What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2022-03-11 compared with 2021-03-18 · 423 added, 766 removed, 509 unchanged (70% of the section changed)

9 unchanged sentences

of this Form 10-K.

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

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

During 2020, the Company repurchased 57,554 shares.

On May 12, 2021, NBI’s Board of Directors approved the repurchase of up to 1,000,000 shares of the Company’s common stock.

The authorization extends from June 1, 2021 to May 31, 2022.

During 2021, the Company repurchased 368,083 shares, of which 87,400 shares were repurchased under a prior repurchase plan in effect from June 1, 2020 to May 31, 2021 and 106,121 shares were repurchased under the plan that became effective June 1, 2021.

The Company may yet repurchase 893,879 shares under the program.

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

During 2020, the Company repurchased 57,554 shares under prior repurchase authorizations.

Purchases of Equity Securities by the Issuer  

Share repurchase activity during the fourth quarter of 2021 was as follows:

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November 30, 2021

December 1, 2020 –

December 31, 2020

Total during fourth quarter 2021

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

The authorization expires May 31, 2021.

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

Stock Performance Graph

The following graph compares the yearly percentage change in the cumulative total of stockholder return on NBI common stock with the cumulative return on the Nasdaq Composite Index, and the Nasdaq Bank Index for the five-year period commencing on December 31, 2015.

These comparisons assume the investment of $100 in National Bankshares, Inc.

common stock in each of the indices on December 31, 2015, and the reinvestment of dividends.

NATIONAL BANKSHARES, INC.

NASDAQ COMPOSITE INDEX

NASDAQ BANK INDEX

Selected Financial Data

National Bankshares, Inc.

and Subsidiaries

Selected Consolidated Financial Data

$ in thousands, except per share data

Year ended December 31,

Selected Income Statement Data:

Interest income

Interest expense

Net interest income

Provision for (recovery of) loan losses

Noninterest income

Noninterest expense

Per Share Data:

Basic net income

Diluted net income

Cash dividends declared

Selected Balance Sheet Data at End of Year:

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

Total securities

Total deposits

Stockholders’

Selected Balance Sheet Daily Averages:

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

Total securities

Total deposits

Stockholders’

Selected Ratios:

Return on average assets

Return on average equity

Dividend payout ratio

Average equity to average assets

Efficiency ratio (1)

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

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

See “Non-GAAP Financial Measures”

included in Item 7 of this Form 10-K.

Management ’

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

s Discussion and Analysis of Financial Condition and Results of Operations

$ in thousands, except per share data.

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Government, including policies of the U.S.

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

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

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

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the Company’s technology initiatives,

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

performance by the Company's counterparties or vendors,

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

performance by the Company’s counterparties or vendors,

applicable accounting principles, policies and guidelines, and

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of this Form 10-K.

Non-GAAP Financial Measures  

Cybersecurity

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

We have deployed a multi-faceted approach to limit the risk and impact of unauthorized access to customer accounts and to information relevant to customer accounts.

We use digital technology safeguards, internal policies and procedures, and employee training to reduce the exposure of our systems to cyber-intrusions.

The Company also requires assurances from key vendors regarding their cybersecurity.

We control functionalities of online and mobile banking to reduce risk. 

We do not offer online account openings or loan originations. 

We do not permit customers to submit address changes or wire requests through online banking, and we limit the dollar amount of online banking transfers to other banks. 

We require a special vetting process for commercial customers who wish to originate ACH transfers.

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

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

The cost of these measures was $357 for 2021 and $379 for 2020.

These costs are included in various categories of noninterest expense.

However, it is not possible to fully eliminate exposure.

The potential for financial and reputational losses due to cyber-breaches is increased by the possibility of human error, unknown system susceptibilities, and the rising sophistication of cyber-criminals to attack systems, disable safeguards and gain access to accounts and related information. We maintain insurance for these risks but insurance policies are subject to exceptions, exclusions and terms whose applications have not been widely interpreted in litigation. 

Accordingly, insurance can provide less than complete protection against the losses that result from cybersecurity breaches and pursuing recovery from insurers can result in significant expense. 

In addition, some risks such as reputational damage and loss of customer goodwill, which can result from cybersecurity breaches, cannot be insured against.

Response to COVID-19 Pandemic

The COVID-19 pandemic has affected the global economy since the first quarter of 2020.

The Company has complied with national, state and local guidelines to help reduce the spread of the virus, including implementing social distancing measures for employees and customers.

The Company’s business relies on positive relationships with customers.

At this time, we feel our customer relationships remain strong and our team remains ready to provide banking services.

All forms of customer service are now available without restriction.

The Company has a robust business continuity plan, and partners with vendors whom we believe also have robust business continuity plans.

In implementing its business continuity plan to address the COVID-19 pandemic, the Company has not incurred material expenditures and does not anticipate material expenditures.

Further, all critical functions are cross-trained as part of our business continuity preparedness.

Controls over cash and physical assets have remained in place and internal controls over financial reporting and disclosure have been maintained.

Non-GAAP Financial Measures

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

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

Efficiency Ratio

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

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

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

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

$ in thousands

Year ended December 31,

Noninterest expense

items deemed non-recurring:

Write-down of insurance receivable

Noninterest expense for ratio calculation

Taxable-equivalent net interest income

Noninterest income

items deemed non-recurring:

Recovery of insurance receivable

Realized securities gains

Total income for ratio calculation

Efficiency ratio

Net Interest Margin

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

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

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Interest on deposits

Interest on borrowings

Total interest expense

Net interest income

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Total tax-equivalent net interest income

Noninterest Margin

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

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

Efficiency Ratio

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

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

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

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

$ in thousands

Year ended December 31,

Noninterest expense under GAAP

write-down of insurance receivable

Noninterest expense for ratio calculation, non-GAAP

Noninterest income under GAAP

recovery of insurance receivable

realized securities gains, net

Noninterest income for ratio calculation, non-GAAP

Net noninterest expense, non-GAAP

Average assets

Noninterest margin

Noninterest expense

Taxable-equivalent net interest income

Noninterest income

partnership income (1)

realized securities gains

Total income for ratio calculation

Efficiency ratio

During the first quarter of each year, the Company adjusts its basis in partnership interests.

During 2021 and 2020, the adjustment resulted in recognition of a gain. 

During 2021, the Company also received a one-time payout from a partnership interest.

The gains and one-time payout are reflected in other income.

Critical Accounting Policies

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

Presented below is a discussion of accounting policies that are the most important to the portrayal and understanding of the Company’s financial condition and results of operations.

Please refer to Note 1 of Notes to Consolidated Financial Statements for additional information on the Company’s accounting policies.

Critical accounting policies require management’s most difficult, subjective, and complex judgments about matters that are inherently uncertain.

If conditions occur that differ from our assumptions, depending upon the severity of such differences, the Company’s financial condition or results of operations may be materially impacted.

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

Allowance for Loan Losses

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

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

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

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

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

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

TDRs with an impairment loss may accrue interest if they have demonstrated six months of timely payment performance.

The Company evaluates the allowance each quarter through a methodology that estimates losses on individual impaired loans and evaluates the effect of numerous factors on the credit risk of groups of homogeneous loans (collectively-evaluated loans).

Impaired loans

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

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

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

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

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

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

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

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

or “special mention.”

