Item 5. Market for Registrant’s Common Equity
Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Common Stock Information and Dividends
NBI’s common stock is traded on the Nasdaq Capital Market under the symbol “NKSH.” As of December 31, 2022, there were 549 record stockholders of NBI common stock.
NBI’s primary source of funds for dividend payments is dividends from its bank subsidiary, NBB. Bank dividend payments are restricted by regulators, as more fully disclosed in “Regulation, Supervision and Government Policy” contained in Part I, Item 1, “Business” and Note 10 of Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.
In May 2022, NBI’s Board of Directors approved the repurchase of up to 250,000 shares of the Company’s common stock. The authorization extends from June 1, 2022 to May 31, 2023. During 2022, the Company repurchased 174,250 shares, of which 73,793 shares were repurchased under a prior repurchase plan in effect from June 1, 2021 to May 31, 2022 and 100,457 shares were repurchased under the plan that became effective June 1, 2022. The Company may yet repurchase 149,543 shares under the program. The Company’s share repurchase program does not obligate it to acquire any specific number of shares or any shares at all. During 2021, the Company repurchased 368,083 shares under prior repurchase authorizations.
 
Purchases of Equity Securities by the Issuer
Share repurchase activity during the fourth quarter of 2022 was as follows:
 
Period
 
Total
Number of
Shares
Purchased
 
 
Average Price
Paid
Per Share
 
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Program
 
 
Number of
Shares that May Yet
Be Purchased
Under the Program
 
October 1, 2022 – October 31, 2022
 
 
3,500
 
 
$
35.76
 
 
 
3,500
 
 
 
213,631
 
November 1, 2022 – November 30, 2022
 
 
29,400
 
 
 
38.28
 
 
 
29,400
 
 
 
184,231
 
December 1, 2022 – December 31, 2022
 
 
34,688
 
 
 
39.32
 
 
 
34,688
 
 
 
149,543
 
Total during fourth quarter 2022
 
 
67,588
 
 
$
38.68
 
 
 
67,588
 
 
 
 
 
 
Item 6. [Reserved]
 
18
Table of Contents
 
 
Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations
$ in thousands, except per share data.
 
The purpose of this discussion and analysis is to provide information about the results of operations, financial condition, liquidity and capital resources of the Company. The discussion should be read in conjunction with the material presented in Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K.
Subsequent events have been considered through the date of this Form 10-K.
 
Cautionary Statement Regarding Forward-Looking Statements
We make forward-looking statements in this Form 10-K that are subject to significant risks and uncertainties.  These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals, and are based upon our management’s views and assumptions as of the date of this report.  The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements.
These forward-looking statements are based upon or are affected by factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. These factors include, but are not limited to, effects of or changes in:
 
●
interest rates,
 
●
general and local economic conditions,
 
●
monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury, the OCC, the Federal Reserve, the CFPB and the FDIC, and the impact of any policies or programs implemented pursuant to financial reform legislation,
 
●
unanticipated increases in the level of unemployment in the Company’s market,
 
●
the quality or composition of the loan and/or investment portfolios,
 
●
demand for loan products,
 
●
deposit flows,
 
●
competition,
 
●
demand for financial services in the Company’s market,
 
●
the real estate market in the Company’s market,
 
●
laws, regulations and policies impacting financial institutions,
 
●
technological risks and developments, and cyber-threats, attacks or events,
 
●
the Company’s technology initiatives,
 
●
geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts,
 
●
the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events,
 
●
the Company's ability to identify, attract, and retain experienced management, relationship managers, and support personnel, particularly in a competitive labor environment,
 
●
performance by the Company’s counterparties or vendors,
 
●
applicable accounting principles, policies and guidelines, and
 
●
the impact of the COVID-19 pandemic, including the adverse impact on our business and operations and on our customers.
These risks and uncertainties should be considered in evaluating the forward-looking statements contained in this report. We caution readers not to place undue reliance on those statements, which speak only as of the date of this report. This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A. of this Form 10-K.
 
Cybersecurity
The Company considers cybersecurity risk to be one of the greatest risks to its business. We have deployed a multi-faceted approach to limit the risk and impact of unauthorized access to customer accounts and to information relevant to customer accounts. We use digital technology safeguards, internal policies and procedures, and employee training to reduce the exposure of our systems to cyber-intrusions. The Company also requires assurances from key vendors regarding their cybersecurity.
We control functionalities of online and mobile banking to reduce risk. We do not offer online account openings or loan originations. We do not permit customers to submit address changes through online banking, and we limit the dollar amount of online banking transfers to other banks. We require a special vetting process for commercial customers who wish to originate ACH transfers and for customers who submit wire requests through online banking.          
Further, the Company has a program to identify, mitigate and manage its cybersecurity risks.  The program includes penetration testing and vulnerability assessment, technological defenses such as antivirus software, patch management, firewall management, email and web protections, an intrusion prevention system, a cybersecurity insurance policy which covers some but not all losses arising from cybersecurity breaches, as well as ongoing employee training.  The cost of these measures was $418 for 2022 and $357 for 2021. These costs are included in various categories of noninterest expense.
 
