What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-11 compared with 2021-03-18 · 537 added, 794 removed, 1467 unchanged (48% of the section changed)

1 unchanged sentence

Consolidated Balance Sheets

$ in thousands, except share and per share data

$ in thousands, except per share data

Cash and due from banks

76 unchanged sentences

Authorized 10,000,000 shares;

issued and outstanding, 6,432,020 shares in 2020 and 6,489,574 in 2019

issued and outstanding, 6,063,937 shares at December 31, 2021 and 6,432,020 at December 31, 2020

Retained earnings

1 unchanged sentence

189,547  

Accumulated other comprehensive income (loss), net

Accumulated other comprehensive (loss) income, net

Total stockholders’

10 unchanged sentences

Interest and fees on loans

$ 34,923  

$ 34,523  

Interest on interest-bearing deposits

2 unchanged sentences

Total interest income

44,987  

44,008  

Interest Expense

Interest on deposits

Interest on borrowings

Total interest expense

Net interest income

41,889  

38,171  

Provision for (recovery of) loan losses

Net interest income after provision for (recovery of) loan losses

42,287  

36,180  

Noninterest Income

7 unchanged sentences

Salaries and employee benefits

15,747  

14,674  

Occupancy, furniture and fixtures

1 unchanged sentence

FDIC assessment

Intangible assets amortization

Net costs of other real estate owned

Franchise taxes

Write-down of insurance receivable

Other operating expenses

Total noninterest expense

26,080  

24,970  

Income before income taxes

24,633  

19,154  

Income tax expense

Basic net income per common share

Fully diluted net income per common share

$ 20,382  

$ 16,077  

Basic and fully diluted net income per common share

$ 3.28  

$ 2.48  

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

1 unchanged sentence

Years ended December 31,

$ in thousands, except per share data

$ 16,077  

$ in thousands

$ 20,382  

$ 16,077  

Other Comprehensive Income ( Loss ) , Net of Tax

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

Other Comprehensive (Loss) Income, Net of Tax

Unrealized holding (loss) gain on available for sale securities net of tax of ($2,740) in 2021 and $3,502 in 2020

13,176  

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

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

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

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

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

Reclassification adjustment for gain included in net income, net of tax of ($1) in 2021 and ($23) in 2020

Net pension gain (loss) arising during the period, net of tax of $862 in 2021 and ($393) in 2020

Less amortization of prior service cost included in net periodic pension cost, net of tax of ($2) in 2021 and ($23) in 2020

Other comprehensive (loss) income, net of tax of ($1,881) in 2021 and $3,063 in 2020

11,526  

2 unchanged sentences

$ 27,603  

$ 13,761  

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

Consolidated Statements of Changes in Stockholders ’

$ in thousands, except share and per share data

$ in thousands, except per share data

Retained Earnings

Accumulated Other Comprehensive Income (Loss)

Accumulated Other

Comprehensive

Income (Loss)

Balance at December 31, 2019

4 unchanged sentences

16,077  

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

Cash dividend ($ 1.21 per share)

Balance at December 31, 201 8

$ 8,698  

$ 193,625  

$ 190,238  

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

11,526  

Other comprehensive income, net of tax of $ 950

Cash dividend ( $1.39 per share)

Stock repurchase ( 57,554 shares)

Balance at Decembe r 31, 201 9

$ 8,112  

Balance at December 31, 2020

$ 8,040  

2 unchanged sentences

$ 200,607  

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

20,382  

Other comprehensive loss, net of tax of ( $1,881 )

Cash dividend ( $1.44 per share)

4 unchanged sentences

$ 191,751  

$ 200,607  

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

Consolidated Statements of Cash Flows

Years e nded December 31,

Years ended December 31,  

$ in thousands

Cash Flows from Operating Activities

$ 20,382  

$ 16,077  

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

Provision for (recovery of) loan losses

Deferred income tax expense (benefit)

(Recovery of) provision for loan losses

Deferred income tax expense

Depreciation of premises and equipment

Amortization of intangibles

Amortization of premiums and accretion of discounts, net

Loss (gain) on disposal of fixed assets

Gain on disposal of fixed assets

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

5 unchanged sentences

Sale of mortgage loans held for sale

18,287  

40,362  

Contribution to defined benefit plan

4 unchanged sentences

Net cash provided by operating activities

22,882  

13,793  

Cash Flows from Investing Activities

1 unchanged sentence

Proceeds from repayments of mortgage-backed securities

44,881  

18,068  

Proceeds from calls, sales and maturities of securities available for sale

Proceeds from calls and maturities of securities held to maturity

20,377  

126,840  

Purchases of securities available for sale

2 unchanged sentences

Collections of loan participations

15,191  

Loan originations and principal collections, net

2 unchanged sentences

Recoveries on loans charged off

Purchase of BOLI

Additions to premises and equipment

1 unchanged sentence

Net cash used in investing activities

 (continued)

Cash Flows from Financing Activities

1 unchanged sentence

Net change in other deposits

208,058  

215,836  

Cash dividends paid

Shares repurchased

Net cash provided by (used in) financing activities

Net cash provided by financing activities

175,284  

166,668  

Net change in cash and due from banks

Cash and due from banks at beginning of year

13,147  

10,290  

Cash and due from banks at end of year

$ 8,768  

$ 13,147  

Supplemental Disclosures of Cash Flow Information

Interest paid on deposits and borrowed funds

$ 3,106  

$ 5,925  

Income taxes paid

3 unchanged sentences

Loans transferred to repossessed assets

Unrealized gain (loss) on securities available for sale

Unrealized net gain on securities transferred from HTM to AFS

Fair value of securities transferred from held to maturity to available for sale

Unrealized (loss) gain on securities available for sale

16,570  

Minimum pension liability adjustment

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

Increase in operating lease liability during the period

Lease liabilities arising from obtaining right-of-use assets during the period

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

6 unchanged sentences

The accounting and reporting policies of the Company conform to GAAP and to general practices within the banking industry.

The following is a summary of significant accounting policies.

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

The following summarizes significant accounting policies.

Cash and Cash Equivalents

7 unchanged sentences

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

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

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

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

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

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

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

The unrealized gain/loss on the re-designated securities is included in accumulated other comprehensive income, net of deferred tax.

The Company follows the accounting guidance related to recognition and presentation of OTTI.

The guidance specifies that if (a) an entity does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that the entity will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired, unless there is a credit loss.

When criteria (a) and (b) are met, the entity will recognize the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive income.

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

The Company follows the accounting guidance related to recognition and presentation of other–than-temporary impairment (“OTTI”).

When criteria (a) and (b) are met, the entity will recognize the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive (loss) income. 

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

6 unchanged sentences

The Company, through its banking subsidiary, provides mortgage, commercial, and consumer loans to customers.

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

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

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

Interest income is accrued on the unpaid principal balance.

Unearned income on dealer-originated loans and loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

Purchase premium or discount is recognized as an adjustment of the related loan yield using the interest method.

The Bank’s loan policy is updated and approved by the Board of Directors annually and disseminated to lending and loan portfolio management personnel to ensure consistent lending practices.

The policy communicates the Company’s risk tolerance by prescribing underwriting guidelines and procedures, including approval limits and hierarchy, documentation standards, requirements for collateral and loan-to-value limits, debt coverage, overall creditworthiness and guarantor support.

Of primary consideration is the repayment ability of the borrowers and (if secured) the collateral value in relation to the principal balance.

Collateral lowers risk and may be used as a secondary source of repayment.

The credit decision must be supported by documentation appropriate to the type of loan, including current financial information, income verification or cash flow analysis, tax returns, credit reports, collateral information, guarantor verification, title reports, appraisals (where appropriate) and other documents.

The Company’s loans are grouped into six segments:

1 unchanged sentence

Each segment is subject to certain risks that influence pricing, loan structures, approval requirements, reserves, and ongoing credit management.

Real Estate Construction Loans.

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

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

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

Construction loans are underwritten against projected cash flows from rental income, business and/or personal income from an owner-occupant or the sale of the property to an end-user.

Associated risks may be mitigated by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements.

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

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

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

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

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

Consumer Real Estate Loans.

