrective action. 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, 2020 and 2019 are presented in the following tables.       Actual     Minimum Capital Requirement (1)     Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions       Amount     Ratio     Amount     Ratio     Amount     Ratio   December 31, 2020                                                 Total capital (to risk weighted assets)   $ 185,937       19.943 %   $ 97,898       10.500 %   $ 93,236       10.000 % Tier 1 capital (to risk weighted assets)   $ 177,409       19.028 %   $ 79,251       8.500 %   $ 74,589       8.000 % Common Equity Tier 1 capital (to risk weighted assets)   $ 177,409       19.028 %   $ 65,265       7.000 %   $ 60,604       6.500 % Tier 1 capital (to average assets)   $ 177,409       12.105 %   $ 58,624       4.000 %   $ 73,281       5.000 %       Actual     Minimum Capital Requirement (1)     Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions       Amount     Ratio     Amount     Ratio     Amount     Ratio   December 31, 201 9                                                 Total capital (to risk weighted assets)   $ 188,946       23.128 %   $ 85,781       10.500 %   $ 81,696       10.000 % Tier 1 capital (to risk weighted assets)   $ 182,044       22.283 %   $ 69,442       8.500 %   $ 65,357       8.000 % Common Equity Tier 1 capital (to risk weighted assets)   $ 182,044       22.283 %   $ 57,187       7.000 %   $ 53,103       6.500 % Tier 1 capital (to average assets)   $ 182,044       14.175 %   $ 51,371       4.000 %   $ 64,213       5.000 %     ( 1 ) 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.   84 Table of Contents     Note 1 2 : Condensed Financial Statements of Parent Company Financial information pertaining only to NBI (Parent) as of the dates indicated, is as follows:   Condensed Balance Sheets   December 31,       2020     2019   Assets                 Cash due from subsidiaries   $ 987     $ 57   Interest-bearing deposits     10,027       623   Investments in subsidiaries     189,667       183,056   Refundable income taxes     446       423   Other assets     791       880   Total assets   $ 201,918     $ 185,039                     Liabilities and Stockholders’ Equity                 Other liabilities   $ 1,311     $ 1,313   Stockholders’ equity     200,607       183,726   Total liabilities and stockholders’ equity   $ 201,918     $ 185,039     Condensed Statements of Income   Years Ended December 31,       2020     2019     2018   Income                         Dividends from subsidiaries   $ 22,000     $ 28,556     $ 9,419   Other income     4       18       10   Total income     22,004       28,574       9,429   Expenses                         Other expenses     1,179       1,025       1,244   Income before income tax benefit and equity in undistributed net income of subsidiaries     20,825       27,549       8,185   Applicable income tax benefit     301       266       308   Income before equity in undistributed net income of subsidiaries     21,126       27,815       8,493   Equity (deficit) in undistributed net income of subsidiaries     ( 5,049 )     ( 10,349 )     7,658   Net income   $ 16,077     $ 17,466     $ 16,151       85 Table of Contents   Condensed Statements of Cash Flows   Years ended December 31,       2020     2019     2018   Cash Flows f rom Operating Expenses                         Net income   $ 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     5,049       10,349       ( 7,658 ) Net change in refundable income taxes due from subsidiaries     ( 23 )     ( 27 )     ( 228 ) Net change in other assets     ( 45 )     ( 173 )     ( 109 ) Net change in other liabilities     ( 2 )     221       115   Net cash provided by operating activities     21,056       27,836       8,271                             Cash Flows from Investing Activities                         Net change in interest-bearing deposits     ( 9,404 )     ( 266 )     146   Net cash (used in) provided by investing activities     ( 9,404 )     ( 266 )     146                             Cash Flows from Financing Activities                         Cash dividends paid     ( 9,000 )     ( 9,032 )     ( 8,419 ) Repurchase of shares     ( 1,722 )     ( 18,525 )     -   Net cash used in financing activities     ( 10,722 )     ( 27,557 )     ( 8,419 ) Net change in cash     930       13       ( 2 ) Cash due from subsidiaries at beginning of year     57       44       46   Cash due from subsidiaries at end of year   $ 987     $ 57     $ 44       Not e 1 3 : Financial Instruments with Off-Balance Sheet Risk The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and interest rate locks. 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. The Company may require collateral or other security to support the following financial instruments with credit risk. At December 31, 2020 and 2019, financial instruments outstanding whose contract amounts represent credit risk were:       December 31,       2020     2019   Financial instruments whose contract amounts represent credit risk:                 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. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. 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. Some of these commitments are uncollateralized and do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.   86 Table of Contents   The Company originates mortgage loans for sale to secondary market investors subject to contractually specified and limited recourse provisions. In 2020, the Company originated $ 39,647 and sold $ 40,362 of mortgage loans to investors, compared to $ 21,032 originated and $ 20,496 of mortgage loans sold in 2019. Every contract with each investor contains certain recourse language. In general, the Company may be required to repurchase a previously sold mortgage loan if there is major noncompliance with defined loan origination or documentation standards, including fraud, negligence or material misstatement in the loan documents. Repurchase may also be required if necessary governmental loan guarantees are canceled or never issued, or if an investor is forced to buy back a loan after it has been resold as a part of a loan pool. 