NATIONAL BANKSHARES INC 10-Q

Item 1. Financial Statements Financial Information     National Bankshares, Inc.     Consolidated Balance Sheets                (Unaudited)             September 30,   December 31, (in thousands, except share and per share data)   2021   2020 Assets                 Cash and due from banks   $ 11,728     $ 13,147   Interest-bearing deposits     118,863       120,725   Securities available for sale, at fair value     641,486       546,742   Restricted stock, at cost     845       1,279   Loans held for sale     235       866   Loans:                 Loans, net of unearned income and deferred fees and costs     797,494       768,799   Less allowance for loan losses     ( 7,698 )     ( 8,481 ) Loans, net     789,796       760,318   Premises and equipment, net     9,823       10,035   Accrued interest receivable     5,161       5,028   Other real estate owned, net     957       1,553   Goodwill     5,848       5,848   Bank-owned life insurance     42,108       36,444   Other assets     17,181       17,688   Total assets   $ 1,644,031     $ 1,519,673                     Liabilities and Stockholders' Equity                 Noninterest-bearing demand deposits   $ 328,893     $ 276,793   Interest-bearing demand deposits     819,730       763,293   Savings deposits     201,656       167,475   Time deposits     82,455       89,582   Total deposits     1,432,734       1,297,143   Accrued interest payable     46       56   Other liabilities     20,398       21,867   Total liabilities     1,453,178       1,319,066   Commitments and contingencies                     Stockholders' Equity                 Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding     -       -   Common stock of $ 1.25 par value. Authorized 10,000,000 shares; issued and outstanding 6,096,958 at September 30, 2021 and 6,432,020 shares at December 31, 2020     7,621       8,040   Retained earnings     188,693       189,547   Accumulated other comprehensive income (loss), net     ( 5,461 )     3,020   Total stockholders' equity     190,853       200,607   Total liabilities and stockholders' equity   $ 1,644,031     $ 1,519,673     See accompanying notes to consolidated financial statements.   3 Table of Contents     National Bankshares, Inc. Consolidated Statements of Income Three Months Ended September 30, 2021 and 2020 (Unaudited)   (in thousands, except share and per share data)   September 30, 2021   September 30, 2020 Interest Income                 Interest and fees on loans   $ 9,088     $ 8,606   Interest on interest-bearing deposits     56       17   Interest on securities – taxable     2,043       1,572   Interest on securities – nontaxable     469       513   Total interest income     11,656       10,708                     Interest Expense                 Interest on time deposits     61       395   Interest on other deposits     658       1,025   Total interest expense     719       1,420   Net interest income     10,937       9,288   Provision for (recovery of) loan losses     ( 392 )     154   Net interest income after provision for (recovery of) loan losses     11,329       9,134                     Noninterest Income                 Service charges on deposit accounts     548       471   Other service charges and fees     50       37   Credit and debit card fees, net     460       339   Trust income     433       423   BOLI income     248       219   Gain on sale of mortgage loans     76       165   Other income     177       258   Realized securities gain, net     -       14   Total noninterest income     1,992       1,926                     Noninterest Expense                 Salaries and employee benefits     3,909       3,511   Occupancy, furniture and fixtures     447       452   Data processing and ATM     728       799   FDIC assessment     120       87   Net costs of other real estate owned     11       18   Franchise taxes     367       331   Other operating expenses     785       922   Total noninterest expense     6,367       6,120   Income before income taxes     6,954       4,940   Income tax expense     1,202       772   Net Income   $ 5,752     $ 4,168   Basic net income per common share   $ 0.94     $ 0.64   Fully diluted net income per common share   $ 0.94     $ 0.64   Weighted average number of common shares outstanding, basic and diluted     6,142,538       6,489,574   Dividends declared per common share     -       -     See accompanying notes to consolidated financial statements.   4 Table of Contents   National Bankshares, Inc. Consolidated Statements of Comprehensive Income Three Months Ended September 30, 2021 and 2020 (Unaudited)       September 30,   September 30, (in thousands)   2021   2020 Net Income   $ 5,752     $ 4,168                     Other Comprehensive Income (Loss), Net of Tax                 Unrealized holding gain (loss) on available for sale securities net of tax of ($ 905 ) and $ 601 for the periods ended September 30, 2021 and September 30, 2020, respectively     ( 3,403 )     2,256   Reclassification adjustment for gain included in net income, net of tax of ($ 3 ) for the period ended September 30, 2020     -       ( 11 ) Other comprehensive income (loss), net of tax     ( 3,403 )     2,245   Total Comprehensive Income   $ 2,349     $ 6,413     See accompanying notes to consolidated financial statements.   5 Table of Contents   National Bankshares, Inc. Consolidated Statements of Income Nine Months Ended September 30, 2021 and 2020 (Unaudited)   (in thousands, except share and per share data)   September 30, 2021   September 30, 2020 Interest Income                 Interest and fees on loans   $ 26,104     $ 25,491   Interest on interest-bearing deposits     123       248   Interest on securities – taxable     5,736       5,791   Interest on securities – nontaxable     1,472       1,316   Total interest income     33,435       32,846                     Interest Expense                 Interest on time deposits     223       1,476   Interest on other deposits     2,185       3,338   Total interest expense     2,408       4,814   Net interest income     31,027       28,032   Provision for (recovery of) loan losses     ( 338 )     1,985   Net interest income after provision for (recovery of) loan losses     31,365       26,047                     Noninterest Income                 Service charges on deposit accounts     1,488       1,430   Other service charges and fees     134       113   Credit and debit card fees, net     1,373       1,031   Trust income     1,282       1,244   BOLI income     664       659   Gain on sale of mortgage loans     287       416   Other income     1,034       817   Realized securities gain, net     5       96   Total noninterest income     6,267       5,806                     Noninterest Expense                 Salaries and employee benefits     11,767       10,882   Occupancy, furniture and fixtures     1,378       1,360   Data processing and ATM     2,292       2,396   FDIC assessment     296       127   Net costs of other real estate owned     49       36   Franchise taxes     1,059       1,009   Other operating expenses     2,509       2,854   Total noninterest expense     19,350       18,664   Income before income taxes     18,282       13,189   Income tax expense     3,151       2,060   Net Income   $ 15,131     $ 11,129   Basic net income per common share   $ 2.42     $ 1.71   Fully diluted net income per common share   $ 2.42     $ 1.71   Weighted average number of common shares outstanding, basic and diluted     6,253,796       6,489,574   Dividends declared per common share   $ 0.70     $ 0.67     See accompanying notes to consolidated financial statements.   6 Table of Contents   National Bankshares, Inc. Consolidated Statements of Comprehensive Income Nine Months Ended September 30, 2021 and 2020 (Unaudited)       September 30,   September 30, (in thousands)   2021   2020 Net Income   $ 15,131     $ 11,129                     Other Comprehensive Income (Loss), Net of Tax                 Unrealized holding gain (loss) on available for sale securities net of tax of ($ 2,254 ) and $ 3,127 for the periods ended September 30, 2021 and September 30, 2020, respectively     ( 8,477 )     11,763   Reclassification adjustment for gain included in net income, net of tax of ($ 1 ) and ($ 20 ), for the periods ended September 30, 2021 and September 30, 2020, respectively     ( 4 )     ( 76 ) Other comprehensive income (loss), net of tax     ( 8,481 )     11,687   Total Comprehensive Income   $ 6,650     $ 22,816     See accompanying notes to consolidated financial statements.   