Nonaccrual loan relationships that meet the Company’s balance threshold of $250 are designated impaired.

Other loan relationships that meet the Company’s balance threshold of $250 and for which a credit review identified a weakness that indicates principal and interest will not be collected according to the loan terms.

All TDRs, regardless of size or past due status are designated impaired.

Troubled debt restructurings

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

With the exception of borrowers affected by COVID-19 in 2020 or 2021 who fell under the provisions of the CARES Act and CAA, modified loans that meet this criteria are designated TDRs.

Individual evaluation

At the reporting date, the fair value of each impaired loan is estimated using either the cash flow method or the collateral method.

Cash flow method

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

The cash flow method measures fair value using assumptions specific to each loan, including expected amount and timing of cash flows and discount rate.

For TDR loans, the discount rate is the rate immediately prior to the modification that resulted in a TDR.

If an impaired loan evaluated under the cash flow method becomes 90 days or more 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.

Collateral method

The collateral method is applied to impaired loans that are collateral-dependent, for which foreclosure is imminent or for which non-collateral repayment sources are determined not to be available or reliable.

Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable.

Fair value is based upon the “as-is”

value of independent appraisals or evaluations.

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

Impaired loans secured by residential 1-4 family properties with outstanding principal balances greater than $250 are valued using an appraisal.

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

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

Appraisals and internal valuations provide an estimate of market value.

Impaired loans secured by residential 1-4 family property with outstanding principal balances of $250 or less, or secured by commercial real estate with outstanding principal balances of $500 or less, are valued using a real estate evaluation prepared by a third party.

Appraisals must conform to the Uniform Standards of Professional Appraisal Practice and are prepared by an independent third-party appraiser who is certified and licensed and who is approved by the Company.

Appraisals may incorporate market analysis, comparable sales analysis, cash flow analysis and market data pertinent to the property to determine market value.

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

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

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

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

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

Multiple sources of data contribute to the estimate of market value, including physical inspection, independent third-party automated tools, comparable sales analysis and local market information.

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

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

If an updated appraisal or evaluation has been ordered but has not been received by a reporting date, the fair value may be based on the most recent available appraisal or evaluation, discounted for age.

The appraisal or evaluation value for a collateral-dependent loan for which recovery is expected solely from the sale of collateral is reduced by estimated selling costs.

Estimated losses on collateral-dependent loans, as well as any other impairment loss considered uncollectible, are charged against the allowance for loan losses.

Impairment losses that are not considered uncollectible or for loans that are not collateral-dependent are accrued in the allowance.

The appraisal or evaluation value is reduced by selling costs if recovery is expected solely from the sale of collateral.

Nonaccrual status of impaired loans

Nonaccrual status is applied to impaired loans that are not TDRs and for which fair value measurement indicates an impairment loss.

Nonaccrual status is applied to TDRs that allow the borrower to discontinue payments of principal or interest for more than 90 days, unless the modification provides reasonable assurance of repayment performance and collateral value supports regular underwriting requirements.

TDRs that maintain current status for at least a six-month period, including history prior to restructuring, may accrue interest.

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

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

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

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

Collectively evaluated loans

Non-impaired loans and smaller homogeneous impaired loans that are not TDRs and not part of a larger impaired relationship are grouped by portfolio segments.

Non-impaired loans are grouped by portfolio segments.

Portfolio segments are further divided into smaller loan classes.

Loans within a segment or class have similar risk characteristics.

Probable loss is determined by applying historical net charge-off rates as well as additional percentages for trends and current levels of quantitative and qualitative factors.

Credit loss on collectively-evaluated loans is estimated by applying to current class balances the class historical charge-off rates and percentages for qualitative factors that affect credit risk.

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

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

The qualitative factor allocations are determined for pass-rated loans. 

To reflect the increased risk of criticized assets, qualitative factor allocations are multiplied by 150% for special mention loans, and multiplied by 200% for classified loans.

Loss rates are calculated for and applied to individual classes by averaging loss rates over the most recent eight quarters.

The loss rate calculation for each class includes losses and recoveries on all loans within the class, including TDRs and other impaired loans.

The look-back period of eight quarters is applied consistently among all classes.

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

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

or “loss”.

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

Class historical loss rates are applied to collectively evaluated non-classified loan balances, and classified historical loss rates are applied to collectively evaluated classified loan balances.

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

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

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

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

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

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

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

High risk loans are defined as junior lien mortgages, loans with high loan-to-value ratios and loans with terms that require interest only payments.

Both criticized loans and high risk loans are included in the base risk analysis for each class and are allocated additional reserves.

Net charge-offs in both calculations include charge-offs and recoveries for all loans within the class, including classified and non-classified loans, as well as impaired and TDR loans.

Class historical loss rates are applied to collectively evaluated pass-rated loan balances and special mention rated loan balances, and classified historical loss rates are applied to collectively evaluated classified loan balances.

Qualitative factor allocations

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

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

experience, changes in loan review, and economic factors including local unemployment levels, local bankruptcy rates, interest rate environment, and competition/legal/regulatory environments.

Standard allocations for residential vacancy rates and housing inventory are applied to the following classes:

all classes within the consumer real estate segment, residential construction, investor-owned residential real estate, multifamily loans, other commercial real estate and state and political subdivision loans.

Qualitative factors incorporate economic data targeted to the Company’s market.

If market–specific information is not available on a timely basis, regional or national information that historically shows a high degree of correlation to market data may be used.

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

national unemployment filings.

Due to continuous developments related to the COVID-19 pandemic, current data is valuable in assessing risk.

Local unemployment data lags the reporting date but historical analysis determined that local unemployment filings were closely correlated to national unemployment filings.

Factors analyzed for each class, with resultant allocations based upon the level of risk assessed for each class, include levels of past due loans, levels of nonaccrual loans, current class balance as a percentage of total loans, loans that received COVID-related modifications that are still in the modification period, and the percentage of high risk loans within the class.

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

High risk loans within each class are analyzed and allocated additional reserves based on current trends.

Nonaccrual status

The Company reviews loans with certain risk indicators to determine whether the loans should be placed on nonaccrual status, including loans that exceed 90 days past due, loans rated classified, and loans with a non-COVID 19 related modification that provides relief from payments of interest or principle for more than 90 days.

Loans in nonaccrual are reviewed on an individual loan basis to determine whether they may return to accrual status.

To return to accrual status, the Company’s analysis must determine that future payments are reasonably assured.

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

Nonaccrual loans that demonstrate reasonable assurance of future payments and that have made at least six consecutive payments in accordance with repayment terms and timeframes may be returned to accrual status.

Sales, purchases and reclassification of loans

The Company finances consumer real estate mortgages under “best efforts”

contracts with mortgage purchasers.

The mortgages are designated as held for sale upon initiation.

There have been no major reclassifications from portfolio loans to held for sale.

Mortgages held for sale are not included in the calculation of the allowance for loan losses.

Occasionally, the Company purchases or sells participations in loans.

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

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

Unallocated surplus

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

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

At December 31, 2021, management provided an unallocated surplus of 4.9% to reflect the uncertainty presented by the ongoing COVID-19 pandemic.