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 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 . Risks arise from the possible inability of counterparties to meet the terms of their contracts. The Company does not expect any counterparty to fail to meet its obligations. The Company maintains cash accounts in other commercial banks. The Company had $ 18 in deposits with correspondent institutions at December 31, 2020 that were not insured by the Federal Deposit Insurance Corporation.     Note 1 4 : 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, 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. Management considers the concentration of credit risk to be minimal.     Note 1 5 : Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of the observable inputs and minimize the use of the unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:   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, 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.         87 Table of Contents   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 Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1 ). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. 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 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:               Fair Value Measurements at December 31, 2020 Using   Description   Balance as of December 31, 2020     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   U.S. Government agencies and corporations   $ 91,163     $ -     $ 91,163     $ -   States and political subdivisions     203,961       -       203,961       -   Mortgage-backed securities     249,175       -       249,175       -   Corporate debt securities     2,443       -       2,443       -   Total securities available for sale   $ 546,742     $ -     $ 546,742     $ -                 Fair Value Measurements at December 31, 2019 Using   Description   Balance as of December 31, 2019     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   U.S. Government agencies and corporations   $ 121,123     $ -     $ 121,123     $ -   States and political subdivisions     88,239       -       88,239       -   Mortgage-backed securities     221,783       -       221,783       -   Corporate debt securities     4,118       -       4,118       -   Total securities available for sale   $ 435,263     $ -     $ 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.   88 Table of Contents   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   Description   Balance as of December 31, 2020     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Interest rate loan contracts   $ 1     $ -     $ -     $ 1   Forward contracts   $ ( 11 )   $ -     $ -     $ ( 11 )               Fair Value Measurements at December 31, 2019 Using   Description   Balance as of December 31, 2019     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)   Interest rate loan contracts   $ 1     $ -     $ -     $ 1   Forward contracts   $ ( 4 )   $ -     $ -     $ ( 4 )   December 31, 2020   Valuation Technique   Unobservable Input   Range (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)       ( 1 ) Current reference prices were weighted by the relative amount of the loan   December 31, 2019   Valuation Technique   Unobservable Input   Range (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)       ( 1 ) All contracts are valued using the same pull-through rate   ( 2 ) 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 consolidated financial statements:   Loans H eld for S ale Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of one -to- four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2 ). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the years ended December 31, 2020 and 2019.       89 Table of Contents   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 due will not be collected according to the contractual terms of the loan agreement. TDRs are impaired loans. 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. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The fair value of an impaired loan and measurement of associated loss is based on one of three methods: the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral. 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. Loans measured using the fair value of collateral method may be categorized in Level 2 or Level 3. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Most collateral is real estate. The Company bases collateral method fair valuation upon the “as-is” value of independent appraisals or evaluations. Valuations for impaired loans secured by residential 1 - 4 family properties with outstanding principal balances greater than $250 are based on an appraisal. Appraisals are also used to value impaired loans secured by commercial real estate with outstanding principal balances greater than $500. Collateral-method impaired loans secured by residential 1 - 4 family property with outstanding principal balances of $250 or less, or secured by commercial real estate with outstanding principal balances of $500 or less, are valued using an internal evaluation. The value of real estate collateral is determined by a current (less than 24 months of age) appraisal or internal evaluation utilizing an income or market valuation approach. Appraisals conducted by an independent, licensed appraiser outside of the Company using observable market data is categorized as Level 2. If a current appraisal cannot be obtained prior to a reporting date and an existing appraisal is discounted to obtain an estimated value, or if declines in value are identified after the date of the appraisal, or if an appraisal is discounted for estimated selling costs, the valuation of real estate collateral is categorized as Level 3. 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. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3 ). 