What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-10 compared with 2022-03-11 · 484 added, 502 removed, 1502 unchanged (40% of the section changed)

11 unchanged sentences

686,080  

Restricted stock

Restricted stock, at cost

Mortgage loans held for sale

70 unchanged sentences

188,229  

Accumulated other comprehensive (loss) income, net

Accumulated other comprehensive loss, net

Total stockholders’

6 unchanged sentences

Consolidated Statements of Income

Years ended December 31,

Year ended December 31,

$ in thousands, except per share data

1 unchanged sentence

Interest and fees on loans

$ 34,923  

$ 34,523  

Interest on interest-bearing deposits

2 unchanged sentences

Total interest income

44,987  

44,008  

Interest Expense

1 unchanged sentence

Net interest income

41,889  

38,171  

Provision for (recovery of) loan losses

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

42,287  

36,180  

Noninterest Income

3 unchanged sentences

Gain on sale of mortgage loans

Gain on sale of private equity investment

Realized securities gains, net

2 unchanged sentences

Salaries and employee benefits

15,747  

14,674  

Occupancy, furniture and fixtures

5 unchanged sentences

Total noninterest expense

26,080  

24,970  

Income before income taxes

24,633  

19,154  

Income tax expense

$ 20,382  

$ 16,077  

Basic and fully diluted net income per common share

$ 3.28  

$ 2.48  

Basic and fully diluted net income per common share

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

Consolidated Statements of Comprehensive Income

Years ended December 31,

Consolidated Statements of Comprehensive (Loss) Income

Year ended December 31,

$ in thousands

1 unchanged sentence

$ 20,382  

Other Comprehensive (Loss) Income, Net of Tax

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

13,176  

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

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

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

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

11,526  

Total Comprehensive Income

$ 13,304  

Other Comprehensive Loss, Net of Tax

Unrealized holding loss on available for sale securities net of tax of ($ 22,403 ) in 2022 and ($ 2,740 ) in 2021

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

Net pension gain arising during the period, net of tax of $ 1,214 in 2022 and $ 862 in 2021

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

Other comprehensive loss, net of tax of ($ 21,189 ) in 2022 and ($ 1,881 ) in 2021

Total Comprehensive (Loss) Income

$ 13,304  

3 unchanged sentences

Retained Earnings

Accumulated Other

Comprehensive

Accumulated Other Comprehensive

Income (Loss)

5 unchanged sentences

20,382  

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

20,382  

11,526  

Cash dividend ( $1.39 per share)

Stock repurchase ( 57,554 shares)

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

Cash dividends of $ 1.44 per share

Stock repurchase of 368,083 shares

Balance at December 31, 2021

4 unchanged sentences

25,932  

20,382  

Other comprehensive loss, net of tax of ($ 21,189 )

Cash dividend ( $1.44 per share)

Stock repurchase ( 368,083 shares)

Cash dividends of $ 1.50 per share

Stock repurchase of 174,250 shares

Balance at December 31, 2022

4 unchanged sentences

Consolidated Statements of Cash Flows

Years ended December 31,  

Year ended December 31,

$ in thousands

3 unchanged sentences

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

(Recovery of) provision for loan losses

Deferred income tax expense

Provision for (recovery of) loan losses

Deferred income tax (benefit) expense

Depreciation of premises and equipment

2 unchanged sentences

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

Loss (gain) and write-down on other real estate owned

Loss on sale of repossessed assets

Loss and write-down on other real estate owned

Income on investment in BOLI

3 unchanged sentences

18,287  

40,362  

Contribution to defined benefit plan

Net change in:

6 unchanged sentences

Cash Flows from Investing Activities

Net change in interest-bearing deposits

Proceeds from repayments of mortgage-backed securities

3 unchanged sentences

20,377  

126,840  

Purchases of securities available for sale

3 unchanged sentences

21,452  

15,191  

Loan originations and principal collections, net

13 unchanged sentences

Shares repurchased

Net cash provided by financing activities

Net cash provided by financing activities

32,850  

1 unchanged sentence

Net change in cash and due from banks

( 67,360 )  

Cash and due from banks at beginning of year

13 unchanged sentences

Loans transferred to repossessed assets

Unrealized (loss) gain on securities available for sale

16,570  

Unrealized loss on securities available for sale

Minimum pension liability adjustment

19 unchanged sentences

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

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

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

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

2 unchanged sentences

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

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

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

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

39 unchanged sentences

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

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

A hybrid loan begins as a fixed rate mortgage and after a set number of years, automatically adjusts to an ARM.

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

19 unchanged sentences

credit history supplement the analysis.

Included within this category are SBA PPP loans.

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

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

Public Sector and IDA Loans.

2 unchanged sentences

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

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

Repayment sources are derived from taxation, such as property taxes and sales taxes, or revenue from the project financed with the loan.

The Company’s underwriting considers economic and population trends of the municipality and the municipality’s reserves, pension liabilities and other liabilities.

Consumer Non-Real Estate Loans.

4 unchanged sentences

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

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

We require borrowers to maintain collision insurance on loans secured by automobiles.

Loan modifications are reviewed at the time of modification to determine whether the loan should be designated as TDR.

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

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

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

TDRs may be removed from TDR status if the restructuring agreement specifies a contractual interest rate that is a market interest rate at the time of restructuring and the loan is in compliance with its modified terms one year after the restructure was completed.

Past due status and nonaccrual designation

1 unchanged sentence

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

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

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

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

1 unchanged sentence

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

Loans modified to provide relief from payments of interest or principle for more than 90 days are designated nonaccrual.

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

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

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

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

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

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

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 evaluation must determine that the underlying cause of the original delinquency or weakness has been resolved, such as receipt of new guarantees and/or increased cash flows that cover the debt service, and that future payments are reasonably assured.

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

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

Charge-off policy

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

When available information confirms that a specific loan or a portion thereof, within any loan class, is uncollectible the amount is charged off against the allowance for loan losses.

