NATIONAL BANKSHARES INC 10-Q

nksh20220930_10q.htm   Table of Contents   UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C.   20549   FORM 10-Q   ☒   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 ( d )  OF THE SECURITIES EXCHANGE ACT   OF 1934 For the quarterly period ended September 30, 2022 ☐   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 ( d )  OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________   NATIONAL BANKSHARES, INC. (Exact name of registrant as specified in its charter) Commission File Number 0-15204   Virginia (State or other jurisdiction of incorporation or organization) 54-1375874 (I.R.S. Employer Identification No.)   101 Hubbard Street Blacksburg , Virginia 24062-9002 (Address of principal executive offices)   ( 540 ) 951-6300 (Registrant’s telephone number, including area code)   (Not applicable) (Former name, former address and former fiscal year, if changed since last report)   Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock, par value $1.25 per share NKSH Nasdaq Capital Market   Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒  Yes    ☐ No   Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒  Yes    ☐ No   Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.   Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer  ☒ Smaller reporting company  ☒ Emerging growth company  ☐                          If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒   Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.   Outstanding shares of common stock at November 7, 2022 5,947,875     Table of Contents        NATIONAL BANKSHARES, INC. Form 10-Q Index     Part I –  Financial Information Page       Item 1 Financial Statements 3         Consolidated Balance Sheets, September 30, 2022 (Unaudited) and December 31, 2021 3         Consolidated Statements of Income for the Three Months Ended September 30, 2022 and 2021 (Unaudited) 4         Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended September 30, 2022 and 2021 (Unaudited) 5         Consolidated Statements of Income for the Nine Months Ended September 30, 2022 and 2021 (Unaudited) 6         Consolidated Statements of Comprehensive (Loss) Income for the Nine Months Ended September 30, 2022 and 2021 (Unaudited) 7         Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended September 30, 2022 and 2021 (Unaudited) 8         Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2022 and 2021 (Unaudited) 8         Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (Unaudited) 9  – 10         Notes to Consolidated Financial Statements (Unaudited)   11  – 31       Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 32       Item 3 Quantitative and Qualitative Disclosures About Market Risk   49       Item 4 Controls and Procedures 50       Part II –  Other Information         Item 1 Legal Proceedings 50       Item 1A Risk Factors 50       Item 2 Unregistered Sales of Equity Securities and Use of Proceeds   50       Item 3 Defaults Upon Senior Securities 50       Item 4 Mine Safety Disclosures 50       Item 5 Other Information 51       Item 6 Exhibits   51       Signatures 52       Certifications     2 Table of Contents        Part I Item 1. Financial Statements Financial Information   National Bankshares, Inc. Consolidated Balance Sheets       (Unaudited)               September 30,     December 31,   (in thousands, except share and per share data)   2022     2021   Assets                 Cash and due from banks   $ 10,957     $ 8,768   Interest-bearing deposits     79,466       130,021   Securities available for sale, at fair value     657,410       686,080   Restricted stock, at cost     941       845   Mortgage loans held for sale     -       615   Loans:                 Loans, net of unearned income and deferred fees and costs     852,863       803,248   Less allowance for loan losses     ( 8,207 )     ( 7,674 ) Loans, net     844,656       795,574   Premises and equipment, net     10,183       9,722   Accrued interest receivable     5,822       5,104   Other real estate owned, net     907       957   Goodwill     5,848       5,848   Bank-owned life insurance     43,072       42,354   Other assets     39,684       16,287   Total assets   $ 1,698,946     $ 1,702,175                     Liabilities and Stockholders' Equity                 Noninterest-bearing demand deposits   $ 358,772     $ 317,430   Interest-bearing demand deposits     917,449       890,124   Savings deposits     217,405       208,065   Time deposits     77,023       78,968   Total deposits     1,570,649       1,494,587   Accrued interest payable     40       48   Other liabilities     16,070       15,789   Total liabilities     1,586,759       1,510,424   Commitments and contingencies                     Stockholders' Equity                 Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding     -       -   Common stock of $ 1.25 par value. Authorized 10,000,000 shares; issued and outstanding 5,957,275 at September 30, 2022 and 6,063,937 shares at December 31, 2021     7,447       7,580   Retained earnings     196,941       188,229   Accumulated other comprehensive loss, net     ( 92,201 )     ( 4,058 ) Total stockholders' equity     112,187       191,751   Total liabilities and stockholders' equity   $ 1,698,946     $ 1,702,175     See accompanying notes to consolidated financial statements.   3 Table of Contents       National Bankshares, Inc. Consolidated Statements of Income Three Months Ended September 30, 2022 and 2021 (Unaudited)       September 30,   (in thousands, except share and per share data)   2022     2021   Interest Income                 Interest and fees on loans   $ 8,816     $ 9,088   Interest on interest-bearing deposits     506       56   Interest on securities – taxable     3,425       2,043   Interest on securities – nontaxable     408       469   Total interest income     13,155       11,656                     Interest Expense                 Interest on deposits     753       719   Net interest income     12,402       10,937   Provision for (recovery of) loan losses     252       ( 392 ) Net interest income after provision for (recovery of) loan losses     12,150       11,329                     Noninterest Income                 Service charges on deposit accounts     661       548   Other service charges and fees     51       50   Credit and debit card fees, net     448       460   Trust income     492       433   BOLI income     239       248   Gain on sale of mortgage loans     40       76   Other income     209       177   Total noninterest income     2,140       1,992                     Noninterest Expense                 Salaries and employee benefits     4,144       3,909   Occupancy, furniture and fixtures     476       447   Data processing and ATM     774       728   FDIC assessment     114       120   Net costs of other real estate owned     68       11   Franchise taxes     375       367   Other operating expenses     785       785   Total noninterest expense     6,736       6,367   Income before income taxes     7,554       6,954   Income tax expense     1,392       1,202   Net Income   $ 6,162     $ 5,752   Basic and fully diluted net income per common share   $ 1.03     $ 0.94   Weighted average number of common shares outstanding, basic and diluted     5,974,961       6,142,538   Dividends declared per common share     -       -     See accompanying notes to consolidated financial statements.   4 Table of Contents       National Bankshares, Inc. Consolidated Statements of Comprehensive (Loss) Income Three Months Ended September 30, 2022 and 2021 (Unaudited)       September 30,   (in thousands)   2022     2021   Net Income   $ 6,162     $ 5,752                     Other Comprehensive Loss, Net of Tax                 Unrealized holding loss on available for sale securities net of tax of ($7,822) and ($905) for the periods ended September 30, 2022 and September 30, 2021, respectively     ( 29,424 )     ( 3,403 ) Other comprehensive loss, net of tax     ( 29,424 )     ( 3,403 ) Total Comprehensive (Loss) Income   $ ( 23,262 )   $ 2,349     See accompanying notes to consolidated financial statements.   5 Table of Contents       National Bankshares, Inc. Consolidated Statements of Income Nine Months Ended September 30, 2022 and 2021 (Unaudited)   (in thousands, except share and per share data)   September 30, 2022     September 30, 2021   Interest Income                 Interest and fees on loans   $ 25,240     $ 26,104   Interest on interest-bearing deposits     757       123   Interest on securities – taxable     8,847       5,736   Interest on securities – nontaxable     1,283       1,472   Total interest income     36,127       33,435                     Interest Expense                 Interest on deposits     2,055       2,408   Net interest income     34,072       31,027   Provision for (recovery of) loan losses     696       ( 338 ) Net interest income after provision for (recovery of) loan losses     33,376       31,365                     Noninterest Income                 Service charges on deposit accounts     1,826       1,488   Other service charges and fees     157       134   Credit and debit card fees, net     1,423       1,373   Trust income     1,374       1,282   BOLI income     718       664   Gain on sale of mortgage loans     136       287   Other income     909       1,034   Realized securities gain, net     -       5   Total noninterest income     6,543       6,267                     Noninterest Expense                 Salaries and employee benefits     12,133       11,767   Occupancy, furniture and fixtures     1,432       1,378   Data processing and ATM     2,354       2,292   FDIC assessment     336       296   Net costs of other real estate owned     78       49   Franchise taxes     1,108       1,059   Other operating expenses     2,219       2,509   Total noninterest expense     19,660       19,350   Income before income taxes     20,259       18,282   Income tax expense     3,637       3,151   Net Income   $ 16,622     $ 15,131   Basic and fully diluted net income per common share   $ 2.77     $ 2.42   Weighted average number of common shares outstanding, basic and diluted     6,008,607       6,253,796   Dividends declared per common share     0.72       0.70     See accompanying notes to consolidated financial statements.   6 Table of Contents       National Bankshares, Inc. Consolidated Statements of Comprehensive (Loss) Income Nine Months Ended September 30, 2022 and 2021 (Unaudited)       September 30,     September 30,   (in thousands)   2022     2021   Net Income   $ 16,622     $ 15,131                     Other Comprehensive Loss, Net of Tax                 Unrealized holding loss on available for sale securities net of tax of ($23,431) and ($2,254) for the periods ended September 30, 2022 and September 30, 2021, respectively     ( 88,143 )     ( 8,477 ) Reclassification adjustment for gain included in net income, net of tax of ($1) , for the period ended September 30, 2021     -       ( 4 ) Other comprehensive loss, net of tax     ( 88,143 )     ( 8,481 ) Total Comprehensive (Loss) Income   $ ( 71,521 )   $ 6,650     See accompanying notes to consolidated financial statements.   7 Table of Contents       National Bankshares, Inc. Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)   Three Months Ended September 30, 2022 and 2021   (in thousands except per share and share data)   Common Stock     Retained Earnings     Accumulated Other Comprehensive Loss     Total   Balances at June 30, 2021   $ 7,713     $ 185,580     $ ( 2,058 )   $ 191,235   Net income     -       5,752       -       5,752   Common stock repurchased, 73,100 shares     ( 92 )     ( 2,639 )     -       ( 2,731 ) Other comprehensive loss, net of tax of ($905)     -       -       ( 3,403 )     ( 3,403 ) Balances at September 30, 2021   $ 7,621     $ 188,693     $ ( 5,461 )   $ 190,853                                     Balances at June 30, 2022   $ 7,476     $ 191,545     $ ( 62,777 )   $ 136,244   Net income     -       6,162       -       6,162   Common stock repurchased, 23,500 shares     ( 29 )     ( 766 )     -       ( 795 ) Other comprehensive loss, net of tax of ($7,822)     -       -       ( 29,424 )     ( 29,424 ) Balances at September 30, 2022   $ 7,447     $ 196,941     $ ( 92,201 )   $ 112,187     See accompanying notes to consolidated financial statements.       Nine Months Ended September 30, 2022 and 2021   (in thousands except per share and share data)   Common Stock     Retained Earnings     Accumulated Other Comprehensive Loss     Total   Balances at December 31, 2020   $ 8,040     $ 189,547     $ 3,020     $ 200,607   Net income     -       15,131       -       15,131   Common stock repurchased, 335,062 shares     ( 419 )     ( 11,666 )     -       ( 12,085 ) Cash dividend ($ 0.70 per share)     -       ( 4,319 )     -       ( 4,319 ) Other comprehensive loss, net of tax of ($2,255)     -       -       ( 8,481 )     ( 8,481 ) Balances at September 30, 2021   $ 7,621     $ 188,693     $ ( 5,461 )   $ 190,853                                     Balances at December 31, 2021   $ 7,580     $ 188,229     $ ( 4,058 )   $ 191,751   Net income     -       16,622       -       16,622   Common stock repurchased, 106,662 shares     ( 133 )     ( 3,591 )     -       ( 3,724 ) Cash dividend ($ 0.72 per share)     -       ( 4,319 )     -       ( 4,319 ) Other comprehensive loss, net of tax of ($23,431)     -       -       ( 88,143 )     ( 88,143 ) Balances at September 30, 2022   $ 7,447     $ 196,941     $ ( 92,201 )   $ 112,187     See accompanying notes to consolidated financial statements.   8 Table of Contents       National Bankshares, Inc. Consolidated Statements of Cash Flows Nine Months Ended September 30, 2022 and 2021 (Unaudited)       September 30,     September 30,   (in thousands)   2022     2021   Cash Flows from Operating Activities                 Net income   $ 16,622     $ 15,131   Adjustments to reconcile net income to net cash provided by operating activities:                 Provision for (recovery of) loan losses     696       ( 338 ) Depreciation of bank premises and equipment     449       484   Amortization of premiums and accretion of discounts, net     972       1,266   Gain on disposal of fixed asset     ( 4 )     -   Gain on sales and calls of securities available for sale, net     -       ( 5 ) Losses and write-downs on other real estate owned, net     50       25   Increase in cash value of bank-owned life insurance     ( 718 )     ( 664 ) Origination of mortgage loans held for sale     ( 6,348 )     ( 13,320 ) Proceeds from sale of mortgage loans held for sale     7,099       14,238   Gain on sale of mortgage loans held for sale     ( 136 )     ( 287 ) Net change in:                 Accrued interest receivable     ( 718 )     ( 133 ) Other assets     33       1,293   Accrued interest payable     ( 8 )     ( 10 ) Other liabilities     282       ( 1 ) Net cash provided by operating activities     18,271       17,679                     Cash Flows from Investing Activities                 Net change in interest-bearing deposits     50,555       1,862   Proceeds from calls, principal payments, sales and maturities of securities available for sale     33,465       46,887   Purchase of securities available for sale     ( 117,341 )     ( 153,627 ) Net change in restricted stock     ( 96 )     434   Purchase of loan participations     ( 10,965 )     ( 20,544 ) Collection of loan participations     4,513       3,759   Loan originations and principal collections, net     ( 43,479 )     ( 12,661 ) Proceeds from sale of other real estate owned     -       621   Proceeds from sale of repossessed assets     -       11   Recoveries on loans charged off     153       245   Purchase of bank-owned life insurance     -       ( 5,000 ) Proceeds from sale and purchases of premises and equipment, net     ( 906 )     ( 272 ) Net cash used in investing activities     ( 84,101 )     ( 138,285 ) (continued)   9 Table of Contents     Cash Flows from Financing Activities                 Net change in time deposits     ( 1,945 )     ( 7,127 ) Net change in other deposits     78,007       142,718   Common stock repurchased     ( 3,724 )     ( 12,085 ) Cash dividends paid     ( 4,319 )     ( 4,319 ) Net cash provided by financing activities     68,019       119,187   Net change in cash and due from banks     2,189       ( 1,419 ) Cash and due from banks at beginning of period     8,768       13,147   Cash and due from banks at end of period   $ 10,957     $ 11,728                     Supplemental Disclosures of Cash Flow Information                 Interest paid on deposits   $ 2,063     $ 2,418   Income taxes paid     3,441       2,150                     Supplemental Disclosure of Noncash Activities                 Loans charged against the allowance for loan losses   $ 316     $ 690   Loans transferred to OREO     -       50   Loans transferred to repossessed assets     -       11   Unrealized holding loss on securities available for sale     ( 111,574 )     ( 10,736 ) Lease liabilities arising from obtaining right-of-use assets     104       -     See accompanying notes to consolidated financial statements.   