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   Date Description   Balance     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)     Assets:                                 December 31, 2020 Impaired loans net of valuation allowance   $ 970     $ -     $ -     $ 970   December 31, 2019 Impaired loans net of valuation allowance     1,005       -       -       1,005     The following table presents information about Level 3 Fair Value Measurements for impaired loans as of the dates indicated.   Impaired Loans Valuation Technique Unobservable Input   Range (Weighted Average (1) )   December 31, 2020 Present value of cash flows Discount rate     5.50 % - 6.50 % ( 5.78 %)   December 31, 2019 Present value of cash flows Discount rate     5.50 % - 6.50 % ( 5.77 %)       ( 1 ) 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.   90 Table of Contents   Other Real Estate Owned Certain assets such as OREO are measured at fair value less cost to sell. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. 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   Date Description   Balance     Quoted Prices in Active Markets for Identical Assets (Level 1)     Significant Other Observable Inputs (Level 2)     Significant Unobservable Inputs (Level 3)     Assets:                                 December 31, 2020 Other real estate owned net of valuation allowance   $ 1,553     $ -     $ -     $ 1,553   December 31, 2019 Other real estate owned net of valuation allowance     1,612       -       -       1,612     The following table presents information about Level 3 Fair Value Measurements as of the dates indicated.     Valuation Technique Unobservable Input   Range (Weighted Average (1) )           December 31,           2020   201 9   Other real estate owned Discounted appraised value Selling cost     4.00% (2) – 9.23 % ( 4.54 %)     0.00% (2) – 6.00 % ( 0.68 %)   Other real estate owned Discounted appraised value Discount for lack of marketability and age of appraisal     0.00 % - 7.66 % ( 0.62 %)     0.00 % - 45.17 % ( 1.28 %)       ( 1 ) Discounts were weighted by the relative appraised value of the OREO properties.   ( 2 ) 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.   91 Table of Contents   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. For non-marketable equity securities such as FHLB and Federal Reserve Bank of Richmond stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution. 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 using the exit price notion.       December 31, 2020               Estimated Fair Value       Carrying Amount     Level 1     Level 2     Level 3   Financial assets:                                 Cash and due from banks   $ 13,147     $ 13,147     $ -     $ -   Interest-bearing deposits     120,725       120,725       -       -   Securities     546,742       -       546,742       -   Restricted securities     1,279       -       1,279       -   Mortgage loans held for sale     866       -       866       -   Loans, net     760,318       -       -       752,624   Accrued interest receivable     5,028       -       5,028       -   Bank-owned life insurance     36,444       -       36,444       -   Financial liabilities:                                 Deposits   $ 1,297,143     $ -     $ 1,207,561     $ 89,681   Accrued interest payable     56       -       56       -         December 31, 2019               Estimated Fair Value       Carrying Amount     Level 1     Level 2     Level 3   Financial assets:                                 Cash and due from banks   $ 10,290     $ 10,290     $ -     $ -   Interest-bearing deposits     76,881       76,881       -       -   Securities     435,263       -       435,263       -   Restricted securities     1,220       -       1,220       -   Mortgage loans held for sale     905       -       905       -   Loans, net     726,588       -       -       718,299   Accrued interest receivable     4,285       -       4,285       -   Bank-owned life insurance     35,567       -       35,567       -   Financial liabilities:                                 Deposits   $ 1,119,753     $ -     $ 991,725     $ 128,011   Accrued interest payable     144       -       144       -     92 Table of Contents     Note 1 6 : Components of Accumulated Other Comprehensive Income (Loss) The following table summarizes the activity related to each component of accumulated other comprehensive income (loss) for the years ended December 31, 2018, 2019 and 2020:       Net Unrealized Gain (Loss) on Securities     Adjustments Related to Pension Benefits     Accumulated Other Comprehensive Income (Loss)   Balance at December 31, 201 7   $ ( 3,704 )   $ ( 5,991 )   $ ( 9,695 ) Unrealized holding loss on available for sale securities net of tax of ($595)     ( 2,246 )     -       ( 2,246 ) Transfer from held to maturity to available for sale securities, net of tax of $ 237     891       -       891   Reclassification adjustment, net of tax of ($4)     ( 13 )     -       ( 13 ) Net pension loss, net of tax of ($249)     -       ( 936 )     ( 936 ) Less amortization of prior service cost included in net periodic pension cost, net of tax of ($24)     -       ( 86 )     ( 86 ) Balance at December 31, 201 8   $ ( 5,072 )   $ ( 7,013 )   $ ( 12,085 ) Unrealized holding gain on available for sale securities net of tax of $ 1,486     5,595       -       5,595   Reclassification adjustment, net of tax of ($119)     ( 447 )     -       ( 447 ) Net pension loss, net of tax of ($394)     -       ( 1,482 )     ( 1,482 ) Less amortization of prior service cost included in net periodic pension cost, net of tax of ($23)     -       ( 87 )     ( 87 ) Balance at December 31, 201 9   $ 76     $ ( 8,582 )   $ ( 8,506 ) Unrealized holding gain on available for sale securities net of tax of $ 3,502     13,176       -       13,176   Reclassification adjustment, net of tax of ($23)     ( 85 )     -       ( 85 ) Net pension loss, net of tax of ($393)     -       ( 1,478 )     ( 1,478 ) Less