19
Table of Contents
 
 
However, it is not possible to fully eliminate exposure. The potential for financial and reputational losses due to cyber-breaches is increased by the possibility of human error, unknown system susceptibilities, and the rising sophistication of cyber-criminals to attack systems, disable safeguards and gain access to accounts and related information. We maintain insurance for these risks but insurance policies are subject to exceptions, exclusions and terms whose applications have not been widely interpreted in litigation. Accordingly, insurance can provide less than complete protection against the losses that result from cybersecurity breaches and pursuing recovery from insurers can result in significant expense. In addition, some risks such as reputational damage and loss of customer goodwill, which can result from cybersecurity breaches, cannot be insured against.
 
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with GAAP. The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change.
Critical accounting policies are most important to the portrayal of the Company’s financial condition or results of operations and require management’s most difficult, subjective, and complex judgments about matters that are inherently uncertain.  If conditions occur that differ from our assumptions, depending upon the severity of such differences, the Company’s financial condition or results of operations may be materially impacted.  The Company has designated three policies as critical, including those governing the allowance for loan losses, goodwill and the pension plan. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Please refer to Note 1 of Notes to Consolidated Financial Statements for information on these and other accounting policies.
 
Non-GAAP Financial Measures
The Company prepares financial information in accordance with GAAP, with the exception of certain financial measures which are computed under a basis other than GAAP (“non-GAAP”). These measures include the efficiency ratio, the net interest margin and the noninterest margin. Management believes such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP.
 
Net Interest Margin
The Company uses the net interest margin to measure profit on interest generating activities, as a percentage of total interest-earning assets. The net interest margin is calculated by dividing fully taxable equivalent (“FTE”) net interest income by total average interest-earning assets. FTE net interest income is non-GAAP because it incorporates the tax benefit of interest income on loans and securities that is not subject to federal tax. The tax rate utilized in calculating the tax benefit is 21%. The reconciliation of FTE net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below.
 
 
 
Year ended December 31,
 
 
 
2022
 
 
2021
 
Total interest income
 
$
50,109
 
 
$
44,987
 
FTE adjustment
 
 
919
 
 
 
961
 
FTE interest income (non-GAAP)
 
$
51,028
 
 
$
45,948
 
Interest expense
 
 
3,083
 
 
 
3,098
 
FTE net interest income (non-GAAP)
 
$
47,945
 
 
$
42,850
 
Average earning assets
 
 
1,667,191
 
 
 
1,525,651
 
Net interest margin (non-GAAP)
 
 
2.88
%
 
 
2.81
%
 
20
Table of Contents
 
 
Efficiency Ratio
The efficiency ratio is computed by dividing noninterest expense by the sum of FTE net interest income and noninterest income, excluding certain items management deems unusual or non-recurring. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. The components of the efficiency ratio calculation are summarized in the following table.
 
 
 
Year ended December 31,
 
 
 
2022
 
 
2021
 
Noninterest expense
 
$
26,958
 
 
$
26,080
 
 
 
 
 
 
 
 
 
 
FTE net interest income (non-GAAP)
 
$
47,945
 
 
$
42,850
 
Noninterest income
 
 
12,401
 
 
 
8,426
 
Less: partnership income (1)
 
 
(367
)
 
 
(467
)
Less: realized securities gains
 
 
-
 
 
 
(6
)
Less: gain on sale of private equity investment
 
 
(3,823
)
 
 
-
 
Total income for ratio calculation
 
$
56,156
 
 
$
50,803
 
 
 
 
 
 
 
 
 
 
Efficiency ratio
 
 
48.01
%
 
 
51.34
%
 
 
(1)
Gain on adjustment of basis in partnership interests and payouts at the partnerships’ election, reflected in other income.
 
Performance Summary
The following table presents summary income and expenses for the years indicated:
 
 
 
Year ended December 31,
 
 
 
2022
 
 
2021
 
Interest income
 
$
50,109
 
 
$
44,987
 
Interest on deposits
 
 
3,083
 
 
 
3,098
 
Net interest income
 
 
47,026
 
 
 
41,889
 
Provision for (recovery of) loan losses
 
 
706
 
 
 
(398
)
Net interest income after provision for (recovery of) loan losses
 
 
46,320
 
 
 
42,287
 
Noninterest income
 
 
12,401
 
 
 
8,426
 
Noninterest expense
 
 
26,958
 
 
 
26,080
 
Income before income taxes
 
 
31,763
 
 
 
