NATIONAL BANKSHARES INC 10-Q

Item 1. Financial Statements Financial Information   National Bankshares, Inc. Consolidated Balance Sheets       (Unaudited)               September 30,     December 31,   (in thousands, except share and per share data)   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