The Bank offers a variety of first mortgage and junior lien loans secured by primary residences within our markets.

The credit quality of consumer real estate is subject to risks associated with the borrower’s repayment ability and collateral value.

Credit decisions are primarily based on loan-to-value (“LTV”) ratios, debt-to-income (“DTI”) ratios, liquidity and net worth.

Income and financial information is obtained from personal tax returns, personal financial statements and employment documentation.

A maximum LTV ratio of 80% is generally required.

The DTI ratio is limited to 43% of gross income.

Consumer real estate mortgages may have fixed interest rates for the entire term of the loan or variable interest rates subject to change after the first, third, or fifth year.

Variable rates are based on the weekly average yield of United States Treasury Securities and are underwritten at fully-indexed rates.         

Home equity loans are secured primarily by second mortgages on residential property.

The underwriting policy for home equity loans generally permits aggregate (the total of all liens secured by the collateral property) borrowing availability up to 80% of the appraised value of the collateral.

We offer both fixed rate and variable rate home equity loans, with variable rate loans underwritten at fully-indexed rates.

Decisions are primarily based on LTV ratios, DTI ratios, liquidity and credit history.

We do not offer home equity loan products with reduced documentation.

We do not offer certain high risk loan products such as interest-only consumer mortgage loans, hybrid loans, payment option adjustable rate mortgages (“ARMs”), reverse mortgage loans, loans with initial teaser rates or any product with negative amortization.

Hybrid loans are loans that start out as a fixed rate mortgage, but after a set number of years they automatically adjust to an ARM.

Payment option ARMs usually have adjustable rates, for which borrowers choose their monthly payment of either a full payment, interest only, or a minimum payment which may be lower than the payment required to reduce the balance of the loan in accordance with the originally underwritten amortization.

Commercial Real Estate Loans.

Commercial real estate loans generally are secured by first mortgages on real estate, including multifamily residential real estate, commercial real estate occupied by the owner/borrower, and commercial real estate leased to non-owners.

Properties financed include retail centers, office space, hotels and motels, apartments, and industrial properties.

Loans in the commercial real estate segment are impacted by economic risks from changing commercial real estate markets, rental markets for multi-family housing and commercial buildings, and economic factors that would impact the businesses housed by the commercial real estate.

Underwriting decisions are based upon an analysis of the economic viability of the collateral and creditworthiness of the borrower.

The Bank obtains appraisals from qualified certified independent appraisers to establish the value of collateral properties.

The loan amount is generally limited to 80% of the lower of cost or appraised value and is individually determined based on the property type, quality, location and financial strength of any guarantors.

The property’s projected net cash flows compared to the debt service (often referred to as the “debt service coverage ratio”) is required to be 115% or greater and is computed after deduction for a vacancy factor and property expenses, as appropriate.

Borrower cash flow may be supplemented by a personal guarantee from the principal(s) of the borrower and guarantees from other parties.

The Bank may employ stress testing techniques on higher balance loans to determine repayment ability in a changing rate environment before granting loan approval.

The Bank requires title insurance, fire, extended coverage casualty insurance and flood insurance, if appropriate, in order to protect the security interest in the underlying property.

Commercial Non-Real Estate Loans.

Commercial non-real estate loans are secured by collateral other than real estate, or are unsecured.

Credit risk for commercial non-real estate loans is subject to economic conditions, generally monitored by local business bankruptcy trends, interest rates, borrower repayment ability and collateral value (if secured).

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

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

Credit risk for commercial non-real estate loans is subject to economic conditions, borrower repayment ability and collateral value (if secured).

Commercial and agricultural loans primarily finance equipment acquisition, expansion, working capital, and other general business purposes.

Because these loans have a higher degree of risk, the Bank generally obtains collateral such as inventory, accounts receivables or equipment and personal guarantees from the borrowing entity’s principal owners.

The Bank’s policy limits lending up to 60% of the appraised value for inventory, up to 90% of the lower of cost of market value of equipment and up to 70% for accounts receivables less than 90 days old.

Credit decisions are based upon an assessment of the financial capacity of the applicant, including the primary borrower’s ability to repay within proposed terms, a risk assessment, financial strength of guarantors and adequacy of collateral.

Credit agency reports of individual owners’

credit history supplement the analysis.

Included within this category are SBA PPP loans.

The Bank provided qualifying customers with small business loans to pay payroll and other qualifying expenses.

The vast majority of the Bank’s PPP loans have been repaid.

Public Sector and IDA Loans.

Public sector and IDA loans are extended to municipalities and related entities within the Bank’s geographical footprint.

Borrowers include general taxing authorities such as a city or county, industrial/economic development authorities or utility authorities.

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

Repayment sources are derived from taxation, such as property taxes and sales taxes, or revenue from the project financed with the loan. The Company’s underwriting considers economic and population trends of the municipality and the municipality’s reserves, pension liabilities and other liabilities.

Consumer Non-Real Estate Loans.

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

1 unchanged sentence

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

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

All consumer non-real estate loans are analyzed for debt-to-income ratios and previous credit history, as well as for general risks for the portfolio, including local unemployment rates, personal bankruptcy rates and interest rates.

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

Interest income is accrued on the unpaid principal balance.

Purchase premium or discount is recognized as an adjustment of the related loan yield using the interest method.

Our procedures for underwriting consumer loans include an assessment of an applicant’s overall financial capacity, including credit history and the ability to meet existing obligations and payments on the proposed loan.

If the loan is secured by an automobile or other collateral, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount.

We require borrowers to maintain collision insurance on automobiles securing consumer loans.

Past Due Status and Nonaccrual Designation

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

Credit card payments not received within 30 days after the statement date, real estate loan payments not received within the payment cycle and all other non-real estate secured loans for which payment is not made within the required payment cycle are considered 30 days past due.

Management closely monitors past due loans in timeframes of 30 - 89 days past due and 90 or more days past due.

The Company considers multiple factors when determining whether to discontinue accrual of interest on individual loans.

1 unchanged sentence

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

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

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

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

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

Any interest payments received on nonaccrual loans of all classes are credited to the principal balance of the loan.

Loans of all classes that have not been restructured and that have been designated nonaccrual are returned to accrual status when all the principal and interest amounts contractually due are current;

future payments are reasonably assured;

and for loans that financed the sale of OREO property, loan-to-value thresholds are met.

Loans that have been restructured that have been designated nonaccrual may return to accrual status after six months of timely repayment performance.

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

Accrued interest is reversed against income when a loan is placed in nonaccrual status.

Any interest payments received during a loan’s nonaccrual period are credited to the principal balance of the loan.

Nonaccrual loans that are not TDR are returned to accrual status when all the principal and interest amounts contractually due are current and future payments are reasonably assured.

Nonaccrual TDR loans may return to accrual status after six months of timely repayment performance. 

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

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

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

Management closely monitors past due loans in timeframes of 30 - 89 days past due and 90 or more days past due.

Allowance for Loan Losses

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

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

When management determines that a loan balance or portion of a loan balance is not collectible, the loss is charged against the allowance.

Subsequent recoveries, if any, are credited to the allowance.

Management evaluates the allowance each quarter through a methodology that estimates losses on individual impaired loans and evaluates the effect of numerous factors on the credit risk of groups of homogeneous loans.

Specific allowances are established for individually-evaluated impaired loans based on the excess of the loan balance relative to the fair value of the loan.

Impaired loans are designated as such when current information indicates that it is probable that the Company will be unable to collect principal or interest when due according to the contractual terms of the loan agreement.

Loan relationships exceeding $ 250 in nonaccrual status or that are significantly past due, or for which a credit review identified weaknesses that indicate principal and interest will not be collected according to the loan terms, as well as TDRs, are designated impaired.

This policy is applicable to all loan classes.

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

Impaired loans

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

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

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

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

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

The estimated fair value is compared with the loan’s recorded investment (unpaid principal net of any interest payments made by the borrower during the nonaccrual period and net of any partial charge-offs, accrued interest and deferred fees and costs).

Any amount of recorded investment that exceeds estimated fair value on collateral-dependent loans, as well as any other impairment loss considered uncollectible, is charged against the allowance for loan losses.