Additionally, losses on consumer real estate and consumer non-real estate loans are typically charged off no later than when the loans are 120 - 180 days past due, and losses on loans secured by residential real estate or by commercial real estate are charged off by the time the loans reach 180 days past due, in compliance with regulatory guidelines.

Accordingly, secured loans may be charged down to the estimated value of the collateral, with previously accrued unpaid interest reversed.

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

Allowance for Loan Losses

1 unchanged sentence

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

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

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

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

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

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

or “special mention.”

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

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

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

Impaired loan measurement methods

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

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

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

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

Fair value of impaired loans is estimated by either the present value of the loan’s expected future cash flows (“cash flow method”) or the estimated fair value, less selling costs, of the underlying collateral (“collateral method”).

Cash flow method:

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

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

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

If an impaired loan evaluated under the cash flow method becomes 90 days or more past due, it is examined to determine whether the late payment indicates collateral dependency or cash flows below those that were used in the fair value measurement.

Collateral method:

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

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

Fair value is based upon the “as-is”

value of independent appraisals or evaluations.

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 employees of the Company who are independent of the loan origination, operation, management and collection functions.

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

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.

Results of fair value measurement

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

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

2 unchanged sentences

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

Nonaccrual status of impaired loans

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

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

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

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

Collectively evaluated loans

General allowances are established for collectively evaluated loans.

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

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

Charge-off policy

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

When available information confirms that a specific loan or a portion thereof, within any loan class, is uncollectible the amount is charged off against the allowance for loan losses.

Accordingly, secured loans may be charged down to the estimated value of the collateral, with previously accrued unpaid interest reversed.

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

Collectively evaluated loans are grouped into classes based on similar characteristics. Factors considered in determining general allowances include historical loss rates, credit quality indicators, and qualitative factors.

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

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

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

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.

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.

Credit quality indicators

6 unchanged sentences

and “doubtful.”

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

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

TDR loans are individually measured for impairment.

TDRs may be removed from TDR status, and therefore from individual evaluation, if the restructuring agreement specifies a contractual interest rate that is a market interest rate at the time of restructuring and the loan is in compliance with its modified terms one year after the restructure was completed.

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 all real-estate secured classes and state and political subdivision loans.

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

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

In 2021, the Company applied to all segments and classes an economic factor implemented to address COVID- 19 uncertainty:

national unemployment filings.

Local unemployment filings are closely correlated to national unemployment filings and presented real-time data that was not available with local unemployment data.

After a sustained period of pre-pandemic levels of national unemployment filings, the Company removed the factor in 2022.

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.

Allocations for qualitative factors 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.

Sales, purchases and reclassification of loans

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

contracts with mortgage purchasers.

The mortgages are designated as held for sale upon initiation.

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

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

Occasionally, the Company purchases or sells participations in loans.

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

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

Unallocated surplus

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

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

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, and management’s assessment of current economic conditions.

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.

Please see Note 5 for additional information.

Rate Lock Commitments

20 unchanged sentences

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

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

The Company contracts with a third party valuation expert to perform annual testing as of September 30 of each fiscal year.

The impairment test for 2022 incorporated data as of September 30, 2022.

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

The Company opted not to perform the preliminary assessment.

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

6 unchanged sentences

Based upon data at September 30, 2022, each measure indicated that the Company’s fair value exceeded its book value and no impairment was indicated.

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

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

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

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

37 unchanged sentences

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

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

These reclassifications had no effect on the Company’s net income or stockholders’

Recent Accounting Pronouncements

ASU 2016 - 13

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

2 unchanged sentences

Measurement of Credit Losses on Financial Instruments.” 

The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.

Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.

In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.

The FASB has issued multiple updates to ASU 2016 - 13 as codified in Topic 326, including ASUs 2019 - 04, 2019 - 05, 2019 - 10, 2019 - 11, 2020 - 02, and 2020 - 03.

These ASUs have provided for various minor technical corrections and improvements to the codification as well as other transition matters. 

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

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

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

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

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

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

The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. 

Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration.

On January 1, 2023, the Company adopted ASU No.

2016 - 13 and related ASUs, in accordance with the required implementation date, and applied the standard’s provisions as a cumulative-effect adjustment to retained earnings as of January 1, 2023. 

Subsequent to adoption, the Company will record adjustments to its allowance(s) for credit losses and reserve for unfunded commitments through the provision for credit losses in the consolidated statements of income.

In future filings, results for reporting periods beginning after January 1, 2023 will be presented under Topic 326, while periods prior to January 1, 2023 will be reported in accordance with GAAP applicable at the time period.

Upon adoption, the allowance for credit losses on loans increased from $8,225 to $10,567 and the reserve for unfunded commitments increased from $35 to $242.

Based upon the nature and characteristics of our securities portfolios (including issuer specific matters) at the adoption date, macroeconomic conditions and forecasts at that date, and other management judgments, adoption did not result in an allowance for credit losses on available for sale securities. 

The increase to allowance for credit losses and reserve for unfunded commitments, net of tax, decreased retained earnings by $ 2,014 as of 

January 1, 2023.

The Company engaged a third -party model to tabulate its estimate of current expected credit losses, applying a probability of default/loss given default driven discounted cashflow methodology, with default defined as full or partial charge-off, nonaccrual status or past due 90 days or more.

In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics, using call report code and risk rating.

The Company designated national unemployment as its forecast variable.

Multiple forecasts from reputable and independent third parties are sourced to inform the Company’s reasonable and supportable forecasting of current expected credit losses. 

The forecast is applied over a forecast horizon selected by management at each reporting date, typically of one year and not to exceed two years, after which loss rates revert to long term historical loss experience on a straight line basis.

To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company considers the following qualitative adjustment factors:

changes in lending policies and procedures, changes in economic conditions, changes in the nature and volume of the loan portfolio, changes in lending management’s experience, changes in the volume and severity of past due loans, changes in the loan review system, changes in concentrations of credit, and the effect of competition, legal and regulatory requirements.