Estimation of the allowance for loan losses

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

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

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

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

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

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

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

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

The estimate of the allowance for December 31, 2021 considered market conditions as of December 31, 2021 where possible, and the most recent available information when data was not available as of December 31, 2021, portfolio conditions and levels of delinquencies at December 31, 2021, and net charge-offs in the eight quarters prior to the quarter ended December 31, 2021.

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

and “Provision and Allowance for Loan Losses”

 Goodwill

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

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

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

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

The Company contracts with a third party valuation expert to perform impairment testing in the fourth quarter of each year.

The Company’s most recent impairment test was performed using data from September 30, 2021.

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

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

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

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

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

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

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

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

The analysis did not result in an impairment assessment.

Other Real Estate Owned (“OREO”)

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

Any excess of cost over the fair value less costs to sell at the time of acquisition is charged to the allowance for loan losses.

The fair value is reviewed periodically by management and any write-downs are charged against current earnings.

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

while the third technique uses current market pricing multiples for change-of-control transactions involving companies comparable to the Company. The analysis did not result in an impairment assessment.

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

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

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

National Bankshares, Inc.

is a financial holding company incorporated under the laws of Virginia.

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

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

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

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

Income from NBFS is not significant at this time, nor is it expected to be so in the near future.

National Bankshares, Inc.

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

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

Performance Summary

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

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

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

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

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

The COVID-19 pandemic continued to impact the Company in 2021, although in somewhat different respects than the impact in 2020.

During 2020, the Company worked with borrowers impacted by the COVID-19 pandemic to provide payment relief, which reduced interest income on certain loans within the portfolio.

Adverse economic indicators escalated credit risk, increasing provision for loan loss expense.

Positive effects of the COVID-19 pandemic resulted from the low interest rate environment, which fueled refinance activity and gains from the sale of mortgages.

The Company also participated in the SBA’s PPP loan program and recognized increased fee income.

During 2021, the Company recognized additional fee income from PPP loans.

Pandemic-related modifications slowed significantly and there are currently no loans under modified terms related to the COVID-19 pandemic.

Economic indicators improved markedly and the Company was able to recover some of the provision expense recognized in 2020.

Key performance ratios provide a summary of the Company’s results and allow comparison with results from prior years.

The following table presents NBI’s key performance ratios for the years indicated:

Year Ended December 31,

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Net interest margin (2)

Noninterest margin (2)

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

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

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

Please see “Non-GAAP Financial Measures”

for a reconciliation of non-GAAP measures to GAAP.

The noninterest margin is a non-GAAP financial measure.

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

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

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

Please see “Non-GAAP Financial Measures”

for a reconciliation of non-GAAP measures to GAAP.

Efficiency ratio (3)

During the year ended December 31, 2021, the Company repurchased 368,083 shares under its publicly announced stock repurchase plan.

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

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

No shares were repurchased during 2018.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

See “Non-GAAP Financial Measures” above.

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

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Securities and restricted stock, loans and total assets increased when amounts at December 31, 2021 are compared with amounts at December 31, 2020.

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

Customer deposits increased $197,444 or 15.22% from December 31, 2020, with the most substantial increase in interest-bearing deposits, as well as increases in noninterest-bearing deposits and savings deposits.

Time deposits declined.

The liquidity provided by the increase of deposits supported growth in loans of $35,256 or 4.64% and growth in securities and restricted stock of $138,904 or 25.35%.

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Allowance for loan losses to loans (2)

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

Net charge-off ratio

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

Measure is non-GAAP. 

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

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

At December 31, 2020, nonperforming loans were $3,685 or 0.48% of loans net of unearned income and deferred fees and costs.

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

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

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

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

As of December 31, 2021, nonperforming loans and other real estate improved when compared with levels at December 31, 2020, while accruing loans past due 90 days or more increased slightly.

The net charge-off ratio remained steady from 2020 to 2021.

The Company’s risk analysis determined an allowance for loan losses of $7,674 at December 31, 2021, resulting in a recovery of previous provision expense of $398.

This compares with an allowance for loan losses of $8,481 as of December 31, 2020, and a provision of $1,991 for the year ended December 31, 2020.

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

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

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

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

The ratio of the allowance for loan losses to loans decreased to 0.96% at December 31, 2021, from 1.10% at December 31, 2020.

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

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

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Net Interest Income

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

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

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

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

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

Net interest income is affected by various factors, including the Federal Reserve’s monetary policy, U.S.

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

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

Interest rates have decreased since 2018.

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

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

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

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

Changes in the Federal Reserve’s target interest rate immediately affect the yield on the Company’s interest-bearing deposits in other banks, and affect other interest-earning assets within a short time.

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

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

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

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

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

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

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

The net interest margin for the year ended December 31, 2021 declined when compared with the year ended December 31, 2020.

The Federal Reserve cut rates in March 2020 in an effort to counter the COVID-19 pandemic’s economic impact and maintained low interest rates throughout 2021.

The low rates spurred high levels of loan refinance activity.

Calls on securities surged and reinvestment opportunities for matured and called securities as well as investing excess liquidity from customer deposits resulted in lower yields for taxable and nontaxable securities.

Further, uncertainty surrounding the length of time that customer deposits, bolstered by federal stimulus aid, will remain with the Bank resulted in a higher balance in interest-bearing deposits, which provides the lowest yielding investment opportunity.

In response, the Company reduced offering rates on deposits in 2020 and 2021.

         Fees and interest income from PPP loans helped increase the net interest margin in 2021 and 2020.

During 2020 and 2021, the Company generated 1,259 PPP loans with original principal balances totaling $83,023.

The loans bear a contractual interest rate of 1%, supplemented by an origination fee which is accreted over the life of the loan.

When loans are forgiven or paid off prior to maturity, the Company recognizes the outstanding origination fee at the date of forgiveness or payoff.

PPP loans contributed interest and fee income of $2,711 for the year ended December 31, 2021 and $1,753 for the year ended December 31, 2020.

As of December 31, 2021, gross PPP loans totaling $1,094 with net deferred fees of $42 remain on the balance sheet.

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

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for further information related to rate and volume changes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Analysis of Net Interest Earnings

The following table shows the major categories of interest-earning assets and interest-bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net yield on average interest-earning assets for the years indicated.

December 31, 2020

The following table shows the major categories of interest‑earning assets and interest‑bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net yield on average interest‑earning assets for the years indicated.

December 31, 2021

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Net interest income (2) and interest rate spread

Net yield on average interest-earning assets

Net yield on average interest‑earning assets

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

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

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

Net loan fees included in interest income in 2021 are $2,558, of which $2,444 was related to PPP loans.

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

Nonaccrual loans are included in average balances for yield computations.

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Analysis of Changes in Interest Income and Interest Expense

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

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

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2021 Over 2020

201 9 Over 201 8

Changes Due To

Net Dollar Change

Interest income:

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Time deposits

Short-term borrowings

Increase (decrease) in expense of interest-bearing liabilities

Increase (decrease) in net interest income

Increase in net interest income

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

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

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

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

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

2020 over 2019:

Impact of Interest Rate Environment

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

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

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

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

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

2020 over 2019:

Impact of Volume

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

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

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

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

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

2019 over 2018

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

Total interest income on a taxable equivalent basis increased $1,625 while total interest expense increased by $2,333.

Rate changes decreased net interest income by $1,000, partially offset by $292 from increased volume.