7 Table of Contents     National Bankshares, Inc. Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)   Three Months Ended September 30, 2021 and 2020   (in thousands except share data)   Common Stock   Retained Earnings   Accumulated Other Comprehensive Income (Loss)   Total Balances at June 30, 2020   $ 8,112     $ 186,733     $ 936     $ 195,781   Net income     -       4,168       -       4,168   Other comprehensive income, net of tax of $ 598     -       -       2,245       2,245   Balances at September 30, 2020   $ 8,112     $ 190,901     $ 3,181     $ 202,194                                     Balances at June 30, 2021   $ 7,713     $ 185,580     $ ( 2,058 )   $ 191,235   Net income     -       5,752       -       5,752   Common stock repurchased, 73,100 shares     ( 92 )     ( 2,639 )     -       ( 2,731 ) Other comprehensive loss, net of tax of ($ 905 )     -       -       ( 3,403 )     ( 3,403 ) Balances at September 30, 2021   $ 7,621     $ 188,693     $ ( 5,461 )   $ 190,853     See accompanying notes to consolidated financial statements.     Nine Months Ended September 30, 2021 and 2020   (in thousands except per share and share data)   Common Stock   Retained Earnings   Accumulated Other Comprehensive Income (Loss)   Total Balances at December 31, 2019   $ 8,112     $ 184,120     $ ( 8,506 )   $ 183,726   Net income     -       11,129       -       11,129   Dividends $ 0.67 per share     -       ( 4,348 )     -       ( 4,348 ) Other comprehensive income, net of tax of $ 3,107     -       -       11,687       11,687   Balances at September 30, 2020   $ 8,112     $ 190,901     $ 3,181     $ 202,194                                     Balances at December 31, 2020   $ 8,040     $ 189,547     $ 3,020     $ 200,607   Net income     -       15,131       -       15,131   Common stock repurchased, 335,062 shares     ( 419 )     ( 11,666 )     -       ( 12,085 ) Dividends $ 0.70 per share     -       ( 4,319 )     -       ( 4,319 ) Other comprehensive loss, net of tax of ($ 2,255 )     -       -       ( 8,481 )     ( 8,481 ) Balances at September 30, 2021   $ 7,621     $ 188,693     $ ( 5,461 )   $ 190,853     See accompanying notes to consolidated financial statements.   8 Table of Contents     National Bankshares, Inc. Consolidated Statements of Cash Flows Nine Months Ended September 30, 2021 and 2020 (Unaudited)       September 30,   September 30, (in thousands)   2021   2020 Cash Flows from Operating Activities                 Net income   $ 15,131     $ 11,129   Adjustments to reconcile net income to net cash provided by operating activities:                 Provision for (recovery of) loan losses     ( 338 )     1,985   Depreciation of bank premises and equipment     484       529   Amortization of premiums and accretion of discounts, net     1,266       1,016   Gain on disposal of fixed assets     -       ( 2 ) Gain on sales and calls of securities available for sale, net     ( 5 )     ( 96 ) Loss (gain) and write-down on other real estate owned, net     25       ( 13 ) Loss on sale of repossessed assets, net     -       1   Increase in cash value of bank-owned life insurance     ( 664 )     ( 659 ) Origination of mortgage loans held for sale     ( 13,320 )     ( 27,929 ) Proceeds from sale of mortgage loans held for sale     14,238       25,560   Gain on sale of mortgage loans held for sale     ( 287 )     ( 416 ) Net change in:                 Accrued interest receivable     ( 133 )     ( 953 ) Other assets     1,293       ( 136 ) Accrued interest payable     ( 10 )     ( 58 ) Other liabilities     ( 1 )     192   Net cash provided by operating activities     17,679       10,150                     Cash Flows from Investing Activities                 Net change in interest-bearing deposits     1,862       8,102   Proceeds from calls, principal payments, sales and maturities of securities available for sale     46,887       116,567   Purchase of securities available for sale     ( 153,627 )     ( 154,781 ) Net change in restricted stock     434       ( 59 ) Purchase of loan participations     ( 20,544 )     ( 4,273 ) Collection of loan participations     3,759       122   Loan originations and principal collections, net     ( 12,661 )     ( 63,695 ) Proceeds from sale of other real estate owned     621       72   Proceeds from sale of repossessed assets     11       30   Recoveries on loans charged off     245       219   Purchase of bank-owned life insurance     ( 5,000 )     -   Proceeds from sale and purchases of premises and equipment, net     ( 272 )     ( 1,632 ) Net cash used in investing activities     ( 138,285 )     ( 99,328 )   (continued)   9 Table of Contents   Cash Flows from Financing Activities                 Net change in time deposits     ( 7,127 )     ( 25,020 ) Net change in other deposits     142,718       118,849   Common stock repurchased     ( 12,085 )     -   Cash dividends paid     ( 4,319 )     ( 4,348 ) Net cash provided by financing activities     119,187       89,481   Net change in cash and due from banks     ( 1,419 )     303   Cash and due from banks at beginning of period     13,147       10,290   Cash and due from banks at end of period   $ 11,728     $ 10,593                     Supplemental Disclosures of Cash Flow Information                 Interest paid on deposits   $ 2,418     $ 4,872   Income taxes paid     2,150       2,785                     Supplemental Disclosure of Noncash Activities                 Loans charged against the allowance for loan losses   $ 690     $ 639   Loans transferred to OREO     50       -   Loans transferred to repossessed assets     11       4   Unrealized gain (loss) on securities available for sale     ( 10,736 )     14,794   Lease liabilities arising from obtaining right-of-use assets     -       23     See accompanying notes to consolidated financial statements.   10 Table of Contents   National Bankshares, Inc. Notes to Consolidated Financial Statements September 30, 2021 (Unaudited)   $ in thousands, except per share data     Note 1: General   The consolidated financial statements of National Bankshares, Inc. (“NBI”) and its wholly-owned subsidiaries, The National Bank of Blacksburg (the “Bank” or “NBB”) and National Bankshares Financial Services, Inc. (“NBFS”) (collectively, the “Company”), conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the banking industry. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of management, all adjustments consisting of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial statements, have been included.  The results of operations for the three and nine month periods ended September 30, 2021 are not necessarily indicative of results of operations for the full year or any other interim period.  The interim period consolidated financial statements and financial information included in this Form 10 -Q should be read in conjunction with the notes to the consolidated financial statements included in the Company’s 2020 Form 10 -K.  The Company posts all reports required to be filed under the Securities Exchange Act of 1934 on its web site at www.nationalbankshares.com .   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.   Risks and Uncertainties   Since the beginning of 2020, the COVID- 19 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 business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. Some measures appear to indicate a positive trajectory, however if the pandemic escalates, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent of the impact COVID- 19 will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.   Financial position and results of operations During 2020, the pandemic led to declines in two key income categories: interest income and overdraft fee income. Interest income was impacted by modification requests and by a decreased interest rate environment. During the first nine months of 2021, the number of modification requests that reduce interest income vastly decreased, though loan refinance and securities call activity spurred by the low interest rates continue to impact interest income, with reinvestment opportunities at lower rates. If the pandemic’s evolution brings new or worsened economic impacts, these income categories and others may be negatively affected.   Lending operations, accommodations to borrowers and credit risk The Company has worked with customers directly affected by COVID- 19, providing short-term assistance in accordance with the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Consolidated Appropriations Act (“CAA”) and regulatory guidelines. Assistance included providing payment extensions, periods of interest only payments to otherwise amortizing loans, and interest rate reductions. Pandemic-related modification requests have greatly subsided and as of September 30, 2021, there were no loans remaining in a temporarily modified state for COVID- 19 relief. If eventual credit losses are identified on loans that received modifications or other loans, accrued interest and fee income would be reversed at the time the loss is identified. If the loans are fully or partially charged off, future requirements for the provision for loan losses will increase. 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. The Company is closely monitoring credit quality and developments related to the pandemic. The Company provided loans through the Paycheck Protection Program (“PPP”), administered by the Small Business Administration (“SBA”). Loans funded through the program to qualifying borrowers carry the expectation that the SBA will either pay off the loans and forgive the borrower’s debt, or guarantee the loans until the borrower pays off the debt. The loans bear a contractual interest rate of 1%, bolstered by an origination fee to be recognized over the life of the loan. Loans that are forgiven or paid off prior to maturity result in recognition of the outstanding origination fee at the date of forgiveness or payoff. The Company has assisted local businesses through the PPP by providing 1,259 loans totaling $ 83,023 since the program’s inception in April of 2020. To date, 1,039 PPP loans with original balances totaling $ 70,228 have been forgiven or paid off. As of September 30, 2021, the Company held $ 12,086 in PPP loans, net of deferred fees and costs. The company expects that the remaining loans will be forgiven by the SBA in accordance with the terms of the program, and that any remaining balances will be fully guaranteed by the SBA. Should those circumstances change, the Company could be required to establish additional allowance for loan loss through provision for loan loss charged to earnings.   11 Table of Contents   Asset valuation COVID- 19 has not affected the Company’s ability, nor is it expected to affect the Company’s 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 U.S. 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. If the evolution of 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 U.S. 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.   Capital and liquidity While the Company believes that it has sufficient capital to withstand a potential second economic recession if the pandemic resurges, its reported and regulatory capital ratios could be adversely impacted if credit losses increase. 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. Deposits have increased since the beginning of the pandemic, however, if conditions worsen and cause a large number of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.   Accounting Standards Adopted as of January 1, 2021 In December 2019, the FASB issued ASU 2019 - 12, “Income Taxes (Topic 740 ) – Simplifying the Accounting for Income Taxes.” The amendments are 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. ASU 2019 - 12 was effective for the Company on January 1, 2021. The adoption of ASU 2019 - 12 did not have a material impact on the Company’s consolidated financial statements. In January 2020, the FASB issued ASU 2020 - 01, “Investments—Equity Securities (Topic 321 ), Investments—Equity Method and Joint Ventures (Topic 323 ), and Derivatives and Hedging (Topic 815 )—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force).” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016 - 01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. ASU 2020 - 01 was effective for the Company on January 1, 2021. The adoption of ASU 2020 - 01 did not have a material impact on the Company’s consolidated financial statements. In October 2020, the FASB issued ASU 2020 - 08, “Codification Improvements to Subtopic 310 - 20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310 - 20 - 35 - 33 for each reporting period. ASU 2020 - 08 was effective for the Company on January 1, 2021. The adoption of ASU 2020 - 08 did not have a material impact on the Company’s consolidated financial statements. In December 2020, the CAA was passed. Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID- 19 pandemic. The Company modified loans in accordance with the CAA and the CARES Act. Further discussion on loan modifications is noted in Management’s Discussion and Analysis.   12 Table of Contents   Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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 ASU’s 2019 - 04, 2019 - 05, 2019 - 10, 2019 - 11, 2020 - 02, and 2020 - 03. These ASU’s 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 U.S. Securities and Exchange Commission (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. Management is working to ensure readiness and compliance with the standard and has implemented coding of the loan portfolio to enable appropriate segregation and data integrity, analyzed correlations for forecasting, determined methodologies, and selected a vendor to provide a platform.  Management has prepared multiple concurrent models using the Current Expected Credit Losses (“CECL”) methodology and will continue to refine assumptions that impact the calculation prior to the effective date. Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including ( 1 ) measuring current expected credit losses; ( 2 ) development, governance, and documentation of a systematic methodology; ( 3 ) documenting the results of a systematic methodology; and ( 4 ) validating a systematic methodology. In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020 - 04 “Reference Rate Reform (Topic 848 ): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021 - 01 “Reference Rate Reform (Topic 848 ): Scope.” This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU No. 2021 - 01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021 - 01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.The Company has three participation loans that references LIBOR and is working with the primary banks to determine appropriate actions. The Company is assessing ASU 2020 - 04 and its impact on the Company’s transition away from LIBOR for this loan. In August 2021, the FASB issued ASU 2021 - 06, “'Presentation of Financial Statements (Topic 205 ), Financial Services—Depository and Lending (Topic 942 ), and Financial Services—Investment Companies (Topic 946 ): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33 - 10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33 - 10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33 - 10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33 - 10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants”. The ASU is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2021 - 06 to have a material impact on its consolidated financial statements.   13 Table of Contents     Note 2:   Loan Portfolio   The loan portfolio, excluding loans held for sale, was comprised of the following.       