10 Table of Contents     National Bankshares, Inc. Notes to Consolidated Financial Statements September 30, 2022 (Unaudited)   $ in thousands, except per share data   Note 1: General   The consolidated financial statements of National Bankshares, Inc. (“NBI”) and its wholly-owned subsidiaries, The National Bank of Blacksburg (the “Bank” or “NBB”) and National Bankshares Financial Services, Inc. (“NBFS”) (collectively, the “Company”), conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”) and to general practices within the banking industry. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of management, all adjustments consisting of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial statements, have been included.  The results of operations for the three and nine month periods ended September 30, 2022 are not necessarily indicative of results of operations for the full year or any other interim period.  The interim period consolidated financial statements and financial information included in this Form 10 -Q should be read in conjunction with the notes to consolidated financial statements included in the Company’s 2021 Form 10 -K.  The Company posts all reports required to be filed under the Securities Exchange Act of 1934 on its web site at www.nationalbankshares.com .   Risks and Uncertainties The Company is closely monitoring risks that may impact its business, including the ongoing COVID- 19 pandemic and high inflation, along with U.S. monetary policy maneuvers to reduce inflation. If the pandemic re-escalates, the willingness and ability of the Company’s employees and customers to conduct banking and other financial transactions may be impacted. Inflation and U.S. monetary policy maneuvers to reduce it may impact the Company’s customers’ demand for banking services and ability to qualify for and/or repay loans. These risks could adversely affect the Company’s business, financial condition, results of operations, cash flows, credit risk, asset valuations and capital position.   Subsequent Events During October, 2022, the Company recognized a pre-tax gain of $ 3,823 for the sale of stock of a securities brokerage firm.  The sale occurred in October and the gain will be reported with results for the fourth quarter of 2022.   Recent Accounting Pronouncements In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The FASB has issued multiple updates to ASU 2016 - 13 as codified in Topic 326, including ASU’s 2019 - 04, 2019 - 05, 2019 - 10, 2019 - 11, 2020 - 02, and 2020 - 03. These ASU’s have provided for various minor technical corrections and improvements to the codification as well as other transition matters. Smaller reporting companies who file with the U.S. Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company is currently assessing the impact that ASU 2016 - 13 will have on its consolidated financial statements. The Company is working to ensure readiness and compliance with the standard. The Company engaged a vendor, validated data, analyzed correlations for forecasting, selected methodologies and is running parallel models.  Policies, procedures and internal controls have been developed and recommendations from external validation are currently being incorporated. 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.     11 Table of Contents     In March 2022, the FASB issued ASU No. 2022 - 02, “Financial Instruments-Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022 - 02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016 - 13 ) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016 - 13, ASU 2022 - 02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016 - 13, the effective dates for ASU 2022 - 02 are the same as the effective dates in ASU 2016 - 13. Early adoption is permitted if an entity has adopted ASU 2016 - 13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022 - 02 will have on its consolidated financial statements.     Note 2:   Loan Portfolio   The loan portfolio, excluding mortgage loans held for sale, was comprised of the following.       September 30, 2022     December 31, 2021   Real estate construction   $ 62,821     $ 48,841   Consumer real estate     219,617       208,977   Commercial real estate     435,185       405,722   Commercial non real estate     52,409       60,264   Public sector and IDA     48,912       47,899   Consumer non real estate     34,328       32,026   Gross loans     853,272       803,729   Less unearned income and deferred fees and costs     ( 409 )     ( 481 ) Loans, net of unearned income and deferred fees and costs   $ 852,863     $ 803,248        Note 3:   Allowance for Loan Losses, Nonperforming Assets and Impaired Loans   The allowance for loan losses methodology incorporates individual evaluation of impaired loans and collective evaluation of groups of non-impaired loans. The Company performs ongoing analysis of the loan portfolio to determine credit quality on an individual loan basis and to identify impaired loans. Please refer to the Company’s 2021 Form 10 -K, Note 1: Summary of Significant Accounting Policies for additional information on evaluation of impaired loans and associated specific reserves, and policies regarding nonaccruals, past due status and charge-offs.   12 Table of Contents     Collectively-Evaluated Loans The loan portfolio is comprised of major segments and smaller classes within each segment. Segments and classes are determined based on characteristics such as 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:   Portfolio Segments and Classes The segments and classes used in determining the allowance for loan losses are as follows. Real Estate Construction Construction, residential Construction, other   Consumer Real Estate Equity lines Residential closed-end first liens Residential closed-end junior liens Investor-owned residential real estate   Commercial Real Estate Multifamily real estate Commercial real estate, owner occupied Commercial real estate, other Commercial Non Real Estate Commercial and industrial   Public Sector and IDA Public sector and IDA   Consumer Non Real Estate Credit cards Automobile Other consumer loans   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 the Company’s 2021 Form 10 -K, Note 1: Summary of Significant Accounting Policies for a discussion of risk factors pertinent to each class.   A detailed analysis showing the allowance roll-forward by portfolio segment and related loan balance by segment follows.       Activity in the Allowance for Loan Losses for the Nine Months Ended September 30, 2022       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, 2021   $ 422     $ 1,930     $ 3,121     $ 1,099     $ 297     $ 444     $ 361     $ 7,674   Charge-offs     -       ( 13 )     -       ( 2 )     -       ( 301 )     -       ( 316 ) Recoveries     -       29       36       10       -       78       -       153   Provision for (recovery of) loan losses     225       266       452       ( 329 )     39       263       ( 220 )     696   Balance, September 30, 2022   $ 647     $ 2,212     $ 3,609     $ 778     $ 336     $ 484     $ 141     $ 8,207         Activity in the Allowance for Loan Losses for the Nine Months Ended September 30, 2021       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non Real Estate     Unallocated     Total   Balance, December 31, 2020   $ 503     $ 2,165     $ 3,853     $ 670     $ 339     $ 555     $ 396     $ 8,481   Charge-offs     -       ( 13 )     -       ( 526 )     -       ( 151 )     -       ( 690 ) Recoveries     -       19       86       31       -       109       -       245   Provision for (recovery of) loan losses     ( 5 )     ( 203 )     ( 776 )     743       ( 27 )     ( 39 )     ( 31 )     ( 338 ) Balance, September 30, 2021   $ 498     $ 1,968     $ 3,163     $ 918     $ 312     $ 474     $ 365     $ 7,698     13 Table of Contents         Activity in the Allowance for Loan Losses 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         Allowance for Loan Losses as of September 30, 2022       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    $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -   Collectively evaluated      647       2,212       3,609       778       336       484       141       8,207   Total   $ 647     $ 2,212     $ 3,609     $ 778     $ 336     $ 484     $ 141     $ 8,207         Allowance for Loan Losses 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    $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -   Collectively evaluated      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 as of September 30, 2022       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non Real Estate     Total   Individually evaluated    $ -     $ 187     $ 2,599     $ 263     $ -     $ -     $ 3,049   Collectively evaluated      62,821       219,430       432,586       52,146       48,912       34,328       850,223   Total   $ 62,821     $ 219,617     $ 435,185     $ 52,409     $ 48,912     $ 34,328     $ 853,272     14 Table of Contents         Loans 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     Total   Individually evaluated    $ -     $ 191     $ 5,386     $ 301     $ -     $ -     $ 5,878   Collectively evaluated      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     A summary of ratios for the allowance for loan losses follows.       As of and for the       Nine Months Ended September 30,     Year Ended December 31,       2022     2021     2021   Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees and costs (1)     0.96 %     0.97 %     0.96 % Ratio of net charge-offs to average loans, net of unearned income and deferred fees and costs (1)     0.03 %     0.08 %     0.05 %   ( 1 ) Net charge-offs are on an annualized basis.   The Company defines nonperforming loans as nonaccrual loans and restructured loans that are nonaccrual. Loans 90 days past due and still accruing and accruing restructured loans are not considered nonperforming. A summary of nonperforming assets follows.       September 30,     December 31,       2022     2021     2021   Nonperforming assets:                         Nonaccrual loans   $ 118     $ 39     $ -   Restructured loans in nonaccrual     2,770       3,075       2,873   Total nonperforming loans     2,888       3,114       2,873   Other real estate owned, net     907       957       957   Total nonperforming assets   $ 3,795     $ 4,071     $ 3,830   Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned     0.44 %     0.51 %     0.48 % Ratio of allowance for loan losses to nonperforming loans     284.18 %     247.21 %     267.11 %     15 Table of Contents     A summary of loans past due 90 days or more and impaired loans follows.       September 30,     December 31,       2022     2021     2021   Loans past due 90 days or more and still accruing   $ 48     $ 62     $ 90   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 %     0.01 %     0.01 % Accruing restructured loans   $ 279     $ 3,009     $ 3,005   Impaired loans:                         Impaired loans with no valuation allowance   $ 3,049     $ 6,084     $ 5,878   Impaired loans with a valuation allowance     -       -       -   Total impaired loans   $ 3,049     $ 6,084     $ 5,878   Valuation allowance     -       -       -   Impaired loans, net of allowance   $ 3,049     $ 6,084     $ 5,878   Average recorded investment in impaired loans (1)   $ 3,067     $ 6,108     $ 5,901   Interest income recognized on impaired loans, after designation as impaired   $ 13     $ 175     $ 137   Amount of income recognized on a cash basis   $ -     $ -     $ -     ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   No interest income was recognized on nonaccrual loans for the nine months ended September 30, 2022 or September 30, 2021 or for the year ended December 31, 2021.   A detailed analysis of investment in impaired loans and associated reserves, segregated by loan class follows. Only classes with impaired loans are presented.                Impaired Loans as of September 30, 2022       Principal Balance     Total Recorded Investment (1)     Recorded Investment (1) for Which There is No Related Allowance     Recorded Investment (1) for Which There is a Related Allowance     Related Allowance   Consumer Real Estate                                         Investor-owned residential real estate   $ 187     $ 187     $ 187     $ -     $ -   Commercial Real Estate                                         Commercial real estate, owner occupied     3,251       2,599       2,599       -       -   Commercial Non Real Estate                                         Commercial and industrial     283       263       263       -       -   Total   $ 3,721     $ 3,049     $ 3,049     $ -     $ -     16 Table of Contents         Impaired Loans as of December 31, 2021       Principal Balance     Total Recorded Investment (1)     Recorded Investment (1) for Which There is No Related Allowance     Recorded Investment (1) for Which There is a Related Allowance     Related Allowance   Consumer Real Estate                                         Investor-owned residential real estate   $ 191     $ 191     $ 191     $ -     $ -   Commercial Real Estate                                         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                                         Commercial and industrial     310       301       301       -       -   Total   $ 6,478     $ 5,878     $ 5,878     $ -     $ -     ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   The following tables show the average recorded investment and interest income recognized for impaired loans. Only classes with impaired loans are presented.       For the Nine Months Ended September 30, 2022       Average Recorded Investment (1)     Interest Income Recognized   Consumer Real Estate                 Investor-owned residential real estate   $ 189     $ 9   Commercial Real Estate                 Commercial real estate, owner occupied     2,601       4   Commercial Non Real Estate                 Commercial and industrial     277       -   Total   $ 3,067     $ 13     ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.       For the Nine Months Ended September 30, 2021       Average Recorded Investment (1)     Interest Income Recognized   Consumer Real Estate                 Investor-owned residential real estate   $ 193     $ 9   Commercial Real Estate                 Commercial real estate, owner occupied     2,866       72   Commercial real estate, other     2,724       83   Commercial Non Real Estate                 Commercial and industrial     324       11   Consumer Non Real Estate                 Automobile     1       -   Total   $ 6,108     $ 175     ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   17 Table of Contents         For the Year Ended December 31, 2021       Average Recorded Investment (1)     Interest Income Recognized   Consumer Real Estate                 Investor-owned residential real estate   $ 192     $ 13   Commercial Real Estate                 Commercial real estate, owner occupied     2,668       9   Commercial real estate, other     2,723       100   Commercial Non Real Estate                 Commercial and industrial     317       15   Consumer Non Real Estate                 Automobile     1       -   Total   $ 5,901     $ 137     ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   An analysis of past due and nonaccrual loans, including impaired and collectively-evaluated loans, follows. Nonaccrual loans include those in both current and past due status. Only classes with past due or nonaccrual loans are shown.   September 30, 2022                                     30 – 89 Days Past Due and Accruing     90 or More Days Past Due (1)     90 or More Days Past Due and Accruing     Nonaccruals   Real Estate Construction                                 Construction, other   $ 311     $ -     $ -     $ -   Consumer Real Estate                                 Residential closed-end first liens     769       159       42       118   Equity lines     7       -       -       -   Investor-owned residential real estate     144       -       -       -   Commercial Real Estate                                 Commercial real estate, owner occupied     -       255       -       2,507   Commercial Non Real Estate                                 Commercial and industrial     82       -       -       263   Consumer Non Real Estate                                 Automobile     53       -       -       -   Credit cards     2       1       1       -   Other consumer loans     68       5       5       -   Total   $ 1,436     $ 420     $ 48     $ 2,888     18 Table of Contents     December 31, 2021                                     30 – 89 Days Past Due and Accruing     90 or More Days Past Due (1)     90 or More Days Past Due and Accruing     Nonaccruals   Real Estate Construction                                 Construction, other   $ 14     $ -     $ -     $ -   Consumer Real Estate                                 Equity lines     50       29       29       -   Residential closed-end first liens     715       58       58       -   Commercial Real Estate                                 Commercial real estate, owner occupied     12       266       -       2,572   Commercial Non Real Estate                                 Commercial and industrial     13       -       -       301   Consumer Non Real Estate                                 Credit cards     2       2       2       -   Automobile     93       -       -       -   Other consumer loans     88       1       1       -   Total   $ 987     $ 356     $ 90     $ 2,873     ( 1 ) Includes accruing and nonaccrual loans past due 90 days or more.   