Compared with 2018, the interest rate environment in 2019 was elevated by Federal Reserve interest rate increases throughout 2018, partially offset by Federal Reserve rate decreases in the latter half of 2019.

The higher rate environment provided an increase of $83 in interest income on interest-bearing deposits, $638 on taxable securities and $880 (taxable equivalent) on loans when 2019 is compared with 2018.

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

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

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

The average balance of securities declined $70,339 when 2019 is compared with 2018, reducing interest income by $2,241.

During 2019, the Company implemented a plan to restructure its securities portfolio to manage interest rate risk.

Timing differences in sales and purchase activity increased the average balance of interest-bearing deposits.

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

See “Net Interest Income”

for additional information related to interest income and expense.

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

The low interest rate environment reduced interest income when the year ended December 31, 2021 is compared with the year ended December 31, 2020.

However, greater volume more than offset the impact of rates, resulting in a net increase in interest income.

The Company’s reduced deposit offering rates saved $3,178 in interest expense, slightly offset by increased expense for higher volume when the year ended December 31, 2021 is compared with the year ended December 31, 2020.

Interest Rate Sensitivity

The Company considers interest rate risk to be a significant risk and has systems in place to measure the exposure of net interest income and fair market values to movement in interest rates.

Among the tools available to management is interest rate sensitivity analysis, which provides information related to repricing opportunities.

Interest rate shock simulations indicate potential economic loss due to future interest rate changes.

Shock analysis is a test that measures the effect of a hypothetical, immediate and parallel shift in interest rates.

The following table shows the results of a rate shock and the effects on the return on average assets and the return on average equity projected at December 31, 2020 and 2019.

Interest rate risk is the risk to earnings or capital arising from movements in market interest rates.

When interest-earning assets and interest-bearing liabilities reprice at different times or in different degrees or when call options are exercised, in response to change in market interest rates, future net interest income is impacted.

When interest-earning assets mature or re-price more quickly than interest-bearing liabilities, the balance sheet is considered “asset sensitive”.

An asset sensitive position will produce relatively more net interest income when interest rates rise and less net interest income when rates decline.

Conversely, when interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, the balance sheet is considered “liability sensitive”.

A liability sensitive position will produce relatively more net interest income when interest rates fall and less net interest income when rates increase.

The Company considers interest rate risk to be a significant risk and manages its exposure through policies approved by its Asset Liability Committee ("ALCO") and Board of Directors.

ALCO reviews periodic reports of the Company's interest rate risk position, including results of simulation analysis.

Simulation analysis applies interest rate shocks, hypothetical immediate shifts in interest rates, to the Company’s financial instruments and determines the impact to projected one-year net interest income and other key measures.

The following table shows the results of rate shocks on the one-year projected net interest income as of December 31, 2021 and 2020.

For purposes of this analysis, noninterest income and expenses are assumed to be flat.

Rate Shift (bp)

Return on Average Assets

Return on Average Equity

Simulation analysis is another tool available to the Company to test asset and liability management strategies under rising and falling rate conditions.

Change in Projected Net Interest Income

Results of the simulation for net interest income at December 31, 2021 and December 31, 2020 indicate the Company is in an asset sensitive position.

As a part of the simulation process, certain estimates and assumptions must be made.

These include, but are not limited to, asset growth, the mix of assets and liabilities, rate environment and local and national economic conditions.

These include, but are not limited to, asset growth, the mix of assets and liabilities, the interest rate environment and local and national economic conditions.

Asset growth and the mix of assets can, to a degree, be influenced by management.

Other areas, such as the rate environment and economic factors, cannot be controlled.

Other areas, such as the interest rate environment and economic factors, cannot be controlled.

In addition, competitive pressures can make it difficult to price deposits and loans in a manner that optimally minimizes interest rate risk.

Therefore, actual results may vary materially from any particular forecast or shock analysis.

This shortcoming is offset somewhat by the periodic reforecasting of the balance sheet to reflect current trends and economic conditions.

Shock analysis must also be updated periodically as a part of the asset and liability management process.

Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes;

changes in market conditions and customer behavior;

and changes in management strategies.

While the asset/liability management program is designed to protect the Company over the long term, it does not provide near-term protection from interest rate shocks, as interest rate sensitive assets and liabilities do not by their nature move up or down in tandem in response to changes in the overall rate environment.

The Company’s profitability in the near term may be temporarily negatively affected in a period of rapidly rising or rapidly falling rates, because it takes some time for the Company’s portfolio to reflect changes to offering rates in response to a new interest rate environment.

Noninterest Income

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$ in thousands

December 31, 2020

December 31, 2019

December 31, 2018

Year Ended December 31,

Service charges on deposits

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Total noninterest income

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

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

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

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

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

An enhanced fee schedule implemented in the latter half of 2020 benefitted income from service charges on deposits in 2021.

Service charges on deposit accounts include account maintenance fees, fees for nonsufficient funds, ATM and wire transfer fees.

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

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

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

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

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

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

Increased transactions improved credit card fees when the year ended December 31, 2021 is compared with the year ended December 31, 2020.

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

Trust fees at $1,662 increased by $40 or 2.47% when the years ended December 31, 2020 and 2019 are compared.

For the year ended December 31, 2019, trust fees were $1,622, an increase of $57, or 3.64%, from 2018.

Trust fees increased when the year ended December 31, 2021 is compared with the year ended December 31, 2020.

Trust fees are generated from a number of different types of accounts, including estates, personal trusts, employee benefit trusts, investment management accounts, attorney-in-fact accounts and guardianships.

Trust income varies depending on the number and type of accounts under management and financial market conditions.

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

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

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

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

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

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

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

Many of these loans were sold on the secondary market.

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

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

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

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

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

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

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

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

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

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

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

The Company purchased an additional $5,000 in bank-owned life insurance (“BOLI”) during 2021, contributing to increased income compared with 2020.

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

During the year ended December 31, 2021, activity returned to more conventional levels, decreasing the gain on sale of mortgage loans when the year ended December 31, 2021 is compared with the year ended December 31, 2020.

Other income benefitted in 2021 from increased commissions on sales of securities and insurance, compared with the year ended December 31, 2020.

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

During 2021, securities gains resulted solely from the call of securities.

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

The sale of securities was pursuant to a restructuring plan to manage interest rate risk.

Noninterest Expense

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$ in thousands

December 31, 2020

December 31, 2019

December 31, 2018

Year Ended December 31,

Salaries and employee benefits

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FDIC assessment

Intangibles amortization

Net costs of other real estate owned

Franchise taxes

Write-down of insurance receivable

Other operating expenses

Total noninterest expense

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

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

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

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

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

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

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

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

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

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

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

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

Salaries and employee benefits expense, which includes salaries, payroll taxes, health insurance, contributions to the employee stock ownership plan and employee 401(k), pension expense, incentives and salary continuation increased when 2021 is compared with 2020, due to normal compensation and staffing decisions as well as increased pension cost.

When the year ended December 31, 2021 is compared with the year ended December 31, 2020, occupancy, furniture and fixtures expense increased slightly, while data processing and ATM expense decreased slightly.

FDIC assessment expense increased from 2020 to 2021.

The FDIC assessment is accrued based on a method provided by the FDIC.

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

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

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

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

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

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

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

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

The credits reduced expense for the first half of 2020, after which FDIC assessment expense returned to normal levels.