24,633
 
Income tax expense
 
 
5,831
 
 
 
4,251
 
Net income
 
$
25,932
 
 
$
20,382
 
 
Net income in 2022 benefitted from expansion in net interest income and from the sale of a private equity investment, reflected in noninterest income. Key performance ratios provide a summary of the Company’s results and allow comparison with results from prior years. The following table presents NBI’s key performance ratios for the years indicated:
 
 
 
Year Ended December 31,
 
 
 
2022
 
 
2021
 
Return on average assets
 
 
1.52
%
 
 
1.26
%
Return on average equity (1)(2)
 
 
17.81
%
 
 
10.59
%
Basic and fully diluted net earnings per common share
 
$
4.33
 
 
$
3.28
 
Net interest margin (3)
 
 
2.88
%
 
 
2.81
%
Efficiency ratio (4)
 
 
48.01
%
 
 
51.34
%
 
 
(1)
During the year ended December 31, 2022, the Company repurchased 174,250 shares under its publicly announced stock repurchase plan. The repurchased shares reduced stockholders' equity by $6,338 during 2022. During the year ended December 31, 2021, the Company repurchased 368,083 shares under its publicly announced stock repurchase plan. The repurchased shares reduced stockholders' equity by $13,354 during 2021.
 
21
Table of Contents
 
 
 
(2)
During 2022, average unrealized losses on the securities portfolio reduced average stockholders’ equity by $48,109. During 2021, average unrealized gains on the securities portfolio increased stockholders’ equity by $7,759.
 
(3)
The net interest margin is a non-GAAP financial measure. Please see “Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to GAAP.
 
(4)
The efficiency ratio is a non-GAAP financial measure. Please see “Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to GAAP.
 
Change in Key Balances
Key balances are shown in the following table:
 
 
 
 
 
 
 
 
 
 
 
Change
 
 
 
12/31/2022
 
 
12/31/2021
 
 
Dollars
 
 
Percent
 
Loans, net of unearned income and deferred fees and costs, and the allowance for loan losses
 
$
844,519
 
 
$
795,574
 
 
$
48,945
 
 
 
6.15
%
Securities available for sale
 
 
656,852
 
 
 
686,080
 
 
 
(29,228
)
 
 
(4.26
%)
Deposits
 
 
1,542,725
 
 
 
1,494,587
 
 
 
48,138
 
 
 
3.22
%
Total assets
 
 
1,677,551
 
 
 
1,702,175
 
 
 
(24,624
)
 
 
(1.45
%)
Stockholders’ equity
 
 
122,687
 
 
 
191,751
 
 
 
(69,064
)
 
 
(36.02
%)
 
Loans, net of unearned income and deferred fees and costs and the allowance for loan losses, grew when December 31, 2022 is compared with December 31, 2021 due to customer demand in the Company’s primary markets.  During 2022, the Company expanded its lending footprint, opening two new loan production offices in Charlottesville and Staunton, Virginia.
Securities available for sale are reported at fair value, which moves inversely to interest rate changes.  The Federal Reserve increased interest rates substantially during 2022, causing a decline in securities fair value when December 31, 2022 is compared with December 31, 2021.
Customer deposits increased when December 31, 2022 is compared with December 31, 2021, in all categories except for time deposits.  Time deposit offering rates were set strategically low during 2022. During the fourth quarter of 2022, deposits decreased from the third quarter of 2022 due to competitive pressure.
When December 31, 2022 is compared with December 31, 2021, the decrease in total assets and in stockholders’ equity is primarily due to a decline in the market value of securities.
 
Asset Quality
Key indicators of NBI’s asset quality are presented in the following table:
 
 
 
12/31/2022
 
 
12/31/2021
 
Nonperforming loans (1)
 
$
2,847
 
 
$
2,873
 
Loans past due 90 days or more and accruing
 
 
8
 
 
 
90
 
Other real estate owned
 
 
662
 
 
 
957
 
Allowance for loan losses to loans (2)
 
 
0.96
%
 
 
0.96
%
Net charge-off ratio
 
 
0.02
%
 
 
0.05
%
 
 
(1)
Nonperforming loans are nonaccrual loans and troubled debt restructurings ("TDRs") in nonaccrual status. Accruing TDRs are not included.
 
(2)
Loans are net of unearned income and deferred fees and costs.
 
The Company monitors asset quality indicators in managing credit risk and in determining the allowance and provision for loan losses. As of December 31, 2022, nonperforming loans, other real estate owned ("OREO"), and loans past due 90 days or more improved when compared with levels as of December 31, 2021. The net charge-off ratio decreased from 2021 to 2022.
The Company believes that sufficient resources have been dedicated to working out problem assets, and exposure to loss is somewhat mitigated because most of the nonperforming loans are collateralized. More information about nonaccrual and past due loans is provided in Note 1 and Note 5 of Notes to Consolidated Financial Statements. The Company continues to carefully monitor risk levels within the loan portfolio.
 