September 30, 2021   December 31, 2020 Real estate construction   $ 50,883     $ 42,266   Consumer real estate     204,880       181,782   Commercial real estate     403,840       393,115   Commercial non real estate     59,082       78,771   Public sector and IDA     48,345       40,983   Consumer non real estate     31,576       33,110   Gross loans     798,606       770,027   Less unearned income and deferred fees and costs     ( 1,112 )     ( 1,228 ) Loans, net of unearned income and deferred fees and costs   $ 797,494     $ 768,799       Note 3:   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.   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 troubled debt restructuring (“TDR”) as well as larger, usually non-homogeneous loans that exhibit payment history or financial status that indicate that collection probably will not occur when due according to the loan’s terms.   Measurement Impaired loans are individually evaluated to determine appropriate reserves and are measured at the lower of the invested amount or fair value. Fair value is estimated using the collateral method or the cash flow method. The collateral method is applied to collateral-dependent loans, loans for which foreclosure is imminent and to loans for which the fair value of collateral is a more reliable estimate of fair value. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The cash flow method is applied to loans that are not collateral dependent and for which cash flows may be estimated.   TDRs TDRs are impaired loans. 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.   Please refer to the Company’s 2020 Form 10 -K, 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.   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. Loans within each class are further stratified by risk rating: pass-rated loans, loans rated special mention, and loans rated classified.   14 Table of Contents   Portfolio Segments and Classes The segments and classes used in determining the allowance for loan losses are as follows. Real Estate Construction Construction, residential Construction, other   Consumer Real Estate Equity lines Residential closed-end first liens Residential closed-end junior liens Investor-owned residential real estate   Commercial Real Estate Multifamily real estate Commercial real estate, owner-occupied Commercial real estate, other Commercial Non Real Estate Commercial and industrial   Public Sector and IDA Public sector and IDA   Consumer Non Real Estate Credit cards Automobile Other consumer loans   Please refer to the Company’s 2020 Form 10 -K, Note 1: Summary of Significant Accounting Policies for a discussion of risk factors pertinent to each class. Credit risk is estimated at the class level, by risk rating, by applying historical net charge-off rates and percentages for qualitative factors that influence credit risk.   Historical Loss Rates The Company’s allowance methodology for collectively evaluated loans applies historical loss rates by class to current class balances as part of the process of determining required reserves. The Company averages loss rates for the most recent eight quarters to determine the historical loss rate for each class. Within each class, loans are risk rated pass, special mention or classified. Loss rates are applied based upon risk rating. Total net charge-offs for the class as a percentage of average class loan balance is applied to pass rated loans and loans rated special mention. Total net charge-offs for the class as a percentage of average classified loans in the class is applied to classified loans. 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.   Qualitative 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.   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 for the Nine Months Ended September 30, 2021       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, 2020   $ 503     $ 2,165     $ 3,853     $ 670     $ 339     $ 555     $ 396     $ 8,481   Charge-offs     -       ( 13 )     -       ( 526 )     -       ( 151 )     -       ( 690 ) Recoveries     -       19       86       31       -       109       -       245   Provision for (recovery of) loan losses     ( 5 )     ( 203 )     ( 776 )     743       ( 27 )     ( 39 )     ( 31 )     ( 338 ) Balance, September 30, 2021   $ 498     $ 1,968     $ 3,163     $ 918     $ 312     $ 474     $ 365     $ 7,698     15 Table of Contents       Activity in the Allowance for Loan Losses for the Nine Months Ended September 30, 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     -       ( 62 )     ( 15 )     ( 372 )     -       ( 190 )     -       ( 639 ) Recoveries     -       18       53       6       -       142       -       219   Provision for (recovery of) loan losses     24       311       1,047       510       53       ( 5 )     45       1,985   Balance, September 30, 2020   $ 424     $ 2,162     $ 3,644     $ 699     $ 531     $ 597     $ 371     $ 8,428         Activity in the Allowance for Loan Losses 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         Allowance for Loan Losses as of September 30, 2021       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   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -   Collectively evaluated for impairment     498       1,968       3,163       918       312       474       365       7,698   Total   $ 498     $ 1,968     $ 3,163     $ 918     $ 312     $ 474     $ 365     $ 7,698         Allowance for Loan Losses 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 for impairment     503       2,163       3,853       597       339       555       396       8,406   Total   $ 503     $ 2,165     $ 3,853     $ 670     $ 339     $ 555     $ 396     $ 8,481     16 Table of Contents       Loans as of September 30, 2021       Real Estate Construction   Consumer Real Estate   Commercial Real Estate   Commercial Non Real Estate   Public Sector and IDA   Consumer Non Real Estate   Total Individually evaluated for impairment   $ -     $ 192     $ 5,583     $ 308     $ -     $ 1     $ 6,084   Collectively evaluated for impairment     50,883       204,688       398,257       58,774       48,345       31,575       792,522   Total   $ 50,883     $ 204,880     $ 403,840     $ 59,082     $ 48,345     $ 31,576     $ 798,606         Loans 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   Total Individually evaluated for impairment   $ -     $ 194     $ 3,856     $ 851     $ -     $ 2     $ 4,903   Collectively evaluated for impairment     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     A summary of ratios for the allowance for loan losses follows.       As of and for the     Nine Months Ended September 30,   Year Ended December 31,     2021   2020   2020 Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees and costs (1)     0.97 %     1.05 %     1.10 % Ratio of net charge-offs to average loans, net of unearned income and deferred fees and costs (2)     0.08 %     0.07 %     0.05 %   ( 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 September 30, 2021, December 31, 2020 and September 30, 2020 includes government-guaranteed SBA PPP loans, which do not require an allowance for loan losses. Excluding the PPP loans, the ratio would be 0.98 % at September 30, 2021, 1.16 % at December 31, 2020 and 1.13 % at September 30, 2020. ( 2 ) Net charge-offs are on an annualized basis.   A summary of nonperforming assets follows.       September 30,   December 31,     2021   2020   2020 Nonperforming assets:                         Nonaccrual loans   $ 39     $ 736     $ 846   Restructured loans in nonaccrual     3,075       2,866       2,839   Total nonperforming loans     3,114       3,602       3,685   Other real estate owned, net     957       1,553       1,553   Total nonperforming assets   $ 4,071     $ 5,155     $ 5,238   Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned     0.51 %     0.64 %     0.68 % Ratio of allowance for loan losses to nonperforming loans (1)     247.21 %     233.98 %     230.15 %   ( 1 ) The Company defines nonperforming loans as nonaccrual loans and restructured loans that are nonaccrual. Loans 90 days past due and still accruing and accruing restructured loans are excluded.   17 Table of Contents   A summary of loans past due 90 days or more and impaired loans follows.       