Net costs of other real estate owned ("OREO") increased slightly when the years ended December 31, 2021 and 2020 are compared.

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

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

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

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

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

There were no write-downs on OREO in 2019.

This compares with $476 in 2018.

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

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

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

There were no write downs during 2021 and one write-down in 2020 totaling $9.

Other costs for these properties in 2021 were $25, compared with $51 in 2020.

The Company recorded a loss of $26 on the sale of OREO in 2021 and a gain of $21 on the sale of OREO in 2020.

The Company currently has loans of $62 in process of foreclosure.

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

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

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

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

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

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

Franchise tax expense increased when the years ended December 31, 2021 and 2020 are compared.

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

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

For the year ended December 31, 2020, other operating expenses were $3,836.

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

Cyber s ecurity Risks and Incidents

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

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

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

These costs are included in various categories of noninterest expense.

The Company experienced two intrusions to its digital systems, one in May 2016 and one in January 2017.

Hackers and related organized criminal groups obtained unauthorized access to certain customer accounts.

The attacks disabled certain systems protections, including limits on the number, amount, and frequency of ATM withdrawals.

The attacks resulted in the theft of funds disbursed through ATMs.

In the May 2016 attack, hackers accessed customer funds and in the January 2017 intrusion, the hackers artificially inflated account balances and did not access customer funds.

The Company notified all affected customers, and restored all funds so that no customer experienced a loss.

The Company retained a nationally recognized firm to investigate and remediate the May 2016 intrusion and a separate nationally recognized firm to investigate and remediate the January 2017 intrusion.

The Company adopted and implemented all of the recommendations provided through the investigations.

The financial impact of the attacks include the amount of the theft, as well as costs of investigation and remediation.

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

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

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

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

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

We have deployed a multi-faceted approach to limit the risk and impact of unauthorized access to customer accounts and to information relevant to customer accounts.

We use digital technology safeguards, internal policies and procedures, and employee training to reduce the exposure of our systems to cyber-intrusions.

However, it is not possible to fully eliminate exposure.

The Company maintains insurance which provides a degree of coverage depending on the nature and circumstances of any cyber penetration but cannot be relied upon to reimburse fully the Company for all losses that may arise.

The Company has adopted new protections and invested additional resources to increase its security.

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

Other operating expenses decreased when the years ended December 31, 2021 and 2020 are compared, primarily due to decreased non-service pension cost.

Income tax expense for 2021 was $4,251 compared to $3,077 in 2020.

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

9 unchanged sentences

The Company’s risk analysis at December 31, 2021 determined an allowance for loan losses of $7,674 or 0.96% of loans net of unearned income and deferred fees and costs.

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

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

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

The allowance at December 31, 2020 was $8,481 or 1.10% of loans net of unearned income and deferred fees and costs.

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

The determination of the appropriate level for the allowance for loan losses resulted in a recovery of $398 for the twelve months ended December 31, 2021, compared with a provision of $1,991 for the twelve month period ended December 31, 2020.

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

Individually Evaluated Impaired Loans

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

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

Individually evaluated impaired loans at December 30, 2021 were $5,878 gross and $5,880 net of unearned income and deferred fees and costs.

There were no specific allocations to the allowance for loan losses as of December 31, 2021.

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

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

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

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

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

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

Individually evaluated impaired loans include TDRs.

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

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

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

Loans with modifications that meet these criteria are designated TDR.

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

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

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

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

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

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

Collectively Evaluated Loans

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

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

Collectively evaluated loans totaled $797,851 gross and $797,368 net of unearned income and deferred fees and costs, with an allowance of $7,674 or 0.96% of collectively-evaluated loans net of unearned income and deferred fees and costs at December 31, 2021.

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

3 unchanged sentences

Net Charge-Offs

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

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

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

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

On a portfolio level, net charge-offs were $409 for the twelve months ended December 31, 2021, or 0.05% of average loans.

Net charge-offs for the twelve months ended December 31, 2020 were $373 or 0.05% of average loans.

The 8-quarter average historical loss rate was 0.05% as of December 31, 2021 and 0.07% as of December 31, 2020.

Economic Factors

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

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

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

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

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

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

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

Higher levels increase credit risk. 

The interest rate environment impacts variable rate loans. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Company increased the allocation for unemployment rate. 

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

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

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

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

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

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

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

The Company sources economic data pertinent to its market from the most recently available publications.

Most economic indicators lag the report date by one to three months.

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

The COVID-19 pandemic introduced significant uncertainty and beginning in 2020, the Company implemented a qualitative factor for national unemployment filings to capture current economic data.

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

National unemployment claims escalated sharply beginning in the latter half of March 2020 and the Company reacted by substantially increasing the allowance for loan losses.

During 2021, national unemployment claims decreased considerably and average weekly claims over the last six weeks of the year were similar to pre-pandemic levels, allowing the Company to reduce the allocation for this factor.

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

As of December 30, 2021, the unemployment rate for the Company’s market area was measured as of November 30, 2021 and decreased from the measurement available at December 31, 2020, decreasing the allocation to the allowance for loan losses.

Business and personal bankruptcy filing data was available as of September 2021.

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

Compared with data available at December 31, 2020, business bankruptcies were at a similar level and received the same allocation and personal bankruptcies were slightly lower and resulted in a slightly lower allocation.

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

Higher levels increase credit risk.

The residential vacancy rate at December 31, 2021 was measured as of the third quarter of 2021 and while still lower than normal levels, worsened slightly from the data incorporated into the December 31, 2020 calculation, resulting in a higher allocation.

Housing inventory data was available as of December 31, 2021.

Levels are historically low and are lower than those at December 31, 2020.

Asset Quality Indicators

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

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

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

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

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

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

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

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

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

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

Loans rated “special mention”

and “classified”

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

Accruing loans past due 30-89 days were 0.12% of total loans net of unearned income and deferred fees and costs at December 31, 2021, a decrease from 0.19% at December 31, 2020.

Accruing loans past due 90 days or more were 0.01% of total loans, net of unearned income and deferred fees and costs at December 31, 2021 compared to 0.00% at December 31, 2020.

Nonaccrual loans at December 30, 2021 were 0.36% of total loans net of unearned income and deferred fees and costs, lower than 0.48% at December 31, 2020.

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

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

Loans rated special mention receive a 50% greater allocation for qualitative risk factors, and loans rated classified receive a 100% greater allocation for qualitative risk factors.

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

Collectively evaluated loans rated “special mention”

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

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

Collectively evaluated loans rated special mention were $3,728 at December 31, 2021, lower than $8,035 at December 31, 2020.

Collectively evaluated loans rated classified were $1,064 at December 31, 2021 and $473 at December 31, 2020.

Other Factors

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

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

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

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

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

The interest rate environment impacts variable rate loans.

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

The interest rate environment is at a low level as of December 31, 2021, unchanged from the level at December 31, 2020.

The low level of interest rates indicates no additional credit risk.

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

Competition remained at similar levels from December 31, 2019. 

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

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

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

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

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

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

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

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

Competition remained at similar levels to those at December 31, 2020.

The legal and regulatory environments remain in a similar posture to that at December 31, 2020.

Lending policies, loan review procedures and management’s experience influence credit risk.

Since December 31, 2020, there have been no changes that affect credit risk to the Company’s lending policies or loan review procedures.