Fair value shortfalls that are not considered uncollectible for loans that are not collateral-dependent are accrued in the allowance as specific reserves.

Impaired loans for which collection of interest or principal is in doubt are placed in nonaccrual status.

For collateral-dependent impaired loans, the amount of recorded investment that exceeds the fair value is charged off.

If fair value of an impaired loan is higher than the book value, no specific reserve is recorded, and the loan remains impaired as long as analysis indicates that collection of the loan will not occur according to the contractual terms of the loan agreement.

Collectively-evaluated loans

General allowances are established for collectively evaluated loans.

Collectively evaluated loans are grouped into classes based on similar characteristics.

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

Factors considered in determining general allowances include historical loss rates, internal risk ratings, delinquency and nonperforming rates, product mix, changes in loan policies and procedures, changes in loan review systems, changes in economic conditions, changes in management experience, industry trends, interest rate trends and changes in the competitive, legal and regulatory environment.

Charge-off policy

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

3 unchanged sentences

Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects.

Troubled Debt Restructurings

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

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

Credit quality indicators

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

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

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

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

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

Classified loans have regulatory risk ratings of “substandard”

and “doubtful.”

When the Company grants a concession to a borrower for economic or legal reasons related to a borrower’s financial condition, the loan is classified a TDR.

When the Company grants a subsequent modification to a loan that had previously been modified but not designated TDR, it considers whether the totality of the accommodations amount to a concession that, along with the evaluation of borrower financial difficulty, indicate TDR status.

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

TDR loans are individually measured for impairment.

7 unchanged sentences

The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity.

The market value of rate lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments and best effort contracts are not actively traded in stand-alone markets.

The market value of rate lock commitments and best efforts contracts is not readily ascertainable because rate lock commitments and best effort contracts are not actively traded in stand-alone markets.

The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the changes in the value of the underlying assets while taking into consideration the probability that the rate lock commitments will close.

13 unchanged sentences

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

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

The impairment test for 2021 incorporated data as of September 30, 2021.

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

3 unchanged sentences

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

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

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

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

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

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

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

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

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

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

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

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

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

The Company amortized on a straight-line basis intangible assets arising from branch purchase transactions over their useful lives, determined by the Company to be 10 to 12 years.

Prior to becoming fully amortized, core deposit intangibles were subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used.

The impairment testing showed that the expected cash flows of the intangible assets exceeded the carrying value.

The Company recognizes the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognizes changes in that funded status in the year in which the changes occur through comprehensive income.

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 techniques were appropriate to the estimate of the Company’s fair value, and that the comparable multiples are appropriate indicators of fair value, and compliant with accounting guidance.

Based upon data at September 30, 2021, each measure indicated that the Company’s fair value exceeded its book value and no impairment was indicated.

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

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

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

current and deferred.

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Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period.

During 2021 and 2020, there were no potential common shares outstanding.

The following shows the weighted average number of shares used in computing earnings per common share for the years indicated.

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6,483,230  

6,957,974  

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

Loss Contingencies

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The Company charges advertising costs to expenses as incurred.

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

Advertising expenses were $ 112 for the year ended December 31, 2021 and $ 99 for the year ended December 31, 2020.

Revenue Recognition

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Actual results could differ from those estimates.

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

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

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

Reclassifications

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

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

These reclassifications had no effect on the Company’s net income of stockholders' equity.

Recent Accounting Pronouncements

In June 2016, 

the FASB issued ASU No.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) No.

2016 - 13, “Financial Instruments –

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

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

The Company’

CECL Readiness Committee is working to 

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

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

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

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

The Company is working to ensure readiness and compliance with the standard. 

The Company has engaged with a vendor, validated data, analyzed correlations for forecasting, selected methodologies and begun running parallel models. 

Management will continue to refine assumptions that impact the calculation prior to the effective date.

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

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

Credit Losses.”

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

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and ( 4 ) validating a systematic methodology.

In March 2020, the FASB issued ASU No.

2020 - 04 “Reference Rate Reform (Topic 848 ):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.”

These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued.

It is intended to help stakeholders during the global market-wide reference rate transition period.

The guidance is effective for all entities as of March 12, 2020 through December 31, 2022.

Subsequently, in January 2021, the FASB issued ASU No.

2021 - 01 “Reference Rate Reform (Topic 848 ):

Scope.”

This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

An entity may elect to apply ASU No.

2021 - 01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued.

An entity may elect to apply ASU No.

2021 - 01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. 

The Company has a small number of participation loans that reference LIBOR. 

The Company is working with the primary banks to determine appropriate actions. 

Recently Adopted Accounting Developments

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

Simplifying the Accounting for Income Taxes.”

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

application of certain income tax-related guidance.

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

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

Early adoption is permitted.

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

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

and “large accelerated filer”

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

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

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

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

The rule revises the definition of “smaller reporting companies”

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

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

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

The classifications of “accelerated filer”

and “large accelerated filer”

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

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

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

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

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

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

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

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

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

the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period.

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

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

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

Early adoption is permitted. 

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

Recently Adopted Accounting Developments

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

(“ASU 2017 - 04”

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

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

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

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

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

ASU 2019 - 12 was effective for the Company on January 1, 2021.

The adoption of ASU 2019 - 12 did not have a material impact on the Company’s consolidated financial statements.

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

(“ASU 2018 - 13”

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

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

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

In January 2020, the FASB issued ASU 2020 - 01, “Investments –

Equity Securities (Topic 321 ), Investments –

Equity Method and Joint Ventures (Topic 323 ), and Derivatives and Hedging (Topic 815 ) –

Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”

The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. 

ASU 2020 - 01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. 

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

ASU 2020 - 01 was effective for the Company on January 1, 2021. 

The adoption of ASU 2020 - 01 did not have a material impact on the Company’s consolidated financial statements.

In October 2020, the FASB issued ASU 2020 - 08, “Codification Improvements to Subtopic 310 - 20, Receivables –

Nonrefundable fees and Other Costs.”

This ASU clarifies that an entity should reevaluate whether a callable debt security is within the scope of ASC paragraph 310 - 20 - 35 - 33 for each reporting period.

ASU 2020 - 08 was effective for the Company on January 1, 2021.

The adoption of ASU 2020 - 08 did not have a material impact on the Company’s consolidated financial statements.

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

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

Under ASC 310 - 40, “Receivables –

Troubled Debt Restructurings by Creditors”

(“ASC 310 - 40”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In December 2020, the CAA was passed. 

Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID- 19 pandemic.    

The Company modified loans in accordance with the CAA and the CARES Act.

In August 2021, the FASB issued ASU 2021 - 06, “'Presentation of Financial Statements (Topic 205 ), Financial Services—Depository and Lending (Topic 942 ), and Financial Services—Investment Companies (Topic 946 ):

Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No.

33 - 10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.

33 - 10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants.

This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No.

33 - 10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.

33 - 10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants”.

The ASU was effective upon addition to the FASB Codification.

The adoption of ASU 2021 - 06 did not have a material impact on the Company’s consolidated financial statements.

Risks and Uncertainties

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

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

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

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

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

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

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

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

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

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

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

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

Since the beginning of 2020, the COVID- 19 pandemic and efforts to reduce its spread have caused significant disruptions in the U.S.

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

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

Some measures appear to indicate a positive trajectory, however if the pandemic escalates, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows.

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

Financial position and results of operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ability to repay in future periods.

During 2020, the COVID- 19 pandemic led to declines in two key income categories:

interest income and overdraft fee income. 

Interest income was impacted by certain modification requests that reversed accrued interest when granted, and by a decreased interest rate environment.

During 2021, the number of modification requests that reduce interest income vastly decreased, though loan refinance and securities call activity spurred by the low interest rates continue to impact interest income, with reinvestment opportunities at lower rates. 

If the COVID- 19 pandemic’s evolution brings new or worsened economic impacts, these income categories and others may be negatively affected. 

Low interest rates since the beginning of the pandemic, financial aid to consumers provided by the CARES Act and the CAA, increased demand and supply chain bottlenecks have resulted in historically high levels of inflation.

Potential future increases in interest rates to address inflation may adversely affect net interest income if liabilities reprice more quickly than assets.