The Company’s CECL implementation process was overseen by a management committee which included the CFO, Controller, Chief Credit Officer and SVP of Credit Administration and reported to the Company’s Enterprise Risk Management Committee. 

The implementation process included an assessment of data availability and gap analysis, data collection, consideration and analysis of multiple loss estimation methodologies, an assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company’s historical loss experience.

During 2022, the Company calculated its current expected credit losses model in parallel to its incurred loss model in order to further refine the methodology and model. 

In addition, the Company engaged a third -party to perform a comprehensive model validation.

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 –

4 unchanged sentences

and ( 4 ) validating a systematic methodology.

ASU 2022 - 03

In June 2022, the FASB issued ASU 2022 - 03, “Fair Value Measurement (Topic 820 ):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”.

ASU 2022 - 03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. 

The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. 

Early adoption is permitted.

The Company does not expect the adoption of ASU 2022 - 03 to have a material impact on its consolidated financial statements.

ASU 2022 - 02

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 TDRs 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.

ASU 2020 - 04

In March 2020, the FASB issued ASU No.

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

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

Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

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

8 unchanged sentences

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

Recently Adopted Accounting Developments

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

Simplifying the Accounting for Income Taxes.” 

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

application of certain income tax-related guidance.

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

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

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

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

Equity Securities (Topic 321 ), Investments –

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

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

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

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

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

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

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

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

Nonrefundable fees and Other Costs.”

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

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

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

In December 2020, the CAA was passed. 

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

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

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

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

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

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

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

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

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

The ASU was effective upon addition to the FASB Codification.

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

Risks and Uncertainties

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

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

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

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

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

Financial position and results of operations

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

interest income and overdraft fee income. 

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

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

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

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

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

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

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

Capital and Liquidity

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

The Company maintains access to multiple sources of liquidity.

Wholesale funding markets are currently available to the Company.

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

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

Asset valuation

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

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

While certain valuation assumptions and judgments will change to account for pandemic-related circumstances, such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

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

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

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

Lending operations, accommodations to borrowers and credit risk

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

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

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

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

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

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

ability to repay in future periods.

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

Restriction on Cash

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Available for sale:

Unrealized Gains

Unrealized Losses

government agencies and corporations

$ 391,538  

$ 55,002  

$ 336,575  

States and political subdivisions

190,192  

38,018  

152,200  

Mortgage-backed securities

170,694  

161,477  

Corporate debt securities

Total securities available for sale

$ 759,917  

$ 103,152  

$ 656,852  

December 31, 2021

Available for sale:

Unrealized Gains

Unrealized Losses

government agencies and corporations

$ 279,934  

$ 2,795  

$ 4,710  

$ 278,019  

States and political subdivisions

195,365  

198,672  

Mortgage-backed securities

204,164  

206,174  

Corporate debt securities

Total securities available for sale

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

$ 682,467  

$ 10,680  

$ 7,067  

$ 686,080  

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

Mortgage-backed securities are categorized by final maturity.

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Mortgage-backed securities included in these totals are categorized by final maturity at December 31, 2021.

December 31, 2022

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Due in one year or less

$ 2,779  

$ 2,738  

Due after one year through five years

139,168  

129,798  

Due after five years through ten years

328,812  

279,880  

Due after ten years

289,158  

244,436  

Total securities available for sale

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

$ 759,917  

$ 656,852  

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:

December 31, 2022

2 unchanged sentences

government agencies and corporations

$ 144,574  

$ 12,699  

$ 190,950  

$ 42,303  

State and political subdivisions

94,657  

18,373  

52,134  

19,645  

Mortgage-backed securities

144,198  

15,165  

Corporate debt securities

Total temporarily impaired securities

$ 389,208  

$ 39,109  

$ 259,070  

$ 64,043  

December 31, 2021

2 unchanged sentences

Government agencies and corporations

$ 201,650  

$ 3,530  

$ 26,792  

$ 1,180  

State and political subdivisions

50,659  

20,542  

Mortgage-backed securities

13,139  

Corporate debt securities

Total temporarily impaired securities

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

$ 266,414  

$ 4,922  

$ 51,999  

$ 2,145  

The Company had 614 securities with a fair value of $ 648,278 that were temporarily impaired as of 

December 31, 2022.  

The total unrealized loss on these securities was $ 103,152 .

Of the temporarily impaired total, 289 securities with a fair value of $ 259,070 and an unrealized loss of $ 64,043 have been in a continuous loss position for 12 months or more.

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

The Company has determined that these securities are temporarily impaired as of 

December 31, 2022 

for the reasons set out below.

Government agencies.

3 unchanged sentences

States and political subdivisions.

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

The Company reviewed financial statements and cash flow information for the 58 securities with a fair value of $ 52,134 and unrealized losses of $ 19,645 and determined that the unrealized loss is the result of interest rate and market fluctuations and not associated with impaired financial status.

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

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

Corporate debt securities.

One corporate debt security with a fair value of $ 821 presented an unrealized loss of $ 182 .

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.

Restricted Stock

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

The Company held restricted stock of $ 941 as of 

December 31, 2022 and $ 845 as of 

December 31, 2021.

Restricted stock is reported separately from available for sale securities.

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At its discretion, the FHLB may declare dividends on the stock.

In addition to dividends, NBB also benefits from its membership with FHLB through eligibility to borrow from the FHLB, using as collateral NBB’s capital stock investment in the FHLB and qualifying NBB real estate mortgage loans totaling $ 603,827 at December 31, 2021.

Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at December 31, 2021, management did not determine any impairment.

December 31, 2022.

Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and as of 

December 31, 2022, management did not determine any impairment.

Management regularly monitors the credit quality of the investment portfolio.

2 unchanged sentences

Pledged Securities

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

December 31, 2022 and 2021, securities with a carrying value of $ 345,689 and $ 287,023 , respectively, were pledged to secure municipal deposits and for other purposes as required or permitted by law.

Realized Securities Gains and Losses

The Company did not have any realized gains or losses in 2022.

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

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

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

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

For the year ended December 31, 2021

Available for sale

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

For the year ended December 31, 2021

Available for sale

$ 20,377  

$ 20,371  

Related Party Transactions

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

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

Total funded credit extended to related parties amounted to $ 18,187 at December 31, 2022 and $ 14,822 at December 31, 2021.

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

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

During 2022, total principal additions were $ 5,145 and principal payments were $ 1,780 .

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

The Company held $ 9,509 in deposits for related parties as of December 31, 2022 and $ 14,460 as of December 31, 2021.

The Company leases to a director a small office space. 

The Company leased to a director a small office space.

The lease was terminated during 2022.

The lease payments totaled $ 2 in 2022 and $ 5 in 2021.

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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 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.

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

Portfolio Segments and Classes

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

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

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

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

The Company determines major segments of loans and smaller classes within each segment based upon characteristics including 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 loan segments and classes within each segment are presented below:

Real Estate Construction

17 unchanged sentences

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

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

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

Please refer to Note 1:

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

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Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2022  

Real Estate Construction

Consumer Real Estate

Commercial Real Estate  

Commercial Non-Real Estate

Public Sector and IDA

Consumer Non-Real Estate

Real Estate Construction  

Unallocated  

3 unchanged sentences

$ 1,099  

$ 7,674  

Provision for (recovery of) loan losses

3 unchanged sentences

$ 8,225  

$ 7,674  

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

Real Estate Construction

Consumer Real Estate

Commercial Real Estate

Commercial Non-Real Estate

Public Sector and IDA

Consumer Non-Real Estate

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

Real Estate Construction  

Unallocated  

8 unchanged sentences

$ 1,099  

$ 7,674  

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

2 unchanged sentences

Real Estate Construction

Consumer Real Estate

Commercial Real Estate

Commercial Non-Real Estate

Public Sector and IDA

Consumer Non-Real Estate

Individually evaluated for impairment

Collectively evaluated loans

$ 1,930  

Consumer Non-

Individually evaluated

Collectively evaluated

$ 2,199  

4 unchanged sentences

Real Estate Construction

Consumer Real Estate

Commercial Real Estate

Commercial Non-Real Estate

Public Sector and IDA

Consumer Non-Real Estate

Individually evaluated for impairment

Individually evaluated

$ 2,583  

$ 3,032  

Collectively evaluated loans

Collectively evaluated

54,579  

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Real Estate Construction

Consumer Real Estate

Commercial Real Estate

Commercial Non-Real Estate

Public Sector and IDA

Consumer Non-Real Estate

Individually evaluated for impairment

Collectively evaluated loans

Consumer Non-

Individually evaluated

Collectively evaluated

$ 1,930  

1 unchanged sentence

$ 1,099  

$ 7,674  

Loans by Segment and Evaluation Method as of

1 unchanged sentence

Real Estate Construction

Consumer Real Estate

Commercial Real Estate

Commercial Non-Real Estate

Public Sector and IDA

Consumer Non-Real Estate

Individually evaluated for impairment

Consumer Non-

Individually evaluated

$ 5,386  

$ 5,878  

Collectively evaluated loans

Collectively evaluated

48,841  

12 unchanged sentences

$ 803,729  

A summary of ratios for the allowance for loan losses follows:

A summary of ratios for the allowance for loan losses, as of the dates indicated, follows:

Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees and costs

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

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

As of December 31, 2022, OREO is comprised of one construction property.

There is no residential real estate in OREO.

5 unchanged sentences

$ 3,005  

$ 1,410  

Impaired loans:

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

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

No interest income was recognized on nonaccrual loans for the years ended December 31, 2022 or 2021.

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

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Impaired Loans as of December 31, 2022

Principal Balance

Investment (1)

Total Recorded Investment (1)

Recorded Investment (1)

in (A) for Which There

is No Related

Investment (1) in (A)

for Which There is

Investment (1) in

(A) for Which

There is a Related

for Which There is a Related Allowance

Consumer Real Estate (2)

Investor-owned residential real estate

 $ 191  

 $ -  

Commercial Real Estate (2)

Commercial real estate, owner occupied

Commercial real estate, other

Commercial Non Real Estate (2)

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Impaired Loans as of December 31, 2021

Principal Balance

Investment (1)

Total Recorded Investment (1)

Recorded Investment (1)

in (A) for Which There

is No Related

Investment (1) in (A)

for Which There is

Investment (1) in

(A) for Which

There is a Related

for Which There is a Related Allowance

Consumer Real Estate (2)

5 unchanged sentences

Commercial and industrial

Consumer Non-Real Estate (2)

$ 6,478  

1 unchanged sentence

$ 5,878  

$ 1,045  

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

1 unchanged sentence

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

Impaired Loans

For the Year Ended December 31, 2022

Average Recorded Investment (1)

Interest Income Recognized

Average Recorded 

Investment (1)

Interest Income 

Consumer Real Estate (2)

Investor-owned residential real estate

 $ 192  

 $ 13  

Commercial Real Estate (2)

Commercial real estate, owner occupied

Commercial real estate, other

Commercial Non Real Estate (2)

Commercial and industrial

Consumer Non-Real Estate (2)

$ 3,776  

Impaired Loans

For the Year Ended December 31, 2021

Average Recorded Investment (1)

Interest Income Recognized

Interest Income 

Consumer Real Estate (2)

12 unchanged sentences

89 Days Past Due

Days Past Due

Real Estate Construction (1)

Construction, other

90 or More Days

Nonaccruals (2)

Consumer Real Estate (1)

Residential closed-end first liens

Investor-owned residential real estate

Commercial Real Estate (1)

5 unchanged sentences

$ 1,388  

$ 2,847  

Only classes with past due or nonaccrual loans are presented.

Includes current and past due loans in nonaccrual status.

Includes impaired loans in nonaccrual status.

December 31, 2021

Days Past Due

89 Days 

90 or More Days

Nonaccruals (2)

Real Estate Construction (1)

Construction, other

Consumer Real Estate (1)

Residential closed-end first liens

Investor-owned residential real estate

Commercial Real Estate (1)

Commercial real estate, owner occupied

Commercial real estate, other

Commercial Non Real Estate (1)

3 unchanged sentences

$ 2,873  

$ 1,331  

$ 3,685  

Only classes with past due or nonaccrual loans are presented.

Includes current and past due loans in nonaccrual status.

Includes impaired loans in nonaccrual status.

Determination of risk grades was completed for the portfolio as of December 31, 2022 and 2021.

1 unchanged sentence

December 31, 2022

Collectively-Evaluated Loans

Special Mention

Real Estate Construction

5 unchanged sentences

15,026  

Closed-end first liens

Residential closed-end first liens

122,187  

Closed-end junior liens

Residential closed-end junior liens

Investor-owned residential real estate

14 unchanged sentences

Consumer Non-Real Estate

10,990  

Other consumer

2 unchanged sentences

$ 1,393  

$ 1,064  

December 31, 2021

Collectively-Evaluated Loans

Special Mention

Real Estate Construction

5 unchanged sentences

13,588  

Closed-end first liens

Residential closed-end first liens

106,107  

Closed-end junior liens

Residential closed-end junior liens

Investor-owned residential real estate

19 unchanged sentences

$ 3,728  

$ 1,064  

Sales, Purchases and Reclassification of Loans

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TDRs Designated During the Reporting Period

The Company recognized three new TDRs during 2021.

The Company did not recognize any new TDRs during 2022, and recognized three new TDRs during 2021.

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

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

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

No principal or interest was forgiven.

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

There were no new TDRs designated in 2020.

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

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

TDRs that occurred during the year ended

December 31, 2021

Investment (1)

TDRs that occurred during the year ended December 31, 2021

Recorded Investment Outstanding

Number of Contracts

Pre-Modification

Post-Modification (1)

Commercial Real Estate

22 unchanged sentences

$ 9,722  

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

Depreciation expense for the years ended December 31, 2022 and 2021 amounted to $ 609 and $ 636 , respectively. 

Premises includes construction in process. 

NBB has purchased land and developed plans for a new branch building in Roanoke, Virginia. 

The amount included in construction in process totals $ 1,586 as of December 31, 2022.

The aggregate amounts of time deposits in denominations of $250 or more at December 31, 2022 and 2021 were $ 18,610 and $ 14,600 , respectively.

2 unchanged sentences

Time Deposits

$ 64,262  

Total time deposits

$ 78,968  

At December 31, 2022 and 2021, overdraft demand deposits reclassified to loans totaled $ 277 and $ 170 , respectively.

3 unchanged sentences

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

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

For the years ended December 31, 2022 and 2021, the Company contributed $ 392 and $ 402 respectively.

Employee Stock Ownership Plan          

23 unchanged sentences

Interest cost

Actuarial loss (gain) (2)

Actuarial gain 

Benefits paid

7 unchanged sentences

Actual return on plan assets

Employer contribution

Benefits paid

3 unchanged sentences

Funded status at the end of the year

$ 6,618  

Amounts recognized in the Consolidated Balance Sheet

Deferred tax (liability) asset

Other assets (liabilities)

Deferred tax liabilities

Total amounts recognized in the Consolidated Balance Sheet

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

Prior service cost

$ 5,228  

Amounts recognized in accumulated other comprehensive loss, net

Deferred tax asset

6 unchanged sentences

Unrecognized net actuarial loss

12,855  

Unrecognized prior service cost

Deferred tax liability

3 unchanged sentences

Components of net periodic benefit cost

Service cost 

$ 1,297  

$ 1,445  

Interest cost

Expected return on plan assets

Amortization of prior service cost

Recognized net actuarial loss

Interest cost 

Expected return on plan assets 

Amortization of prior service cost 

Recognized net actuarial loss 

Net periodic benefit cost

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

Net (gain) loss

$ 1,871  

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

Amortization of prior service cost

Deferred income tax expense (benefit)

Deferred income tax expense 

Total recognized

$ 1,565  

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

$ 2,802  

Total recognized in net periodic benefit cost and other comprehensive loss

Weighted average assumptions at end of the year

3 unchanged sentences

Rate of compensation increase

Cost is included in Salaries and Employee Benefits expense.

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

Cost is included in Salaries and Employee Benefits expense on the Consolidates Statements of Income.

Actuarial gain in 2022 is composed of loss due to demographic changes of $ 66 and gain due to change in discount rate of ($ 11,632 ).

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

( 3 ) Cost is included in other operating expense on the Consolidated Statements of Income.

Long Term Rate of Return

6 unchanged sentences

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

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

The Company’s Pension Administrative Committee Policy (the “Policy”) sets requirements for monitoring the investment management of its qualified plans.

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

11 unchanged sentences

The Company’s required minimum pension contribution for 2023 has not yet been determined.

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

Fair value measurements of the pension plan’s assets are presented below:

Fair Value Measurements at December 31, 2022

Asset Category

$ 1,390  

Equity securities:

35 unchanged sentences

2028 - 2032  

$ 11,054  

The Company files United States federal income tax returns, and Virginia, West Virginia and North Carolina state income tax returns.

2 unchanged sentences

Allocation of income tax expense between current and deferred portions is as follows:

Years ended December 31,

Year ended December 31,

$ 5,940  

$ 4,099  

Deferred expense

Deferred (benefit) expense

Total income tax expense

4 unchanged sentences

federal income tax rate of 21% to income before tax expense, with the reported income tax expense:

Years ended December 31,

Year ended December 31,

Computed “expected”

13 unchanged sentences

Valuation allowance on other real estate owned

Defined benefit plan

Defined benefit pension plan

Deferred compensation and other liabilities

Net unrealized loss on securities available for sale

21,644  

Lease accounting

3 unchanged sentences

Deferred tax liabilities:

Defined benefit plan, prepaid portion

Net unrealized gain on securities available for sale

Defined benefit pension plan, prepaid portion

Net unrealized loss on securities available for sale

Lease accounting

2 unchanged sentences

Net deferred tax assets (liabilities)

$ 21,558  

The Company determined that no valuation allowance for gross deferred tax assets was necessary at December 31, 2022 and 2021.

3 unchanged sentences

Substantially all of NBI’s retained earnings are undistributed earnings of its sole banking subsidiary, which are restricted by various regulations administered by federal bank regulatory agencies.

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

During 2022 and 2021, the Bank applied to its primary regulator and was approved to dividend to NBI an amount in excess of the regulatory maximum.

8 unchanged sentences

The capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

The Bank is subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act (the “Basel III Capital Rules”) as applied by the Office of the Comptroller of the Currency.

The Bank is subject to the Basel III Capital Rules as applied by the Office of the Comptroller of the Currency.

The Basel III Capital Rules require the Bank to comply with minimum capital ratios plus a “capital conservation buffer”

6 unchanged sentences

Tier 1 Capital includes CET1 capital and additional Tier 1 capital components.

At December 31, 2021 and 2020, NBB did not hold any additional Tier 1 capital beyond CET1 capital.

December 31, 2022 and 2021, NBB did not hold any additional Tier 1 capital beyond CET1 capital.

Total capital includes Tier 1 capital and Tier 2 capital.

Tier 2 capital includes the allowance for loan losses.

NBB’s risk-weighted assets were $ 989,503 at December 31, 2021 and $ 932,364 as of December 31, 2020.

NBB’s risk-weighted assets were $ 1,092,101 at December 31, 2022 

and $ 989,503 as of December 31, 2021.

Management believes, as of December 31, 2022 and 2021, that NBB met all capital adequacy requirements to which it is subject.

2 unchanged sentences

There are no conditions or events since these notifications that management believes have changed NBB’s category.

NBB’s capital amounts and ratios as of December 31, 2021 and 2020 are presented in the following tables.

NBB’s capital amounts and ratios are presented in the following tables.

December 31, 2022

Minimum Capital

4 unchanged sentences

Action Provisions

December 31, 2021

Total Capital (to Risk Weighted Assets)

14 unchanged sentences

$ 87,406  

December 31, 2021

Minimum Capital

4 unchanged sentences

Action Provisions

December 31, 2020

Total Capital (to Risk Weighted Assets)

18 unchanged sentences

Condensed Financial Statements of Parent Company

Financial information pertaining only to NBI (Parent) as of the dates indicated, is as follows:

Financial information pertaining only to NBI (Parent) as of the dates and for the years indicated, is as follows:

Condensed Balance Sheets

1 unchanged sentence

$ 14,927  

Interest-bearing deposits

$ 2,324  

8 unchanged sentences

$ 1,094  

$ 1,311  

Stockholders’

9 unchanged sentences

$ 14,508  

Gain on sale of private equity investments  

28,823  

1 unchanged sentence

Other expenses

Income before income tax benefit and equity in undistributed net income of subsidiaries

Income before income tax (expense) benefit and equity in undistributed net income of subsidiaries

27,604  

13,374  

Applicable income tax benefit

Income before equity in undistributed net income of subsidiaries

Applicable income tax (expense) benefit

Income before equity (deficit) in undistributed net income of subsidiaries

27,112  

5 unchanged sentences

Years ended December 31,

Cash Flows from Operating Expenses

Cash Flows from Operating Activities

$ 25,932  

1 unchanged sentence

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

Deficit (equity) in undistributed net income of subsidiaries

(Equity) deficit in undistributed net income of subsidiaries

Net change in refundable income taxes due from subsidiaries

7 unchanged sentences

10,027  

Net cash provided by (used in) investing activities

Net cash provided by investing activities

10,027  

1 unchanged sentence

Cash dividends paid

Repurchase of shares

Shares repurchased  

Net cash used in financing activities

Net change in cash

12,603  

Cash due from subsidiaries at beginning of year

1 unchanged sentence

$ 14,927  

$ 2,324  

Financial Instruments with Off-Balance Sheet Risk

5 unchanged sentences

The Company may require collateral or other security to support the following financial instruments with credit risk.

At December 31, 2021 and 2020, financial instruments outstanding whose contract amounts represent credit risk were:

Financial instruments whose contract amounts represent credit risk:

The following table presents the unfunded balance of financial instruments that pose credit risk:

Commitments to extend credit

12 unchanged sentences

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

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

In 2022, the Company originated $ 7,882 and sold $ 8,654 mortgage loans to investors, compared with $ 17,672 originated and $ 18,287 sold in 2021.

Every contract with each investor contains certain recourse language.

3 unchanged sentences

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

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

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

At December 31, 2022, the Company had locked-rate commitments to originate mortgage loans of $ 95 .

There were no loans held for sale at December 31, 2022.

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

3 unchanged sentences

Concentrations of Credit Risk

The Company does a general banking business, serving the commercial and personal banking needs of its customers.

NBB’s primary service area is defined as the counties of Montgomery, Giles, Carroll, Grayson, Pulaski, Tazewell, Smyth, Wythe, Roanoke and Washington and the cities of Galax, Radford and Roanoke in southwest Virginia, and Mercer, Monroe and McDowell counties in West Virginia.

For loan purposes, the Company’s market also includes the Virginia cities of Salem and Bristol and counties of Botetourt and Craig, the southernmost tip of West Virginia adjacent to the counties of Giles, Buchanan, Russell and Bland, the North Carolina counties of Surry and Alleghany, and the Tennessee city of Bristol and counties of Washington and Sullivan.

Substantially all of NBB’s loans are made in its primary service area.

Additionally, the Company occasionally participates in loans in nearby higher growth metropolitan areas.

Loans outside of the primary service area are a small percentage of the loan portfolio, are appropriately underwritten and are not considered out of market exceptions.

The Company does a general banking business, serving the commercial and personal banking needs of its customers.

NBB’s primary service area is defined as the Virginia counties of Albemarle, Augusta, Bedford, Bland, Botetourt, Buchanan, Carroll, Craig, Floyd, Franklin, Giles, Grayson, Montgomery, Pulaski, Roanoke, Rockbridge, Rockingham, Russell, Tazewell, Smyth, Washington, Wythe, and the cities of Bristol, Buena Vista, Charlottesville, Galax, Harrisonburg, Lexington, Lynchburg, Radford, Roanoke, Salem, Staunton, and Waynesboro. 

The service area also includes the West Virginia counties of Mercer, Monroe and McDowell and the Tennessee city of Bristol and counties of Sullivan and Washington. 

 Substantially all of NBB’s loans are made in its primary service area.

Additionally, the Company occasionally participates in loans in nearby higher growth metropolitan areas. 

Real estate mortgage loans secured by property outside NBB’s primary service area are not considered an out of market exception when the customer is located within the primary service area.

All other loans that are out of the primary service area and do not also have collateral within the primary service area require policy exception approval.

The ultimate collectability of NBB’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, is influenced by the economic conditions of the market area.

The Company’s operating results are therefore closely correlated with the economic trends within this area.

The Company’s operating results are therefore closely correlated with the economic trends within this area.

Commercial real estate as of December 31, 2022 and 2021 represented approximately 51 % and 50 %, respectively, of the loan portfolio, at $ 437,888 and $ 405,722 , respectively.

Included in commercial real estate are loans for college housing and professional office buildings that comprised $ 201,858 and $ 189,421 as of December 31, 2021 and 2020, respectively, corresponding to approximately 25 % of the loan portfolio at December 31, 2021 and December 31, 2020.

Loans secured by residential real estate were $ 208,977 , or approximately 26 % of the portfolio, and $ 181,782 , or 24 % of the portfolio at December 31, 2021 and 2020, respectively.

Included in commercial real estate are loans for college housing and professional office buildings that comprised $ 196,398 and $ 201,858 as of December 31, 2022 and 2021, respectively, corresponding to approximately 23 % of the loan portfolio as of 

December 31, 2022 and 25 % of the loan portfolio as of 

December 31, 2021.

Loans secured by residential real estate were $ 221,052 , or approximately 26 % of the portfolio, and $ 208,977 , or 26 % of the portfolio as of 

December 31, 2022 and 2021, respectively.

The Company has established operating policies relating to the credit process and collateral in loan originations.

8 unchanged sentences

These levels are:

Level 1 – 

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

Level 2 –

Valuation is based on observable inputs including:

3 unchanged sentences

●         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.

14 unchanged sentences

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 December 31, 2021 and 2020:

December 31, 2021

The following tables present the balances of financial assets measured at fair value on a recurring basis:

Fair Value Measurement Using

December 31, 2022  

government agencies and corporations

11 unchanged sentences

$ 656,852  

December 31, 2020

Fair Value Measurement Using

December 31, 2021  

Government agencies and corporations

13 unchanged sentences

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 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.

16 unchanged sentences

Changes in fair value measurement impacts net income.

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

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

December 31, 2020

Fair Value Measurements Using

Interest rate loan contracts

Forward contracts

December 31, 2020

Valuation Technique

Unobservable Input

(Weighted Average)

Interest rate loan contracts

Market approach

Pull-through rate

Forward contracts

Market approach

Pull-through rate

Interest rate loan contracts

Market approach

Current reference price

101.91 % - 103.02% (102.55%) (2)

Forward contracts

Market approach

Current reference price

101.91 % - 103.19% (102.67%) (2)

All contracts are valued using the same pull-through rate.

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

The Company had one rate lock commitment as of December 31, 2022, resulting in an interest rate loan contract and forward sales commitment.

The interest rate lock was at market value as of December 31, 2022 and did not result in recognition of an asset or liability.

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

Financial Instruments Measured at Fair Value on a Non-Recurring Basis

31 unchanged sentences

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

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

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

December 31, 2020

Carrying value

Impaired loans net of valuation allowance

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

Valuation Technique

Unobservable Input

(Weighted Average (1) )

Present value of cash flows

Discount rate

5.50 % - 6.50%(5.78%)  

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

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

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

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

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

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

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

December 31, 2022 and December 31, 2021, measurement of the Company’s impaired loans did not result in any specific allocations.

Other Real Estate Owned          

1 unchanged sentence

Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input.

If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates.

If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.

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

The Company works with a 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.

Discounts to appraisals for selling costs or for marketability result in a Level 3 estimate.

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

Carrying Value

6 unchanged sentences

Unobservable Input

(Weighted Average (1) )

December 31, 2022

2 unchanged sentences

Discounted appraised value

4.00 % –

9.23%(4.54%) (2)

Discount for lack of marketability

December 31, 2021

Discounted appraised value

Discount for lack of marketability and age of appraisal

0.00 % –

7.66%(0.62%) (1)

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

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

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

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

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

Determining the discount to appraisals for selling cost and lack of marketability and age of the appraisal relies on certain key assumptions and judgements.

Discounts for selling costs and in some instances, marketability, result when the Company markets OREO properties via local realtors.

The Company works with the realtor to determine the list price, which may be set at appraised value or at a different amount based on the realtor’s advice and management’s judgement of marketability.

Selling costs for improved land generally are estimated at 6% of the list price, and for raw land at 10% of the list price.

If the final sale price is different from the list price, the amount of selling costs will also be different from those estimated.

Discounts for age may be applied if current appraisals cannot be obtained prior to reporting dates.

The most recent appraised value available may be discounted based upon management judgement.

December 31, 2022 and December 31, 2021, the Company held a single OREO property, measured using appraised value, discounted by selling costs.

During 2022, the Company reduced the list price as part of a marketing strategy and recorded an additional discount for marketability.

There is uncertainty in determining discounts to appraised value.

If the final sale price is different from the list price, the amount of selling costs will also be different from those estimated.

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

2 unchanged sentences

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2022 and December 31, 2021.

For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.

For non-marketable equity securities such as FHLB and Federal Reserve Bank of Richmond stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution.

For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

Fair values are estimated using the exit price notion.

December 31, 2021

Estimated Fair Value

December 31, 2022  

Carrying Amount

Financial assets:

5 unchanged sentences

59,026  

Securities available for sale

656,852  

Restricted securities

Mortgage loans held for sale

Restricted stock, at cost

844,519  

9 unchanged sentences

Accrued interest payable

December 31, 2020

Estimated Fair Value

December 31, 2021  

Carrying Amount

Financial assets:

5 unchanged sentences

130,021  

Securities available for sale

686,080  

Restricted securities

Restricted stock, at cost

Mortgage loans held for sale

5 unchanged sentences

42,354  

Interest rate loan contracts

Financial liabilities:

3 unchanged sentences

Accrued interest payable

Forward contracts

Components of Accumulated Other Comprehensive Income (Loss)

The following table summarizes the activity related to each component of accumulated other comprehensive income (loss) for the years ended December 31, 2020 and 2021:

The following table summarizes the activity related to each component of accumulated other comprehensive loss for the years ended December 31, 2022 and 2021:

Net Unrealized

5 unchanged sentences

Income (Loss)

Balance at December 31, 2019

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

13,176  

Reclassification adjustment, net of tax of ($23)

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

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

Balance at December 31, 2020

$ 13,167  

$ 3,020  

Balance as of December 31, 2020

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

Reclassification adjustment, net of tax of ($1)

Reclassification adjustment for gains included in net income, net of tax of ($1)

Net pension gain, net of tax of $862

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

Balance at December 31, 2021

$ 2,854  

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

Balance as of December 31, 2021

Unrealized holding loss on available for sale securities net of tax of ($22,403)

Net pension gain, net of tax of $1,214

Balance as of December 31, 2022

The following table provides information regarding reclassifications out of accumulated other comprehensive loss for the years ended December 31, 2022 and 2021:

Component of Accumulated Other Comprehensive Income (Loss)

Reclassification out of unrealized gains on available for sale securities:

Reclassification out of unrealized losses on available for sale securities:

Realized securities gain, net

8 unchanged sentences

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

Testing for 2021 and 2020 did not indicate impairment.

As of December 31, 2022 and December 31, 2021, the gross carrying value of goodwill was $ 5,848 .

There was no accumulated amortization or impairment.

Testing for 2022 and 2021 did not indicate impairment.

Revenue Recognition

11 unchanged sentences

Other Service Charges and Fees

Other service charges include safety deposit box rental fees, check ordering charges, and other service charges.

Other service charges include safe 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.

23 unchanged sentences

Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined.

OREO Gains and Losses

The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.

When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable.

Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2022 and 2021.

2 unchanged sentences

Service charges on deposit accounts

$ 2,045  

$ 1,966  

Other service charges and fees

2 unchanged sentences

Noninterest Income (in-scope of Topic 606)

$ 6,653  

$ 5,654  

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

Total noninterest income

$ 8,426  

$ 7,944  

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

8 unchanged sentences

Lease payments

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

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

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

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

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

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

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

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

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

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

1 unchanged sentence

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

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

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

Of the Company’s seven operating leases as of December 31, 2022, four leases offer the option to extend the lease term. 

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

Another lease has one option to extend the term for an additional five years. 

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

4 unchanged sentences

The Company paid an early termination fee to the lessor of $ 150 .

The contracts in which the Company is lessee are with parties external to the Company and not related parties.

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

3 unchanged sentences

Lease liability

$ 1,558  

$ 2,016  

Right-of-use asset

$ 1,532  

$ 1,998  

Weighted average remaining lease term (in years)

Weighted average remaining lease term (years)

Weighted average discount rate

15 unchanged sentences

Total undiscounted cash flows

$ 1,726  

Lease liability

$ 1,558  

The contracts in which the Company is lessee are with parties external to the company and not related parties.

The Company has a small lease relationship with a director in which the Company is lessor.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors

National Bankshares, Inc.

Blacksburg, Virginia

To the Stockholders and the Board of Directors of National Bankshares, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of National Bankshares, Inc.

and its subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

and its subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive (loss) income, changes in stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

These financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

2 unchanged sentences

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion. 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

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Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

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As of December 31, 2022, there were no specific reserves based on analysis of individually identified impaired loans.

For loans that are not specifically identified for impairment, management determine the allowance for loan losses based on historical loss experience adjusted for qualitative factors.

For loans that were not specifically identified for impairment, management determined the allowance for loan losses based on historical loss experience adjusted for qualitative factors.

Qualitative adjustments to the historical loss experience are established by applying a loss percentage to the loan classes established by management based on their assessment of shared risk characteristics.

8 unchanged sentences

The primary audit procedures we performed to address this critical audit matter included:

Obtain an understanding of controls over the evaluation of qualitative factors, including management's development and review of the data inputs used as the basis for the allocation factors and management's review and approval of the reasonableness of the assumptions used to develop the qualitative adjustments.

Obtaining an understanding of controls over the evaluation of qualitative factors, including management's development and review of the data inputs used as the basis for the allocation factors and management's review and approval of the reasonableness of the assumptions used to develop the qualitative adjustments.

● 

Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative factors, which included:

Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.

Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors, including evaluating the metrics, including the relevance of source data and assumptions.

Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors, including evaluating the metrics, the relevance of source data and assumptions.

Evaluating the qualitative factors for directional consistency and for reasonableness.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data