September 30,   December 31,     2021   2020   2020 Loans past due 90 days or more and still accruing   $ 62     $ 236     $ 17   Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees and costs     0.01 %     0.03 %     0.00 % Accruing restructured loans   $ 3,009     $ 1,426     $ 1,410   Impaired loans:                         Impaired loans with no valuation allowance   $ 6,084     $ 3,939     $ 3,858   Impaired loans with a valuation allowance     -       1,056       1,045   Total impaired loans   $ 6,084     $ 4,995     $ 4,903   Valuation allowance     -       ( 104 )     ( 75 ) Impaired loans, net of allowance   $ 6,084     $ 4,891     $ 4,828   Average recorded investment in impaired loans (1)   $ 6,108     $ 5,227     $ 5,093   Interest income recognized on impaired loans, after designation as impaired   $ 175     $ 49     $ 54   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 nine months ended September 30, 2021 or September 30, 2020 or for the year ended December 31, 2020.   A detailed analysis of investment in impaired loans and associated reserves, segregated by loan class follows.                Impaired Loans as of September 30, 2021     Principal Balance   Total Recorded Investment (1)   Recorded Investment (1) for Which There is No Related Allowance   Recorded Investment (1) for Which There is a Related Allowance   Related Allowance Consumer Real Estate (2)                                         Investor-owned residential real estate   $ 192     $ 192     $ 192     $ -     $ -   Commercial Real Estate (2)                                         Commercial real estate, owner-occupied     3,481       2,861       2,861       -       -   Commercial real estate, other     2,722       2,722       2,722       -       -   Commercial Non Real Estate (2)                                         Commercial and industrial     313       308       308       -       -   Consumer Non Real Estate (2)                                         Automobile     1       1       1       -       -   Total   $ 6,709     $ 6,084     $ 6,084     $ -     $ -     ( 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.   18 Table of Contents       Impaired Loans as of December 31, 2020     Principal Balance   Total Recorded Investment (1)   Recorded Investment (1) for Which There is No Related Allowance   Recorded Investment (1) 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.   The following tables show the average recorded investment and interest income recognized for impaired loans.       For the Nine Months Ended September 30, 2021     Average Recorded Investment (1)   Interest Income Recognized Consumer Real Estate (2)                 Investor-owned residential real estate   $ 193     $ 9   Commercial Real Estate (2)                 Commercial real estate, owner occupied     2,866       72   Commercial real estate, other     2,724       83   Commercial Non Real Estate (2)                 Commercial and industrial     324       11   Consumer Non Real Estate (2)                 Automobile     1       -   Total   $ 6,108     $ 175             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.   19 Table of Contents   An analysis of past due and nonaccrual loans follows.   September 30, 2021                                     30 – 89 Days Past Due and Accruing   90 or More Days Past Due   90 or More Days Past Due and Accruing   Nonaccruals (2) Real Estate Construction (1)                                 Construction, other   $ 115     $ -     $ -     $ -   Consumer Real Estate (1)                                 Equity lines     29       -       -       -   Residential closed-end first liens     489       39       39       -   Investor-owned residential real estate     102       -       -       -   Commercial Real Estate (1)             -       -       -   Commercial real estate, owner-occupied     147       445       -       2,767   Commercial real estate, other     -       -       -       -   Commercial Non Real Estate (1)                                 Commercial and industrial     29       318       10       347   Consumer Non Real Estate (1)                                 Credit cards     3       1       1       -   Automobile     91       -       -       -   Other consumer loans     218       12       12       -   Total   $ 1,223     $ 815     $ 62     $ 3,114     ( 1 ) Only classes with past-due or nonaccrual loans are shown. ( 2 ) Includes current and past due loans in nonaccrual status. Includes impaired loans in nonaccrual status.   December 31, 2020                                     30 – 89 Days Past Due and Accruing   90 or More Days Past Due   90 or More Days Past Due and Accruing   Nonaccruals (2) 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     ( 1 ) Only classes with past-due or nonaccrual loans are shown. ( 2 ) Includes current and past due loans in nonaccrual status. Includes impaired loans in nonaccrual status.   20 Table of Contents   The following displays collectively-evaluated loans by credit quality indicator.   September 30, 2021                             Pass (1)   Special Mention (1)   Classified (1) Real Estate Construction                         Construction, 1-4 family residential   $ 10,498     $ -     $ -   Construction, other     40,385       -       -   Consumer Real Estate                         Equity lines     13,962       -       -   Closed-end first liens     106,806       -       284   Closed-end junior liens     2,773       -       -   Investor-owned residential real estate     80,244       619       -   Commercial Real Estate                         Multifamily residential real estate     106,368       -       -   Commercial real estate owner-occupied     137,965       -       36   Commercial real estate, other     150,131       3,757       -   Commercial Non Real Estate                         Commercial and industrial     58,726       -       48   Public Sector and IDA                         States and political subdivisions     48,345       -       -   Consumer Non Real Estate                         Credit cards     4,270       -       -   Automobile     11,653       -       -   Other consumer     15,528       -       124   Total   $ 787,654     $ 4,376     $ 492     ( 1 ) Excludes impaired, if any.   21 Table of Contents   The following displays collectively-evaluated loans by credit quality indicator.   December 31, 2020                             Pass (1)   Special Mention (1)   Classified (1) Real Estate Construction                         Construction, 1-4 family residential   $ 8,195     $ -     $ -   Construction, other     34,071       -       -   Consumer Real Estate                         Equity lines     13,903       -       -   Residential closed-end first liens     92,241       66       284   Residential 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     ( 1 ) Excludes impaired, if any.   Determination of risk ratings was completed for the portfolio as of September 30, 2021 and December 31, 2020. For detail on determination of risk ratings, please refer to the Company’s 2020 Form 10 -K, Note 1: Summary of Significant Accounting Policies and Note 5: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans.   TDRs   Total TDRs amounted to $ 6,084 at September 30, 2021, $ 4,249 at December 31, 2020, and $ 4,292 at September 30, 2020. All of the Company’s TDR loans are fully funded and no further increase in credit is available.   TDRs Designated During the Reporting Period The Company did not designate any loans as TDR during the three months ended September 30, 2021.           During the nine months ended September 30, 2021 the Company designated three loans as a TDR. The restructuring of the commercial real estate owner-occupied loan provided cash flow relief to the borrower by shifting the payment structure from interest-only to amortizing and reducing the interest rate. The restructurings of the two other commercial real estate loans provided cash flow relief by re-amortizing the loans over a longer period and reducing the interest rate. No principal or interest was forgiven. The impairment measurement for all three loans at September 30, 2021 was based upon the collateral method and did not result in a specific allocation.   