If future interest rate movements reduce economic activity more substantially than desired, the Company’s market area could experience a decline that would reduce lending activity and fee income.

At this time, the Company is unable to project the materiality of such an impact.

Capital and Liquidity

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

While the Company believes that it has sufficient capital to withstand a potential second economic recession if the pandemic resurges or if potential interest rate movements reduce economic activity more substantially than desired, its reported and regulatory capital ratios could be adversely impacted if credit losses increase.

The Company maintains access to multiple sources of liquidity.

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

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

Deposits have increased since the beginning of the pandemic, however, if conditions worsen and cause a large number of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

Asset valuation

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

The pandemic has not affected the Company’s ability, nor is it expected to affect the Company’s ability, to account timely for the assets on its balance sheet.

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

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

Impairment testing considers three techniques.

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

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

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

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

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

Management performed an interim quantitative goodwill impairment analysis as of March 31, 2020 and June 30, 2020.

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

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

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

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

Processes, controls and business continuity plan

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

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

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

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

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

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

Lending operations and accommodations to borrowers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lending operations, accommodations to borrowers and credit risk

The Company worked with customers directly affected by COVID- 19, providing short-term assistance in accordance with the CARES Act, the CAA and regulatory guidelines.

Assistance included providing payment extensions, periods of interest only payments to otherwise amortizing loans, and interest rate reductions.

Pandemic-related modification requests have greatly subsided and as of December 31, 2021, there were no loans remaining in a temporarily modified state for COVID- 19 relief.

If eventual credit losses are identified on loans that received modifications or other loans, accrued interest and fee income would be reversed at the time the loss is identified.

If the loans are fully or partially charged off, future requirements for the provision for loan losses expense will increase.

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

ability to repay in future periods.

The Company is closely monitoring credit quality and developments related to the pandemic.

Restriction on Cash

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

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

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

December 31, 2021

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Government agencies and corporations

$ 86,859  

$ 4,477  

$ 91,163  

States and political subdivisions

196,435  

203,961  

Mortgage-backed securities

244,780  

249,175  

Corporate debt securities

Total securities available for sale

$ 530,075  

$ 17,170  

$ 546,742  

December 31, 2020

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Government agencies and corporations

$ 119,903  

$ 1,995  

$ 121,123  

States and political subdivisions

88,092  

88,239  

Mortgage-backed securities

223,173  

221,783  

Corporate debt securities

Total securities available for sale

$ 435,166  

$ 2,951  

$ 2,854  

$ 435,263  

The amortized cost and fair value of single maturity securities available for sale at December 31, 2021, by contractual maturity, are shown below.

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Due in one year or less

$ 4,002  

$ 4,048  

Due after one year through five years

Due after five years through ten years

141,804  

146,716  

Due after ten years

378,664  

390,191  

Total securities available for sale

$ 530,075  

$ 546,742  

Information pertaining to securities with gross unrealized losses at December 31, 2021 and 2020 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

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Government agencies and corporations

$ 28,798  

State and political subdivisions

32,353  

Mortgage-backed securities

Corporate debt securities

Total temporarily impaired securities

$ 69,967  

$ 4,695  

December 31, 2020

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Government agencies and corporations

$ 53,244  

$ 38,962  

State and political subdivisions

35,934  

Mortgage-backed securities

181,279  

Total temporarily impaired securities

$ 270,457  

$ 2,769  

$ 39,553  

The Company had 291 securities with a fair value of $ 318,413 that were temporarily impaired at December 31, 2021.  

The total unrealized loss on these securities was $ 7,067 .

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

Of the temporarily impaired total, 48 securities with a fair value of $ 51,999 and an unrealized loss of $ 2,145 have been in a continuous loss position for 12 months or more.

The Company has determined that these securities are temporarily impaired at December 31, 2021 for the reasons set out below.

Government agencies.

Unrealized losses of $ 1,180 on 28 securities with a fair value of $ 26,792 were caused by interest rate and market fluctuations.

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

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

States and political subdivisions.

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

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

The Company reviewed financial statements and cash flows for the 17 securities with a fair value of $ 20,542 and unrealized losses of $ 793 and determined that the unrealized loss is primarily the result of interest rate and market fluctuations and not associated with impaired financial status.

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

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Mortgage-backed securities.

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

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

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

Unrealized losses of $ 172 on 3 securities with a fair value of $ 4,665 were caused by interest rate and market fluctuations.

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

Restricted Stock

The Company holds restricted stock of $ 1,279 as of December 31, 2020 and $ 1,220 as of December 31, 2019.

Restricted stock is reported separately from available for sale securities and held to maturity securities.

The Company held restricted stock of $ 845 at December 31, 2021 and $ 1,279 at December 31, 2020.

Restricted stock is reported separately from available for sale securities.

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

10 unchanged sentences

Pledged Securities

At December 31, 2020 

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

At December 31, 2021 and 2020, securities with a carrying value of $ 287,023 and $ 251,048 , respectively, were pledged to secure municipal deposits and for other purposes as required or permitted by law.

Realized Securities Gains and Losses

During 2021, the Company realized net securities gains of $ 6 , all of which stemmed from calls of securities.

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

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

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

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

All other net realized gains resulted from calls of securities.

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

Information pertaining to realized gains and losses on sold and called securities follows:

1 unchanged sentence

Available for sale

$ 126,840  

$ 126,732  

For the year ended December 31, 2020

Available for sale

$ 348,032  

$ 347,466  

$ 1,157  

For the year ended December 31, 201 8

Available for sale

$ 17,287  

$ 17,270  

Held to maturity

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

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

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

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

Related Party Transactions

In the ordinary course of business, the Company, through its banking subsidiary, has granted loans to related parties, including executive officers and directors of NBI and its subsidiaries.

In the ordinary course of business, the Company, through its banking subsidiary, has granted loans to related parties, including executive officers and directors of NBI and its subsidiaries.

Total funded credit extended to related parties amounted to $ 14,822 at December 31, 2021 and $ 15,403 at December 31, 2020.

During 2021, total principal additions totaled $ 2,570 and principal payments were $ 3,151 .

Loans totaling $ 116 at December 31, 2020 were removed when a director retired and a review of related parties determined a previously reported party did not meet the definition for reporting.

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

6 unchanged sentences

The allowance for loan losses methodology incorporates individual evaluation of impaired loans and collective evaluation of groups of non-impaired loans.

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

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

Impaired Loans

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

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

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

or “special mention.”

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

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

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

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

Please refer to Note 1:

Summary of Significant Accounting Policies for additional information on evaluation of impaired loans and associated specific reserves, and policies regarding nonaccruals, past due status and charge-offs.

TDRs impact the estimation of the appropriate level of the allowance for loan losses.

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

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

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

TDRs, as well as all impaired loans, that are determined to be collateral dependent are charged down to fair value.

Deficiencies indicated by impairment measurements for TDRs that are not collateral dependent may be accrued in the allowance for loan losses or charged off if deemed uncollectible.

Collectively Evaluated Loans

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

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

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

Portfolio Segments and Classes

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

Real Estate Construction Commercial Non-Real Estate

Construction, residential Commercial and Industrial

Construction, other  

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

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

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

The Company’s segments and classes within each segment are presented below:

Real Estate Construction

Construction, residential

Construction, other

Consumer Real Estate

Residential closed-end first liens

Residential closed-end junior liens

Investor-owned residential real estate

Commercial Real Estate

Multifamily real estate

Commercial real estate, owner-occupied

Commercial real estate, other

Commercial Non-Real Estate

Commercial and Industrial

Public Sector and IDA

Consumer Real Estate State and political subdivisions

Equity lines  

Residential closed-end first liens Consumer Non-Real Estate

Residential closed-end junior liens Credit cards

Investor-owned residential real estate Automobile

State and political subdivisions

Consumer Non-Real Estate

Other consumer loans

Commercial Real Estate  

Multifamily real estate  

Commercial real estate, owner-occupied  

Commercial real estate, other  

Historical Loss Rates

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

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

The Company averages loss rates for the most recent eight quarters to determine the historical loss rate for each class.

Two loss rates for each class are calculated:

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

Classified loans are those with risk ratings of “substandard”

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

Class historical loss rates are applied to non-classified loan balances at the reporting date, and classified historical loss rates are applied to classified balances at the reporting date.

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

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

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

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

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

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

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

national unemployment filings.

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

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

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

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

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

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

Please refer to Note 1:

Summary of Significant Accounting Policies for a discussion of risk factors pertinent to each class.

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

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

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

Commercial non-real estate loans are secured by collateral other than real estate, or are unsecured.

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

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

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

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

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

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

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

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

The Company allocates additional reserves for “high risk”

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

A detailed analysis showing the allowance roll-forward by portfolio segment and related loan balance by segment follows:

Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2020

Collectively-evaluated loans within each class are further stratified by risk rating:

pass-rated loans, loans rated special mention, and loans rated classified.

Credit risk for collectively-evaluated loans is estimated at the class level, by risk rating, by applying historical net charge-off rates and percentages for qualitative factors that influence credit risk.  Please refer to Note 1:

Summary of Significant Accounting Policies for a discussion of risk factors pertinent to each class, information on evaluation of impaired loans and associated specific reserves, and policies regarding nonaccruals, past due status and charge-offs.

A detailed analysis showing the allowance roll-forward by portfolio segment follows:

Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2021  

Real Estate Construction

Consumer Real Estate

Commercial Real Estate  

Commercial Non-Real Estate

Public Sector and IDA

Consumer Non-Real Estate

Unallocated  

Balance, December 31, 2020

7 unchanged sentences

$ 1,099  

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

Real Estate Construction

Balance, December 31, 2018

$ 7,674  

$ 2,798  

$ 7,390  

Provision for (recovery of) loan losses

Balance, December 31, 2019

$ 1,895  

$ 2,559  

$ 6,863  

Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2020

Real Estate Construction

Consumer Real Estate

Commercial Real Estate

Commercial Non-Real Estate

Public Sector and IDA

Consumer Non-Real Estate

Unallocated  

Balance, December 31, 2019

2 unchanged sentences

$ 6,863  

$ 7,925  

Provision for (recovery of) loan losses  

( 295 )  

( 385 )  

( 109 )  

Provision for (recovery of) loan losses

Balance, December 31, 2020

2 unchanged sentences

$ 8,481  

A detailed analysis showing the allowance and loan portfolio by segment and evaluation method follows:

Allowance for Loan Losses by Segment and Evaluation Method as of

1 unchanged sentence

Real Estate Construction

Consumer Real Estate

Commercial Real Estate

Commercial Non-Real Estate

Public Sector and IDA

Consumer Non-Real Estate

Individually evaluated for impairment

3 unchanged sentences

$ 1,099  

$ 7,674  

Loans by Segment and Evaluation Method as of

1 unchanged sentence

Real Estate Construction

Consumer Real Estate

Commercial Real Estate

Commercial Non-Real Estate

Public Sector and IDA

Consumer Non-Real Estate

Individually evaluated for impairment

19 unchanged sentences

Real Estate Construction

Consumer Real Estate

Commercial Real Estate

Commercial Non-Real Estate

Public Sector and IDA

Consumer Non-Real Estate

Individually evaluated for impairment

6 unchanged sentences

Real Estate Construction

Consumer Real Estate

Commercial Real Estate

Commercial Non-Real Estate

Public Sector and IDA

Consumer Non-Real Estate

Individually evaluated for impairment

19 unchanged sentences

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

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

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

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

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

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

1 unchanged sentence

Nonaccrual loans

Restructured loans in nonaccrual

TDR loans in nonaccrual

Total nonperforming loans

5 unchanged sentences

Ratio of allowance for loan losses to nonperforming loans (1)

The Company defines nonperforming loans as total nonaccrual and restructured loans that are nonaccrual.

Loans 90 days past due and still accruing and accruing restructured loans are excluded.

The Company defines nonperforming loans as total nonaccrual and TDR loans that are nonaccrual.

Loans 90 days past due and still accruing and accruing TDR loans are excluded.

As of December 31, 2021, OREO is comprised of construction properties.

There is no residential real estate in OREO.

As of December 31, 2021, $ 62 in loans secured by residential real estate are in process of foreclosure.

A summary of loans past due 90 days or more and impaired loans, as of the dates indicated, follows:

1 unchanged sentence

Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees and costs

Accruing restructured loans

Accruing TDR loans

$ 3,005  

18 unchanged sentences

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

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

No interest income was recognized on nonaccrual loans for the years ended December 31, 2021 or 

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

1 unchanged sentence

Impaired Loans as of December 31, 2021

Principal Balance

Investment (1)

6 unchanged sentences

Investor-owned residential real estate

 $ 191  

 $ -  

Commercial Real Estate (2)

3 unchanged sentences

Commercial and Industrial

Consumer Non - Real Estate (2)

$ 6,478  

1 unchanged sentence

$ 5,878  

$ 1,045  

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

Only classes with impaired loans are shown.

Impaired Loans as of December 31, 2020

Principal Balance

Investment (1)

5 unchanged sentences

Consumer Real Estate (2)

Residential equity lines

Residential closed-end first liens

Investor-owned residential real estate

Commercial Real Estate (2)

Multifamily real estate

Commercial real estate, owner occupied

9 unchanged sentences

Only classes with impaired loans are shown.

Average Investment and Interest Income for

Impaired Loans

For the Year Ended

December 31, 2020

Average Recorded

Investment (1)

Interest Income

Consumer Real Estate (2)

Investor-owned residential real estate

Commercial Real Estate (2)

Commercial real estate, owner occupied

Commercial real estate, other

Commercial Non -Real Estate (2)

Commercial and Industrial

Consumer Non -Real Estate (2)

$ 5,093  

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

Only classes with impaired loans are shown.

Average Investment and Interest Income for

Information on the average investment and interest income of impaired loans is presented in the tables below:

Impaired Loans

For the Year Ended

December 31, 2019

Average Recorded

Investment (1)

Interest Income

For the Year Ended December 31, 2021

Average Recorded Investment (1)

Interest Income Recognized

Consumer Real Estate (2)

Residential equity lines

Residential closed-end first liens

Investor-owned residential real estate

 $ 192  

 $ 13  

Commercial Real Estate (2)

Multifamily real estate

Commercial real estate, owner occupied

4 unchanged sentences

$ 5,901  

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

Only classes with impaired loans are shown.

Average Investment and Interest Income for

Impaired Loans

For the Year Ended

December 31, 2018

Average Recorded

Investment (1)

Interest Income

For the Year Ended December 31, 2020

Average Recorded Investment (1)

Interest Income Recognized

Consumer Real Estate (2)

Residential closed-end first liens

$ 1,202  

Residential closed-end junior liens

Investor-owned residential real estate

Commercial Real Estate (2)

Multifamily real estate

Commercial real estate, owner occupied

10 unchanged sentences

Days Past Due

Real Estate Construction (1)

Construction, other

Consumer Real Estate (1)

Residential closed-end first liens

Investor-owned residential real estate

Commercial Real Estate (1)

Commercial real estate, owner occupied

Commercial real estate, other

Commercial Non-Real Estate (1)

3 unchanged sentences

$ 2,873  

$ 1,331  

$ 3,685  

Only classes with past due or nonaccrual loans are presented.

December 31, 2020

1 unchanged sentence

Days Past Due

Real Estate Construction (1)

Construction, other

Consumer Real Estate (1)

Residential closed-end first liens

Residential closed-end junior liens

Investor-owned residential real estate

Commercial Real Estate (1)

Multifamily real estate

Commercial real estate, owner occupied

6 unchanged sentences

$ 1,331  

$ 3,685  

Only classes with past due or nonaccrual loans are presented.

The estimate of credit risk for non-impaired loans is obtained by applying allocations for internal and external factors.

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

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

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

After the revision, the “special mention”

rating is no longer applied to consumer loans.

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

Classified loans have regulatory risk ratings of “substandard”

and “doubtful.”

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

and “classified,”

respectively.

Determination of risk grades was completed for the portfolio as of December 31, 2021 and 2020.

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

December 31, 2020  

December 31, 2021

Collectively-Evaluated Loans

Real Estate Construction

29 unchanged sentences

$ 3,728  

December 31, 201 9  

$ 1,064  

December 31, 2020

Collectively-Evaluated Loans

Real Estate Construction

28 unchanged sentences

$ 756,616  

$ 8,035  

Sales, Purchases and Reclassification of Loans

7 unchanged sentences

Troubled Debt Restructurings

From time to time the Company modifies loans in TDRs.

There were no new restructurings designated in 2020.

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

Only classes with restructured loans are presented.

Restructurings that occurred during the year ended

December 31, 201 9

Investment (1)

Consumer Real Estate

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

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

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

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

The Company allowed the borrower to maintain full funding for more than a year, and extended the maturity date.

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

Restructurings that occurred during the year ended

Total TDRs amounted to $ 5,878 at December 31, 2021 and $ 4,249 at December 31, 2020.

All of the Company’s TDR loans are fully funded and no further increase in credit is available.

TDRs Designated During the Reporting Period

The Company recognized three new TDRs during 2021.

The restructuring of one commercial real estate owner-occupied loan provided cash flow relief to the borrower by shifting the payment structure from interest-only to amortizing and reducing the interest rate.

The restructurings of the two other commercial real estate loans provided cash flow relief by re-amortizing the loans over a longer period and reducing the interest rate.

No principal or interest was forgiven.

The impairment measurement for all three loans at December 31, 2021 was based upon the collateral method and did not result in a specific allocation.

There were no new TDRs designated in 2020.

The following table presents TDRs by class that occurred during the year ended December 31, 2021.

TDRs that occurred during the year ended

December 31, 2021

Investment (1)

Construction Real Estate

Construction, other

$ 2,882  

Commercial Real Estate

Commercial real estate owner-occupied

Consumer Real Estate

Closed-end first liens

Investor-owned residential real estate

Commercial real estate, other

$ 2,826  

2 unchanged sentences

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

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

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

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

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

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

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

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

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

The other investor owned residential real estate restructure consolidated debt at a longer term, provided a rate reduction and capitalized interest.

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

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

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

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

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

Defaulted TDRs

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

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

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

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

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

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

COVID- 19 Related Modifications

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

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

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

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

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

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

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

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

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

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

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

The Company analyzed its TDR portfolio for loans that defaulted during 2021 and 2020, and that were modified within 12 months prior to default.

The Company designates three circumstances that indicate default:

one or more payments that occur more than 90 days past the due date, charge-off, or foreclosure after the date of restructuring.

Of the Company’s TDRs at December 31, 2021 and December 31, 2020, none of the defaulted TDRs were modified within 12 months prior to default.

Premises and Equipment

A summary of the cost and accumulated depreciation of premises and equipment as of the dates indicated, follows:

$ 14,933  

$ 14,809  

Furniture and equipment

Premises and equipment

$ 21,752  

$ 21,429  

Accumulated depreciation

Premises and equipment, net

$ 9,722  

$ 10,035  

Depreciation expense for the years ended December 31, 2021 and 2020 amounted to $ 636 and $ 708 , respectively.

1 unchanged sentence

At December 31, 2021, the scheduled maturities of time deposits are as follows:

Year of Maturity

Time Deposits

$ 64,262  

Total time deposits

$ 78,968  

At December 31, 2021 and 2020, overdraft demand deposits reclassified to loans totaled $ 170 and $ 39 , respectively.

Employee Benefit Plans

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

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

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

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

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

Employee Stock Ownership Plan

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

For the years ended December 31, 2021 and 2020, the Company contributed to the plan $ 402 and $ 394 respectively.

Employee Stock Ownership Plan          

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

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

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

Contribution expense amounted to $ 360 for the year ended December 31, 2021 and $ 300 for the year ended December 31, 2020.

Dividends on ESOP shares are charged to retained earnings.

9 unchanged sentences

However bank-owned life insurance has been acquired on the life of the key employees in amounts sufficient to discharge the obligations of the agreement.

Defined Benefit Plan

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

5 unchanged sentences

$ 29,641  

$ 23,492  

Service cost (1)

5 unchanged sentences

$ 34,852  

$ 23,688  

Change in plan assets

2 unchanged sentences

$ 25,007  

$ 23,428  

Actual return on plan assets

4 unchanged sentences

$ 32,415  

$ 21,786  

Funded status at the end of the year

Amounts recognized in the Consolidated Balance Sheet

Deferred tax asset

Other liabilities

Deferred tax (liability) asset

Other assets (liabilities)

Total amounts recognized in the Consolidated Balance Sheet

Amounts recognized in accumulated other comprehensive (loss), net

Amounts recognized in accumulated other comprehensive (loss) income, net

Prior service cost

1 unchanged sentence

Amount recognized

Accrued/Prepaid benefit c ost, net

Accrued/Prepaid benefit cost, net

Benefit obligation

2 unchanged sentences

32,415  

21,789  

Unrecognized net actuarial loss

12,855  

10,983  

Unrecognized prior service cost

3 unchanged sentences

$ 8,222  

$ 5,510  

Components of net periodic benefit cost

$ 1,445  

$ 1,080  

Interest cost

3 unchanged sentences

Net periodic benefit cost

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

$ 1,871  

$ 1,876  

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

Net (gain) loss

$ 1,871  

Amortization of prior service cost

Deferred income tax benefit

Deferred income tax expense (benefit)

Total recognized

$ 1,565  

$ 1,569  

$ 1,022  

Total recognized in net periodic benefit cost and other comprehensive income

$ 2,802  

$ 2,732  

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

$ 2,802  

5 unchanged sentences

Cost is included in Salaries and Employee Benefits expense.

Actuarial loss (gain) in 2021 is composed of loss due to demographic changes of $ 764 , loss due to change in mortality table of $ 40 and gain due to change in discount rate of ($ 1,590 ).

Long Term Rate of Return

6 unchanged sentences

However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).

The Company, as plan sponsor, has adopted a Pension Administrative Committee Policy (the "Policy") for monitoring the investment management of its qualified plans.

The Company, as plan sponsor, has adopted a Pension Administrative Committee Policy (the “Policy”) for monitoring the investment management of its qualified plans.

The Policy includes a statement of general investment principles and a listing of specific investment guidelines, to which the committee may make documented exceptions.

10 unchanged sentences

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

The Company’s required minimum pension contribution for 2022 has not yet been determined.

Fair value measurements of the pension plan’s assets at December 31, 2021 and December 31, 2020 are presented below:

1 unchanged sentence

Asset Category

Quoted Prices in

Active Markets for

Identical Assets

Observable Inputs

Unobservable Inputs

$ 1,390  

12 unchanged sentences

$ 7,060  

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

This category represents investment grade bonds of U.S.

issuers from diverse industries.

Fair Value Measurements at December 31, 2020

Asset Category

Quoted Prices in

Active Markets for

Identical Assets

Observable Inputs

Unobservable Inputs

$ 4,336  

15 unchanged sentences

issuers from diverse industries.

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

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

9 unchanged sentences

Years ended December 31,

Deferred expense (benefit)

$ 4,099  

$ 2,795  

Deferred expense

Total income tax expense

The following is a reconciliation of the “expected”

$ 4,251  

$ 3,077  

The following reconciles the “expected”

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

3 unchanged sentences

income tax expense

$ 5,173  

$ 4,021  

Tax-exempt interest income

1 unchanged sentence

Reported income tax expense

$ 4,251  

$ 3,077  

The components of net deferred tax assets, included in other assets, are as follows:

11 unchanged sentences

Deferred tax liabilities:

Goodwill and deposit intangibles

Defined benefit plan, prepaid portion

4 unchanged sentences

Net deferred tax assets (liabilities)

$ 1,877  

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

The Company determined that no valuation allowance for gross deferred tax assets was necessary at December 31, 2021 and 2020.

Restrictions on Dividends

3 unchanged sentences

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

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

During 2021 and 2020, the Bank applied to its primary regulator and was approved to dividend to NBI an amount in excess of the regulatory maximum.

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

At December 31, 2021, NBB had no retained net income free of restriction.

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

The Bank remains in a highly capitalized position and the Company intends to request approval for additional dividends in 2022.

Minimum Regulatory Capital Requirement

68 unchanged sentences

$ 73,281  

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

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

Except with regard to NBB’s Tier 1 capital to average assets ratio, the minimum capital requirement includes the Basel III Capital Rules’ capital conservation buffer ( 2.50% ) which is added to the minimum capital requirements for capital adequacy purposes.

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

4 unchanged sentences

Cash due from subsidiaries

$ 2,324  

Interest-bearing deposits

23 unchanged sentences

22,004  

28,574  

Other expenses

9 unchanged sentences

$ 16,077  

$ 16,151  

Condensed Statements of Cash Flows

Years ended December 31,

Cash Flows f rom Operating Expenses

$ 16,077  

Cash Flows from Operating Expenses

$ 20,382  

2 unchanged sentences

Deficit (equity) in undistributed net income of subsidiaries

10,349  

Net change in refundable income taxes due from subsidiaries

6 unchanged sentences

Net change in interest-bearing deposits

Net cash (used in) provided by investing activities

10,027  

Net cash provided by (used in) investing activities

10,027  

Cash Flows from Financing Activities

5 unchanged sentences

Cash due from subsidiaries at end of year

$ 2,324  

Financial Instruments with Off-Balance Sheet Risk

8 unchanged sentences

Commitments to extend credit

$ 178,341  

$ 158,859  

Standby letters of credit

13,474  

15,212  

Mortgage loans sold with potential recourse

40,362  

20,496  

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

9 unchanged sentences

The Company originates mortgage loans for sale to secondary market investors subject to contractually specified and limited recourse provisions.

In 2020, the Company originated $ 39,647 and sold $ 40,362 of mortgage loans to investors, compared to $ 21,032 originated and $ 20,496 of mortgage loans sold in 2019.

In 2021, the Company originated $ 17,672 and sold $ 18,287 of mortgage loans to investors, compared with $ 39,647 originated and $ 40,362 sold in 2020.

Every contract with each investor contains certain recourse language.

3 unchanged sentences

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

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

At December 31, 2021, the Company did not have any locked-rate commitments to originate mortgage loans. 

Loans held for sale at December 31, 2021 were $ 615 .

Risks arise from the possible inability of counterparties to meet the terms of their contracts.

1 unchanged sentence

The Company maintains cash accounts in other commercial banks.

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

The Company had $ 28 in deposits with correspondent institutions at December 31, 2021 that were not insured by the FDIC.

Concentrations of Credit Risk

20 unchanged sentences

These levels are:

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

Level 2 – Valuation is based on observable inputs including:

quoted prices in active markets for similar assets and liabilities,

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

inputs other than quoted prices that are observable, and

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

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

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

Valuation is based on observable inputs including:

●         quoted prices in active markets for similar assets and liabilities,

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

●         inputs other than quoted prices that are observable, and

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

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

Fair value is best determined by quoted market prices.

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

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

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

2 unchanged sentences

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

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

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

Financial Instruments Measured At Fair Value on a Recurring Basis

Securities A vailable for S ale

Securities Available for Sale

Securities available for sale are recorded at fair value on a recurring basis.

2 unchanged sentences

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

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

The following tables present the balances of financial assets measured at fair value on a recurring basis as of December 31, 2021 and 2020:

Fair Value Measurements at December 31, 2020 Using

Balance as of

Quoted Prices

Identical Assets

December 31, 2021

Fair Value Measurement Using

Government agencies and corporations

11 unchanged sentences

$ 686,080  

Fair Value Measurements at December 31, 2019 Using

Balance as of

Quoted Prices

Identical Assets

December 31, 2020

Fair Value Measurement Using

Government agencies and corporations

21 unchanged sentences

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

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

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

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

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

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

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

7 unchanged sentences

Changes in fair value measurement impacts net income.

Fair Value Measurements at December 31, 2020 Using

Balance as of

December 31, 2020

Quoted Prices

Identical Assets

Unobservable Inputs

Interest rate loan contracts

Forward contracts

Fair Value Measurements at December 31, 2019 Using

Balance as of

Quoted Prices

Identical Assets

Unobservable Inputs

Interest rate loan contracts

Forward contracts

The Company did not have any interest rate loan contracts or forward contracts at December 31, 2021.

The following tables present information on interest rate loan contracts and forward contracts at December 31, 2020:

December 31, 2020

Valuation Technique

Unobservable Input

(Weighted Average)

Interest rate loan contracts

Market approach

Pull-through rate

87.02% (1)  

Forward contracts

Market approach

Pull-through rate

87.02% (1)  

Fair Value Measurements Using

Interest rate loan contracts

Market approach

Current reference price

101.91 % - 103.02 % (102.55%) (2)  

Forward contracts

Market approach

Current reference price

101.91 % - 103.19 % (102.67%) (2)  

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

December 31, 2020

5 unchanged sentences

Pull-through rate

90.00% (1)  

Forward contracts

1 unchanged sentence

Pull-through rate

65.60% (1)  

Interest rate loan contracts

11 unchanged sentences

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

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

Loans H eld for S ale

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

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value.

3 unchanged sentences

No nonrecurring fair value adjustments were recorded on loans held for sale during the years ended December 31, 2021 and 2020.

Impaired Loans

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

TDRs are impaired loans.

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

1 unchanged sentence

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

The fair value of an impaired loan and measurement of associated loss is based on one of three methods:

the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral.

The fair value of an impaired loan may be measured using one of three methods.

Each method falls within a different level of the fair value hierarchy.

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

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

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

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

Most collateral is real estate.

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

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

Loans valued using the collateral method may be secured by real estate or business assets including equipment, inventory, and accounts receivable.

Real estate collateral secures most loans and valuation is based upon the “as-is”

value of independent appraisals or evaluations.

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

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

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

The value of real estate collateral is determined by a current (less than 24 months of age) appraisal or internal evaluation utilizing an income or market valuation approach.

Appraisals conducted by an independent, licensed appraiser outside of the Company using observable market data is categorized as Level 2.

If a current appraisal cannot be obtained prior to a reporting date and an existing appraisal is discounted to obtain an estimated value, or if declines in value are identified after the date of the appraisal, or if an appraisal is discounted for estimated selling costs, the valuation of real estate collateral is categorized as Level 3.

Valuations derived from internal evaluations are categorized as Level 3.

Appraisals are used to value loans secured by residential 1 - 4 family properties with outstanding principal balances greater than $250 and commercial real estate loans with outstanding principal balances greater than $500.

Appraisals or real estate evaluations prepared by a third party may be used to value loans with principal balances below these thresholds.

Appraisals of less than 24 months of age, conducted by independent, licensed appraisers using observable market data analyzed through an income or sales valuation approach result in Level 2 categorization.

If a current appraisal cannot be obtained prior to a reporting date and an existing appraisal is discounted to obtain an estimated value, or if declines in value are identified after the date of the appraisal, or if an appraisal is discounted for estimated selling costs, or if the appraisal uses unobservable market data, the valuation of real estate collateral is categorized as Level 3.

Valuations based on evaluations are categorized as Level 3.

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

1 unchanged sentence

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

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

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

Carrying value

Quoted Prices

Identical Assets

Unobservable Inputs

December 31, 2020

Impaired loans net of valuation allowance

If a current appraisal uses unobservable data as part of the assessment, the value of the collateral is classified as Level 3.

At December 31, 2021, measurement of the Company’s impaired loans did not result in any specific allocations.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis as of December 31, 2020.

December 31, 2020

Carrying value

Impaired loans net of valuation allowance

The following table presents information about Level 3 Fair Value Measurements for impaired loans as of the dates indicated.

Impaired Loans

The following table presents information about Level 3 Fair Value Measurements for impaired loans as of December 31, 2020.

Valuation Technique

1 unchanged sentence

(Weighted Average (1) )

December 31, 2020

Present value of cash flows

1 unchanged sentence

5.50 % - 6.50%(5.78%)  

December 31, 2019

Present value of cash flows

Discount rate

5.50 % - 6.50 % ( 5.77 %)  

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

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

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

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

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

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

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

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

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

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

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

Other Real Estate Owned

Certain assets such as OREO are measured at fair value less cost to sell.