During the fourth quarter, the Company’s Chief Credit Officer resigned.

The Company allocated to the allowance for loan losses to reflect the increased risk that results from a change in management.

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

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

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

Total high risk loans decreased $23,101 or 20.41% from the level at December 31, 2020, resulting in a decreased allocation.

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

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

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

At December 31, 2020, the Company allocated to the allowance for loan losses for certain COVID-19 related modifications.

As of December 31, 2021, there were no loans with COVID-19 related modifications still in the modification period, and no allocation was taken.

Unallocated Surplus

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

The unallocated surplus at December 30, 2021 is $361 or 4.94% in excess of the calculated requirement.

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

The unallocated surplus at December 31, 2020 was $396 or 4.89% in excess of the calculated requirement.

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

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

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

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

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

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

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

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

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

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

The most recently available data showed improvements that decreased the required level of the allowance for loan losses at December 31, 2021 from December 31, 2020 including loans considered high risk, business and personal bankruptcy filings, the unemployment rate, criticized loans and certain loans with COVID-19 related modifications.

Other indicators, including accruing loans past due 90 days or more and residential vacancy, showed worsening from levels at December 31, 2020 and increased the required level of the allowance for loan losses.

To reflect the impact of the COVID-19 pandemic, the Company added a qualitative factor for national unemployment filings beginning with the first quarter of 2020.

During 2020, national unemployment filings increased dramatically from pre-pandemic levels and was the source of most of the provision taken for 2020.

During 2021, unemployment filings declined substantially, which was a key factor in reducing the required level of the allowance for loan losses and resulted in a recovery for the year ended December 31, 2021.

The Company augmented the calculated requirement with an unallocated surplus of 4.94% to mitigate some of the uncertainty caused by the lingering pandemic.

Based on analysis of historical indicators, asset quality and economic factors, management believes the level of allowance for loan losses is reasonable for the credit risk in the loan portfolio as of December 31, 2021.

Please refer to Note 5:

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

Quarterly Results of Operations

The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2020, 2019 and 2018:

$ in thousands, except per share data

Income Statement Data:

Interest income

Interest expense

Net interest income

Provision for loan losses

Noninterest income

Noninterest expense

Per Share Data:

Basic net income per common share

Fully diluted net income per common share

Cash dividends per common share

Book value per common share

$ in thousands, except per share data

Income Statement Data:

Interest income

Interest expense

Net interest income

Provision for (recovery of) loan losses

Noninterest income

Noninterest expense

Per Share Data:

Basic net income per common share

Fully diluted net income per common share

Cash dividends per common share

Book value per common share

$ in thousands, except per share data

Income Statement Data:

Interest income

Interest expense

Net interest income

Provision for (recovery of) loan losses

Noninterest income

Noninterest expense

Per Share Data:

Basic net income per common share

Fully diluted net income per common share

Cash dividends per common share

Book value per common share

Please refer to Note 5of Notes to Consolidated Financial Statements for further information on collectively evaluated loans, individually evaluated impaired loans and the unallocated portion of the allowance for loan losses.

Balance Sheet

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

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

Total assets at December 31, 2021 were $1,702,175, an increase of $182,502 or 12.01%, from $1,519,673 at December 31, 2020.

Growth in assets was fueled by growth in customer deposits, which increased $197,444 or 15.22% from $1,297,143 at December 31, 2020 to $1,494,587 at December 31, 2021.

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

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

Consumer real estate loans include conventional and junior lien mortgages, equity lines and investor-owned residential real estate.

Commercial real estate loans are comprised of owner-occupied and leased nonfarm, nonresidential properties, multi-family residence loans and farmland.

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

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

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

At December 31, 2021, PPP loans were $1,094 with deferred fees of $42. 

At December 31, 2020, PPP loans were $36,903 with net deferred fees of $911.

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

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

Types of Loans

    Maturities and Interest Rate Sensitivities

The following table presents maturities and interest rate sensitivities for loans.

Loans are presented on a gross basis.

$ in thousands

December 31, 2021

 5 Years

6-15 Years

Real estate construction

3 unchanged sentences

Public sector and IDA

Consumer non-real estate

Less unearned income and deferred fees (2)

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

Less allowance for loans losses

Total loans, net

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

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

Maturities and Interest Rate Sensitivities

The following table presents maturities and interest rate sensitivities for commercial non-real estate, commercial real estate and real estate construction loans.

$ in thousands

December 31, 2020

After 5 Years

Commercial non-real estate (1)

Commercial real estate

Real estate construction

Consumer non-real estate loans

Less loans with predetermined interest rates

Loans with adjustable rates

Includes PPP loans totaling $36,903.

Risk Elements

The following table presents aggregate amounts for nonaccrual loans, restructured loans in nonaccrual, other real estate owned net, and accruing loans which are contractually past due ninety days or more as to interest or principal payments, and accruing restructured loans.

$ in thousands

Nonaccrual loans

Real estate construction

Consumer real estate

Commercial real estate

Commercial non-real estate

Public sector and IDA

Consumer non-real estate

Total nonaccrual loans

Restructured loans (TDR Loans) in nonaccrual

Real estate construction

Consumer real estate

Commercial real estate

Commercial non-real estate

Public sector and IDA

Consumer non-real estate

Total restructured loans in nonaccrual

Total nonperforming loans

Other real estate owned, net

Total nonperforming assets

Accruing loans past due 90 days or more

Real estate construction

Consumer real estate

Commercial real estate

Commercial non-real estate

Public sector and IDA

Consumer non-real estate

Total accruing loans past due 90 days or more

Accruing restructured loans

Real estate construction

Consumer real estate

Commercial real estate

Commercial non-real estate

Public sector and IDA

Consumer non-real estate

Total accruing restructured loans

Loan loss and other indicators related to asset quality are presented in the Loan Loss Data table.

Loan Loss Data Table

$ in thousands

Provision for (recovery of) loan losses

Net charge-offs to average net loans

Allowance for loan losses to loans, net of unearned income and deferred fees (1)

Allowance for loan losses to nonperforming loans

Allowance for loan losses to nonperforming assets

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

Nonaccrual loans

Restructured loans in nonaccrual status

Other real estate owned, net

Total nonperforming assets

Accruing loans past due 90 days or more

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

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

Excluding PPP loans, the ratio would be 1.16%.

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

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

Modifications and Troubled Debt Restructurings”

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

Total impaired loans at December 31, 2020 were $4,903, of which $3,493 were in nonaccrual status.

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

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

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

Modifications and T roubled D ebt R estructuring s

Modifications and Troubled Debt Restructurings

Modifications

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

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

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

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

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

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

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

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

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

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

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

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

COVID-19 Modifications

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

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

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

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

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

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

The Company codes modifications to assist in identifying TDRs.

When the COVID-19 pandemic began, the Company added coding to identify modifications to borrowers experiencing COVID-19 related hardship.

Modifications Made for Competitive Purposes

During the year ended December 31, 2021, the Company provided 875 modifications for competitive reasons to loans totaling $112,718.

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

For the twelve months ended December 31, 2020, the Company provided non-TDR modifications for competitive reasons to 1,047 loans totaling $152,681.

Modifications Related to COVID-19

The COVID-19 pandemic negatively impacted a significant number of the Company’s borrowers, and may adversely impact some borrowers in the future.