amortization of prior service cost included in net periodic pension cost, net of tax of ($23)     -       ( 87 )     ( 87 ) Balance at December 31, 2020   $ 13,167     $ ( 10,147 )   $ 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:       December 31,       2020     2019     2018   Component of Accumulated Other Comprehensive Income (Loss)                         Reclassification out of unrealized gains on available for sale securities:                         Realized securities gain, net   $ ( 108 )   $ ( 566 )   $ ( 17 ) Income tax benefit     ( 23 )     ( 119 )     ( 4 ) Realized gain on available for sale securities, net of tax, reclassified out of accumulated other comprehensive loss   $ ( 85 )   $ ( 447 )   $ ( 13 ) Amortization of defined benefit pension items:                         Prior service costs (1)   $ ( 110 )   $ ( 110 )   $ ( 110 ) Income tax benefit     ( 23 )     ( 23 )     ( 24 ) Amortization of defined benefit pension items, net of tax, reclassified out of accumulated other comprehensive loss   $ ( 87 )   $ ( 87 )   $ ( 86 )     ( 1 ) 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.)   93 Table of Contents     Note 1 7 . 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.         Note 18: Revenue Recognition 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. 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. 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 Other service charges include safety deposit box rental fees, check ordering charges, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. 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.   Credit and Debit Card Fees 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. 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. 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 Trust income is primarily comprised of fees earned from the management and administration of trusts and estates 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. The Company does not earn performance-based incentives. Estate management fees are based upon the size of the estate. A partial fee is recognized half-way through the estate administration and the remainder of the fee is recognized when remaining assets are distributed and the estate is closed.   Insurance and Investment 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. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue.   94 Table of Contents   Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined.   The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2020, 2019 and 2018.       December 31,       2020     2019     201 8   Noninterest Income                         In-scope of Topic 606:                         Service charges on deposit accounts   $ 1,966     $ 2,453     $ 2,678   Other service charges and fees     162       198       132   Credit and debit card fees     1,400       1,398       1,431   Trust income     1,662       1,622       1,565   Insurance and Investment (included within Other Income on the Consolidated Statements of Income)     464       483       460   Noninterest Income (in-scope of Topic 606)   $ 5,654     $ 6,154     $ 6,266   Noninterest Income (out-of-scope of Topic 606)     2,290       2,636       1,463   Total noninterest income   $ 7,944     $ 8,790     $ 7,729       Note 1 9 : Leases 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. 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. 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 Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred. Payments for leases with terms longer than 12 months are included in the determination of the lease liability. Payments may be fixed for the term of the lease or variable. If the lease agreement provides a known escalator, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability. 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 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 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.   95 Table of Contents         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)     6.81       6.90   Weighted average discount rate     3.04 %     3.02 %       For the Year s Ended December 31 ,       2020     2019   Lease Expense                 Operating lease expense   $ 368     $ 310   Short-term lease expense     2       114   Total lease expense   $ 370     $ 424                     Cash paid for amounts included in lease liabilities   $ 360     $ 414   Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period   $ 24     $ 1,837     The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability:   Undiscounted Cash Flow for the   As of December 31, 20 20   Twelve months ending December 31, 2021   $ 363   Twelve months ending December 31, 2022     352   Twelve months ending December 31, 2023     352   Twelve months ending December 31, 2024     334   Twelve months ending December 31, 2025     244   Thereafter     604   Total undiscounted cash flows   $ 2,249   Less: discount   $ ( 233 ) Lease liability   $ 2,016     The contracts in which the Company is lessee are with parties external to the company and not related parties. The Company has a small lease relationship with a director in which the Company is lessor.   96 Table of Contents         REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the Stockholders and the Board of Directors National Bankshares, Inc.  Blacksburg, Virginia   Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of National Bankshares, Inc. 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.   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 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 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. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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.   We have served as the Company's auditor since 2000.   Winchester, Virginia March 17, 2021   97 Table of Contents     Item 9 . Changes In and Disagreements With Accountants on Accounting and Financial Disclosure   None