4 unchanged sentences

Carrying Value

Quoted Prices

Identical Assets

Unobservable Inputs

December 31, 2021

Other real estate owned net of valuation allowance

$ 1,553  

OREO net of valuation allowance

December 31, 2020

Other real estate owned net of valuation allowance

The following table presents information about Level 3 Fair Value Measurements as of the dates indicated.

OREO net of valuation allowance

The following table presents information about OREO and Level 3 Fair Value Measurements as of the dates indicated.

Valuation Technique

1 unchanged sentence

(Weighted Average (1) )

Other real estate owned

December 31, 2021

Discounted appraised value

4.00% (2) –

9.23 % ( 4.54 %)  

December 31, 2020

Discounted appraised value

4.00 % –

6.00 % ( 0.68 %)  

Other real estate owned

9.23%(4.54%) (2)

December 31, 2020

Discounted appraised value

Discount for lack of marketability and age of appraisal

0.00 % - 7.66 % ( 0.62 %)  

0.00 % - 45.17 % ( 1.28 %)  

0.00 % –

7.66%(0.62%) (1)

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

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

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

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

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

As of December 31, 2021, the Company held one OREO property

At December 31, 2021 and December 31, 2020, OREO properties were measured using appraised value, and if applicable, discounted by selling costs, lack of marketability and age of appraisal.

8 unchanged sentences

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

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

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

48 unchanged sentences

36,444  

Interest rate loan contracts

Financial liabilities:

3 unchanged sentences

Accrued interest payable

Forward contracts

Components of Accumulated Other Comprehensive Income (Loss)

1 unchanged sentence

Net Unrealized

Gain (Loss) on Securities

Gain (Loss) on

Adjustments Related

4 unchanged sentences

Balance at December 31, 2019

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

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

Reclassification adjustment, net of tax of ($4)

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

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

Balance at December 31, 201 8

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

13,176  

Reclassification adjustment, net of tax of ($23)

2 unchanged sentences

Balance at December 31, 2020

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

$ 13,167  

$ 3,020  

Unrealized holding loss on available for sale securities net of tax of ($2,740)

Reclassification adjustment, net of tax of ($1)

Net pension loss, net of tax of ($393)

Net pension gain, net of tax of $862

Less amortization of prior service cost included in net periodic pension cost, net of tax of ($2)

1 unchanged sentence

$ 2,854  

$ 3,020  

The following table provides information regarding reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2021 and 2020:

11 unchanged sentences

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

Testing for 2020 and 2019 did not indicate impairment. 

Testing for 2021 and 2020 did not indicate impairment.

As of December 31, 2021 and December 31, 2020, the gross carrying value of goodwill was $ 5,848 .

7 unchanged sentences

Service Charges on Deposit Accounts

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

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

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

35 unchanged sentences

$ 1,966  

$ 2,678  

Other service charges and fees

4 unchanged sentences

$ 5,654  

$ 6,266  

Noninterest Income (out-of-scope of Topic 606)

2 unchanged sentences

$ 7,944  

$ 7,729  

The Company’s leases are recorded under ASC Topic 842, “Leases”.

8 unchanged sentences

Lease payments

Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred.

Payments for leases with terms longer than 12 months are included in the determination of the lease liability.

Payments may be fixed for the term of the lease or variable.

If the lease agreement provides a known escalator, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability.

If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability.

Two of the Company’s leases provide known escalators that are included in the determination of the lease liability.

One lease has an annual escalator based on the consumer price index-urban (“CPI-U”).

Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred. 

Payments for leases with terms longer than 12 months are included in the determination of the lease liability. 

Payments may be fixed for the term of the lease or variable. 

Variable payments result when the lease agreement includes a clause providing for escalation of lease payments at specified dates.

If the escalation factor is known, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability. 

If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability. 

One of the Company’s leases provides a known escalator that is included in the determination of the lease liability.

The remaining leases do not have variable payments during the term of the lease.

Options to Extend, Residual Value Guarantees, and Restrictions and Covenants

Of the Company’s six operating leases, three leases offer the option to extend the lease term.

Each of the three leases provides two options of five years each.

For one of the leases, the Company is reasonably certain it will exercise one option of five years and has included the additional time and lease payments in the calculation of the lease liability.

The lease agreement provides that the lease payment will increase at the exercise date based on the CPI-U.

Because the CPI-U at the exercise date is unknown, the increase is not included in the cash flows determining the lease liability.

None of the Company’s leases provide for residual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations.

      The Company’s lease right of use asset is included in other assets and the lease liability is included in other liabilities.

Of the Company’s five operating leases at December 31, 2021, three leases offer the option to extend the lease term. 

Two of the leases have two options of five years each. 

At the time of capitalization, the Company was not reasonably certain whether it would exercise the options and did not include the time period in the calculation of the lease liability.

One of the leases has one option to extend the term for an additional five years. 

The Company exercised a previous option in 2020 to extend the lease. 

The lease agreement provides that the lease payment will increase at the exercise date based on the Consumer Price Index for All Urban Consumers (“CPI-U”). 

Because the CPI-U at the exercise date is unknown, the increase is not included in the cash flows determining the lease liability. 

None of the Company’s leases provide for residual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations. 

The Company terminated a lease prior to maturity during 2021.

The Company paid an early termination fee to the lessor of $ 150 .

The Company’s lease right of use asset is included in other assets and the lease liability is included in other liabilities.

The following tables present information about leases:

9 unchanged sentences

Weighted average discount rate

For the Year s Ended December 31 ,

For the Years Ended December 31,

Lease Expense

4 unchanged sentences

Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period

$ 1,837  

The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability:

14 unchanged sentences

To the Stockholders and the Board of Directors

National Bankshares, Inc. 

Blacksburg, Virginia

1 unchanged sentence

We have audited the accompanying consolidated balance sheets of National Bankshares, Inc.

and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

and its subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 

We conducted our audits in accordance with the standards of the PCAOB.

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As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

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Description of the Matter

As described in Note 1 (Summary of Significant Accounting Policies) and Note 5 (Allowance for Loan Losses, Nonperforming Assets and Impaired Loans) to the consolidated financial statements, the Company maintains an allowance for loan losses to provide for probable losses inherent in the loan portfolio. 

The Company’s allowance for loan losses has two basic components, the general allowance and the specific allowance.

At December 31, 2020, the general allowance represented $8,406,837 of the total allowance for loan losses of $8,481,537.

For loans that are not specifically identified for impairment, the general allowance uses historical loss experience along with various qualitative and risk factors to develop adjusted loss factors for each loan segment. 

The qualitative adjustments to the historical loss experience are established by applying a loss percentage at the class level identified by management based on their assessment of shared risk characteristics within groups of similar loans.

Qualitative risk factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio.

Management evaluates qualitative factors, primarily considering national and local economic and business trends and conditions;

the nature and volume of classes within the portfolio;

loan quality;

loan officers’

experience, lending policies;

competition/legal/regulatory environment;

high risk loans;

and the Company’s loan review system. 

The analysis of certain factors results in standard allocations to all segments and classes and other factors are analyzed for each class. 

As of December 31, 2021, there were no specific reserves based on analysis of individually identified impaired loans.

For loans that are not specifically identified for impairment, management determine the allowance for loan losses based on historical loss experience adjusted for qualitative factors.

Qualitative adjustments to the historical loss experience are established by applying a loss percentage to the loan classes established by management based on their assessment of shared risk characteristics.

As of December 31, 2021, the qualitative factor adjustments represented $6.61 million of the total allowance for loan losses of $7.67 million.

Qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio.

Management evaluates qualitative factors by loan class.

The primary factors considered are internal risk ratings, delinquency and nonperforming rates, product mix, changes in loan policies and procedures, changes in loan review systems, changes in economic conditions, changes in management experience, industry trends, interest rate trends, and changes in competitive, legal and regulatory environment.

The analysis of certain factors results in standard allocations to all classes and other factors are analyzed for each class.

Management exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses.

We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates. 

How We Addressed the Matter in Our Audit

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Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.

Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors, including evaluating the metrics, including the relevance of source data and assumptions.  

Evaluating the qualitative factors for directional consistency and for reasonableness.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data