Since the COVID-19 pandemic began in March 2020, the Company provided modifications related to COVID-19 financial difficulty, including payment extensions and interest only periods.

The CARES Act, the CAA and regulatory guidance specify criteria that, if met, permit an election not to designate the loans as TDRs.

The TDRs designated during the year ended December 31, 2021 resulted from COVID-19 related modifications that did not meet the legal and regulatory criteria to avoid designation as TDR.

All of the Company’s other COVID-19 related modifications met the criteria and were not designated TDR.

The following tables provide information regarding COVID-19 related modifications for the years ended December 31, 2021 and December 31, 2020.

Twelve Months Ended December 31,

Modification s To Borrowers Impacted by the  

Modifications To Borrowers Impacted by the

COVID-19 Pandemic

(in thousands)

Rate reductions (1)

(in thousands)

Payment extensions (2)

Maturity date extension

Interest-only period for amortizing loans (2)

Maturity date extension

Rate reductions (1)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TDR Designation

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

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

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

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

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

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

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

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

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

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

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

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

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

There were no new TDRs designated in 2020.

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

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

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

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

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

The following tables present the delinquency status of TDR loans.

All COVID-19 related modifications for payment extensions and interest-only periods have returned to contractual terms as of December 31, 2021.

The Company’s TDRs, by delinquency status, are presented below:

$ in thousands

TDR Delinquency Status as of December 31, 2021

Real estate construction

Consumer real estate

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Commercial non-real estate

Public sector and IDA

Consumer non-real estate

Total TDR Loans

$ in thousands

TDR Delinquenc y Status as of December 31, 2019

Real estate construction

Consumer real estate

Commercial real estate

Commercial non-real estate

Public sector and IDA

Consumer non-real estate

Total TDR Loans

$ in thousands

TDR Delinquency Status as of December 31, 2020

Real estate construction

Consumer real estate

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Commercial non-real estate

Public sector and IDA

Consumer non-real estate

Total TDR Loans

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

Summary of Loan Loss Experience

Analysis of the Allowance for Loan Losses

The following table shows average loan balances at the end of each period;

changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category;

and additions to the allowance which have been charged to operating expense:

 Loan Loss Data 

The following table provides information about the allowance for loan losses, nonperforming assets and accruing loans past due 90 days or more:

$ in thousands

Allowance for loan losses

Total loans, net of unearned income and deferred fees

Allowance for loan losses to loans, net of unearned income and deferred fees

Nonaccrual loans

TDR loans in nonaccrual status

Total nonperforming loans

Other real estate owned, net

Total nonperforming assets

Nonperforming loans to total loans, net of unearned income and deferred fees and costs

Allowance for loan losses to nonperforming loans

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

Allowance for loan losses to nonperforming assets

Accruing loans past due 90 days or more

Management analyzes many factors to determine the appropriate level for the allowance for loan losses and resultant provision expense, including the historical loss rate, the quality of the loan portfolio as determined by management, diversification as to type of loans in the portfolio, internal policies and economic factors. The allowance for loan losses at December 31, 2020 reflected stressed economic data and a high level of uncertainty associated with the COVID-19 pandemic. 

The percentage of the allowance for loan losses to total loans decreased from December 31, 2020 to December 31, 2021. 

Improved economic conditions at December 31, 2021, as well as lower loss rates, decreases in the amount of loans considered high risk, criticized loans and certain loans with COVID-19 related modifications, led to the reduction of the percentage of the allowance for loan losses to loans. 

Nonperforming loans and other real estate owned (“OREO”), together nonperforming assets, improved from December 31, 2020 to December 31, 2021, while accruing loans past due 90 days or more worsened slightly. 

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

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

Analysis of Net Charge-Offs

The following tables show net charge-offs, average loan balance and the percentage of charge-offs to average loan balance for each of the Company’s loan segments at the end of each period. 

Average loans are presented net of unearned income and net deferred fees.

$ in thousands

December 31, 2021

Net Charge-Offs (Recoveries)

Average Loans

Allowance for loan losses at beginning of year

Percentage of Net Charge-Offs (Recoveries) to Average Loans

Real estate construction

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Commercial non-real estate

Public Sector and IDA

Public Sector  and IDA

Consumer non-real estate

Total loans charged off

$ in thousands

December 31, 2020

Net Charge-Offs (Recoveries)

Average Loans

Percentage of Net Charge-Offs (Recoveries) to Average Loans

Real estate construction

2 unchanged sentences

Commercial non-real estate

Public Sector and IDA

Public Sector  and IDA

Consumer non-real estate

Total recoveries

Net loans charged off

Provision for (recovery of) loan losses

Allowance for loan losses at end of year

Net charge-offs to average loans (1)

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

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

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Any loan amount in excess of collateral value is charged off and the collateral is taken into OREO.

Management considers net charge-offs over the most recent eight quarters to determine the historical loss rate to be applied to the calculation.

The historical loss rate contributes significantly to the required level for the allowance for loan losses.

Allocation of the Allowance for Loan Losses

The allowance for loan losses has been allocated according to the amount deemed necessary to provide for anticipated losses within the categories of loans for the years indicated as follows:

The allowance for loan losses has been allocated according to the amount deemed necessary to provide for anticipated losses within the categories of loans for the years indicated. 

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

$ in thousands

Percent of Loans to

Total Loans (1)

December 31, 2021

December 31, 2020

Allowance 

Percent of 

Loans to 

Percent of 

Allowance to 

Allowance 

Percent of 

Loans to 

Percent of 

Real estate construction

Consumer real estate

Commercial real estate

Commercial non-real estate

Public sector and IDA

Consumer non-real estate

Public sector and IDA     

Consumer non-real estate     

Unallocated     

An analysis of the allowance for loan losses by impairment basis follows. 

Loans are presented on a gross basis.

An analysis of the allowance for loan losses by impairment basis follows:

$ in thousands

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Allowance as a percentage of loans, net of unearned income and deferred fees and costs

Loans are presented on a gross basis.

Individually-evaluated impaired loans are valued using the fair value of the underlying collateral or the present value of cash flows for each loan.

Valuation procedures for impaired loans resulted in a required reserve for impaired loans of $75 at December 31, 2020, $110 at December 31, 2019 and $139 at December 31, 2018.

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

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

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

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

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

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

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

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

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

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

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

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

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The Company’s investment portfolio includes corporate bonds.

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

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

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

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

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

The fair value of available for sale securities is reflected on the Company's balance sheet, while held to maturity securities are reported at amortized cost.

The fair value of available for sale securities is reflected on the Company's balance sheet.

In making investment decisions, management follows internal policy guidelines that help to limit risk by specifying parameters for both security quality and industry and geographic concentrations.

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Additional information about securities available for sale and securities held to maturity can be found in Note 3 of the Notes to Consolidated Financial Statements.

 Maturities and Associated Yields

The following table presents the maturities for securities available for sale and restricted stock at their carrying values as of December 31, 2020 and weighted average yield for each range of maturities.

Maturities and Associated Yields

The following table presents the maturities for debt securities available for sale at their carrying values as of December 31, 2021 and weighted average yield for each range of maturities. 

Weights are based upon the value of each security.