The following displays collectively-evaluated loans by credit quality indicator. Impaired loans are not included.   September 30, 2022   Pass     Special Mention     Classified   Real Estate Construction                         Construction, 1-4 family residential   $ 15,433     $ -     $ -   Construction, other     47,077       311       -   Consumer Real Estate                         Equity lines     14,634       -       -   Residential closed-end first liens     120,150       -       438   Residential closed-end junior liens     2,430       -       -   Investor-owned residential real estate     81,188       -       590   Commercial Real Estate                         Multifamily residential real estate     125,814       -       -   Commercial real estate owner occupied     127,779       -       -   Commercial real estate, other     178,993       -       -   Commercial Non Real Estate                         Commercial and industrial     52,136       -       10   Public Sector and IDA                         States and political subdivisions     48,912       -       -   Consumer Non Real Estate                         Credit cards     4,806       -       -   Automobile     10,253       -       -   Other consumer     19,266       -       3   Total   $ 848,871     $ 311     $ 1,041     19 Table of Contents     December 31, 2021   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   Residential closed-end first liens     106,107       -       275   Residential 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     Determination of risk ratings was completed for the portfolio as of September 30, 2022 and December 31, 2021. Please refer to the Company's 2021 Annual Report on Form 10 -K for risk rating definitions and characteristics.   Troubled Debt Restructurings   Total TDRs amounted to $ 3,049 at September 30, 2022, $ 5,878 at December 31, 2021, and $ 6,084 at September 30, 2021. All of the Company’s TDR loans are fully funded and no further increase in credit is available.   TDRs Designated During the Reporting Period The Company did not designate any new TDRs during the three or nine month periods ended September 30, 2022. During the three months ended September 30, 2021, the Company did not designate any loans as a TDR.   During the nine months ended September 30, 2021, the Company designated three loans as a TDR. One loan was modified to shift the payment structure from interest-only to amortizing and reduce the interest rate to provide cash flow relief. Two loans were re-amortized at lower interest rates to provide cash flow relief. No principal or interest was forgiven. The impairment measurement for all three loans at September 30, 2021 was based upon the collateral method and did not result in a specific allocation.   The following table presents restructurings by class that occurred during the nine month period ended September 30, 2021.       Number of Contracts     Pre-Modification Outstanding Principal Balance     Post-Modification Outstanding Principal Balance   Commercial Real Estate                         Commercial real estate owner occupied     1     $ 102     $ 102   Commercial real estate, other     2       2,724       2,724   Total     3     $ 2,826     $ 2,826     20 Table of Contents     Defaulted TDRs The Company analyzed its TDR portfolio for loans that defaulted during the three and nine month periods ended September 30, 2022 and September 30, 2021, and that were modified within 12 months prior to default. The Company designates three circumstances that indicate default: one or more payments that occur more than 90 days past the due date, charge-off, or foreclosure after the date of restructuring. Of the Company’s TDRs at September 30, 2022 and September 30, 2021, none of the defaulted TDRs were modified within 12 months prior to default. All of the defaulted TDRs were in nonaccrual status as of September 30, 2022 and September 30, 2021.      Note 4: Securities   The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities available for sale by major security type are as follows.       September 30, 2022       Amortized Costs     Gross Unrealized Gains     Gross Unrealized Losses     Fair Values   Available for Sale:                                 U.S. Treasuries   $ 991     $ -     $ 59     $ 932   U.S. Government agencies and corporations     391,473       45       56,988       334,530   States and political subdivisions     190,361       28       41,229       149,160   Mortgage-backed securities     176,045       23       8,824       167,244   Corporate debt securities     6,501       -       957       5,544   Total securities available for sale   $ 765,371     $ 96     $ 108,057     $ 657,410         December 31, 2021       Amortized Costs     Gross Unrealized Gains     Gross Unrealized Losses     Fair Values   Available for Sale:                                 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     The amortized cost and fair value of single maturity securities available for sale at September 30, 2022, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities included in these totals are categorized by final maturity.       September 30, 2022       Amortized Cost     Fair Value   Available for Sale:                 Due in one year or less   $ 1,799     $ 1,798   Due after one year through five years     133,556       124,384   Due after five years through ten years     324,861       276,378   Due after ten years     305,155       254,850   Total securities available for sale   $ 765,371     $ 657,410     21 Table of Contents     Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows.       September 30, 2022       Less Than 12 Months     12 Months or More       Fair Value     Unrealized Loss     Fair Value     Unrealized Loss   U.S. Treasuries   $ 932     $ 59     $ -     $ -   U.S. Government agencies and corporations     207,506       25,296       124,968       31,692   States and political subdivisions     100,072       23,747       43,622       17,482   Mortgage-backed securities     152,201       7,624       12,802       1,200   Corporate debt securities     4,749       749       795       208   Total temporarily impaired securities   $ 465,460     $ 57,475     $ 182,187     $ 50,582         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   States 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     The Company has 614 securities with a fair value of $ 647,648 that are temporarily impaired at September 30, 2022.   The total unrealized loss on these securities is $ 108,057 . Of the temporarily impaired securities, 207 securities with a fair value of $ 182,187 and an unrealized loss of $ 50,582 have been in a continuous loss position for 12 months or more. The Company determined that these securities are temporarily impaired at September 30, 2022 for the reasons set out below. U.S. Government agencies and corporations: Unrealized losses of $ 31,692 on 150 securities with a fair value of $ 124,968 were caused by interest rate and market fluctuations. The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the cost basis of the investments. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company does not consider the securities to be other-than-temporarily impaired.          States and political subdivisions: The unrealized loss of $ 17,482 on state and political subdivision securities stemmed from 50 securities with a fair value of $ 43,622 . The Company reviewed financial statements and cash flows for each of the securities in a continuous loss position for more than 12 months. The Company’s analysis determined that the unrealized losses are primarily the result of interest rate and market fluctuations and not associated with impaired financial status. The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the cost basis of each investment. The Company is monitoring bond market trends to develop strategies to address unrealized losses. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of amortized cost basis, which may be at maturity, the Company does not consider the investments to be other-than-temporarily impaired.          Mortgage-backed securities: The unrealized loss of $ 1,200 on mortgage-backed securities stemmed from six securities with a fair value of $ 12,802 . The unrealized loss was 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 each investment. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of its amortized cost basis, which may be at maturity, the Company does not consider the investments to be other-than-temporarily impaired. Corporate debt securities: One corporate debt security with a fair value of $ 795 presented an unrealized loss of $ 208 . The Company reviewed the corporation's financial position 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 the amortized cost basis, which may be at maturity, the Company does not consider the investment to be other-than-temporarily impaired. 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.   22 Table of Contents     Restricted Stock. The Company held restricted stock of $ 941 as of September 30, 2022 and $ 845 at December 31, 2021. Restricted stock is reported separately from available for sale securities. As a member bank of the Federal Reserve system and the Federal Home Loan Bank of Atlanta (“FHLB”), NBB is required to maintain certain minimum investments in the common stock of those entities. Required levels of investment are based upon NBB’s capital, current borrowings, and a percentage of qualifying assets. The correspondents provide calculations that require the Company purchase or sell stock back to the correspondents. The stock is held by member institutions only and is not actively traded. Redemption of FHLB stock is subject to certain limitations and conditions. At its discretion, the FHLB may declare dividends on the stock. In addition to dividends, NBB also benefits from its membership with FHLB through eligibility to borrow from the FHLB, using as collateral NBB’s capital stock investment in the FHLB and qualifying NBB real estate mortgage loans totaling $ 641,798 at September 30, 2022. Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at September 30, 2022, management did not determine any impairment.      Note 5: Defined Benefit Plan             Components of Net Periodic Benefit Cost:       Pension Benefits       Three Months Ended September 30,       2022     2021   Service cost   $ 324     $ 361   Interest cost     204       184   Expected return on plan assets     ( 629 )     ( 555 ) Amortization of prior service cost     -       ( 3 ) Recognized net actuarial loss     110       208   Net periodic benefit cost   $ 9     $ 195         Pension Benefits       Nine Months Ended September 30,       2022     2021   Service cost   $ 972     $ 1,083   Interest cost     612       552   Expected return on plan assets     ( 1,887 )     ( 1,665 ) Amortization of prior service cost     -       ( 9 ) Recognized net actuarial loss     330       624   Net periodic benefit cost   $ 27     $ 585     The service cost component of net periodic benefit cost is included in salaries and employee benefits expense in the consolidated statements of income. All other components are included in other noninterest expense in the consolidated statements of income. For the nine months ended September 30, 2022, the Company did not make a contribution to the defined benefit plan.   23 Table of Contents        Note 6: Fair Value Measurements   Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. 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. When 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. The following tables present the balances of financial assets measured at fair value on a recurring basis as of the dates indicated.   September 30, 2022           Fair Value Measurements Using   Description   Balance     Level 1     Level 2     Level 3   U.S. Treasuries   $ 932      $ -     $ 932      $ -   U.S. Government agencies and corporations     334,530       -       334,530       -   States and political subdivisions     149,160       -       149,160       -   Mortgage-backed securities     167,244       -       167,244       -   Corporate debt securities     5,544       -       5,544       -   Total securities available for sale   $ 657,410     $ -     $ 657,410     $ -     December 31, 2021           Fair Value Measurements 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     $ -     24 Table of Contents     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. At December 31, 2021, there were no interest rate loan contracts or forward contracts.  At September 30, 2022, the Company had one rate-lock commitment that resulted in an interest rate loan contract and forward contract, as presented in the following table:   September 30, 2022           Fair Value Measurements Using   Description   Balance     Level 1     Level 2     Level 3   Interest rate loan contracts   $ ( 9 )    $ -     $ -      $ ( 9 )  Forward contracts     9       -       -       9     September 30, 2022 Valuation Technique Unobservable Input   Range (Weighted Average)   Interest rate loan contracts Market approach Pull-through rate     46.97 %   Forward contracts Market approach Pull-through rate     46.97 %   Interest rate loan contracts Market approach Current reference price     94.83 %   Forward contracts Market approach Current reference price     94.83 %     Financial Instruments Measured at Fair Value on a Non-Recurring Basis Certain financial instruments are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.   Loans Held for Sale Loans held for sale are carried at the lower of cost or fair value. These loans consist of one -to- four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2 ). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale at September 30, 2022 or December 31, 2021.   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 prepared by independent, licensed appraisers using observable market data analyzed through an income or sales valuation approach. Appraisals of less than 24 months of age result in Level 2 categorization. If a current appraisal cannot be obtained prior to a reporting date and an existing appraisal is discounted to estimate 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. Loans valued using an independent real estate 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 September 30, 2022 and December 31, 2021, measurement of the Company’s impaired loans did not result in any specific allocations.   Other Real Estate Owned Certain assets such as other real estate owned (“OREO”) are measured at fair value less cost to sell. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.   The following table summarizes the Company’s OREO that was measured at fair value on a nonrecurring basis.   Date Description   Balance     Level 1     Level 2     Level 3   September 30, 2022 OREO, net of valuation allowance   $ 907     $ -     $ -     $ 907   December 31, 2021 OREO, net of valuation allowance     957       -       -       957     25 Table of Contents     The following table presents information about OREO and Level 3 Fair Value Measurements for the dates indicated.   Date Valuation Technique Unobservable Input   Range (Weighted Average)   September 30, 2022 Discounted appraised value Selling cost     7.19% (1)   September 30, 2022 Discounted appraised value Discount for lack of marketability     9.63% (1)                 December 31, 2021 Discounted appraised value Selling cost     6.20% (1)       ( 1 ) As of September 30, 2022 and December 31, 2021, OREO was composed of a single property.   At September 30, 2022 and December 31, 2021, OREO was measured using appraised value, discounted by selling cost. At September 30, 2022, the appraised value was also discounted for lack of marketability. Discounts for selling costs, and in some instances, marketability, are recognized 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. 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.   Fair Value Summary The following presents the recorded amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of the dates indicated. Fair values are estimated using the exit price notion.       September 30, 2022       Recorded Amount     Level 1     Level 2     Level 3   Financial Assets:                                 Cash and due from banks   $ 10,957     $ 10,957     $ -     $ -   Interest-bearing deposits     79,466       79,466       -       -   Securities available for sale     657,410       -       657,410       -   Restricted securities     941       -       941       -   Loans, net     844,656       -       -       801,779   Accrued interest receivable     5,822       -       5,822       -   Bank-owned life insurance     43,072       -       43,072       -   Forward loan contracts     9       -       -       9   Financial Liabilities:                                 Deposits   $ 1,570,649     $ -     $ 1,493,626     $ 76,946   Accrued interest payable     40       -       40       -   Interest rate loan contracts     9       -       -       9     26 Table of Contents         December 31, 2021       Recorded 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 available for sale     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       -        Note 7: Components of Accumulated Other Comprehensive Loss   The following tables provide information about components of accumulated other comprehensive loss as of the dates indicated:       Net Unrealized Gain (Loss) on Securities     Adjustments Related to Pension Benefits     Accumulated Other Comprehensive Loss   Balance at June 30, 2021   $ 8,089     $ ( 10,147 )   $ ( 2,058 ) Unrealized holding loss on available for sale securities, net of tax of ($905)     ( 3,403 )     -       ( 3,403 ) Balance at September 30, 2021   $ 4,686     $ ( 10,147 )   $ ( 5,461 )                           Balance at June 30, 2022   $ ( 55,865 )   $ ( 6,912 )   $ ( 62,777 ) Unrealized holding loss on available for sale securities, net of tax of ($7,822)     ( 29,424 )     -       ( 29,424 ) Balance at September 30, 2022   $ ( 85,289 )   $ ( 6,912 )   $ ( 92,201 )       Net Unrealized Gain (Loss) on Securities     Adjustments Related to Pension Benefits     Accumulated Other Comprehensive Income (Loss)   Balance at December 31, 2020   $ 13,167     $ ( 10,147 )   $ 3,020   Unrealized holding loss on available for sale securities, net of tax of ($2,254)     ( 8,477 )     -       ( 8,477 ) Reclassification adjustment, net of tax of ($1)     ( 4 )     -       ( 4 ) Balance at September 30, 2021   $ 4,686     $ ( 10,147 )   $ ( 5,461 )                           Balance at December 31, 2021   $ 2,854     $ ( 6,912 )   $ ( 4,058 ) Unrealized holding loss on available for sale securities, net of tax of ($23,431)     ( 88,143 )     -       ( 88,143 ) Balance at September 30, 2022   $ ( 85,289 )   $ ( 6,912 )   $ ( 92,201 )   27 Table of Contents       Note 8: Revenue Recognition   Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams such as service charges on deposit accounts, other service charges and fees, credit and debit card fees, trust income, and annuity and insurance commissions are recognized in accordance with ASC Topic 606, “Revenue from Contracts with Customers”. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as financial guarantees, derivatives, and certain credit card fees are outside the scope of the guidance. Noninterest revenue streams within the scope of Topic 606 are discussed below.   Service Charges on Deposit Accounts Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, 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, annuities 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.   28 Table of Contents     The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2022 and September 30, 2021.       Three Months Ended September 30,       2022     2021   Noninterest Income                 In-scope of Topic 606:                 Service charges on deposit accounts   $ 661     $ 548   Other service charges and fees     51       50   Credit and debit card fees, net     448       460   Trust income     492       433   Insurance and Investment (included within Other Income on the Consolidated Statements of Income)     143       99   Noninterest Income (in-scope of Topic 606)   $ 1,795     $ 1,590   Noninterest Income (out-of-scope of Topic 606)     345       402   Total noninterest income   $ 2,140     $ 1,992         Nine Months Ended September 30,       2022     2021   Noninterest Income                 In-scope of Topic 606:                 Service charges on deposit accounts   $ 1,826     $ 1,488   Other service charges and fees     157       134   Credit and debit card fees, net     1,423       1,373   Trust income     1,374       1,282   Insurance and Investment (included within Other Income on the Consolidated Statements of Income)     491       638   Noninterest Income (in-scope of Topic 606)   $ 5,271     $ 4,915   Noninterest Income (out-of-scope of Topic 606)     1,272       1,352   Total noninterest income   $ 6,543     $ 6,267        Note 9: Leases The Company’s leases are recorded under ASC Topic 842, “Leases”. The Company examines its contracts to determine whether they are or contain a lease. A contract with a lease is further examined to determine whether the lease is a short-term, operating or finance lease. As permitted by ASC Topic 842, the Company elected not to capitalize short-term leases, defined by the standard as leases with terms of 12 months or less. The Company also elected the practical expedient not to separate non-lease components from lease components within a single contract. Right-of-use assets and lease liabilities are recognized for operating and finance leases. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease.    Lease payments Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred. Payments for leases with terms longer than 12 months are included in the determination of the lease liability. Payments may be fixed for the term of the lease or variable. 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. Two of the Company’s leases provide 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.   29 Table of Contents     Options to Extend, Residual Value Guarantees, and Restrictions and Covenants Of the Company’s six operating leases, four leases provide options to extend the lease term. Two of the leases have two options of five years each. One lease has two options of three years each. At the time of capitalization, the Company was not reasonably certain whether it would exercise the options and did not include the optional 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.  At the time of capitalization, the Company was not reasonably certain whether it would exercise the option and did not include the optional time period in the calculation of the lease liability. The Company exercised a previous option in 2020 that was included in the calculation of the lease liability. 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’s lease right of use asset is included in other assets and the lease liability is included in other liabilities. The following tables present information about leases:       September 30, 2022     December 31, 2021   Lease liability   $ 1,463     $ 1,558   Right-of-use asset   $ 1,436     $ 1,532   Weighted average remaining lease term (in years)     5.47       6.33   Weighted average discount rate     3.22 %     3.21 %         For the Three Months Ended September 30,       2022     2021   Lease Expense                 Operating lease expense   $ 84     $ 92   Short-term lease expense     1       1   Total lease expense   $ 85     $ 93                     Cash paid for amounts included in lease liabilities   $ 83     $ 91   Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period   $ 79     $ -         For the Nine Months Ended September 30,       2022     2021   Lease Expense                 Operating lease expense   $ 238     $ 279   Short-term lease expense     2       2   Total lease expense   $ 240     $ 281                     Cash paid for amounts included in lease liabilities   $ 239     $ 275   Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period   $ 104     $ -     30 Table of Contents     The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability:   Undiscounted Cash Flow for the Period   As of September 30, 2022   Twelve months ending September 30, 2023   $ 333   Twelve months ending September 30, 2024     321   Twelve months ending September 30, 2025     286   Twelve months ending September 30, 2026     219   Twelve months ending September 30, 2027     187   Thereafter     253   Total undiscounted cash flows   $ 1,599   Less: discount     ( 136 ) Lease liability   $ 1,463     The contracts in which the Company is lessee are with parties external to the company and not related parties.   31 Table of Contents         Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations $ in thousands, except per share data   The purpose of this discussion and analysis is to provide information about the financial condition and results of operations of the Company.  Please refer to the financial statements and other information included in this report as well as the Company’s 2021 Annual Report on Form 10-K for an understanding of the following discussion and analysis. References in the following discussion and analysis to “we” or “us” refer to the Company unless the context indicates that the reference is to the Bank.   Cautionary Statement Regarding Forward-Looking Statements   We make forward-looking statements in this Form 10-Q that are subject to significant risks and uncertainties.  These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals, and are based upon our management’s views and assumptions as of the date of this report.  The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements. These forward-looking statements are based upon or are affected by factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. These factors include, but are not limited to, changes in:   ● interest rates,   ● general and local economic conditions,   ● the legislative/regulatory climate,   ● monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury, the Office of the Comptroller of the Currency, the Federal Reserve, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation (“FDIC”), and the impact of any policies or programs implemented pursuant to financial reform legislation,   ● unanticipated increases in the level of unemployment in the Company’s market,   ● the quality or composition of the loan and/or investment portfolios,   ● demand for loan products,   ● deposit flows,   ● competition,   ● demand for financial services in the Company’s market,   ● the real estate market in the Company’s market,   ● laws, regulations and policies impacting financial institutions,   ● technological risks and developments, and cyber-threats, attacks or events,   ● the Company’s technology initiatives,   ● performance by the Company’s counterparties or vendors,   ● applicable accounting principles, policies and guidelines,   ● business disruption and/or impact due to the coronavirus or similar pandemic diseases, and   ● the duration and severity of the COVID-19 pandemic, the uncertainty regarding new variants of COVID-19, the efficacy of vaccine and treatment developments, the impact of loosening or tightening of government restrictions, and the heightened impact it has on many of the risks described herein,   ● geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts, negatively impacting business and economic conditions in the U.S. and abroad. These risks and uncertainties should be considered in evaluating the forward-looking statements contained in this report. We caution readers not to place undue reliance on those statements, which speak only as of the date of this report. This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A of the most recently filed Form 10-K.   Cybersecurity The Company considers cybersecurity risk to be one of the greatest risks to its business. We have deployed a multi-faceted approach to limit the risk and impact of unauthorized access to customer accounts and to information relevant to customer accounts. We use digital technology safeguards, internal policies and procedures, and employee training to reduce the exposure of our systems to cyber-intrusions. The Company also requires assurances from key vendors regarding their cybersecurity. We control functionalities of online and mobile banking to reduce risk. We do not offer online account openings or loan originations. We do not permit customers to submit address changes or wire requests through online banking, and we limit the dollar amount of online banking transfers to other banks. We require a special vetting process for commercial customers who wish to originate ACH transfers.            32 Table of Contents     Further, the Company has a program to identify, mitigate and manage its cybersecurity risks.  The program includes penetration testing and vulnerability assessment, technological defenses such as antivirus software, patch management, firewall management, email and web protections, an intrusion prevention system, a cybersecurity insurance policy which covers some but not all losses arising from cybersecurity breaches, as well as ongoing employee training.  The cost of these measures was $95 for the three months ended September 30, 2022 and $80 for the three months ended September 30, 2021. For the nine months ended September 30, 2022 and September 30, 2021, the expense was $282 and $273 respectively. These costs are included in various categories of noninterest expense. However, it is not possible to fully eliminate exposure. The potential for financial and reputational losses due to cyber-breaches is increased by the possibility of human error, unknown system susceptibilities, and the rising sophistication of cyber-criminals to attack systems, disable safeguards and gain access to accounts and related information. We maintain insurance for these risks but insurance policies are subject to exceptions, exclusions and terms whose applications have not been widely interpreted in litigation. Accordingly, insurance can provide less than complete protection against the losses that result from cybersecurity breaches and pursuing recovery from insurers can result in significant expense. In addition, some risks such as reputational damage and loss of customer goodwill, which can result from cybersecurity breaches, cannot be insured against.   Response to COVID-19 Pandemic The COVID-19 pandemic has affected the global economy since the first quarter of 2020. The Company has a robust business continuity plan, and partners with vendors whom we believe also have robust business continuity plans. The Company has not incurred material expenditures and does not anticipate material expenditures to maintain business continuity. Critical functions are cross-trained, controls over cash and physical assets are functioning and internal controls over financial reporting have been maintained.   Critical Accounting Policies   General           The Company’s consolidated financial statements are prepared in accordance with GAAP. The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or satisfying a liability. Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change. Presented below is a discussion of accounting policies that are the most important to the portrayal and understanding of the Company’s financial condition and results of operations. Critical accounting policies require management’s most difficult, subjective, and complex judgments about matters that are inherently uncertain. If conditions occur that differ from our assumptions, depending upon the severity of such differences, the Company’s financial condition or results of operations may be materially impacted. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. There have been no changes since December 31, 2021. Please refer to the Company’s 2021 Form 10-K, Note 1: Summary of Significant Accounting Policies for additional information on the Company’s accounting policies.   Allowance for Loan Losses The Company evaluates the allowance each quarter through a methodology that estimates losses on individual impaired loans and evaluates the effect of numerous factors on the credit risk of groups of homogeneous loans (collectively-evaluated loans).   Impaired loans Impaired loans are identified through the Company’s credit risk rating process. Generally, impaired loans have risk ratings that indicate higher risk, such as “classified” or “special mention.” Nonaccrual loan relationships that meet the Company’s balance threshold of $250 are designated impaired. The Company also designates as impaired other loan relationships that meet the Company’s balance threshold of $250 and for which a credit review identified a weakness that indicates principal and interest will not be collected according to the loan terms. All TDRs, regardless of size or past due status, are designated impaired.   TDRs Loan modifications are reviewed to determine whether, at the time of the modification, the borrower is experiencing financial difficulty and whether the Company provided a concession that it would not otherwise consider. Modified loans that meet this criteria are designated TDRs.   Individual evaluation At the reporting date, the fair value of each impaired loan is estimated using either the cash flow method or the collateral method.   33 Table of Contents     Cash flow method The cash flow method is applied to loans that are not collateral dependent and for which cash flows may be estimated. The cash flow method measures fair value using assumptions specific to each loan, including expected amount and timing of cash flows and discount rate. For TDR loans, the discount rate is the rate immediately prior to the modification that resulted in a TDR. If an impaired loan evaluated under the cash flow method becomes 90 days or more past due, it is examined to determine whether the late payment indicates collateral dependency or cash flows below those that were used in the fair value measurement.   Collateral method The collateral method is applied to impaired loans that are collateral-dependent, for which foreclosure is imminent or for which non-collateral repayment sources are determined not to be available or reliable. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Fair value is based upon the “as-is” value of independent appraisals or evaluations. Impaired loans secured by residential 1-4 family properties with outstanding principal balances greater than $250 are valued using an appraisal. Appraisals are also used to value impaired loans secured by commercial real estate with outstanding principal balances greater than $500. Impaired loans secured by residential 1-4 family property with outstanding principal balances of $250 or less, or secured by commercial real estate with outstanding principal balances of $500 or less, are valued using a real estate evaluation prepared by a third party. Appraisals must conform to the Uniform Standards of Professional Appraisal Practice and are prepared by an independent third-party appraiser who is certified and licensed and who is approved by the Company. Appraisals may incorporate market analysis, comparable sales analysis, cash flow analysis and market data pertinent to the property to determine market value. Evaluations are prepared by third party providers and reviewed by Company employees who are independent of the loan origination, operation, management and collection functions. Evaluations provide a property’s market value based on the property’s current physical condition and characteristics and pertinent economic conditions. Multiple sources of data contribute to the estimate of market value, including physical inspection, independent third-party automated tools, comparable sales analysis and local market information. Updated appraisals or evaluations are ordered when a loan becomes impaired if the appraisal or evaluation on file is more than 24 months old. Appraisals and evaluations are reviewed for propriety and reasonableness and may be discounted if the Company determines that the value exceeds reasonable levels. If an updated appraisal or evaluation has been ordered but has not been received by a reporting date, the fair value may be based on the most recent available appraisal or evaluation, discounted for age. The appraisal or evaluation value is reduced by selling costs if recovery is expected solely from the sale of collateral.   Collectively evaluated loans Non-impaired loans are grouped by portfolio segments. Portfolio segments are further divided into smaller loan classes. Loans within a segment or class have similar risk characteristics. Credit loss on collectively-evaluated loans is estimated by applying to current class balances the class historical charge-off rates and percentages for qualitative factors that affect credit risk. Qualitative factors include changes in national and local economic and business conditions, the nature and volume of classes within the portfolio, loan quality, loan officers’ experience, lending policies and the Company’s loan review system. The qualitative factor allocations are determined for pass-rated loans. To reflect the increased risk of criticized assets, qualitative factor allocations are multiplied by 150% for special mention loans, and multiplied by 200% for classified loans.   Loss rates Loss rates are calculated for and applied to individual classes by averaging loss rates over the most recent eight quarters. Two loss rates for each class are calculated: total net charge-offs for the class as a percentage of average class loan balance (“class loss rate”), and total net charge-offs for the class as a percentage of average classified loans in the class (“classified loss rate”). Net charge-offs in both calculations include charge-offs and recoveries for all loans within the class, including classified and non-classified loans, as well as impaired and TDR loans. If the loss rate calculation results in a recovery, the loss rate applied is zero. Class historical loss rates are applied to collectively evaluated pass-rated loan balances and special mention rated loan balances, and classified historical loss rates are applied to collectively evaluated classified loan balances.   Qualitative factor allocations The analysis of certain factors results in standard allocations to all classes. These factors include the risk from changes in lending policies, loan officers’ experience, changes in loan review, and economic factors including local unemployment levels, local bankruptcy rates, interest rate environment, and competition/legal/regulatory environments. Standard allocations for residential vacancy rates and housing inventory are applied to residential construction, investor-owned residential real estate, multifamily loans, other commercial real estate, state and political subdivision loans and all classes within the consumer real estate segment. Qualitative factors incorporate economic data targeted to the Company’s market. If market–specific information is not available on a timely basis, regional or national information that historically shows a high degree of correlation to market data may be used. Also applied to all segments and classes during 2021 was an economic factor implemented to address COVID-19 uncertainty: national unemployment filings. Local unemployment data lags the reporting date and the Company implemented analysis of national unemployment filings to capture current effects of the COVID-19 pandemic. Historical analysis determined that local unemployment filings were closely correlated to national unemployment filings. National unemployment filings returned to pre-pandemic levels during the fourth quarter of 2021 and no allocation was made during 2022.   34 Table of Contents     Factors analyzed for each class, with resultant allocations based upon the level of risk assessed for each class, include levels of past due loans, levels of nonaccrual loans, current class balance as a percentage of total loans and the percentage of high risk loans within the class. High risk loans include junior liens, interest only and high loan to value loans. High risk loans within each class are analyzed and allocated additional reserves based on current trends.   Nonaccrual status The Company evaluates loans with certain risk indicators to determine whether the loans should be placed on nonaccrual status, including loans that exceed 89 days past due, loans rated classified, and TDR loans. Impaired loans that are not TDRs and for which fair value measurement indicates an impairment loss are placed into nonaccrual status. Nonaccrual status is applied to TDRs that allow the borrower to discontinue payments of principal or interest for more than 90 days, unless the modification provides reasonable assurance of repayment performance and collateral value supports regular underwriting requirements. Impaired loans with partial charge-offs are maintained as impaired until the remaining balance is satisfied. Loans in nonaccrual are reviewed on an individual loan basis to determine whether they may return to accrual status. To return to accrual status, the Company’s analysis must determine that future payments are reasonably assured. To satisfy this criteria, the Company’s evaluation must determine that the underlying cause of the original delinquency or weakness that indicated nonaccrual status has been resolved, such as receipt of new guarantees, increased cash flows that cover the debt service or other resolution. Nonaccrual loans that demonstrate reasonable assurance of future payments and that have made at least six consecutive payments in accordance with repayment terms and timeframes may be returned to accrual status. TDRs that maintain current status for at least a six-month period, including history prior to restructuring, may accrue interest.   Unallocated Surplus In addition to funding the allowance for loan losses based upon data analysis, the Company has the option to fund an unallocated surplus in excess to the calculated requirement, based upon management judgement. The Company’s policy permits an unallocated surplus of between 0% and 5% of the calculated requirement.   Sales, purchases and reclassification of loans The Company finances consumer real estate mortgages under “best efforts” contracts with mortgage purchasers. The mortgages are designated as held for sale upon initiation. There have been no major reclassifications from portfolio loans to held for sale. Mortgages held for sale are not included in the calculation of the allowance for loan losses. Occasionally, the Company purchases or sells participations in loans. All participation loans purchased met the Company’s normal underwriting standards at the time the participation was entered. Participation loans are included in the appropriate portfolio balances to which the allowance methodology is applied.   Estimation of the allowance for loan losses The estimation of the allowance involves analysis of internal and external variables, methodologies, assumptions and management’s judgment and experience. Key judgments used in determining the allowance for loan losses include internal risk rating determinations, market and collateral values, discount rates, loss rates, management’s assessment of current economic conditions, and management’s estimate of the impact of qualitative factors. These judgments are inherently subjective and actual losses could be greater or less than the estimate. Future estimates of the allowance could increase or decrease based on changes in the financial condition of individual borrowers, concentrations of various types of loans, economic conditions or the markets in which collateral may be sold. The estimate of the allowance accrual determines the amount of provision expense and directly affects our financial results. The estimate of the allowance considered market conditions as of the reporting date where possible, and the most recent available information when data was not available as of the reporting date, portfolio conditions and levels of delinquencies at the reporting date, and net charge-offs in the eight quarters prior to the reporting date. For additional discussion of the allowance, see Note 3 to the consolidated financial statements and “Asset Quality,” and “Provision and Allowance for Loan Losses” of Management’s Discussion and Analysis.   Goodwill Goodwill is subject to at least an annual assessment for impairment by applying a fair value based test. The Company engages a third party valuation expert to perform impairment testing in the fourth quarter of each year. The Company’s most recent impairment test was performed using data from September 30, 2021. As permitted by accounting standards, the Company opted not to perform the preliminary assessment of qualitative factors before performing more substantial testing for impairment. 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 the Company; while the third technique uses current market pricing multiples for change-of-control transactions involving companies comparable to the Company. The analysis did not result in an impairment.   35 Table of Contents     Certain key judgments were used in the valuation measurement. Goodwill is held by the Company’s bank subsidiary. The bank subsidiary is 100% owned by the Company, and no market capitalization is available. Because most of the Company’s assets are comprised of the subsidiary bank’s equity, the Company’s market capitalization was used to estimate the Bank’s market capitalization. Other judgments include the assumption that the companies and transactions used as comparables for the second and third technique were appropriate to the estimate of the Company’s fair value, and that the comparable multiples are appropriate indicators of fair value, and compliant with accounting guidance.   Pension Plan The Company’s actuary determines plan obligations and annual pension plan expense using a number of key assumptions. Key assumptions may include the discount rate, the estimated return on plan assets and the anticipated rate of compensation increases. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated, may impact pension assets, liabilities or expense.   Overview   National Bankshares, Inc. is a financial holding company that was organized in 1986 under the laws of Virginia and is registered under the Bank Holding Company Act of 1956. NBI common stock is listed on the Nasdaq Capital Market and is traded under the symbol “NKSH.” NBI has two wholly-owned subsidiaries, the National Bank of Blacksburg and National Bankshares Financial Services, Inc. NBB is a community bank and does business as National Bank from 24 office locations and two loan production offices. NBB is the source of nearly all of the Company’s revenue. NBFS does business as National Bankshares Investment Services and National Bankshares Insurance Services. Income from NBFS is not significant at this time, nor is it expected to be so in the near future.   Non-GAAP Financial Measures   This report refers to certain financial measures that are computed under a basis other than U.S. GAAP (“non-GAAP”). Details on non-GAAP measures follow.   Return on Average Assets and Return on Average Equity The return on average assets and return on average equity are measures of profitability, calculated by annualizing net income and dividing by average year-to-date assets or equity, respectively. Larger nonrecurring income or expenses are not annualized, in order to reduce distortion within the ratios. There were no adjustments for the three months ended September 30, 2022. During the three months ended September 30, 2021, the provision recovery, net of tax was removed from annualization. The provision recovery resulted from the Company's normal process of estimating credit risk for the allowance for loan losses.  Because recovery of loan losses occurs less frequently than provision for loan losses, it was removed from annualization. The tables below present the reconciliation of adjusted annualized net income, which is not a measurement under U.S. GAAP, for the three and nine month periods ended September 30, 2022 and 2021.   $ in thousands   Three months ended September 30,       2022     2021   Net Income   $ 6,162     $ 5,752   Items deemed non-recurring by management:                 Provision recovery, net of tax of $82 in 2021     -       (310 ) Adjusted net income     6,162       5,442   Adjusted net income, annualized     24,447       21,591   Items deemed non-recurring by management:                 Add: Provision recovery, net of tax of ($82) in 2021     -       310   Annualized net income for ratio calculation   $ 24,447     $ 21,901     36 Table of Contents         Nine months ended September 30,       2022     2021   Net Income   $ 16,622     $ 15,131   Items deemed non-recurring by management:                 Less: partnership income (1) , net of tax of ($77) in 2022 and ($98) in 2021     (290 )     (369 ) Securities gains, net of tax of ($1) in 2021     -       (4 ) Provision recovery, net of tax of $71 in 2021     -       (267 ) Adjusted net income     16,332       14,491   Adjusted net income, annualized     21,836       19,374   Items deemed non-recurring by management:                 Add: partnership income, net of tax of $77 in 2022 and $98 in 2021     290       369   Add: securities gains, net of tax of $1 in 2021     -       4   Add: provision recovery, net of tax of ($71) in 2021     -       267   Annualized net income for ratio calculation   $ 22,126     $ 20,014       (1) During the first quarter of each year, the Company adjusts its basis in partnership interests. During 2022 and 2021, the adjustment resulted in recognition of a gain. During 2022 and 2021, the Company also received a payout from a partnership interest. The gain and payout are recognized in other income. Partnership income is removed from income prior to annualization in order to avoid distortion, and added back to income after annualization.   Net Interest Margin The Company uses the net interest margin to measure profit on interest generating activities, as a percentage of total interest-earning assets. The net interest margin is calculated by dividing annualized fully taxable equivalent (“FTE”) net interest income by total average earning assets. The portion of interest income that is nontaxable is grossed up to the tax equivalent by adding the tax benefit. The tax rate utilized in calculating the tax benefit is 21%. The reconciliation of tax equivalent net interest income, which is not a measurement under U.S. GAAP, to net interest income, is reflected in the table below.       Three months ended September 30,       2022     2021   GAAP measures:                 Interest and fees on loans   $ 8,816     $ 9,088   Interest on interest-bearing deposits     506       56   Interest and dividends on securities - taxable     3,425       2,043   Interest on securities - nontaxable     408       469   Total interest income   $ 13,155     $ 11,656                     Interest on deposits   $ 753     $ 719   Net interest income   $ 12,402     $ 10,937                     Non-GAAP measures:                 Tax benefit on nontaxable loan income   $ 84     $ 84   Tax benefit on nontaxable securities income     148       157   Total tax benefit on nontaxable interest income   $ 232     $ 241   Total tax equivalent net interest income   $ 12,634     $ 11,178   Total tax equivalent net interest income, annualized   $ 50,124     $ 44,348       The resulting net interest margin for the three month periods ended September 30, 2022 and 2021 was 2.95% and 2.83%, respectively.  Further detail on the net interest margin is provided under the Net Interest Income discussion.   37 Table of Contents         Nine months ended September 30,       2022     2021   GAAP measures:                 Interest and fees on loans   $ 25,240     $ 26,104   Interest on interest-bearing deposits     757       123   Interest and dividends on securities - taxable     8,847       5,736   Interest on securities - nontaxable     1,283       1,472   Total interest income   $ 36,127     $ 33,435                     Interest on deposits   $ 2,055     $ 2,408   Net interest income   $ 34,072     $ 31,027                     Non-GAAP measures:                 Tax benefit on nontaxable loan income   $ 244     $ 237   Tax benefit on nontaxable securities income     445       488   Total tax benefit on nontaxable interest income   $ 689     $ 725   Total tax equivalent net interest income   $ 34,761     $ 31,752   Total tax equivalent net interest income, annualized   $ 46,475     $ 42,452     The resulting net interest margin for the nine month periods ended September 30, 2022 and 2021 was2.79% and 2.81%, respectively.  Further detail on the net interest margin is provided under the Net Interest Income discussion.   Efficiency Ratio The efficiency ratio is computed by dividing noninterest expense by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding certain items management deems unusual or non-recurring. The tax rate used to calculate fully taxable equivalent basis is 21%. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. The components of the efficiency ratio calculation are summarized in the following table.       Three months ended September 30,       2022     2021   Noninterest expense   $ 6,736     $ 6,367                     Taxable-equivalent net interest income   $ 12,634     $ 11,178   Noninterest income     2,140       1,992   Total income for ratio calculation   $ 14,774     $ 13,170                     Efficiency ratio     45.59 %     48.34 %       Nine months ended September 30,       2022     2021   Noninterest expense   $ 19,660     $ 19,350                     Taxable-equivalent net interest income   $ 34,761     $ 31,752   Noninterest income     6,543       6,267   Less: partnership income     (367 )     (467 ) Less: realized securities gains     -       (5 ) Total income for ratio calculation   $ 40,937     $ 37,547                     Efficiency ratio     48.03 %     51.54 %   38 Table of Contents     Performance Summary   The following table presents the Company’s key performance indicators for the three months ended September 30, 2022 and September 30, 2021. Income and expense items are annualized for the ratios, except for basic and fully diluted earnings per share.       Three Months Ended September 30,       2022     2021   Net Income   $ 6,162     $ 5,752   Return on average assets (1)     1.41 %     1.32 % Return on average equity (1) (2)     17.61 %     11.26 % Basic and fully diluted earnings per share (2)   $ 1.03     $ 0.94   Net interest margin (1)     2.95 %     2.83 % Efficiency ratio (1)     45.59 %     48.34 %   (1)   Ratio is a non-GAAP financial measure that the Company believes provides investors with important information. Such information is not prepared in accordance with GAAP and should not be viewed as a substitute for GAAP. See “Non-GAAP Financial Measures” above. (2)   During the three months ended September 30, 2022, the Company repurchased 23,500 shares under its publicly announced stock repurchase plan. The repurchase reduced stockholders equity by $795. During the three months ended September 30, 2021, the Company repurchased 73,100 shares, reducing stockholders equity by $2,731.   The following table presents the Company’s key performance indicators for the nine months ended September 30, 2022 and September 30, 2021 and the year ended December 31, 2021. The measures for September 30, 2022 and September 30, 2021 are annualized, except for basic and fully diluted earnings per share.       Nine Months Ended September 30, 2022     Nine Months Ended September 30, 2021     Twelve Months Ended December 31, 2021   Net Income   $ 16,622     $ 15,131     $ 20,382   Return on average assets (1)     1.29 %     1.25 %     1.26 % Return on average equity (1) (2)     14.04 %     10.36 %     10.59 % Basic and fully diluted earnings per share (2)   $ 2.77     $ 2.42     $ 3.28   Net interest margin (1)     2.79 %     2.81 %     2.81 % Efficiency ratio (1)     48.03 %     51.54 %     51.34 %   (1)   Ratio is a non-GAAP financial measure that the Company believes provides investors with important information. Such information is not prepared in accordance with GAAP and should not be viewed as a substitute for GAAP. See “Non-GAAP Financial Measures” above. (2)   During the nine months ended September 30, 2022, the Company repurchased 106,662 shares under its publicly announced stock repurchase plan. The repurchase reduced stockholders equity by $3,724. During the nine months ended September 30, 2021, the Company repurchased 335,062 shares under its publicly announced stock repurchase plan. The repurchase reduced stockholders equity by $12,085.   When results for the three and nine months ended September 30, 2022 and September 30, 2021 are compared, the increase in net income was primarily generated by growth in net interest income and service charges on deposit accounts, as well as decreased pension expense. This benefitted each of the key performance ratios. The return on average equity also increased due to lower average equity when the three and nine month periods ended September 30, 2022 are compared with the same periods of 2021, and with the year ended December 31, 2021. Average equity decreased due to unrealized losses on securities during 2022 that reduced accumulated other comprehensive loss, a component of stockholders’ equity. The following discussion provides further detail on the Company’s results of operations for the three and nine month periods ended September 30, 2022 and financial position as of September 30, 2022, compared with comparable periods of the prior year.   39 Table of Contents     Key Assets and Liabilities   NBI’s key assets and liabilities and their change from December 31, 2021 are shown in the following table.       September 30, 2022     December 31, 2021     Percent Change   Interest-bearing deposits   $ 79,466     $ 130,021       (38.88 ) % Securities available for sale and restricted stock     658,351       686,925       (4.16 ) % Loans, net     844,656       795,574       6.17 % Total assets     1,698,946       1,702,175       (0.19 ) % Deposits     1,570,649       1,494,587       5.09 %   Asset Quality   Key indicators of the Company’s asset quality are presented in the following table.       September 30, 2022     September 30, 2021     December 31, 2021   Nonperforming loans   $ 2,888     $ 3,114     $ 2,873   Loans past due 90 days or more, and still accruing     48       62       90   Other real estate owned     907       957       957   Allowance for loan losses to loans net of unearned income and deferred fees and costs     0.96 %     0.97 %     0.96 % Net charge-off ratio     0.03 %     0.08 %     0.05 % Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned     0.44 %     0.51 %     0.48 % Ratio of allowance for loan losses to nonperforming loans     284.18 %     247.21 %     267.11 %   The Company’s risk analysis at September 30, 2022 determined an allowance for loan losses of $8,207 or 0.96% of loans net of unearned income and deferred fees and costs. The allowance at September 30, 2021 was $7,698 or 0.97% of loans net of unearned income and deferred fees and costs. The allowance at December 31, 2021 was $7,674 or 0.96% of loans net of unearned income and deferred fees and costs. The determination of the appropriate level for the allowance for loan losses resulted in a provision of $696 for the nine months ended September 30, 2022, compared with a recovery of $338 for the nine month period ended September 30, 2021, and a recovery of $398 for the 12 months ended December 31, 2021. To determine the appropriate level of the allowance for loan losses, the Company considers credit risk for certain loans designated as impaired and for non-impaired (“collectively evaluated”) loans.   Individually Evaluated Impaired Loans Individually evaluated impaired loans decreased from December 31, 2021 to September 30, 2022, due to the payoff of one relationship. At September 30, 2022 individually evaluated loans were $3,049 on both a gross basis and net of unearned income and deferred fees and costs. There were no specific allocations to the allowance for loan losses at September 30, 2022. Individually evaluated impaired loans at December 31, 2021 were $5,878 gross and $5,880 net of unearned income and deferred fees and costs. There were no specific allocations to the allowance for loan losses as of December 31, 2021. The specific allocation is determined based on criteria particular to each impaired loan.   Collectively Evaluated Loans Collectively evaluated loans totaled $850,223 gross and $849,814 net of unearned income and deferred fees and costs, with an allowance of $8,207 or 0.97% of collectively-evaluated loans net of unearned income and deferred fees and costs at September 30, 2022. At December 31, 2021, collectively evaluated loans totaled $797,851 gross and $797,368 net of unearned income and deferred fees and costs, with an allowance of $7,674 or 0.96% of collectively-evaluated loans net of unearned income and deferred fees and costs. Collectively evaluated loans are divided into classes based upon risk characteristics. In order to calculate the allowance for collectively evaluated loans, the Company applies to each loan class a historical net charge-off rate for the class, adjusted for qualitative factors that influence credit risk. Qualitative factors evaluated for impact to credit risk include economic measures, asset quality indicators, loan characteristics, and changes to internal Company policies and management.   40 Table of Contents     Net Charge-Offs Increases in the net charge-off rate increase the required allowance for collectively-evaluated loans, while decreases in the net charge-off rate decrease the required allowance for collectively-evaluated loans. On a portfolio level, net charge-offs were $163 for the nine months ended September 30, 2022, or 0.03% of average loans. For the nine months ended September 30, 2021, net charge-offs were $445, or 0.08% of average loans. For the 12 months ended December 31, 2021, net charge-offs were $409 or 0.05% of average loans. The 8-quarter average historical loss rate was 0.03% for the nine months ended September 30, 2022 and 0.06% for the nine months ended September 30, 2021, and 0.05% for the 12 months ended December 31, 2021.   Economic Factors Economic factors influence credit risk and impact the allowance for loan loss. The Company sources economic data pertinent to its market from the most recently available publications, including: unemployment, business and personal bankruptcy filings, the residential vacancy rate and the inventory of new and existing homes. As of September 30, 2022, the unemployment rate for the Company’s market area was measured as of August 31, 2022 and increased from the measurement available at December 31, 2021, increasing the allocation to the allowance for loan losses. Business and personal bankruptcy filing data was available as of June 2022. Higher bankruptcy filings indicate heightened credit risk and increase the allowance for loan losses, while lower bankruptcy filings have a beneficial impact on credit risk. Compared with data available at December 31, 2021, business bankruptcy filings and personal bankruptcy filings slightly decreased. The Company estimates that bankruptcy filings are artificially low due to a backlog in the court system and prolonged government aid. When the pandemic began, precautions for COVID-19 slowed the work of the court system. The federal government also implemented a foreclosure moratorium, provided direct payments to qualifying recipients and PPP loans to small businesses, and encouraged banks to work with borrowers who were impacted by the pandemic, all of which had a minimizing effect on bankruptcy filings. All of these measures expired by the end of 2021. Management believes bankruptcy filings will normalize and currently available data does not reflect credit risk. The allocation was based on current data and an average of pre-pandemic filings from 2017 through 2020, which was higher than the current level and the level incorporated to the allowance at December 31, 2021. Residential vacancy rates and housing inventory impact the Company’s residential construction customers and the consumer real estate market. Higher levels increase credit risk. The residential vacancy rate at September 30, 2022 was measured as of the second quarter of 2022 and worsened from the data incorporated into the December 31, 2021 calculation, resulting in a higher allocation. Housing inventory data was available as of September 30, 2022. The level is slightly higher than at December 31, 2021, resulting in a higher allocation. Economic factors in 2021 included an allocation for national unemployment filings. This factor was added early in the pandemic to capture risk that may not have been reflected by the Company’s standard economic indicators. By the beginning of 2022, national unemployment filings had returned to pre-pandemic levels for a sustained period and the Company removed the allocation provided in 2021.   Asset Quality Indicators Asset quality indicators, including past due levels, nonaccrual levels and internal risk ratings, are evaluated at the class level. Loans past due and loans designated nonaccrual indicate heightened credit risk. Increases in past due and nonaccrual loans increase the required level of the allowance for loan losses and decreases in past due and nonaccrual loans reduce the required level of the allowance for loan losses. Accruing loans past due 30-89 days were 0.17% of total loans net of unearned income and deferred fees and costs at September 30, 2022, an increase from 0.12% at December 31, 2021. Accruing loans past due 90 days or more were 0.01% of total loans, net of unearned income and deferred fees and costs at September 30, 2022 and at December 31, 2021. Nonaccrual loans as a percentage of total loans net of unearned income and deferred fees and costs were 0.34% at September 30, 2022 and 0.36% at December 31, 2021. Loans rated special mention and classified (together, “criticized assets”) indicate heightened credit risk. Higher levels of criticized assets increase the required level of the allowance for collectively-evaluated loans, while lower levels of criticized assets reduce the required level of the allowance for collectively-evaluated loans. Collectively evaluated loans rated special mention at September 30, 2022 were $311, compared with $3,728 at December 31, 2021, due to improvement in credit quality of a large relationship. Collectively evaluated loans rated classified were $1,041 at September 30, 2022 and $1,064 at December 31, 2021.   Other Factors The Company considers other factors that impact credit risk, including the interest rate environment, the competitive, legal and regulatory environments, changes in lending policies and loan review, changes in management, and high risk loans. The interest rate environment impacts variable rate loans. When interest rates increase, the payment on variable rate loans increases, which may increase credit risk. The Federal Reserve increased the target Fed Funds rate in March, May, June, July, and September 2022, resulting in an increased allocation for September 30, 2022, compared with the allocation for December 31, 2021. The competitive, legal and regulatory environments were evaluated for changes that would impact credit risk. Higher competition for loans increases credit risk, while lower competition decreases credit risk. Competition remained at similar levels to those at December 31, 2021. The legal and regulatory environments remain in a similar posture to that at December 31, 2021.   41 Table of Contents     Lending policies, loan review procedures and management’s experience influence credit risk. During the second quarter of 2022, appraisal requirements on residential real estate changed, resulting in an increased allocation from December 31, 2021. Loan review procedures remained similar to those at December 31, 2021 and no allocation was taken. During the first quarter of 2022, the Company hired a seasoned Chief Credit Officer to replace the employee who left at the end of 2021. The allocation taken at December 31, 2021 was removed. During the second and third quarters of 2022, the Company opened a new loan production office and hired an experienced commercial lender, resulting in a small allocation to reflect potential risk. Levels of high risk loans are considered in the determination of the level of the allowance for loan loss. A decrease in the level of high risk loans within a class decreases the required allocation for the loan class, and an increase in the level of high risk loans within a class increases the required allocation for the loan class. Total high risk loans increased 5.99% from the level at December 31, 2021, resulting in an increased allocation.   Unallocated Surplus The unallocated surplus at September 30, 2022 is $141 or 1.75% in excess of the calculated requirement. The unallocated surplus at December 31, 2021 was $361 or 4.94% in excess of the calculated requirement. The surplus provides some mitigation of current economic uncertainty that may impact credit risk.   Conclusion The calculation of the appropriate level for the allowance for loan losses incorporates analysis of multiple factors and requires management’s prudent and informed judgment. The Company augmented the calculated requirement with an unallocated surplus. Based on analysis of historical indicators, asset quality and economic factors, management believes the level of allowance for loan losses is reasonable for the credit risk in the loan portfolio as of September 30, 2022.   Provision and Allowance for Loan Losses   The calculation of the allowance for loan losses resulted in a provision for loan losses of $252 for the three month period ended September 30, 2022, compared with a recovery of $392 for the three month period ended September 30, 2021. The provision for the nine month period ended September 30, 2022 was $696, compared with a recovery of $338 for the nine months ended September 30, 2021. The recovery in 2021 reflected a decrease in risk provided for during 2020 and early 2021. The provision for 2022 reflects loan growth and changes in factors detailed in “Asset Quality” above.   Loan Modifications and TDRs   Modifications In the ordinary course of business the Company modifies loan terms on a case-by-case basis for a variety of reasons. Modifications may include rate reductions, payment extensions of varying lengths of time, a change in amortization term or method or other arrangements. Please refer to the Company’s 2021 Form 10-K, Note 1: Summary of Significant Accounting Policies for information on TDR designation. If the modified terms are consistent with competitive market conditions and representative of terms the borrower could otherwise obtain in the open market, the modified loan is not categorized as a TDR. Modifications to consumer loans generally involve short-term payment extensions to accommodate specific, temporary circumstances. Payment extensions provide short-term payment relief to borrowers who have demonstrated a willingness and ability to repay their loan but who are experiencing consequences of a specific unforeseen temporary hardship. If the temporary event is not expected to impact a borrower’s ability to repay the debt, and if the Company expects to collect all amounts due including interest accrued at the contractual interest rate for the extension period at contractual maturity, the modification is not designated a TDR. Modifications to commercial loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants. The Company codes modifications to assist in identifying TDRs.   Modifications That Are Not TDR During the three months ended September 30, 2022, the Company provided 187 modifications for competitive reasons to loans totaling $27,389. During the nine months ended September 30, 2022, the Company provided 652 modifications to loans totaling $101,347. The modifications were not TDRs and were not related to COVID-19. The Company provided non-TDR modifications for competitive reasons to 205 loans totaling $24,754 during the three months ended September 30, 2021, and to 659 loans totaling $72,327 during the nine months ended September 30, 2021. During nine months ended September 30, 2021, the Company also provided 45 modifications to loans totaling $38,561 related to COVID-19 difficulty. The modifications met the criteria under the CARES Act, the CAA and regulatory guidance and were not designated as TDRs.   42 Table of Contents     TDRs The Company’s TDRs, by delinquency status, are presented below:         TDR Status as of September 30, 2022               Accruing               Total TDR Loans     Current     30-89 Days Past Due     90+ Days Past Due     Nonaccrual   Consumer real estate   $ 187     $ 187     $ -     $ -     $ -   Commercial real estate     2,599       92       -       -       2,507   Commercial non real estate     263       -       -       -       263   Total TDR Loans   $ 3,049     $ 279     $ -     $ -     $ 2,770         TDR Status as of December 31, 2021               Accruing               Total TDR Loans     Current     30-89 Days Past Due     90+ Days Past Due     Nonaccrual   Consumer real estate   $ 191     $ 191     $ -     $ -     $ -   Commercial real estate     5,386       2,814       -       -       2,572   Commercial non real estate     301       -       -       -       301   Total TDR Loans   $ 5,878     $ 3,005     $ -     $ -     $ 2,873       Please refer to Note 3: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans for information on TDRs.            Other Real Estate Owned   The following table discloses the OREO in physical possession and in process at each reporting date:   Other Real Estate Owned, net of valuation allowance   September 30, 2022     December 31, 2021   Real estate construction   $ 907     $ 957   Consumer real estate     -       -   Total other real estate owned   $ 907     $ 957     As of September 30, 2022, loans in various stages of foreclosure totaled $224, all of which are secured by residential real estate. Loans currently in the process of foreclosure may increase OREO in future quarters. It is not possible to accurately predict the future total of OREO because property sold at foreclosure may be acquired by third parties and OREO properties are regularly marketed and sold. The Company continues to monitor risk levels within the loan portfolio. If the Company’s market experiences an economic downturn, real estate values could decline and foreclosure activity could increase. A decline in value may result in loss recognition for OREO, while an increase in foreclosures may increase the number of OREO properties.   43 Table of Contents     Net Interest Income   The following table shows interest‑earning assets and interest‑bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net yield on average interest‑earning assets for the periods indicated.       Three Months Ended September 30,       2022     2021       Average Balance     Interest     Average Yield/Rate     Average Balance     Interest     Average Yield/Rate   Interest-earning assets:                                                 Loans (1)(2)(4)(5)   $ 849,929     $ 8,900       4.15 %   $ 798,807     $ 9,172       4.56 % Taxable securities (6)(7)     683,490       3,425       1.99 %     540,854       2,043       1.50 % Nontaxable securities (1)(6)     74,670       556       2.95 %     79,097       626       3.14 % Interest-bearing deposits     89,165       506       2.25 %     145,759       56       0.15 % Total interest-earning assets   $ 1,697,254     $ 13,387       3.13 %   $ 1,564,517     $ 11,897       3.02 % Interest-bearing liabilities:                                                 Interest-bearing demand deposits   $ 936,368     $ 686       0.29 %   $ 839,477     $ 617       0.29 % Savings deposits     217,637       36       0.07 %     195,767       41       0.08 % Time deposits     78,198       31       0.16 %     86,379       61       0.28 % Total interest-bearing liabilities   $ 1,232,203     $ 753       0.24 %   $ 1,121,623     $ 719       0.25 % Net interest income and interest rate spread           $ 12,634       2.89 %           $ 11,178       2.77 % Net yield on average interest‑earning assets                     2.95 %                     2.83 %       Nine Months Ended September 30,       2022     2021       Average Balance     Interest     Average Yield/Rate     Average Balance     Interest     Average Yield/Rate   Interest-earning assets:                                                 Loans (1)(3)(4)(5)   $ 829,133     $ 25,484       4.11 %   $ 786,613     $ 26,341       4.48 % Taxable securities (6)(7)     662,824       8,847       1.78 %     505,134       5,736       1.52 % Nontaxable securities (1)(6)     75,806       1,728       3.05 %     80,596       1,960       3.25 % Interest-bearing deposits     97,917       757       1.03 %     136,391       123       0.12 % Total interest-earning assets   $ 1,665,680     $ 36,816       2.96 %   $ 1,508,734     $ 34,160       3.03 % Interest-bearing liabilities:                                                 Interest-bearing demand deposits   $ 911,926     $ 1,839       0.27 %   $ 799,593     $ 2,053       0.34 % Savings deposits     216,691       111       0.07 %     186,720       132       0.09 % Time deposits     79,981       105       0.18 %     88,009       223       0.34 % Total interest-bearing liabilities   $ 1,208,598     $ 2,055       0.23 %   $ 1,074,322     $ 2,408       0.30 % Net interest income and interest rate spread           $ 34,761       2.73 %           $ 31,752       2.73 % Net yield on average interest‑earning assets                     2.79 %                     2.81 %   (1) Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a Federal income tax rate of 21%. (2) Included in interest income are loan fees of $82 for the three months ended September 30, 2022. For the three months ended September 30, 2021, interest income included loan fees $911, of which $882 was related to PPP loans. (3) Included in interest income are loan fees of $195 for the nine months ended September 30, 2022. For the nine months ended September 30, 2021, interest income included loan fees of $1,855, of which $1,776 was related to PPP loans. (4) Nonaccrual loans are included in average balances for yield computations. (5) Includes loans held for sale. (6) Daily averages are shown at amortized cost. (7) Includes restricted stock.   44 Table of Contents     When results from the nine month period ended September 30, 2022 are compared with the same period of 2021, net interest income benefitted from both lower interest expense and higher interest income. Interest expense for the nine months ended September 30, 2022 improved $353 compared with the same period of 2021.  The cost of interest-bearing liabilities improved from an annualized 0.30% for the nine months ended September 30, 2021 to 0.23% for the nine months ended September 30, 2022.  Elevated levels of deposits and liquidity within the Company, similar to the general banking industry, supported favorable deposit pricing during 2022. The increase in interest income stemmed from Federal Reserve interest rate increases in 2022 as well as growth in earning assets.  The FTE yield on earning assets for the nine months ended September 30, 2022 was 2.96%, compared with 3.03% for the nine months ended September 30, 2021.  Results for 2021 were impacted by Paycheck Protection Program (PPP) loans.  If PPP loans are excluded, the yield on earning assets for the nine months ended September 30, 2021 would have been 2.85%.   Noninterest Income       Three Months Ended September 30,               2022     2021     Percent Change   Service charges on deposits   $ 661     $ 548       20.62 % Other service charges and fees     51       50       2.00 % Credit and debit card fees, net     448       460       (2.61 )% Trust fees     492       433       13.63 % BOLI income     239       248       (3.63 )% Gain on sale of mortgage loans     40       76       (47.37 )% Other income     209       177       18.08 % Total noninterest income   $ 2,140     $ 1,992       7.43 %       Nine Months Ended September 30,               2022     2021     Percent Change   Service charges on deposits   $ 1,826     $ 1,488       22.72 % Other service charges and fees     157       134       17.16 % Credit and debit card fees, net     1,423       1,373       3.64 % Trust fees     1,374       1,282       7.18 % BOLI income     718       664       8.13 % Gain on sale of mortgage loans     136       287       (52.61 )% Other income     909       1,034       (12.09 )% Realized securities gain, net     -       5       (100.00 )% Total noninterest income   $ 6,543     $ 6,267       4.40 %   The increase from 2021 in service charges on deposits stemmed from higher fee income for non-sufficient funds and overdrafts, as depositor activity recovered from lower levels earlier in the COVID-19 pandemic. The Company offers depositors various overdraft solutions and provides disclosures on its fees. Other service charges and fees increased when the three and nine month periods ended September 30, 2022 are compared with the same periods of 2021, due to higher service charges on letters of credit and safe deposit box fee income. Credit and debit card fees are presented net of interchange expense. Credit and debit card fees are driven by volume. Trust income increased for the three and nine month periods ended September 30, 2022, when compared with the same periods of 2021. Trust income varies depending on the total assets held in trust accounts, the type of accounts under management and financial market conditions. BOLI income decreased slightly when the three month periods ended September 30, 2022 and September 30, 2021 are compared and increased when the nine month periods ended September 30, 2022 and September 30, 2021 are compared. The Company purchased an additional $5 million in BOLI investments during June, 2021. Gain on sale of mortgage loans decreased when 2022 is compared with 2021. The Federal Reserve interest rate increases in 2022 have dampened real estate refinance and purchase financing activity.   45 Table of Contents     Other income includes revenue from investment and insurance sales, adjustments to partnership basis and other miscellaneous components. These areas fluctuate with market conditions and competitive factors. Other income increased for the three month period ended September 30, 2022 compared to the same period in 2021 due to higher commissions on securities sales. When the nine month periods ended September 30, 2022 and September 30, 2021 are compared, other income decreased due to lower commissions on securities sales and decreased dividends on a partnership investment.   Noninterest Expense       Three Months Ended September 30,               2022     2021     Percent Change   Salaries and employee benefits   $ 4,144     $ 3,909       6.01 % Occupancy, furniture and fixtures     476       447       6.49 % Data processing and ATM     774       728       6.32 % FDIC assessment     114       120       (5.00 )% Net costs of other real estate owned     68       11       518.18 % Franchise taxes     375       367       2.18 % Other operating expenses     785       785       0.00 % Total noninterest expense   $ 6,736     $ 6,367       5.80 %       Nine Months Ended September 30,               2022     2021     Percent Change   Salaries and employee benefits   $ 12,133     $ 11,767       3.11 % Occupancy, furniture and fixtures     1,432       1,378       3.92 % Data processing and ATM     2,354       2,292       2.71 % FDIC assessment     336       296       13.51 % Net costs of other real estate owned     78       49       59.18 % Franchise taxes     1,108       1,059       4.63 % Other operating expenses     2,219       2,509       (11.56 )% Total noninterest expense   $ 19,660     $ 19,350       1.60 %   Salaries and employee benefits includes employee salaries, payroll taxes, insurance and fringe benefits, ESOP contribution accruals, the service component of net periodic pension cost, and salary continuation expenses. The expense increased when the three and nine month periods ended September 30, 2022 are compared with the same periods ended September 30, 2021. Lower pension expense was offset by normal increases in salary expense, insurance and salary continuation expense. Expense for occupancy, furniture and fixtures and data processing and ATM increased due to normal business activity. Federal Deposit Insurance (“FDIC”) assessment expense decreased when the three month period ended September 30, 2022 is compared to the same period in 2021 and increased when the nine month period ended September 30, 2022 is compared with the same period of 2021. The FDIC assessment is accrued based on a method provided by the FDIC. The calculation is based on average assets divided by average tangible equity and incorporates risk-based factors to determine the amount of the assessment. Net costs of other real estate owned increased when 2022 is compared with 2021, primarily due to a write-down of $50, taken during the third quarter of 2022. The Company received an updated appraisal and modified its marketing strategy for the property, resulting in the write-down. Franchise tax expense increased when the three and nine month periods ended September 30, 2022 and September 30, 2021 are compared. Franchise tax is primarily based on capital levels of the subsidiary bank, and is also affected by investment levels in securities issued by U.S. government agencies. The category of other operating expenses includes noninterest expense items such as professional services, stationery and supplies, telephone costs, postage, charitable donations, losses and other expenses. Other operating expense remained the same when the three month period ended September 30, 2022 is compared to the same period in 2021 and decreased when the nine month period ended September 30, 2022 is compared with the same period ended September 30, 2021, due to lower non-service pension cost and cost control measures.   46 Table of Contents     Income Tax   Income tax expense was $1,392 for the three months ended September 30, 2022 and $1,202 for the same period of 2021. For the nine months ended September 30, 2022 and 2021, income tax expense was $3,637 and $3,151 respectively. The Company’s federal statutory tax rate is 21%. The Company’s effective tax rate was 18.43% and 17.95% for the three and nine month periods ended September 30, 2022, compared with 17.29% and 17.24% for the three and nine month periods ended September 30, 2021.   Balance Sheet   Year-to-date daily averages for the major balance sheet categories are as follows:   Assets   September 30, 2022     December 31, 2021     Percent Change   Interest-bearing deposits   $ 97,917     $ 133,020       (26.39 )% Securities available for sale, net, and restricted stock     694,216       612,636       13.32 % Loans, net of unearned income and deferred fees and costs and the allowance for loan losses     821,082       778,920       5.41 % Total assets     1,716,907       1,618,642       6.07 %                           Liabilities and stockholders ’ equity                         Noninterest-bearing demand deposits   $ 334,727     $ 316,976       5.60 % Interest-bearing demand deposits     911,926       811,661       12.35 % Savings deposits     216,691       190,997       13.45 % Time deposits     79,981       86,089       (7.09 )% Stockholders’ equity     157,540       192,545       (18.18 )%   The decline in interest-bearing deposits resulted as the Company invested in securities and loans to increase yields. The decline in stockholders’ equity resulted from contraction in accumulated other comprehensive income (loss). Changes in securities, loans and deposits are discussed below.   Securities       September 30, 2022     December 31, 2021     Percent Change   Amortized cost   $ 765,371     $ 682,467       12.15  % Unrealized gain (loss)     (107,961 )     3,613       (3088.13 )% Securities available for sale   $ 657,410     $ 686,080       (4.18 )%   Securities available for sale are measured at fair value as of each reporting date. During the nine months ended September 30, 2022, the amortized cost of securities available for sale increased from December 31, 2021 by $82,904, while unrealized losses decreased the fair value from December 31, 2021 by $111,574. Change in the fair value of bonds is inversely related to interest rate movement. During the nine months ended September 30, 2022, the Federal Reserve increased its target rate 300 basis points. These increases, as well as market expectations decreased the fair value of the securities portfolio. The Company’s Asset Liability Management Committee is closely monitoring interest rate risk on all of the Company’s financial assets and liabilities. At this time, the Company has high liquidity and a relatively low loan-to-deposit ratio. No securities sales are anticipated.  The value of individual securities will be written down if the decline in fair value is considered to be other than temporary based upon the totality of circumstances. See “Note 4: Securities” for additional information.   47 Table of Contents     Loans       September 30, 2022     December 31, 2021     Percent Change   Real estate construction loans   $ 62,821     $ 48,841       28.62 % Consumer real estate loans     219,617       208,977       5.09 % Commercial real estate loans     435,185       405,722       7.26 % Commercial non real estate loans     52,409       60,264       (13.03 )% Public sector and IDA     48,912       47,899       2.11 % Consumer non real estate     34,328       32,026       7.19 % Less: unearned income and deferred fees and costs     (409 )     (481 )     14.97 % Loans, net of unearned income and deferred fees and costs   $ 852,863     $ 803,248       6.18 %   Loan demand continues to provide growth. Most of the increase in construction loans is due to investment in participations with other banks.   Deposits       September 30, 2022     December 31, 2021     Percent Change   Noninterest-bearing demand deposits   $ 358,772     $ 317,430       13.02 % Interest-bearing demand deposits     917,449       890,124       3.07 % Saving deposits     217,405       208,065       4.49 % Time deposits     77,023       78,968       (2.46 )% Total deposits   $ 1,570,649     $ 1,494,587       5.09 %   Total deposits increased from December 31, 2021 to September 30, 2022. The increase is due in large part to government stimulus funds received by municipal depositors and other depositors. Deposits do not include any brokered deposits.   Liquidity   Liquidity measures the Company’s ability to meet its financial commitments at a reasonable cost. Demands on liquidity include funding additional loan demand and accepting withdrawals of existing deposits. The Company has diverse liquidity sources, including customer and purchased deposits, customer repayments of loan principal and interest, sales, calls and maturities of securities, Federal Reserve discount window borrowing, short-term borrowing, and FHLB advances. At September 30, 2022, the Bank did not have any borrowings.  To assure that short-term borrowing is readily available, the Company tests accessibility annually. The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters. Portions of the securities portfolio are pledged to meet state requirements for public funds deposits. Discount window borrowings also require pledged securities. Increased/decreased liquidity from public funds deposits or discount window borrowings results in increased/decreased liquidity from pledging requirements. The Company monitors public funds pledging requirements and unpledged available-for-sale securities accessible for liquidity needs. Regulatory capital levels at the subsidiary bank determine the Bank’s ability to use purchased deposits and the Federal Reserve discount window. At September 30, 2022, the Bank is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve discount window. The Company monitors factors that may increase its liquidity needs. Some of these factors include deposit trends, large depositor activity, maturing deposit promotions, interest rate sensitivity, maturity and repricing timing gaps between assets and liabilities, the level of unfunded loan commitments, loan growth and share repurchase activity within the Company’s own stock. The Company’s liquidity position has benefitted over the past two years from increased customer deposits fueled by federal stimulus payments for COVID-19 pandemic relief. At September 30, 2022, the Company’s liquidity is sufficient to meet projected trends in these areas. To monitor and estimate liquidity levels, the Company performs stress testing under varying assumptions on credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows. The Company’s Contingency Funding Plan sets forth avenues for rectifying liquidity shortfalls. At September 30, 2022, the analysis indicated adequate liquidity under the tested scenarios. The Company utilizes several other strategies to maintain sufficient liquidity. Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s internally-set target range. At September 30, 2022, the loan to deposit ratio was 54.30%. The investment strategy takes into consideration the term of the investment, and securities in the available for sale portfolio are laddered based upon projected funding needs.   48 Table of Contents     Capital Resources   Total stockholders’ equity at September 30, 2022 was $112,187, a decrease of $79,564 or 41.49%, from the $191,751 at December 31, 2021. Book value declined from $31.62 at December 31, 2021 to $18.83 at September 30, 2022. The decline in stockholders equity and book value is due to worsening of accumulated other comprehensive loss associated with the unrealized loss in fair value of securities. Accumulated other comprehensive loss is excluded from regulatory capital calculations and does not impact regulatory capital requirements or ratios. The Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement, which exempts bank holding companies with less than $3 billion in assets from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements. NBB is subject to various capital requirements administered by banking agencies, including an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments. Risk-based capital ratios are calculated in compliance with OCC rules based on the Basel III Capital Rules. The Bank’s ratios are well above the required minimums. Risk based capital ratios for the Bank are shown in the following tables.       NBB     Regulatory Capital Minimum Ratios     Regulatory Capital Minimum Ratios with Capital Conservation Buffer   Common Equity Tier I Capital Ratio     17.52 %     4.50 %     7.00 % Tier I Capital Ratio     17.52 %     6.00 %     8.50 % Total Capital Ratio     18.26 %     8.00 %     10.50 % Leverage Ratio     10.88 %     4.00 %     4.00 %   Off-Balance Sheet Arrangements   In the normal course of business, NBB extends lines of credit and letters of credit to its customers. Depending on their needs, customers may draw upon lines of credit at any time in any amount up to a pre-approved limit. Standby letters of credit are issued for two purposes. Financial letters of credit guarantee payments to facilitate customer purchases. Performance letters of credit guarantee payment if the customer fails to complete a specific obligation. Historically, the full approved amount of letters and lines of credit has not been drawn at any one time. The Company has developed plans to meet a sudden and substantial funding demand. These plans include accessing a line of credit with a correspondent bank, borrowing from the FHLB, selling available for sale investments or loans and raising additional deposits. The Company sells mortgages on the secondary market. Our agreement with the purchaser provides for strict underwriting and documentation requirements. Violation of the representations and warranties of the agreement would entitle the purchaser to recourse provisions. The Company has determined that its risk in this area is not significant because of a low volume of secondary market mortgage loans and high underwriting standards. The Company estimates a potential loss reserve for recourse provisions that is not material as of September 30, 2022. To date, no recourse provisions have been invoked. If funds were needed, the Company would access the same sources as noted above for funding lines and letters of credit. There were no material changes in off-balance sheet arrangements during the three or nine months ended September 30, 2022.   Contractual Obligations   The Company had no finance lease or purchase obligations and no long-term debt at September 30, 2022.   Item 3.   Quantitative and Qualitative Disclosures About Market Risk   Not applicable.   49 Table of Contents     Item 4. Controls and Procedures   The Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of September 30, 2022 to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Because of the inherent limitations in all control systems, the Company believes that no system of controls, no matter how well designed and operated, can provide absolute assurance that all control issues have been detected.     Part II Other Information   Item 1.   Legal Proceedings   There are no pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.   Item 1A. Risk Factors   Please refer to the “Risk Factors” previously disclosed in Item 1A of our 2021 Annual Report on Form 10-K and the factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” in Part I. Item 2 of this Form 10-Q.   Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   Purchases of Equity Securities by the Issuer Share repurchase activity during the three months ended September 30, 2022 was as follows:   Period   Total Number of Shares Purchased (1)     Average Price Paid Per Share     Total Number of Shares Purchased as Part of Publicly Announced Program (1)     Number of Shares that May Yet Be Purchased Under the Program (1)   July 1, 2022 – July 31, 2022     -     $ -       -       237,631   August 1, 2022 – August 31, 2022     7,500       33.73       7,500       230,131   September 1, 2022 – September 30, 2022     16,000       33.92       16,000       214,131   Total during third quarter 2022     23,500     $ 33.86       23,500             (1) In May 2022, the Company announced the Board of Directors had authorized a 250,000 share repurchase program. The authorization began June 1, 2022 and expires May 31, 2023. The Company’s share repurchase program does not obligate it to acquire any specific number of shares.   Item 3. Defaults Upon Senior Securities   None.   Item 4.   Mine Safety Disclosures   Not applicable.                     50 Table of Contents     Item 5.   Other Information   None.   Item 6.   Exhibits   Index of Exhibits     Exhibit No.   Description     3(i)   Amended and Restated Articles of Incorporation of National Bankshares, Inc.   (incorporated herein by reference to Exhibit 3.1 of the Form 8-K for filed on March 16, 2006) 3(ii)   Amended and Restated Bylaws of National Bankshares, Inc.   (incorporated herein by reference to Exhibit 3(ii) of the Form 8-K filed on April 14, 2021) 4   Specimen copy of certificate for National Bankshares, Inc. common stock   (incorporated herein by reference to Exhibit 4(a) of the Annual Report on Form 10-K for fiscal year ended December 31, 1993) +31(i)   Section 302 Certification of Chief Executive Officer   Filed herewith +31(ii)   Section 302 Certification of Chief Financial Officer   Filed herewith +32(i)   18 U.S.C. Section 1350 Certification of Chief Executive Officer   Filed herewith +32(ii)   18 U.S.C. Section 1350 Certification of Chief Financial Officer   Filed herewith +101   The following materials from National Bankshares, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2022 are formatted in iXBRL (Inline Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets at September 30, 2022 and December 31, 2021; (ii) Consolidated Statements of Income for the three and nine month periods ended September 30, 2022 and 2021; (iii) Consolidated Statements of Comprehensive (Loss) Income for the three and nine month periods ended September 30, 2022 and 2021; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021; and (vi) Notes to Consolidated Financial Statements.   Filed herewith 104   Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)   Filed herewith   51 Table of Contents     Signatures   Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.       NATIONAL BANKSHARES, INC.       Date: November 9, 2022 /s/ F. Brad Denardo     By: F. Brad Denardo Chairman, President and Chief Executive Officer (Principal Executive Officer)               Date: November 9,   2022 /s/ Lora M. Jones     By: Lora M. Jones Treasurer and Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer)     52