22 Table of Contents   The following table presents restructurings by class that occurred during the nine month period ended September 30, 2021.       Restructurings That Occurred During the Nine Months Ended September 30, 2021     Number of Contracts   Pre-Modification Outstanding Principal Balance   Post-Modification Outstanding Principal Balance Commercial Real Estate                         Commercial real estate owner-occupied     1     $ 102     $ 102   Commercial real estate, other     2       2,724       2,724   Total     3     $ 2,826     $ 2,826     The Company did not modify any loans in TDRs during the three or nine month periods ended September 30, 2020.   Defaulted TDRs The Company analyzed its TDR portfolio for loans that defaulted during the three and nine month periods ended September 30, 2021 and September 30, 2020, and that were modified within 12 months prior to default. The Company designates three circumstances that indicate default: one or more payments that occur more than 90 days past the due date, charge-off, or foreclosure after the date of restructuring. Of the Company’s TDRs at September 30, 2021 and September 30, 2020, none of the defaulted TDRs were modified within 12 months prior to default. All of the defaulted TDRs were in nonaccrual status as of September 30, 2021 and September 30, 2020.     Note 4: Securities   The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities available for sale by major security type are as follows.       September 30, 2021     Amortized Costs   Gross Unrealized Gains   Gross Unrealized Losses   Fair Values Available for Sale:                                 U.S. Government agencies and corporations   $ 220,372     $ 3,062     $ 3,243     $ 220,191   States and political subdivisions     196,518       4,970       2,181       199,307   Mortgage-backed securities     215,661       3,284       193       218,752   Corporate debt securities     3,004       259       27       3,236   Total securities available for sale   $ 635,555     $ 11,575     $ 5,644     $ 641,486         December 31, 2020     Amortized Costs   Gross Unrealized Gains   Gross Unrealized Losses   Fair Values Available for Sale:                                 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     23 Table of Contents   The amortized cost and fair value of single maturity securities available for sale at September 30, 2021, 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.       September 30, 2021     Amortized Cost   Fair Value Available for Sale:                 Due in one year or less   $ 1,864     $ 1,902   Due after one year through five years     8,722       8,785   Due after five years through ten years     264,217       265,751   Due after ten years     360,752       365,048   Total securities available for sale   $ 635,555     $ 641,486     Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows.       September 30, 2021     Less Than 12 Months   12 Months or More     Fair Value   Unrealized Loss   Fair Value   Unrealized Loss Temporarily Impaired Securities:                                 U.S. Government agencies and corporations   $ 156,418     $ 3,190     $ 944     $ 53   States and political subdivisions     71,912       1,868       9,026       313   Mortgage-backed securities     10,229       46       5,146       147   Corporate debt securities     976       27       -       -   Total   $ 239,535     $ 5,131     $ 15,116     $ 513         December 31, 2020     Less Than 12 Months   12 Months or More     Fair Value     Unrealized Loss     Fair Value   Unrealized Loss Temporarily Impaired Securities:                                 U.S. Government agencies and corporations   $ 28,798     $ 173     $ -     $ -   States and political subdivisions     32,353       249       635       3   Mortgage-backed securities     8,816       76       4,060       2   Total   $ 69,967     $ 498     $ 4,695     $ 5     24 Table of Contents   The Company has 229 securities with a fair value of $ 254,651 that are temporarily impaired at September 30, 2021.   The total unrealized loss on these securities is $ 5,644 . Of the temporarily impaired securities, 10 securities with a fair value of $ 15,116 and an unrealized loss of $ 513 have been in a continuous loss position for twelve months or more. The Company determined that these 10 securities are temporarily impaired at September 30, 2021 for the reasons set out below. U.S. Government agencies and corporations. The unrealized loss of $ 53 on US Government agency securities stemmed from one security with a fair value of $ 944 . The unrealized loss was caused by interest rate and market fluctuations. The contractual terms of the investment do not permit the issuers to settle the securities at a price less than the cost basis of the investments. The Company is monitoring bond market trends to develop strategies to address unrealized losses. Because the Company does not intend to sell the investment and it is not likely that the Company will be required to sell the investment before recovery of the amortized cost basis, which may be at maturity, the Company does not consider the investment to be other-than-temporarily impaired. States and political subdivisions. The unrealized loss of $ 313 on state and political subdivision securities stemmed from six securities with a fair value of $ 9,026 . The Company reviewed financial statements and cash flows for each of the securities in a continuous loss position for more than 12 months. The Company’s analysis determined that the unrealized losses are primarily the result of interest rate and market fluctuations and not associated with impaired financial status. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. The Company is monitoring bond market trends to develop strategies to address unrealized losses. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of amortized cost basis, which may be at maturity, the Company does not consider the investments to be other-than-temporarily impaired.          Mortgage-backed securities. The unrealized loss of $ 147 on mortgage-backed securities stemmed from three securities with a fair value of $ 5,146 . The unrealized loss was caused by interest rate and market fluctuations. The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be at maturity, the Company does not consider the investments to be other-than-temporarily impaired.   Restricted Stock. The Company held restricted stock of $ 845 as of September 30, 2021 and $ 1,279 at December 31, 2020. Restricted stock is reported separately from available for sale securities. As a member bank of the Federal Reserve system and the Federal Home Loan Bank of Atlanta (“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, current borrowings, and a percentage of qualifying assets. The correspondents provide calculations that require NBB to purchase or sell stock back to the correspondents. The stock is held by member institutions only and is not actively traded. 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 $ 596,772 at September 30, 2021. Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at September 30, 2021, 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.     Note 5: Defined Benefit Plan             Components of Net Periodic Benefit Cost:       Pension Benefits     Three Months Ended September 30,     2021   2020 Service cost   $ 361     $ 270   Interest cost     184       205   Expected return on plan assets     ( 555 )     ( 420 ) Amortization of prior service cost     ( 3 )     ( 27 ) Recognized net actuarial loss     208       177   Net periodic benefit cost   $ 195     $ 205     25 Table of Contents       Pension Benefits     Nine Months Ended September 30,     2021   2020 Service cost   $ 1,083     $ 810   Interest cost     552       615   Expected return on plan assets     ( 1,665 )     ( 1,260 ) Amortization of prior service cost     ( 9 )     ( 81 ) Recognized net actuarial loss     624       531   Net periodic benefit cost   $ 585     $ 615     The service cost component of net periodic benefit cost is included in salaries and employee benefits expense in the consolidated statements of income. All other components are included in other noninterest expense in the consolidated statements of income. For the nine months ended September 30, 2021, the Company did not make a contribution to the defined benefit plan.     