$ in thousands

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government agencies

Weighted average yield

Mortgage-backed securities

Weighted average yield

States and political subdivision –

nontaxable (1)

Restricted stock:

Restricted stock

Weighted average yield

Rates shown represent weighted average yield on a fully taxable basis.

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government agency securities, the Company has no securities with any issuer that exceeds 10% of stockholders’

Total deposits increased by $177,390 or 15.84%, from $1,119,753 at December 31, 2019 to $1,297,143 at December 31, 2020.

The two greatest impacts came from growth of $119,811 in interest-bearing demand deposits and growth of $74,927 in noninterest-bearing deposits.

During the first quarter of 2020, the Company decreased its deposit offering rates as a result of the Federal Reserve decreases in the Fed Funds rate.

When December 31, 2019 is compared with December 31, 2018, total deposits increased $67,811, or 6.45%, from $1,051,942 at December 31, 2018, primarily due growth in interest-bearing demand deposits and time deposits.

The following table presents deposit categories:

December 31, 2021

December 31, 2020

Percent Change

Noninterest-bearing demand deposits

Interest-bearing demand deposits

Saving deposits

Time deposits

Total deposits

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

The Company’s deposits do not include any brokered deposits.

Time deposits decreased due to decreased offering rates.

All other categories of deposits increased, due in large part to government stimulus funds received by municipal depositors and other depositors.

Average Amounts of Deposits and Average Rates Paid

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Average total deposits

Time Deposits of $ 25 0 or More

The following table sets forth time certificates of deposit and other time deposits of $250 or more:

Uninsured Deposits

FDIC insurance covers deposits of up to $250 per depositor. 

As of December 31, 2021, $599,948 of the Bank's deposits were uninsured. 

The following table sets forth time deposit that exceed $250.

$ in thousands

December 31, 2021

3 Months or Less

Over 3 Months

2 unchanged sentences

Through 12 Months

Over 12 Months

Total time deposits of $250 or more

Derivatives and Market Risk Exposures

The Company is not a party to derivative financial instruments with off-balance sheet risks such as futures, forwards, swaps, and options.

The Company engages in derivative financial instruments associated with its secondary market operation. 

The derivatives are valued within other assets and other liabilities. 

Please refer to Note 1 of Notes to Consolidated Financial Statements for information on derivative valuation. 

The Company is not a party to derivatives with off-balance sheet risks such as futures, forwards, swaps, and options.

The Company is a party to financial instruments with off-balance sheet risks such as commitments to extend credit, standby letters of credit, and recourse obligations in the normal course of business to meet the financing needs of its customers.

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See Note 14 of Notes to Consolidated Financial Statements for information relating to concentrations of credit risk.

The Company has an asset/liability program to manage its interest rate risk.

This program provides management with information related to the rate sensitivity of certain assets and liabilities and the effect of changing rates on profitability and capital accounts.

The effects of changing interest rates are primarily managed through adjustments to the loan portfolio and deposit base, to the extent competitive factors allow.

The investment portfolio is generally longer term.

Adjustments for asset and liability management are made when securities are called or mature and funds are subsequently reinvested.

Securities may be sold for reasons related to credit quality or regulatory limitations, and in limited circumstances, securities available for sale have been disposed for interest rate risk management.

No trading activity for this purpose is planned in the foreseeable future, though it does remain an option.

While the asset/liability planning program is designed to protect the Company over the long term, it does not provide near-term protection from interest rate shocks, as interest rate sensitive assets and liabilities do not by their nature move up or down in tandem in response to changes in the overall rate environment.

The Company’s profitability in the near term may be temporarily negatively affected in a period of rapidly rising or rapidly falling rates, because it takes some time for the Company to change its rates to adjust to a new interest rate environment.

See Note 15 of Notes to Consolidated Financial Statements for information relating to fair value of financial instruments and comments concerning interest rate sensitivity.

Securities may be sold for reasons related to credit quality, to maintain compliance with regulatory limitations or for interest rate risk management.

No trading activity is planned in the foreseeable future.

See Interest Rate Sensitivity for further details on asset liability management and Note 15 of Notes to Consolidated Financial Statements for information relating to fair value of financial instruments.

Liquidity measures the Company’s ability to meet its financial commitments at a reasonable cost.

1 unchanged sentence

The Company has diverse liquidity sources, including customer and purchased deposits, customer repayments of loan principal and interest, sales, calls and maturities of securities, Federal Reserve discount window borrowing, short-term borrowing, and FHLB advances.

At December 31, 2020, the Bank did not have discount window borrowings, short-term borrowings, or FHLB advances.  To assure that short-term borrowing is readily available, the Company tests accessibility annually.

At December 31, 2021, the Bank did not have purchased deposits, discount window borrowings, short-term borrowings, or FHLB advances.  To assure that short-term borrowing is readily available, the Company tests accessibility annually.

The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters.

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In the normal course of business, we enter into certain contractual obligations, including obligations to make future payments on lease arrangements, contractual commitments with depositors, and service contracts.

The table below presents our significant contractual obligations as of December 31, 2020, except for pension and other postretirement benefit plans, which are included in Note 8, "Employee Benefit Plans," of Notes to Consolidated Financial Statements in this Form 10-K.

The table below presents our significant contractual obligations as of December 31, 2021, except for pension and other postretirement benefit plans, which are included in Note 8 of Notes to Consolidated Financial Statements in this Form 10-K.

$ in thousands

10 unchanged sentences

Total stockholders’

equity at December 31, 2020 was $200,607, an increase of $16,881, or 9.19%, from the $183,726 at December 31, 2019.

equity at December 31, 2021 was $191,751, a decrease of $8,856, or 4.41%, from the $200,607 at December 31, 2020.

The largest component of stockholders’

equity was retained earnings of $189,547, which included net income of $16,077, offset by dividends of $9,000 and repurchase of shares of $1,650.

Total stockholders’

equity decreased by $6,512 or 3.42%, from $190,238 on December 31, 2018 to $183,726 on December 31, 2019.

equity, retained earnings, decreased from $189,547 at December 31, 2020 to $188,229 at December 31, 2020, due to dividends of $8,806 and repurchase of shares of $12,894, offset by net income of $20,382.

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

National Bank of Blacksburg is subject to various capital requirements administered by banking agencies, including an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments.

NBB is subject to various capital requirements administered by banking agencies, including an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments.

Risk-based capital ratios are calculated in compliance with OCC rules based on the Basel III Capital Rules.

The Bank’s ratios are well above the required minimums at December 31, 2021 and December 31, 2020.

Risk based capital ratios for the Bank are shown in the following tables.

4 unchanged sentences

Regulatory Capital Minimum

Ratios with Capital Conservation Buffer

Ratios with Capital

Conservation Buffer

Total Capital Ratio

2 unchanged sentences

Leverage Ratio

Risk-based capital ratios are calculated in compliance with FDIC rules based on Basel III Capital Rules.

The Bank’s ratios are well above the required minimums at December 31, 2020 and December 31, 2019.

Off-Balance Sheet Arrangements

24 unchanged sentences

Operating leases are for buildings used in the Company’s day-to-day operations.

Quantitative and Qualitative Disclosures About Market Risk

Information about market risk is set forth above in the “Interest Rate Sensitivity”

and “Derivatives and Market Risk Exposure”

sections of the Management’s Discussion and Analysis.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity