NATIONAL BANKSHARES INC 10-K

Item 8. Financial Statements and Supplementary Data     Consolidated Balance Sheets       December 31,   $ in thousands, except per share data   2021     2020   Assets                 Cash and due from banks   $ 8,768     $ 13,147   Interest-bearing deposits     130,021       120,725   Securities available for sale, at fair value     686,080       546,742   Restricted stock     845       1,279   Mortgage loans held for sale     615       866   Loans:                 Real estate construction loans     48,841       42,266   Consumer real estate loans     208,977       181,782   Commercial real estate loans     405,722       393,115   Commercial non-real estate loans     60,264       78,771   Public sector and IDA loans     47,899       40,983   Consumer non-real estate loans     32,026       33,110   Total loans     803,729       770,027   Less unearned income and deferred fees and costs     ( 481 )     ( 1,228 ) Loans, net of unearned income and deferred fees and costs     803,248       768,799   Less allowance for loan losses     ( 7,674 )     ( 8,481 ) Loans, net     795,574       760,318   Premises and equipment, net     9,722       10,035   Accrued interest receivable     5,104       5,028   Other real estate owned, net     957       1,553   Goodwill     5,848       5,848   Bank-owned life insurance (BOLI)     42,354       36,444   Other assets     16,287       17,688   Total assets   $ 1,702,175     $ 1,519,673   Liabilities and Stockholders ’ Equity                 Noninterest-bearing demand deposits   $ 317,430     $ 276,793   Interest-bearing demand deposits     890,124       763,293   Savings deposits     208,065       167,475   Time deposits     78,968       89,582   Total deposits     1,494,587       1,297,143   Accrued interest payable     48       56   Other liabilities     15,789       21,867   Total liabilities     1,510,424       1,319,066   Commitments and contingencies                     Stockholders’ equity:                 Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding     -       -   Common stock, $1.25 par value. Authorized 10,000,000 shares; issued and outstanding, 6,063,937 shares at December 31, 2021 and 6,432,020 at December 31, 2020     7,580       8,040   Retained earnings     188,229       189,547   Accumulated other comprehensive (loss) income, net     ( 4,058 )     3,020   Total stockholders’ equity     191,751       200,607   Total liabilities and stockholders’ equity   $ 1,702,175     $ 1,519,673     The accompanying notes are an integral part of these consolidated financial statements.   40 Table of Contents     Consolidated Statements of Income       Years ended December 31,   $ in thousands, except per share data   2021     2020   Interest Income                 Interest and fees on loans   $ 34,923     $ 34,523   Interest on interest-bearing deposits     170       276   Interest and dividends on securities – taxable     7,960       7,383   Interest on securities – nontaxable     1,934       1,826   Total interest income     44,987       44,008                     Interest Expense                 Interest on deposits     3,098       5,837   Net interest income     41,889       38,171   Provision for (recovery of) loan losses     ( 398 )     1,991   Net interest income after provision for (recovery of) loan losses     42,287       36,180                     Noninterest Income                 Service charges on deposit accounts     2,045       1,966   Other service charges and fees     179       162   Credit and debit card fees, net     1,869       1,400   Trust income     1,792       1,662   BOLI income     910       877   Gain on sale of mortgage loans     364       676   Other income     1,261       1,093   Realized securities gains, net     6       108   Total noninterest income     8,426       7,944                     Noninterest Expense                 Salaries and employee benefits     15,747       14,674   Occupancy, furniture and fixtures     1,842       1,795   Data processing and ATM     3,039       3,088   FDIC assessment     422       198   Net costs of other real estate owned     51       39   Franchise taxes     1,425       1,340   Other operating expenses     3,554       3,836   Total noninterest expense     26,080       24,970   Income before income taxes     24,633       19,154   Income tax expense     4,251       3,077   Net income   $ 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.   41 Table of Contents     Consolidated Statements of Comprehensive Income       Years ended December 31,   $ in thousands   2021     2020   Net Income   $ 20,382     $ 16,077                     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     ( 10,308 )     13,176   Reclassification adjustment for gain included in net income, net of tax of ($1) in 2021 and ($23) in 2020     ( 5 )     ( 85 ) Net pension gain (loss) arising during the period, net of tax of $862 in 2021 and ($393) in 2020     3,244       ( 1,478 ) Less amortization of prior service cost included in net periodic pension cost, net of tax of ($2) in 2021 and ($23) in 2020     ( 9 )     ( 87 ) Other comprehensive (loss) income, net of tax of ($1,881) in 2021 and $3,063 in 2020     ( 7,078 )     11,526   Total Comprehensive Income   $ 13,304     $ 27,603     The accompanying notes are an integral part of these consolidated financial statements.     Consolidated Statements of Changes in Stockholders ’ Equity   $ in thousands, except per share data   Common Stock     Retained Earnings     Accumulated Other Comprehensive Income (Loss)     Total   Balance at December 31, 2019   $ 8,112     $ 184,120     $ ( 8,506 )   $ 183,726   Net income     -       16,077       -       16,077   Other comprehensive income, net of tax of $3,063     -       -       11,526       11,526   Cash dividend ( $1.39 per share)     -       ( 9,000 )     -       ( 9,000 ) Stock repurchase ( 57,554 shares)     ( 72 )     ( 1,650 )     -       ( 1,722 ) Balance at December 31, 2020   $ 8,040     $ 189,547     $ 3,020     $ 200,607   Net income     -       20,382       -       20,382   Other comprehensive loss, net of tax of ( $1,881 )     -       -       ( 7,078 )     ( 7,078 ) Cash dividend ( $1.44 per share)     -       ( 8,806 )     -       ( 8,806 ) Stock repurchase ( 368,083 shares)     ( 460 )     ( 12,894 )     -       ( 13,354 ) Balance at December 31, 2021   $ 7,580     $ 188,229     $ ( 4,058 )   $ 191,751     The accompanying notes are an integral part of these consolidated financial statements.   42 Table of Contents     Consolidated Statements of Cash Flows         Years ended December 31,     $ in thousands   2021     2020   Cash Flows from Operating Activities                 Net income   $ 20,382     $ 16,077   Adjustment to reconcile net income to net cash provided by operating activities:                 (Recovery of) provision for loan losses     ( 398 )     1,991   Deferred income tax expense     152       282   Depreciation of premises and equipment     636       708   Amortization of premiums and accretion of discounts, net     1,688       1,455   Gain on disposal of fixed assets     -       ( 2 ) Gain on calls and sales of securities available for sale, net     ( 6 )     ( 108 ) Loss (gain) and write-down on other real estate owned     25       ( 13 ) Loss on sale of repossessed assets     -       1   Income on investment in BOLI     ( 910 )     ( 877 ) Gain on sale of mortgage loans held for sale     ( 364 )     ( 676 ) Origination of mortgage loans held for sale     ( 17,672 )     ( 39,647 ) Sale of mortgage loans held for sale     18,287       40,362   Contribution to defined benefit plan     -       ( 5,000 ) Net change in:                 Accrued interest receivable     ( 76 )     ( 743 ) Other assets     1,661       ( 132 ) Accrued interest payable     ( 8 )     ( 88 ) Other liabilities     ( 515 )     203   Net cash provided by operating activities     22,882       13,793                     Cash Flows from Investing Activities                 Net change in interest-bearing deposits     ( 9,296 )     ( 43,844 ) Proceeds from repayments of mortgage-backed securities     44,881       18,068   Proceeds from calls, sales and maturities of securities available for sale     20,377       126,840   Purchases of securities available for sale     ( 219,331 )     ( 241,164 ) Net change in restricted stock     434       ( 59 ) Purchases of loan participations     ( 25,167 )     ( 11,404 ) Collections of loan participations     15,191       207   Loan originations and principal collections, net     ( 25,289 )     ( 24,875 ) Proceeds from disposal of other real estate owned     621       72   Proceeds from disposal of repossessed assets     11       30   Recoveries on loans charged off     346       347   Purchase of BOLI     ( 5,000 )     -   Additions to premises and equipment     ( 323 )     ( 1,824 ) Proceeds from sale of premises and equipment     -       2   Net cash used in investing activities     ( 202,545 )     ( 177,604 ) (continued)   43 Table of Contents   Cash Flows from Financing Activities                 Net change in time deposits     ( 10,614 )     ( 38,446 ) Net change in other deposits     208,058       215,836   Cash dividends paid     ( 8,806 )     ( 9,000 ) Shares repurchased     ( 13,354 )     ( 1,722 ) Net cash provided by financing activities     175,284       166,668                     Net change in cash and due from banks     ( 4,379 )     2,857   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     3,180       3,860                     Supplemental Disclosures of Noncash Activities                 Loans charged against the allowance for loan losses   $ 755     $ 720   Loans transferred to other real estate owned     50       -   Loans transferred to repossessed assets     11       4   Unrealized (loss) gain on securities available for sale     ( 13,054 )     16,570   Minimum pension liability adjustment     4,095       ( 1,981 ) Lease liabilities arising from obtaining right-of-use assets during the period     -       24     The accompanying notes are an integral part of these consolidated financial statements.   44 Table of Contents     Notes to Consolidated Financial Statements $ in thousands, except per share data.     Note 1: Summary of Significant Accounting Policies The consolidated financial statements include the accounts of National Bankshares, Inc. and its wholly-owned subsidiaries, the National Bank of Blacksburg, and National Bankshares Financial Services, Inc. All intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to GAAP and to general practices within the banking industry. Subsequent events have been considered through the date of this Form 10 -K. The following summarizes significant accounting policies.   Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and amounts due from banks.   Interest-Bearing Deposits The Company invests over-night funds in interest-bearing deposits at other banks, including the FHLB, the Federal Reserve and other entities. Interest-bearing deposits are carried at cost.   Securities Certain debt securities that management has the positive intent and ability to hold to maturity may be classified as “held to maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held to maturity or trading, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive (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. The Company follows the accounting guidance related to recognition and presentation of other–than-temporary impairment (“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 OTTI, 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 (loss) income.  Equity securities with readily-determinable fair values are measured at fair value using the “exit price notion”. Changes in fair value are recognized in net income. Equity securities without readily-determinable fair values are recorded as other assets at cost less impairment, if any, and adjusted for changes resulting from observable price changes in orderly transactions for identical or similar investment of the same issuer.   Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value on an individual loan basis. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The Company releases mortgage servicing rights when loans are sold on the secondary market.   Loans The Company, through its banking subsidiary, provides mortgage, commercial, and consumer loans to customers. 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: real estate construction, consumer real estate, commercial real estate, commercial non-real estate, public sector and IDA, and consumer non-real estate. Each segment is subject to certain risks that influence pricing, loan structures, approval requirements, reserves, and ongoing credit management.   45 Table of Contents   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. 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. 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, 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.   46 Table of Contents   Consumer Non-Real Estate Loans. 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. 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. Generally loans are placed in nonaccrual status when collection of interest and/or full principal is considered doubtful. Interest accrual is discontinued at the time a commercial real estate loan or commercial non-real estate loan is 90 days delinquent unless the credit is well secured and in the process of collection. 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.   Allowance for Loan Losses 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 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. 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 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. When available information confirms that a specific loan or a portion thereof, within any loan class, is uncollectible the amount is charged off against the allowance for loan losses. Additionally, losses on consumer real estate and consumer non-real estate loans are typically charged off no later than when the loans are 120 - 180 days past due, and losses on loans secured by residential real estate or by commercial real estate are charged off by the time the loans reach 180 days past due, in compliance with regulatory guidelines. Accordingly, secured loans may be charged down to the estimated value of the collateral, with previously accrued unpaid interest reversed. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects.   47 Table of Contents   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.”   TDRs 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. TDRs may be removed from TDR status, and therefore from individual evaluation, if the restructuring agreement specifies a contractual interest rate that is a market interest rate at the time of restructuring and the loan is in compliance with its modified terms one year after the restructure was completed.   Rate Lock Commitments The Company enters into commitments to originate mortgage loans in which the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 30 to 60 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, by committing to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Company is not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity. The market value of rate lock commitments and best efforts contracts is not readily ascertainable because rate lock commitments and best effort contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the changes in the value of the underlying assets while taking into consideration the probability that the rate lock commitments will close. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss occurs on the rate lock commitments.   Premises and Equipment Land is carried at cost. Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is charged to expense over the estimated useful lives of the assets on the straight-line basis. Depreciable lives include 40 years for premises, 3 - 10 years for furniture and equipment, and 3 years for computer software. Costs of maintenance and repairs are charged to expense as incurred and improvements are capitalized.   Other Real Estate Owned Real estate acquired through or in lieu of foreclosure is held for sale and is initially recorded at fair value less estimated costs to sell at the date of foreclosure, establishing the cost basis of the asset. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other operating expenses.   Goodwill The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. Goodwill is subject to at least an annual assessment for impairment by applying a fair value based test. The Company performs its annual analysis as of September 30 of each fiscal year. The impairment test for 2021 incorporated data as of September 30, 2021. The Company’s goodwill impairment analysis considered three valuation techniques appropriate to the measurement. The first technique uses the Company’s market capitalization as an estimate of fair value, the second technique estimates fair value using current market pricing multiples for companies comparable to NBI, while the third technique uses current market pricing multiples for change-of-control transactions involving companies comparable to NBI. Certain key judgments were used in the valuation measurement. Goodwill is held by the Company’s bank subsidiary. The bank subsidiary is 100 % owned by the Company, and no market capitalization is available. Because most of the Company’s assets are comprised of the 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.   48 Table of Contents   Pension Plan The Company recognizes the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognizes changes in that funded status in the year in which the changes occur through other comprehensive (loss) income. The funded status of a benefit plan is measured as the difference between plan assets at fair value and the projected benefit obligation.   Income Taxes Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the asset and liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than- not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than- not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes interest and penalties on income taxes as a component of income tax expense.   Trust Assets and Income Assets (other than cash deposits) held by NBB’s Trust Department in a fiduciary or agency capacity for customers are not included in the consolidated financial statements since such items are not assets of the Company. Trust income is recognized on the accrual basis.   Earnings Per Common Share Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. 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.       2021     2020   Average number of common shares outstanding     6,209,929       6,483,230     Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business are recorded as liabilities when the likelihood of loss is probable and reasonably estimated. Management does not believe there are such matters that will have a material effect on the consolidated financial statements.   Advertising The Company charges advertising costs to expenses as incurred. Advertising expenses were $ 112 for the year ended December 31, 2021 and $ 99 for the year ended December 31, 2020.   Revenue Recognition The Company accounts for revenue associated with financial instruments, including loans and securities via the accrual method. The Company recognizes noninterest income when it satisfies commitments to customers. Please refer to Note 18: Revenue Recognition.   49 Table of Contents   Use of Estimates In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, 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 net income of stockholders' equity.   Recent Accounting Pronouncements In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments.”  The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016 - 13 as codified in Topic 326, including ASUs 2019 - 04, 2019 - 05, 2019 - 10, 2019 - 11, 2020 - 02, and 2020 - 03.   These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters.  Smaller reporting companies who file with the SEC and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022.  The Company is currently assessing the impact that ASU 2016 - 13 will have on its consolidated financial statements.  The Company is 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; ( 2 ) development, governance, and documentation of a systematic methodology; ( 3 ) documenting the results of a systematic methodology; and ( 4 ) validating a systematic methodology. In March 2020, the 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.    50 Table of Contents   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.  ASU 2019 - 12 was effective for the Company on January 1, 2021. The adoption of ASU 2019 - 12 did not have a material impact on the Company’s consolidated financial statements. In January 2020, the FASB issued ASU 2020 - 01, “Investments – Equity Securities (Topic 321 ), Investments – Equity Method and Joint Ventures (Topic 323 ), and Derivatives and Hedging (Topic 815 ) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”   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 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. 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 Since the beginning of 2020, the COVID- 19 pandemic and efforts to reduce its spread have caused significant disruptions in the U.S. economy and negatively impacted financial activity in the Company’s market. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. Some measures appear to indicate a positive trajectory, however if the pandemic escalates, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent of the impact COVID- 19 will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.   Financial position and results of operations During 2020, the 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.   51 Table of Contents   Capital and Liquidity 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. Wholesale funding markets are currently available to the Company. If the uncertainty caused by the COVID- 19 pandemic results in volatile or elevated funding costs for an extended period of time and if it becomes necessary for the Company to access wholesale funding, the Company’s net interest margin could be adversely affected. Deposits have increased since the beginning of the pandemic, however, if conditions worsen and cause a large number of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.   Asset valuation 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. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances, such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP. The Company tests goodwill for impairment annually, usually during the fourth quarter using September 30 information, unless facts and circumstances indicate the need for more frequent impairment testing. 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.   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.     Note 2: Restriction on Cash The Company’s subsidiary bank is a member of the Federal Reserve System. The Federal Reserve does not currently require member banks to hold an average balance in order to purchase services from the Federal Reserve.     Note 3: Securities The amortized cost and fair value of debt securities available for sale, with gross unrealized gains and losses, as of the dates indicated, follows:       December 31, 2021   Available for sale:   Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair Value   U.S. Government agencies and corporations   $ 279,934     $ 2,795     $ 4,710     $ 278,019   States and political subdivisions     195,365       5,314       2,007       198,672   Mortgage-backed securities     204,164       2,323       313       206,174   Corporate debt securities     3,004       248       37       3,215   Total securities available for sale   $ 682,467     $ 10,680     $ 7,067     $ 686,080     52 Table of Contents       December 31, 2020   Available for sale:   Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair Value   U.S. Government agencies and corporations   $ 86,859     $ 4,477     $ 173     $ 91,163   States and political subdivisions     196,435       7,778       252       203,961   Mortgage-backed securities     244,780       4,473       78       249,175   Corporate debt securities     2,001       442       -       2,443   Total securities available for sale   $ 530,075     $ 17,170     $ 503     $ 546,742     The amortized cost and fair value of single maturity securities available for sale at December 31, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities included in these totals are categorized by final maturity at December 31, 2021.       December 31, 2021   Available for sale:   Amortized Cost     Fair Value   Due in one year or less   $ 2,519     $ 2,540   Due after one year through five years     24,034       24,051   Due after five years through ten years     313,966       313,288   Due after ten years     341,948       346,201   Total securities available for sale   $ 682,467     $ 686,080     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:       December 31, 2021       Less Than 12 Months     12 Months or More       Fair Value     Unrealized Loss     Fair Value     Unrealized Loss   U.S. Government agencies and corporations   $ 201,650     $ 3,530     $ 26,792     $ 1,180   State and political subdivisions     50,659       1,214       20,542       793   Mortgage-backed securities     13,139       141       4,665       172   Corporate debt securities     966       37       -       -   Total temporarily impaired securities   $ 266,414     $ 4,922     $ 51,999     $ 2,145         December 31, 2020       Less Than 12 Months     12 Months or More       Fair Value     Unrealized Loss     Fair Value     Unrealized Loss   U.S. Government agencies and corporations   $ 28,798     $ 173     $ -     $ -   State and political subdivisions     32,353       249       635       3   Mortgage-backed securities     8,816       76       4,060       2   Total temporarily impaired securities   $ 69,967     $ 498     $ 4,695     $ 5     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, 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. U.S. 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.   53 Table of Contents   States and political subdivisions. 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. Because the Company does not intend to sell the investment and it is not likely that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be at maturity, the Company does not consider the investment to be other-than-temporarily impaired. Mortgage-backed securities. 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 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. Required levels of investment are based upon NBB’s capital and a percentage of qualifying assets. The Company purchases stock from or sells stock back to the correspondents based on their calculations. The stock is held by member institutions only and is not actively traded. Redemption of FHLB stock is subject to certain limitations and conditions. At its discretion, the FHLB may declare dividends on the stock. In addition to dividends, NBB also benefits from its membership with FHLB through eligibility to borrow from the FHLB, using as collateral NBB’s capital stock investment in the FHLB and qualifying NBB real estate mortgage loans totaling $ 603,827 at December 31, 2021. Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at December 31, 2021, management did not determine any impairment. Management regularly monitors the credit quality of the investment portfolio. Changes in ratings are noted and follow-up research on the issuer is undertaken when warranted. Management intends to carefully monitor any changes in bond quality.   Pledged Securities 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. 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:       For the year ended December 31, 2021       Proceeds     Book Value     Gross Gain     Gross Loss     Net Gain   Available for sale   $ 20,377     $ 20,371     $ 6     $ -     $ 6         For the year ended December 31, 2020       Proceeds     Book Value     Gross Gain     Gross Loss     Net Gain   Available for sale   $ 126,840     $ 126,732     $ 110     $ 2     $ 108       Note 4: Related Party Transactions In the ordinary course of business, the Company, through its banking subsidiary, has granted loans to related parties, including executive officers and directors of NBI and its subsidiaries. Total funded credit extended to related parties amounted to $ 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 . The Company held $ 14,460 in deposits for related parties as of December 31, 2021 and $ 16,140 as of December 31, 2020. The Company leases to a director a small office space.  The lease payments totaled $ 5 in 2021 and $ 5 in 2020. The Company has also contracted with a director's firm to prepare architectural plans for a new office in Roanoke, Virginia.  The arrangement is at arms-length and the Company paid the director's firm $ 113 in 2021 and $ 66 in 2020.     Note 5: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans The allowance for loan losses methodology incorporates individual evaluation of impaired loans and collective evaluation of groups of non-impaired loans. The Company performs ongoing analysis of the loan portfolio to determine credit quality on an individual loan basis and to identify impaired loans.   54 Table of Contents   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.   Portfolio Segments and Classes 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 Equity lines Residential closed-end first liens Residential closed-end junior liens Investor-owned residential real estate Commercial Real Estate Multifamily real estate Commercial real estate, owner-occupied Commercial real estate, other Commercial Non-Real Estate Commercial and Industrial Public Sector and IDA State and political subdivisions Consumer Non-Real Estate Credit cards Automobile Other consumer loans   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     Total   Balance, December 31, 2020   $ 503     $ 2,165     $ 3,853     $ 670     $ 339     $ 555     $ 396     $ 8,481   Charge-offs     -       ( 13 )     -       ( 526 )     -       ( 216 )     -       ( 755 ) Recoveries     -       20       159       33       -       134       -       346   Provision for (recovery of) loan losses     ( 81 )     ( 242 )     ( 891 )     922       ( 42 )     ( 29 )     ( 35 )     ( 398 ) Balance, December 31, 2021   $ 422     $ 1,930     $ 3,121     $ 1,099     $ 297     $ 444     $ 361     $ 7,674         Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2020       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non-Real Estate     Public Sector and IDA     Consumer Non-Real Estate     Unallocated     Total   Balance, December 31, 2019   $ 400     $ 1,895     $ 2,559     $ 555     $ 478     $ 650     $ 326     $ 6,863   Charge-offs     -       ( 85 )     ( 15 )     ( 372 )     -       ( 248 )     -       ( 720 ) Recoveries     -       18       145       9       -       175       -       347   Provision for (recovery of) loan losses     103       337       1,164       478       ( 139 )     ( 22 )     70       1,991   Balance, December 31, 2020   $ 503     $ 2,165     $ 3,853     $ 670     $ 339     $ 555     $ 396     $ 8,481     55 Table of Contents   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       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     Total   Individually evaluated for impairment   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -   Collectively evaluated loans     422       1,930       3,121       1,099       297       444       361       7,674   Total   $ 422     $ 1,930     $ 3,121     $ 1,099     $ 297     $ 444     $ 361     $ 7,674           Loans by Segment and Evaluation Method as of       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     Total   Individually evaluated for impairment   $ -     $ 191     $ 5,386     $ 301     $ -     $ -     $ -     $ 5,878   Collectively evaluated loans     48,841       208,786       400,336       59,963       47,899       32,026       -       797,851   Total   $ 48,841     $ 208,977     $ 405,722     $ 60,264     $ 47,899     $ 32,026     $ -     $ 803,729           Allowance for Loan Losses by Segment and Evaluation Method as of       December 31, 2020       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non-Real Estate     Public Sector and IDA     Consumer Non-Real Estate     Unallocated     Total   Individually evaluated for impairment   $ -     $ 2     $ -     $ 73     $ -     $ -     $ -     $ 75   Collectively evaluated loans     503       2,163       3,853       597       339       555       396       8,406   Total   $ 503     $ 2,165     $ 3,853     $ 670     $ 339     $ 555     $ 396     $ 8,481           Loans by Segment and Evaluation Method as of       December 31, 2020       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non-Real Estate     Public Sector and IDA     Consumer Non-Real Estate     Unallocated     Total   Individually evaluated for impairment   $ -     $ 194     $ 3,856     $ 851     $ -     $ 2     $ -     $ 4,903   Collectively evaluated loans     42,266       181,588       389,259       77,920       40,983       33,108       -       765,124   Total   $ 42,266     $ 181,782     $ 393,115     $ 78,771     $ 40,983     $ 33,110     $ -     $ 770,027     56 Table of Contents   A summary of ratios for the allowance for loan losses follows:       December 31,       2021     2020   Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees and costs     0.96 %     1.10 % Ratio of net charge-offs to average loans, net of unearned income and deferred fees and costs     0.05 %     0.05 %   A summary of nonperforming assets, as of the dates indicated, follows:       December 31,       2021     2020   Nonperforming assets:                 Nonaccrual loans   $ -     $ 846   TDR loans in nonaccrual     2,873       2,839   Total nonperforming loans     2,873       3,685   Other real estate owned, net     957       1,553   Total nonperforming assets   $ 3,830     $ 5,238   Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned     0.48 %     0.68 % Ratio of allowance for loan losses to nonperforming loans (1)     267.11 %     230.15 %     ( 1 ) 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:       December 31,       2021     2020   Loans past due 90 days or more and still accruing   $ 90     $ 17   Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees and costs     0.01 %     0.00 % Accruing TDR loans   $ 3,005     $ 1,410   Impaired loans:                 Impaired loans with no valuation allowance   $ 5,878     $ 3,858   Impaired loans with a valuation allowance     -       1,045   Total impaired loans   $ 5,878     $ 4,903   Valuation allowance   $ -     $ ( 75 ) Impaired loans, net of allowance   $ 5,878     $ 4,828   Average recorded investment in impaired loans (1)   $ 5,901     $ 5,093   Income recognized on impaired loans, after designation as impaired   $ 137     $ 54   Amount of income recognized on a cash basis   $ -     $ -       ( 1 )   Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   No interest income was recognized on nonaccrual loans for the years ended December 31, 2021 or  2020. Nonaccrual loans that meet the Company’s balance thresholds are designated as impaired.   57 Table of Contents   A detailed analysis of investment in impaired loans, associated reserves and interest income recognized, by loan class follows:       Impaired Loans as of December 31, 2021       Principal Balance     (A) Total Recorded Investment (1)     Recorded Investment (1) in (A) for Which There is No Related Allowance     Recorded Investment (1) in (A) for Which There is a Related Allowance     Related Allowance   Consumer Real Estate (2)                                         Investor-owned residential real estate    $ 191      $ 191      $ 191      $ -      $ -   Commercial Real Estate (2)                                         Commercial real estate, owner occupied     3,256       2,665       2,665       -       -   Commercial real estate, other     2,721       2,721       2,721       -       -   Commercial Non-Real Estate (2)                                         Commercial and Industrial     310       301       301       -       -   Total   $ 6,478     $ 5,878     $ 5,878     $ -     $ -         Impaired Loans as of December 31, 2020       Principal Balance     (A) Total Recorded Investment (1)     Recorded Investment (1) in (A) for Which There is No Related Allowance     Recorded Investment (1) in (A) for Which There is a Related Allowance     Related Allowance   Consumer Real Estate (2)                                         Investor-owned residential real estate   $ 194     $ 194     $ -     $ 194     $ 2   Commercial Real Estate (2)                                         Commercial real estate, owner occupied     3,752       3,202       3,202       -       -   Commercial real estate, other     654       654       654       -       -   Commercial Non-Real Estate (2)                                         Commercial and Industrial     851       851       -       851       73   Consumer Non-Real Estate (2)                                         Automobile     2       2       2       -       -   Total   $ 5,453     $ 4,903     $ 3,858     $ 1,045     $ 75       ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   ( 2 ) Only classes with impaired loans are shown.   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, 2021       Average Recorded Investment (1)     Interest Income Recognized   Consumer Real Estate (2)                 Investor-owned residential real estate    $ 192      $ 13   Commercial Real Estate (2)                 Commercial real estate, owner occupied     2,668       9   Commercial real estate, other     2,723       100   Commercial Non-Real Estate (2)                 Commercial and Industrial     317       15   Consumer Non-Real Estate (2)                 Automobile     1       -   Total   $ 5,901     $ 137     58 Table of Contents   Impaired Loans   For the Year Ended December 31, 2020       Average Recorded Investment (1)     Interest Income Recognized   Consumer Real Estate (2)                 Investor-owned residential real estate   $ 196     $ 13   Commercial Real Estate (2)                 Commercial real estate, owner occupied     3,217       19   Commercial real estate, other     790       -   Commercial Non-Real Estate (2)                 Commercial and Industrial     887       22   Consumer Non-Real Estate (2)                 Automobile     3       -   Total   $ 5,093     $ 54     ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status. ( 2 ) Only classes with impaired loans are shown.   An analysis of past due and nonaccrual loans, as of the dates indicated, follows:   December 31, 2021                                     30 – 89 Days Past Due     90 or More Days Past Due     90 or More Days Past Due and Still Accruing     Nonaccruals (Including Impaired Nonaccruals)   Real Estate Construction (1)                                 Construction, other   $ 14     $ -     $ -     $ -   Consumer Real Estate (1)                                 Equity lines     50       29       29         Residential closed-end first liens     715       58       58       -   Commercial Real Estate (1)                                 Commercial real estate, owner occupied     12       266       -       2,572   Commercial Non-Real Estate (1)                                 Commercial and Industrial     13       -       -       301   Consumer Non-Real Estate (1)                                 Credit cards     2       2       2       -   Automobile     93       -       -       -   Other consumer loans     88       1       1       -   Total   $ 987     $ 356     $ 90     $ 2,873       ( 1 ) Only classes with past due or nonaccrual loans are presented.   59 Table of Contents   December 31, 2020                                     30 – 89 Days Past Due     90 or More Days Past Due     90 or More Days Past Due and Still Accruing     Nonaccruals (Including Impaired Nonaccruals)   Consumer Real Estate (1)                                 Residential closed-end first liens   $ 365     $ 62     $ -     $ 62   Investor-owned residential real estate     106       -       -       -   Commercial Real Estate (1)                                 Commercial real estate, owner occupied     15       571       -       2,941   Commercial real estate, other     -       654       -       654   Commercial Non-Real Estate (1)                                 Commercial and Industrial     730       27       -       28   Consumer Non-Real Estate (1)                                 Credit cards     7       3       3       -   Automobile     144       1       1       -   Other consumer loans     130       13       13       -   Total   $ 1,497     $ 1,331     $ 17     $ 3,685       ( 1 ) Only classes with past due or nonaccrual loans are presented.   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, 2021   Collectively-Evaluated Loans   Pass     Special Mention     Classified   Real Estate Construction                         Construction, 1-4 family residential   $ 10,008     $ -     $ -   Construction, other     38,833       -       -   Consumer Real Estate                         Equity lines     13,588       -       29   Closed-end first liens     106,107       -       275   Closed-end junior liens     2,715       -       -   Investor-owned residential real estate     85,460       -       612   Commercial Real Estate                         Multifamily residential real estate     106,644       -       -   Commercial real estate owner-occupied     125,605       -       35   Commercial real estate, other     164,324       3,728       -   Commercial Non-Real Estate                         Commercial and Industrial     59,953       -       10   Public Sector and IDA                         States and political subdivisions     47,899       -       -   Consumer Non-Real Estate                         Credit cards     4,531       -       -   Automobile     10,990       -       3   Other consumer     16,402       -       100   Total   $ 793,059     $ 3,728     $ 1,064     60 Table of Contents   December 31, 2020   Collectively-Evaluated Loans   Pass     Special Mention     Classified   Real Estate Construction                         Construction, 1-4 family residential   $ 8,195     $ -     $ -   Construction, other     34,071       -       -   Consumer Real Estate                         Equity lines     13,903       -       -   Closed-end first liens     92,241       66       284   Closed-end junior liens     3,003       -       -   Investor-owned residential real estate     71,450       641       -   Commercial Real Estate                         Multifamily residential real estate     87,455       265       -   Commercial real estate owner-occupied     146,900       543       140   Commercial real estate, other     147,436       6,520       -   Commercial Non-Real Estate                         Commercial and Industrial     77,892       -       28   Public Sector and IDA                         States and political subdivisions     40,983       -       -   Consumer Non-Real Estate                         Credit cards     4,665       -       -   Automobile     12,024       -       6   Other consumer     16,398       -       15   Total   $ 756,616     $ 8,035     $ 473     Sales, Purchases and Reclassification of Loans The Company finances mortgages under “best efforts” contracts with mortgage purchasers. The mortgages are designated as held for sale upon initiation. There have been no major reclassifications from portfolio loans to held for sale. Occasionally, the Company purchases or sells participations in loans. All participation loans purchased met the Company’s normal underwriting standards at the time the participation was entered. Participation loans are included in the appropriate portfolio balances to which the allowance methodology is applied.   Troubled Debt Restructurings   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.   61 Table of Contents   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       Number of Contracts     Pre- Modification Outstanding Recorded Investment     Post- Modification Outstanding Recorded Investment (1)   Commercial Real Estate                         Commercial real estate owner-occupied     1     $ 102     $ 102   Commercial real estate, other     2       2,724       2,724   Total     3     $ 2,826     $ 2,826       ( 1 ) Post-modification outstanding recorded investment considers amounts immediately following the modification. Amounts do not reflect balances at the end of the period.   Defaulted TDRs 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.     Note 6: Premises and Equipment A summary of the cost and accumulated depreciation of premises and equipment as of the dates indicated, follows:       December 31,       2021     2020   Premises   $ 14,933     $ 14,809   Furniture and equipment     6,819       6,620   Premises and equipment   $ 21,752     $ 21,429   Accumulated depreciation     ( 12,030 )     ( 11,394 ) 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.     Note 7: Deposits The aggregate amounts of time deposits in denominations of $250 or more at December 31, 2021 and 2020 were $ 14,600 and $ 13,177 , respectively. At December 31, 2021, the scheduled maturities of time deposits are as follows:   Year of Maturity   Time Deposits   2022   $ 64,262   2023     5,954   2024     508   2025     3,195   2026     5,029   Thereafter     20   Total time deposits   $ 78,968     At December 31, 2021 and 2020, overdraft demand deposits reclassified to loans totaled $ 170 and $ 39 , respectively.   62 Table of Contents Table of Contents       Note 8: Employee Benefit Plans 401 (k) Plan The Company has a Retirement Accumulation Plan qualifying under Internal Revenue Code Section 401 (k), in which NBB and NBFS are participating employers. Eligible participants may contribute up to 100 % of their total annual compensation to the plan, subject to certain limits based on federal tax laws. Employee contributions are matched by the employer based on a percentage of an employee’s total annual compensation contributed to the plan. For the years ended December 31, 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 $ 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. As of December 31, 2021, the number of shares held by the ESOP was 184,054 . All shares held by the ESOP are treated as outstanding in computing the Company’s basic net income per share. Upon reaching age 55 with 10 years of plan participation, a vested participant has the right to diversify 50 % of his or her allocated ESOP shares, and NBI or the ESOP, with the agreement of the trustee, is obligated to purchase those shares. The ESOP contains a put option which allows a withdrawing participant to require the Company or the ESOP, if the plan administrator agrees, to purchase his or her allocated shares if the shares are not readily tradable on an established market at the time of distribution.   Salary Continuation Plan The Company has a non-qualified Salary Continuation Plan for certain key officers. The plan provides the participating officers with supplemental retirement income, payable for the greater of 15 years after retirement or the officer’s lifetime. The expense accrued for the plans in 2021 and 2020, based on the present value of the retirement benefits, amounted to $ 296 and $ 304 respectively. The plan is unfunded. However bank-owned life insurance has been acquired on the life of the key employees in amounts sufficient to discharge the obligations of the agreement.   Defined Benefit Plan           The Company’s defined benefit pension plan covers substantially all employees. The plan benefit formula is based upon the length of service of retired employees and a percentage of qualified W- 2 compensation during their final years of employment. Information pertaining to activity in the plan during the years indicated, is as follows:       December 31,     2021     2020   Change in benefit obligation                 Projected benefit obligation at beginning of year   $ 34,852     $ 29,641   Service cost (1)     1,445       1,080   Interest cost     736       820   Actuarial loss (gain) (2)     ( 786 )     4,621   Benefits paid     ( 935 )     ( 1,310 ) Projected benefit obligation at end of year   $ 35,312     $ 34,852                     Change in plan assets                 Fair value of plan assets at beginning of year   $ 32,415     $ 25,007   Actual return on plan assets     4,707       3,718   Employer contribution     -       5,000   Benefits paid     ( 935 )     ( 1,310 ) Fair value of plan assets at end of year   $ 36,187     $ 32,415                     Funded status at the end of the year   $ 875     $ ( 2,437 )   (continued)   63 Table of Contents   Amounts recognized in the Consolidated Balance Sheet                 Deferred tax (liability) asset   $ ( 184 )   $ 512   Other assets (liabilities)     875       ( 2,437 ) Total amounts recognized in the Consolidated Balance Sheet   $ 691     $ ( 1,925 )                   Amounts recognized in accumulated other comprehensive (loss) income, net                 Net loss   $ ( 8,749 )   $ ( 12,855 ) Prior service cost     -       11   Deferred tax asset     1,837       2,697   Amount recognized   $ ( 6,912 )   $ ( 10,147 )                   Accrued/Prepaid benefit cost, net                 Benefit obligation   $ ( 35,312 )   $ ( 34,852 ) Fair value of assets     36,187       32,415   Unrecognized net actuarial loss     8,749       12,855   Unrecognized prior service cost     -       ( 11 ) Deferred tax liability     ( 2,021 )     ( 2,185 ) Prepaid benefit cost included in other assets   $ 7,603     $ 8,222                     Components of net periodic benefit cost                 Service cost   $ 1,445     $ 1,080   Interest cost     736       820   Expected return on plan assets     ( 2,220 )     ( 1,679 ) Amortization of prior service cost     ( 11 )     ( 110 ) Recognized net actuarial loss     833       710   Net periodic benefit cost   $ 783     $ 821                     Other changes in plan assets and benefit obligations recognized in other comprehensive (loss) income                 Net (gain) loss   $ ( 4,106 )   $ 1,871   Amortization of prior service cost     11       110   Deferred income tax expense (benefit)     860       ( 416 ) Total recognized   $ ( 3,235 )   $ 1,565                     Total recognized in net periodic benefit cost and other comprehensive (loss) income   $ ( 3,312 )   $ 2,802                     Weighted average assumptions at end of the year                 Discount rate used for net periodic pension cost     2.25 %     3.00 % Discount rate used for disclosure     2.50 %     2.25 % Expected return on plan assets     7.50 %     7.50 % Rate of compensation increase     3.00 %     3.00 %     ( 1 ) Cost is included in Salaries and Employee Benefits expense.   ( 2 ) 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 The Company, as plan sponsor, selects the expected long term rate-of-return-on-assets assumption in consultation with its investment advisors and actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience, which may not continue over the measurement period, but higher significance is placed on current forecasts of future long term economic conditions.   64 Table of Contents   Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, and solely for this purpose, the plan is assumed to continue in force and not terminate during the period during which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost). The Company, as plan sponsor, has adopted a Pension Administrative Committee Policy (the “Policy”) for monitoring the investment management of its qualified plans. The Policy includes a statement of general investment principles and a listing of specific investment guidelines, to which the committee may make documented exceptions. The guidelines state that, unless otherwise indicated, all investments that are permitted under the prudent investor rule shall be permissible investments for the defined benefit pension plan. All plan assets are to be invested in marketable securities. Certain investments are prohibited, including commodities and future contracts, private placements, repurchase agreements, options and derivatives. The Policy establishes quality standards for fixed income investments and mutual funds included in the pension plan trust. The Policy also outlines diversification standards. The preferred target allocation for the assets of the defined benefit pension plan is 65 % in equity securities and 35 % in fixed income securities. Equity securities include investments in large-cap and mid-cap companies primarily located in the United States, although a small number of international large-cap companies are included. There are also investments in mutual funds holding the equities of large-cap and mid-cap U.S. companies. Fixed income securities include U.S. government agency securities and corporate bonds from companies representing diversified industries. There are no investments in hedge funds, private equity funds or real estate. 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:       Fair Value Measurements at December 31, 2021   Asset Category   Total     Level 1     Level 2     Level 3)   Cash   $ 1,390     $ 1,390     $ -     $ -   Equity securities:                                 U. S. companies     19,758       19,758       -       -   International companies     2,722       2,722       -       -   Equities mutual funds (1)     5,257       5,257       -       -   State and political subdivisions     57       -       57       -   Corporate bonds – investment grade (2)     7,003       -       7,003       -   Total pension plan assets   $ 36,187     $ 29,127     $ 7,060     $ -         Fair Value Measurements at December 31, 2020   Asset Category   Total     Level 1     Level 2     Level 3   Cash   $ 4,336     $ 4,336     $ -     $ -   Equity securities:                                 U. S. companies     15,129       15,129       -       -   International companies     2,735       2,735       -       -   Equities mutual funds (1)     3,840       3,840       -       -   State and political subdivisions     152       -       152       -   Corporate bonds – investment grade (2)     6,223       -       6,223       -   Total pension plan assets   $ 32,415     $ 26,040     $ 6,375     $ -       ( 1 ) This category comprises actively managed equity funds invested in large-cap and mid-cap U.S. companies.   ( 2 ) This category represents investment grade bonds of U.S. issuers from diverse industries.   Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows:   2022     $ 6,049   2023     $ 984   2024     $ 1,649   2025     $ 830   2026     $ 2,093   2027 - 2031     $ 11,352     65 Table of Contents Table of Contents       Note 9: Income Taxes The Company files United States federal income tax returns, and Virginia, West Virginia and North Carolina state income tax returns. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2018. Allocation of income tax expense between current and deferred portions is as follows:       Years ended December 31,       2021     2020   Current   $ 4,099     $ 2,795   Deferred expense     152       282   Total income tax expense   $ 4,251     $ 3,077     The following reconciles the “expected” income tax expense, computed by applying the U.S. federal income tax rate of 21% to income before tax expense, with the reported income tax expense:     Years ended December 31,       2021     2020   Computed “expected” income tax expense   $ 5,173     $ 4,021   Tax-exempt interest income     ( 763 )     ( 798 ) Nondeductible interest expense     25       62   Other, net     ( 184 )     ( 208 ) Reported income tax expense   $ 4,251     $ 3,077     The components of net deferred tax assets, included in other assets, are as follows:       December 31,       2021     2020   Deferred tax assets:                 Allowance for loan losses and unearned fee income   $ 1,774     $ 1,938   Valuation allowance on other real estate owned     186       188   Defined benefit plan     1,837       2,697   Deferred compensation and other liabilities     899       866   Lease accounting     327       423   SBA fees     9       191   Total deferred tax assets   $ 5,032     $ 6,303                     Deferred tax liabilities:                 Fixed assets   $ ( 415 )   $ ( 424 ) Goodwill     ( 1,228 )     ( 1,228 ) Defined benefit plan, prepaid portion     ( 2,021 )     ( 2,186 ) Net unrealized gain on securities available for sale     ( 759 )     ( 3,500 ) Lease accounting     ( 321 )     ( 419 ) Discount accretion of securities     ( 27 )     ( 15 ) Total deferred tax liabilities     ( 4,771 )     ( 7,772 ) Net deferred tax assets (liabilities)   $ 261     $ ( 1,469 )   The Company determined that no valuation allowance for gross deferred tax assets was necessary at December 31, 2021 and 2020.     Note 10: Restrictions on Dividends The Company’s principal source of funds for dividend payments is dividends received from its subsidiary bank. For the years ended December 31, 2021 and 2020, dividends received from the subsidiary bank were $ 14,508 and $ 22,000 , respectively.   66 Table of Contents   Substantially all of NBI’s retained earnings are undistributed earnings of its sole banking subsidiary, which are restricted by various regulations administered by federal bank regulatory agencies. Bank regulatory agencies restrict, unless prior approval is obtained, the total dividend payments of a bank in any calendar year to the bank’s retained net income of that year to date, as defined, combined with its retained net income of the preceding two years, less any required transfers to surplus. During 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. The Bank remains in a highly capitalized position and the Company intends to request approval for additional dividends in 2022.     Note 11: Minimum Regulatory Capital Requirement Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is exempt from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements. NBB is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on NBI’s and NBB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, NBB must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. The Bank is subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act (the “Basel III Capital Rules”) as applied by the Office of the Comptroller of the Currency. The Basel III Capital Rules require the Bank to comply with minimum capital ratios plus a “capital conservation buffer” designed to absorb losses during periods of economic stress. The rules set forth minimum amounts and ratios for CET1 capital, Tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined). NBB’s CET1 capital includes common stock and related surplus and retained earnings. The Basel III Capital Rules provide an option to exclude components of accumulated other comprehensive income (loss) from CET1 capital. Once made, the election is final and cannot be changed. NBB elected to exclude components of accumulated other comprehensive income from CET1 capital. Tier 1 Capital includes CET1 capital and additional Tier 1 capital components. At December 31, 2021 and 2020, NBB did not hold any additional Tier 1 capital beyond CET1 capital. Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes the allowance for loan losses. NBB’s risk-weighted assets were $ 989,503 at December 31, 2021 and $ 932,364 as of December 31, 2020. Management believes, as of December 31, 2021 and 2020, that NBB met all capital adequacy requirements to which it is subject. As of December 31, 2021, the most recent notifications from the Office of the Comptroller of the Currency categorized NBB as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, CET1 risk-based and Tier 1 leverage ratios, as set forth in the following tables. There are no conditions or events since these notifications that management believes have changed NBB’s category. NBB’s capital amounts and ratios as of December 31, 2021 and 2020 are presented in the following tables.       Actual     Minimum Capital Requirement (1)     Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions       Amount     Ratio     Amount     Ratio     Amount     Ratio   December 31, 2021                                                 Total capital (to risk weighted assets)   $ 192,907       19.495 %   $ 103,898       10.500 %   $ 98,950       10.000 % Tier 1 capital (to risk weighted assets)   $ 185,187       18.715 %   $ 84,108       8.500 %   $ 79,160       8.000 % Common Equity Tier 1 capital (to risk weighted assets)   $ 185,187       18.715 %   $ 69,265       7.000 %   $ 64,318       6.500 % Tier 1 capital (to average assets)   $ 185,187       11.165 %   $ 66,348       4.000 %   $ 82,935       5.000 %       Actual     Minimum Capital Requirement (1)     Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions       Amount     Ratio     Amount     Ratio     Amount     Ratio   December 31, 2020                                                 Total capital (to risk weighted assets)   $ 185,937       19.943 %   $ 97,898       10.500 %   $ 93,236       10.000 % Tier 1 capital (to risk weighted assets)   $ 177,409       19.028 %   $ 79,251       8.500 %   $ 74,589       8.000 % Common Equity Tier 1 capital (to risk weighted assets)   $ 177,409       19.028 %   $ 65,265       7.000 %   $ 60,604       6.500 % Tier 1 capital (to average assets)   $ 177,409       12.105 %   $ 58,624       4.000 %   $ 73,281       5.000 %     ( 1 ) Except with regard to NBB’s Tier 1 capital to average assets ratio, the minimum capital requirement includes the Basel III Capital Rules’ capital conservation buffer ( 2.50% ) which is added to the minimum capital requirements for capital adequacy purposes. NBB’s capital conservation buffer consists of additional CET1 above regulatory minimum requirement. Failure to maintain the prescribed levels would result in limitations on capital distributions and discretionary bonuses to executives.   67 Table of Contents Table of Contents       Note 12: Condensed Financial Statements of Parent Company Financial information pertaining only to NBI (Parent) as of the dates indicated, is as follows:   Condensed Balance Sheets   December 31,       2021     2020   Assets                 Cash due from subsidiaries   $ 2,324     $ 987   Interest-bearing deposits     -       10,027   Investments in subsidiaries     189,027       189,667   Refundable income taxes     647       446   Other assets     847       791   Total assets   $ 192,845     $ 201,918                     Liabilities and Stockholders ’ Equity                 Other liabilities   $ 1,094     $ 1,311   Stockholders’ equity     191,751       200,607   Total liabilities and stockholders’ equity   $ 192,845     $ 201,918     Condensed Statements of Income   Years ended December 31,       2021     2020   Income                 Dividends from subsidiaries   $ 14,508     $ 22,000   Other income     1       4   Total income     14,509       22,004   Expenses                 Other expenses     1,135       1,179   Income before income tax benefit and equity in undistributed net income of subsidiaries     13,374       20,825   Applicable income tax benefit     293       301   Income before equity in undistributed net income of subsidiaries     13,667       21,126   Equity (deficit) in undistributed net income of subsidiaries     6,715       ( 5,049 ) Net income   $ 20,382     $ 16,077     Condensed Statements of Cash Flows   Years ended December 31,       2021     2020   Cash Flows from Operating Expenses                 Net income   $ 20,382     $ 16,077   Adjustments to reconcile net income to net cash provided by operating activities:                 Deficit (equity) in undistributed net income of subsidiaries     ( 6,715 )     5,049   Net change in refundable income taxes due from subsidiaries     ( 201 )     ( 23 ) Net change in other assets     221       ( 45 ) Net change in other liabilities     ( 217 )     ( 2 ) Net cash provided by operating activities     13,470       21,056                     Cash Flows from Investing Activities                 Net change in interest-bearing deposits     10,027       ( 9,404 ) Net cash provided by (used in) investing activities     10,027       ( 9,404 )   (continued) 68 Table of Contents   Cash Flows from Financing Activities                 Cash dividends paid     ( 8,806 )     ( 9,000 ) Repurchase of shares     ( 13,354 )     ( 1,722 ) Net cash used in financing activities     ( 22,160 )     ( 10,722 ) Net change in cash     1,337       930   Cash due from subsidiaries at beginning of year     987       57   Cash due from subsidiaries at end of year   $ 2,324     $ 987       Note 13: Financial Instruments with Off-Balance Sheet Risk The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and interest rate locks. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may require collateral or other security to support the following financial instruments with credit risk. At December 31, 2021 and 2020, financial instruments outstanding whose contract amounts represent credit risk were:       December 31,       2021     2020   Financial instruments whose contract amounts represent credit risk:                 Commitments to extend credit   $ 181,395     $ 178,341   Standby letters of credit     13,984       13,474   Mortgage loans sold with potential recourse     18,287       40,362     Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer. Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit. Some of these commitments are uncollateralized and do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. The Company originates mortgage loans for sale to secondary market investors subject to contractually specified and limited recourse provisions. 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. In general, the Company may be required to repurchase a previously sold mortgage loan if there is major noncompliance with defined loan origination or documentation standards, including fraud, negligence or material misstatement in the loan documents. Repurchase may also be required if necessary governmental loan guarantees are canceled or never issued, or if an investor is forced to buy back a loan after it has been resold as a part of a loan pool. In addition, the Company may have an obligation to repurchase a loan if the mortgagor defaults early in the loan term. This potential default period is approximately 12 months after sale of a loan to the investor. At December 31, 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. The Company does not expect any counterparty to fail to meet its obligations. The Company maintains cash accounts in other commercial banks. The Company had $ 28 in deposits with correspondent institutions at December 31, 2021 that were not insured by the FDIC.   69 Table of Contents Table of Contents       Note 14: Concentrations of Credit Risk The Company does a general banking business, serving the commercial and personal banking needs of its customers. NBB’s primary service area is defined as the counties of Montgomery, Giles, Carroll, Grayson, Pulaski, Tazewell, Smyth, Wythe, Roanoke and Washington and the cities of Galax, Radford and Roanoke in southwest Virginia, and Mercer, Monroe and McDowell counties in West Virginia. For loan purposes, the Company’s market also includes the Virginia cities of Salem and Bristol and counties of Botetourt and Craig, the southernmost tip of West Virginia adjacent to the counties of Giles, Buchanan, Russell and Bland, the North Carolina counties of Surry and Alleghany, and the Tennessee city of Bristol and counties of Washington and Sullivan. Substantially all of NBB’s loans are made in its primary service area. Additionally, the Company occasionally participates in loans in nearby higher growth metropolitan areas. Loans outside of the primary service area are a small percentage of the loan portfolio, are appropriately underwritten and are not considered out of market exceptions. The ultimate collectability of NBB’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, is influenced by the economic conditions of the market area. The Company’s operating results are therefore closely correlated with the economic trends within this area. Commercial real estate as of December 31, 2021 and 2020 represented approximately 50 % and 51 %, respectively, of the loan portfolio, at $ 405,722 and $ 393,115 , respectively. Included in commercial real estate are loans for college housing and professional office buildings that comprised $ 201,858 and $ 189,421 as of December 31, 2021 and 2020, respectively, corresponding to approximately 25 % of the loan portfolio at December 31, 2021 and December 31, 2020. Loans secured by residential real estate were $ 208,977 , or approximately 26 % of the portfolio, and $ 181,782 , or 24 % of the portfolio at December 31, 2021 and 2020, respectively. The Company has established operating policies relating to the credit process and collateral in loan originations. Loans to purchase real and personal property are generally collateralized by the related property and with loan amounts established based on certain percentage limitations of the property’s total stated or appraised value. Credit approval is primarily a function of cash flow, collateral and the evaluation of the creditworthiness of the individual borrower or project based on available financial information. Management considers the concentration of credit risk to be minimal.     Note 15: Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of the observable inputs and minimize the use of the unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:     Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities.   Level 2 – Valuation is based on observable inputs including: ●         quoted prices in active markets for similar assets and liabilities, ●         quoted prices for identical or similar assets and liabilities in less active markets, ●         inputs other than quoted prices that are observable, and ●         model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.   Level 3 – Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.   Fair value is best determined by quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from disclosure requirements. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.          The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:   Financial Instruments Measured At Fair Value on a Recurring Basis Securities Available for Sale Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1 ). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2 ). The carrying value of restricted Federal Reserve Bank of Richmond and 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 tables.   70 Table of Contents   The following tables present the balances of financial assets measured at fair value on a recurring basis as of December 31, 2021 and 2020:   December 31, 2021           Fair Value Measurement Using   Description   Balance     Level 1     Level 2     Level 3   U.S. Government agencies and corporations   $ 278,019     $ -     $ 278,019     $ -   States and political subdivisions     198,672       -       198,672       -   Mortgage-backed securities     206,174       -       206,174       -   Corporate debt securities     3,215       -       3,215       -   Total securities available for sale   $ 686,080     $ -     $ 686,080     $ -     December 31, 2020           Fair Value Measurement Using   Description   Balance     Level 1     Level 2     Level 3   U.S. Government agencies and corporations   $ 91,163     $ -     $ 91,163     $ -   States and political subdivisions     203,961       -       203,961       -   Mortgage-backed securities     249,175       -       249,175       -   Corporate debt securities     2,443       -       2,443       -   Total securities available for sale   $ 546,742     $ -     $ 546,742     $ -     The Company’s securities portfolio is valued using Level 2 inputs. The Company relies on an independent third party vendor to provide market valuations. The inputs used to determine value include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two -sided markets, benchmark securities, bids, offers and reference data including market research publications. The third party vendor also monitors market indicators, industry activity and economic events as part of the valuation process. Central to the final valuation is the assumption that the indicators used are representative of the fair value of securities held within the Company’s portfolio. Level 2 inputs are subject to a certain degree of uncertainty and changes in these assumptions or methodologies in the future, if any, may impact securities fair value, deferred tax assets or liabilities, or expense.   Interest Rate Loan Contracts and Forward Contracts The Company originates consumer real estate loans which it intends to sell to a correspondent lender. Interest rate loan contracts and forward contracts result from originating loans held for sale and are derivatives reported at fair value. The Company enters interest rate lock commitments with customers who apply for a loan which 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 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. At the time the Company enters into an interest rate loan contract with a customer, it also enters into a best efforts forward sales commitment with the correspondent lender. If the loan has been closed and funded, the best efforts commitment converts to a mandatory forward sales commitment. Fair value is based on the gain or loss that would occur if the Company were to pair-off the transaction with the investor at the measurement date. This is a Level 3 input. The Company has elected to measure and report best efforts commitments at fair value. Interest rate loan contracts and forward contracts are valued based on quotes from the correspondent lender at the reporting date. Pricing changes daily and if a loan has not been sold to the correspondent by the next reporting date, the fair value may be different from that reported currently. Changes in fair value measurement impacts net income. 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           Fair Value Measurements Using   Description   Balance     Level 1     Level 2     Level 3   Interest rate loan contracts   $ 1     $ -     $ -     $ 1   Forward contracts   $ ( 11 )   $ -     $ -     $ ( 11 )   71 Table of Contents   December 31, 2020   Valuation Technique   Unobservable Input   Range (Weighted Average)   Interest rate loan contracts   Market approach   Pull-through rate     87.02 % (1) Forward contracts   Market approach   Pull-through rate     87.02 % (1)                   Interest rate loan contracts   Market approach   Current reference price     101.91 % - 103.02% (102.55%) (2) Forward contracts   Market approach   Current reference price     101.91 % - 103.19% (102.67%) (2)     ( 1 ) All contracts are valued using the same pull-through rate.   ( 2 ) Current reference prices were weighted by the relative amount of the loan.   Financial Instruments Measured at Fair Value on a Non-Recurring Basis Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.           The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:   Loans Held for Sale Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of one -to- four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2 ). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the years ended December 31, 2021 and 2020.             Impaired Loans Impaired loans are measured at fair value on a nonrecurring basis. If an individually evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income. The fair value of an impaired loan may be measured using one of three methods. Each method falls within a different level of the fair value hierarchy. The observable market price of a loan is categorized as a Level 1 input. The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a TDR. Loans measured using the fair value of collateral may be categorized in Level 2 or Level 3. Loans valued using the collateral method may be secured by real estate or business assets including equipment, inventory, and accounts receivable. Real estate collateral secures most loans and valuation is based upon the “as-is” value of independent appraisals or evaluations. Appraisals are used to value loans secured by residential 1 - 4 family properties with outstanding principal balances greater than $250 and commercial real estate loans with outstanding principal balances greater than $500. Appraisals or real estate evaluations prepared by a third party may be used to value loans with principal balances below these thresholds. Appraisals of less than 24 months of age, conducted by independent, licensed appraisers using observable market data analyzed through an income or sales valuation approach result in Level 2 categorization. If a current appraisal cannot be obtained prior to a reporting date and an existing appraisal is discounted to obtain an estimated value, or if declines in value are identified after the date of the appraisal, or if an appraisal is discounted for estimated selling costs, or if the appraisal uses unobservable market data, the valuation of real estate collateral is categorized as Level 3. Valuations based on evaluations are categorized as Level 3. The value of business equipment is based upon an outside appraisal (Level 2 ) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3 ) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3 ). If a current appraisal uses unobservable data as part of the assessment, the value of the collateral is classified as Level 3. 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   Description   Balance     Level 1     Level 2     Level 3   Impaired loans net of valuation allowance   $ 970       -       -     $ 970     72 Table of Contents     The following table presents information about Level 3 Fair Value Measurements for impaired loans as of December 31, 2020.   Valuation Technique   Unobservable Input   Range (Weighted Average (1) )   Present value of cash flows   Discount rate     5.50 % - 6.50%(5.78%)       ( 1 ) Unobservable inputs were weighted by the relative fair value of the impaired loans.   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. 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. 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. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs. The following table summarizes the Company’s OREO that were measured at fair value on a nonrecurring basis as of the dates indicated.                 Carrying Value   Date Description   Balance     Level 1     Level 2     Level 3   December 31, 2021 OREO net of valuation allowance   $ 957     $ -     $ -     $ 957   December 31, 2020 OREO net of valuation allowance     1,553       -       -       1,553     The following table presents information about OREO and Level 3 Fair Value Measurements as of the dates indicated.   Date   Valuation Technique   Unobservable Input   Range (Weighted Average (1) )   December 31, 2021   Discounted appraised value   Selling cost     6.20 % (3)                     December 31, 2020   Discounted appraised value   Selling cost     4.00 % – 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%) (1)     ( 1 ) Discounts were weighted by the relative appraised value of the OREO properties.   ( 2 ) The appraised value is discounted by selling costs if the OREO property is listed with a realtor and if appraised value exceeds the list price, less estimated selling costs. Selling costs do not discount appraised value if the Company markets the OREO property independently or if the OREO property is listed with a realtor and the list price less estimated selling costs exceeds appraised value.   ( 3 ) As of 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. Determining the discount to appraisals for selling cost and lack of marketability and age of the appraisal relies on certain key assumptions and judgements. Discounts for selling costs and in some instances, marketability, result when the Company markets OREO properties via local realtors. The Company works with the realtor to determine the list price, which may be set at appraised value or at a different amount based on the realtor’s advice and management’s judgement of marketability. Selling costs for improved land generally are estimated at 6% of the list price, and for raw land at 10% of the list price. If the final sale price is different from the list price, the amount of selling costs will also be different from those estimated. Discounts for age may be applied if current appraisals cannot be obtained prior to reporting dates. The most recent appraised value available may be discounted based upon management judgement. There is uncertainty in determining discounts to appraised value. Future changes to marketability assumptions or updated appraisals may indicate a lower fair value, with a corresponding impact to net income. Ultimate proceeds from the sale of OREO property may be less than the estimated fair value, reducing net income.   73 Table of Contents   Fair Value Summary The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2021 and December 31, 2020. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For non-marketable equity securities such as FHLB and Federal Reserve Bank of Richmond stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity. Fair values are estimated using the exit price notion.       December 31, 2021               Estimated Fair Value       Carrying Amount     Level 1     Level 2     Level 3   Financial assets:                                 Cash and due from banks   $ 8,768     $ 8,768     $ -     $ -   Interest-bearing deposits     130,021       130,021       -       -   Securities     686,080       -       686,080       -   Restricted securities     845       -       845       -   Mortgage loans held for sale     615       -       615       -   Loans, net     795,574       -       -       791,335   Accrued interest receivable     5,104       -       5,104       -   Bank-owned life insurance     42,354       -       42,354       -   Financial liabilities:                                 Deposits   $ 1,494,587     $ -     $ 1,415,619     $ 79,115   Accrued interest payable     48       -       48       -         December 31, 2020               Estimated Fair Value       Carrying Amount     Level 1     Level 2     Level 3   Financial assets:                                 Cash and due from banks   $ 13,147     $ 13,147     $ -     $ -   Interest-bearing deposits     120,725       120,725       -       -   Securities     546,742       -       546,742       -   Restricted securities     1,279       -       1,279       -   Mortgage loans held for sale     866       -       866       -   Loans, net     760,318       -       -       752,624   Accrued interest receivable     5,028       -       5,028       -   Bank-owned life insurance     36,444       -       36,444       -   Interest rate loan contracts     1       -       -       1   Financial liabilities:                                 Deposits   $ 1,297,143     $ -     $ 1,207,561     $ 89,681   Accrued interest payable     56       -       56       -   Forward contracts     11       -       56       11     74 Table of Contents Table of Contents       Note 16: Components of Accumulated Other Comprehensive Income (Loss) The following table summarizes the activity related to each component of accumulated other comprehensive income (loss) for the years ended December 31, 2020 and 2021:       Net Unrealized Gain (Loss) on Securities     Adjustments Related to Pension Benefits     Accumulated Other Comprehensive Income (Loss)   Balance at December 31, 2019   $ 76     $ ( 8,582 )   $ ( 8,506 ) Unrealized holding gain on available for sale securities net of tax of $ 3,502     13,176       -       13,176   Reclassification adjustment, net of tax of ($23)     ( 85 )     -       ( 85 ) Net pension loss, net of tax of ($393)     -       ( 1,478 )     ( 1,478 ) Less amortization of prior service cost included in net periodic pension cost, net of tax of ($23)     -       ( 87 )     ( 87 ) Balance at December 31, 2020   $ 13,167     $ ( 10,147 )   $ 3,020   Unrealized holding loss on available for sale securities net of tax of ($2,740)     ( 10,308 )             ( 10,308 ) Reclassification adjustment, net of tax of ($1)     ( 5 )             ( 5 ) Net pension gain, net of tax of $862           3,244       3,244   Less amortization of prior service cost included in net periodic pension cost, net of tax of ($2)             ( 9 )     ( 9 ) Balance at December 31, 2021   $ 2,854     $ ( 6,912 )   $ ( 4,058 )   The following table provides information regarding reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2021 and 2020:       December 31,       2021     2020   Component of Accumulated Other Comprehensive Income (Loss)                 Reclassification out of unrealized gains on available for sale securities:                 Realized securities gain, net   $ ( 6 )   $ ( 108 ) Income tax benefit     ( 1 )     ( 23 ) Realized gain on available for sale securities, net of tax, reclassified out of accumulated other comprehensive loss   $ ( 5 )   $ ( 85 ) Amortization of defined benefit pension items:                 Prior service costs (1)   $ ( 11 )   $ ( 110 ) Income tax benefit     ( 2 )     ( 23 ) Amortization of defined benefit pension items, net of tax, reclassified out of accumulated other comprehensive loss   $ ( 9 )   $ ( 87 )     ( 1 ) This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. (For additional information, see Note 8, Employee Benefit Plans.)     Note 17. Goodwill In accounting for goodwill, the Company conducts an impairment review at least annually and more frequently if certain impairment indicators are evident. Testing for 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 . There was no accumulated amortization or impairment.   75 Table of Contents Table of Contents       Note 18: Revenue Recognition Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams such as service charges on deposit accounts, other service charges and fees, credit and debit card fees, trust income, and annuity and insurance commissions are recognized in accordance with ASC Topic 606, “Revenue from Contracts with Customers”. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as financial guarantees, derivatives, and certain credit card fees are outside the scope of the guidance. Noninterest revenue streams within the scope of Topic 606 are discussed below.   Service Charges on Deposit Accounts Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, ATM fees, wire transfer fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Wire transfer fees, overdraft and nonsufficient funds fees and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.   Other Service Charges and Fees Other service charges include safety deposit box rental fees, check ordering charges, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Check ordering charges are transactional based, and therefore the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.   Credit and Debit Card Fees Credit and debit card fees are primarily comprised of interchange fee income and merchant services income. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa and MasterCard. Merchant services income mainly represents commission fees based upon merchant processing volume. The Company’s performance obligation for interchange fee income and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. In compliance with Topic 606, credit and debit card fee income is presented net of associated expense.   Trust Income Trust income is primarily comprised of fees earned from the management and administration of trusts and estates and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Estate management fees are based upon the size of the estate. A partial fee is recognized half-way through the estate administration and the remainder of the fee is recognized when remaining assets are distributed and the estate is closed.   Insurance and Investment Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined.   76 Table of Contents   The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2021 and 2020.       December 31,       2021     2020   Noninterest Income                 In-scope of Topic 606:                 Service charges on deposit accounts   $ 2,045     $ 1,966   Other service charges and fees     179       162   Credit and debit card fees     1,869       1,400   Trust income     1,792       1,662   Insurance and Investment (included within Other Income on the Consolidated Statements of Income)     768       464   Noninterest Income (in-scope of Topic 606)   $ 6,653     $ 5,654   Noninterest Income (out-of-scope of Topic 606)     1,773       2,290   Total noninterest income   $ 8,426     $ 7,944       Note 19: Leases The Company’s leases are recorded under ASC Topic 842, “Leases”. The Company examines its contracts to determine whether they are or contain a lease. A contract with a lease is further examined to determine whether the lease is a short-term, operating or finance lease. As permitted by ASC Topic 842, the Company elected not to capitalize short-term leases, defined by the standard as leases with terms of 12 months or less. The Company also elected the practical expedient not to separate non-lease components from lease components within a single contract. Right-of-use assets and lease liabilities are recognized for operating and finance leases. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease.    Lease payments Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred.  Payments for leases with terms longer than 12 months are included in the determination of the lease liability.  Payments may be fixed for the term of the lease or variable.  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 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 .   77 Table of Contents   The Company’s lease right of use asset is included in other assets and the lease liability is included in other liabilities. The following tables present information about leases:       December 31, 2021     December 31, 2020   Lease liability   $ 1,558     $ 2,016   Right-of-use asset   $ 1,532     $ 1,998   Weighted average remaining lease term (in years)     6.33       6.81   Weighted average discount rate     3.21 %     3.04 %       For the Years Ended December 31,       2021     2020   Lease Expense                 Operating lease expense   $ 368     $ 368   Short-term lease expense     2       2   Total lease expense   $ 370     $ 370                     Cash paid for amounts included in lease liabilities   $ 362     $ 360   Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period   $ -     $ 24     The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability:   Undiscounted Cash Flow for the   As of December 31, 2021   Twelve months ending December 31, 2022   $ 293   Twelve months ending December 31, 2023     291   Twelve months ending December 31, 2024     293   Twelve months ending December 31, 2025     244   Twelve months ending December 31, 2026     211   Thereafter     394   Total undiscounted cash flows   $ 1,726   Less: discount   $ ( 168 ) Lease liability   $ 1,558     The contracts in which the Company is lessee are with parties external to the company and not related parties. The Company has a small lease relationship with a director in which the Company is lessor.   78 Table of Contents Table of Contents         REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   To the Stockholders and the Board of Directors National Bankshares, Inc. Blacksburg, Virginia   Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of National Bankshares, Inc. and its subsidiaries (the Company) as of December 31, 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. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.    We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.    Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.   Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.   Allowance for Loan Losses – Loans Collectively Evaluated for Impairment – Qualitative Factors   Description of the Matter As described in Note 1 (Summary of Significant Accounting Policies) and Note 5 (Allowance for Loan Losses, Nonperforming Assets and Impaired Loans) to the consolidated financial statements, the Company maintains an allowance for loan losses to provide for probable losses inherent in the loan portfolio. The Company’s allowance for loan losses has two basic components, the general allowance and the specific allowance. 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.   79 Table of Contents   How We Addressed the Matter in Our Audit The primary audit procedures we performed to address this critical audit matter included: ● Obtain an understanding of controls over the evaluation of qualitative factors, including management's development and review of the data inputs used as the basis for the allocation factors and management's review and approval of the reasonableness of the assumptions used to develop the qualitative adjustments. ● Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative factors, which included:   ● Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.   ● Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors, including evaluating the metrics, including the relevance of source data and assumptions.   ● Evaluating the qualitative factors for directional consistency and for reasonableness.   ● Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.   /s/ YOUNT, HYDE & BARBOUR, P.C.   We have served as the Company's auditor since 2000.   Winchester, Virginia March 11, 2022   80 Table of Contents   Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure   None