Note 6: 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. U.S. GAAP requires that valuation techniques maximize the use of the observable inputs and minimize the use of the unobservable inputs. U.S. 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 based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company as of September 30, 2021 and December 31, 2020. The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring and non-recurring basis in the financial statements:   Financial Instruments Measured at Fair Value on a Recurring Basis Securities Available for Sale 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 FHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following tables.            26 Table of Contents   The following tables present the balances of financial assets measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020.               Fair Value Measurements at September 30, 2021 Using Description   Balance as of September 30, 2021   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   $ 220,191     $ -     $ 220,191     $ -   States and political subdivisions     199,307       -       199,307       -   Mortgage-backed securities     218,752       -       218,752       -   Corporate debt securities     3,236       -       3,236       -   Total securities available for sale   $ 641,486     $ -     $ 641,486     $ -                 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     $ -     The Company’s securities portfolio is valued using Level 2 inputs. The Company relies on a 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 lock 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 the Company intends to sell to a correspondent lender. The interest rate lock contract ends when the loan closes or the customer withdraws their application. Fair value of the interest rate lock contracts is based upon the correspondent lender’s pricing quotes at the report date. Fair value is adjusted for the estimated probability of the loan closing with the borrower. At the time the Company enters into an interest rate lock 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 lock 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.   27 Table of Contents               Fair Value Measurements at September 30, 2021 Using Description   Balance as of September 30, 2021   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   $ ( 4 )   $ -     $ -     $ ( 4 ) Forward contracts   $ 3     $ -     $ -     $ 3                 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 )   September 30, 2021   Valuation Technique   Unobservable Input   Range (Weighted Average) Interest rate loan contracts   Market approach   Pull-through rate       85.00% (2)     Forward contracts   Market approach   Pull-through rate       85.00% (2)                           Interest rate loan contracts   Market approach   Current reference price     100.37% - 101.13% (100.73%) (1) Forward contracts   Market approach   Current reference price     100.37% - 102.67% (101.21%) (1)   December 31, 2020   Valuation Technique   Unobservable Input   Range (Weighted Average) Interest rate loan contracts   Market approach   Pull-through rate       87.02% (2)     Forward contracts   Market approach   Pull-through rate       87.02% (2)                           Interest rate loan contracts   Market approach   Current reference price     101.91% - 103.02% (102.55%) (1) Forward contracts   Market approach   Current reference price     101.91% - 103.19% (102.67%) (1)     ( 1 ) Current reference prices were weighted by the relative amount of the loan.   ( 2 ) All contracts were valued using the same pull-through rate.   Financial Instruments Measured at Fair Value on a Non-Recurring Basis Certain financial instruments are measured at fair value on a nonrecurring basis in accordance with U.S. 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 assets recorded at fair value on a nonrecurring basis in the financial statements.   Loans Held for Sale 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 at September 30, 2021 or December 31, 2020.   28 Table of Contents   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 excess 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 may be measured using one of three methods. Each method falls within a different level of the fair value hierarchy. 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 may be categorized in Level 2 or Level 3. Loans valued using the collateral method may be secured by real estate or business assets including equipment, inventory, and accounts receivable. Real estate collateral secures most loans and valuation is based upon the “as-is” value of independent appraisals or evaluations. Appraisals are used to value loans secured by residential 1 - 4 family properties with outstanding principal balances greater than $250 and commercial real estate loans with outstanding principal balances greater than $500. Appraisals or real estate evaluations prepared by a third party may be used to value loans with principal balances below these thresholds. Appraisals of less than 24 months of age, conducted by independent, licensed appraisers using observable market data analyzed through an income or sales valuation approach result in Level 2 categorization. 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, or if the appraisal uses unobservable market data, the valuation of real estate collateral is categorized as Level 3. Valuations based on 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 ). If a current appraisal uses unobservable data as part of the assessment, the value of the collateral is classified as Level 3.   As of September 30, 2021, fair valuation procedures did not result in any individual allocation for impaired loans. The following table summarizes the Company’s impaired loans that were measured at fair value on a nonrecurring basis at December 31, 2020.                 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     The following table presents information about Level 3 Fair Value Measurements at December 31, 2020.   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%)     ( 1 ) Unobservable inputs were weighted by the relative fair value of the impaired loans.   At December 31, 2020, all impaired loans measured at fair value on a nonrecurring basis were measured using the present value of cash flows. The loans are TDRs and the discount rate is the contractual rate that was in effect prior to modification to TDR status. Future changes in cash flow assumptions or if the loans are charged off may result in greater losses than estimated at the reporting dates. An increase in the impairment measurement or a charge-off would increase the provision for loan losses.   Other Real Estate Owned Certain assets such as other real estate owned (“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.   29 Table of Contents   The following table summarizes the Company’s OREO that was measured at fair value on a nonrecurring basis.                 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:                                 September 30, 2021 OREO, net of valuation allowance   $ 957     $ -     $ -     $ 957   December 31, 2020 OREO, net of valuation allowance     1,553       -       -       1,553     The following tables present information about Level 3 Fair Value Measurements for September 30, 2021 and December 31, 2020.   September 30, 2021   Valuation Technique   Unobservable Input   Range (Weighted Average (1) )                   OREO   Discounted appraised value   Selling cost     6.20% (3)     December 31, 2020   Valuation Technique   Unobservable Input   Range (Weighted Average (1) )                       OREO   Discounted appraised value   Selling cost     4.00 % – 9.23 % (4.54%) (2) OREO   Discounted appraised value   Discount for lack of marketability and age of appraisal     0.00 % – 7.66 % (0.62%) (1)     ( 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 appraised value exceeds the list price, less estimated selling costs. Selling costs do not discount 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 appraised value.   ( 3 ) As of September 30, 2021, the Company held one OREO property   At September 30, 2021 and December 31, 2020, 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 lower fair value, with a corresponding impact to net income.   30 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 September 30, 2021 and December 31, 2020. For 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 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.       September 30, 2021     Carrying Amount   Quoted Prices in Active Markets for Identical Assets Level 1   Significant Other Observable Inputs Level 2   Significant Unobservable Inputs Level 3 Financial Assets:                                 Cash and due from banks   $ 11,728     $ 11,728     $ -     $ -   Interest-bearing deposits     118,863       118,863       -       -   Securities     641,486       -       641,486       -   Restricted securities     845       -       845       -   Loans held for sale     235       -       235       -   Loans, net     789,796       -       -       777,049   Accrued interest receivable     5,161       -       5,161       -   Bank-owned life insurance     42,108       -       42,108       -   Forward contracts     3       -       -       3                                     Financial Liabilities:                                 Deposits   $ 1,432,734     $ -     $ 1,350,279     $ 82,626   Accrued interest payable     46       -       46       -   Interest rate loan contracts     4       -       -       4         December 31, 2020     Carrying Amount   Quoted Prices in Active Markets for Identical Assets Level 1   Significant Other Observable Inputs Level 2   Significant Unobservable Inputs 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       -   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       -   Interest rate loan contracts     1       -       -       1                                     Financial Liabilities:                                 Deposits   $ 1,297,143     $ -     $ 1,207,561     $ 89,681   Accrued interest payable     56       -       56       -   Forward contracts     11       -       -       11     31 Table of Contents     Note 7: Components of Accumulated Other Comprehensive Income (Loss)   The following tables present the components of accumulated other comprehensive income (loss) for the three months ended September 30, 2021 and September 30, 2020.       Net Unrealized Gain (Loss) on Securities   Adjustments Related to Pension Benefits   Accumulated Other Comprehensive Income (Loss) Balance at June 30, 2020   $ 9,518     $ ( 8,582 )   $ 936   Unrealized holding gain on available for sale securities, net of tax of $ 601     2,256       -       2,256   Reclassification adjustment, net of tax of ($ 3 )     ( 11 )     -       ( 11 ) Balance at September 30, 2020   $ 11,763     $ ( 8,582 )   $ 3,181                             Balance at June 30, 2021   $ 8,089     $ ( 10,147 )   $ ( 2,058 ) Unrealized holding loss on available for sale securities net of tax of ($ 905 )     ( 3,403 )     -       ( 3,403 ) Balance at September 30, 2021   $ 4,686     $ ( 10,147 )   $ ( 5,461 )   The following tables present the components of accumulated other comprehensive income (loss) for the nine months ended September 30, 2021 and September 30, 2020.       Net Unrealized Gain (Loss) on Securities   Adjustments Related to Pension Benefits   Accumulated Other Comprehensive Income (Loss) Balance at December 31, 2019   $ 76     $ ( 8,582 )   $ ( 8,506 ) Unrealized holding gain on available for sale securities, net of tax of $ 3,127     11,763       -       11,763   Reclassification adjustment, net of tax of ($ 20 )     ( 76 )     -       ( 76 ) Balance at September 30, 2020   $ 11,763     $ ( 8,582 )   $ 3,181                             Balance at December 31, 2020   $ 13,167     $ ( 10,147 )   $ 3,020   Unrealized holding loss on available for sale securities net of tax of ($ 2,254 )     ( 8,477 )     -       ( 8,477 ) Reclassification adjustment, net of tax of ($ 1 )     ( 4 )     -       ( 4 ) Balance at September 30, 2021   $ 4,686     $ ( 10,147 )   $ ( 5,461 )     Note 8: 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, automated teller machine (“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.   32 Table of Contents   Other Service Charges and Fees Other service charges include safe 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. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for interchange fee income and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. 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 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. 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 three and nine months ended September 30, 2021 and September 30, 2020.       Three Months Ended September 30,     2021   2020 Noninterest Income                 In-scope of Topic 606:                 Service charges on deposit accounts   $ 548     $ 471   Other service charges and fees     50       37   Credit and debit card fees, net     460       339   Trust income     433       423   Insurance and Investment (included within Other Income on the Consolidated Statements of Income)     99       143   Noninterest Income (in-scope of Topic 606)   $ 1,590     $ 1,413   Noninterest Income (out-of-scope of Topic 606)     402       513   Total noninterest income   $ 1,992     $ 1,926     33 Table of Contents       Nine Months Ended September 30,     2021   2020 Noninterest Income                 In-scope of Topic 606:                 Service charges on deposit accounts   $ 1,488     $ 1,430   Other service charges and fees     134       113   Credit and debit card fees, net     1,373       1,031   Trust income     1,282       1,244   Insurance and Investment (included within Other Income on the Consolidated Statements of Income)     638       332   Noninterest Income (in-scope of Topic 606)   $ 4,915     $ 4,150   Noninterest Income (out-of-scope of Topic 606)     1,352       1,656   Total noninterest income   $ 6,267     $ 5,806       Note 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. The Company is reasonably certain it will exercise one option of five years on one lease 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. 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:       September 30, 2021   December 31, 2020 Lease liability   $ 1,790     $ 2,016   Right-of-use asset   $ 1,766     $ 1,998   Weighted average remaining lease term (in years)     6.21       6.81   Weighted average discount rate     3.05 %     3.04 %   34 Table of Contents       For the Three Months Ended September 30,     2021   2020 Lease Expense                 Operating lease expense   $ 92     $ 92   Short-term lease expense     1       1   Total lease expense   $ 93     $ 93                     Cash paid for amounts included in lease liabilities   $ 91     $ 90   Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period   $ -     $ 23         For the Nine Months Ended September 30,     2021   2020 Lease Expense                 Operating lease expense   $ 279     $ 277   Short-term lease expense     2       2   Total lease expense   $ 281     $ 279                     Cash paid for amounts included in lease liabilities   $ 275     $ 272   Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period   $ -     $ 23     The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability:   Undiscounted Cash Flow for the Period   As of September 30, 2021 Twelve months ending September 30, 2022   $ 356   Twelve months ending September 30, 2023     350   Twelve months ending September 30, 2024     347   Twelve months ending September 30, 2025     263   Twelve months ending September 30, 2026     219   Thereafter     440   Total undiscounted cash flows   $ 1,975   Less: discount     ( 185 ) Lease liability   $ 1,790     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.   35 Table of Contents