Income Statement
The following provides information on the results of operations for the years ended December 31, 2022 and December 31, 2021.
 
22
Table of Contents
 
 
Net Interest Income
The Company’s primary source of revenue is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on customer deposits and other interest-bearing liabilities. Net interest income is affected by various factors, including the Federal Reserve’s monetary policy, U.S. fiscal policy, competitive pressure, the level and composition of the interest-earning assets and the composition of interest-bearing liabilities. Changes in the Federal Reserve’s target interest rate immediately affect the yield on the Company’s interest-bearing deposits in correspondent banks and affect other interest-earning assets over time. The primary source of funds used to support the Company’s interest-earning assets is deposits. When the interest rate environment changes, the Company assesses competition for deposits in determining changes to its offering rates.
The net interest margin for the year ended December 31, 2022 improved when compared with the year ended December 31, 2021.  Federal Reserve rate increases during 2022 improved yields on interest-bearing deposits in correspondent banks and on adjustable-rate mortgage backed securities.  The yield on loans decreased during 2022,  due to PPP fees received in 2021, however the yield on loans originated or repriced after March of 2022 benefitted from the Federal Reserve rate increases.  High levels of customer deposits and low competition during 2022 allowed the Company to maintain low interest expense for the year ended December 31, 2022, compared with the year ended December 31, 2021.  During the fourth quarter of 2022, the Company experienced higher competition and pricing pressure on deposits, and expects this will continue into 2023.
The frequency and/or magnitude of future changes in market interest rates and legislative changes are difficult to predict and may have a greater short-term impact on net interest income than adjustments by management. Please refer to the section titled “Analysis of Changes In Interest Income and Interest Expense” for further information related to rate and volume changes.
 
Analysis of Net Interest Earnings
The following table shows the major categories of interest‑earning assets and interest‑bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net yield on average interest‑earning assets for the years indicated.
 
 
 
December 31, 2022
 
 
December 31, 2021
 
 
 
Average
Balance
 
 
Interest
 
 
Average
Yield/
Rate
 
 
Average
Balance
 
 
Interest
 
 
Average
Yield/
Rate
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1)(2)(3)(4)(5)
 
$
833,226
 
 
$
34,579
 
 
 
4.15
%
 
$
787,754
 
 
$
35,241
 
 
 
4.47
%
Taxable securities, at amortized cost (6)
 
 
669,515
 
 
 
12,788
 
 
 
1.91
%
 
 
524,818
 
 
 
7,960
 
 
 
1.52
%
Nontaxable securities, at amortized cost (2)
 
 
75,487
 
 
 
2,308
 
 
 
3.06
%
 
 
80,059
 
 
 
2,577
 
 
 
3.22
%
Interest-bearing deposits
 
 
88,963
 
 
 
1,353
 
 
 
1.52
%
 
 
133,020
 
 
 
170
 
 
 
0.13
%
Total interest-earning assets
 
$
1,667,191
 
 
$
51,028
 
 
 
3.06
%
 
$
1,525,651
 
 
$
45,948
 
 
 
3.01
%
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
 
$
910,989
 
 
$
2,794
 
 
 
0.31
%
 
$
811,661
 
 
$
2,657
 
 
 
0.33
%
Savings deposits
 
 
216,414
 
 
 
148
 
 
 
0.07
%
 
 
190,997
 
 
 
174
 
 
 
0.09
%
Time deposits
 
 
77,686
 
 
 
141
 
 
 
0.18
%
 
 
86,089
 
 
 
267
 
 
 
0.31
%
Total interest-bearing liabilities
 
$
1,205,089
 
 
$
3,083
 
 
 
0.26
%
 
$
1,088,747
 
 
$
3,098
 
 
 
0.28
%
Net interest income (2) and interest rate spread
 
 
 
 
 
$
47,945
 
 
 
2.80
%
 
 
 
 
 
$
42,850
 
 
 
2.73
%
Net yield on average interest‑earning assets
 
 
 
 
 
 
 
 
 
 
2.88
%
 
 
 
 
 
 
 
 
 
 
2.81
%
 
 
(1)
Loans are net of unearned income and deferred fees and costs. Loans include loans held in portfolio and loans held for sale.
 
(2)
Interest on nontaxable loans and securities is computed on an FTE basis using a Federal income tax rate of 21%.
 
(3)
Net loan fees included in interest income in 2022 were $230. Net loan fees included in interest income in 2021 were $2,558, of which $2,444 were related to PPP loans.
 
(4)
In 2021, average loans included PPP loans of $25,600 with associated interest and fee income of $2,711. If PPP loans were excluded the FTE yield on loans would have been 4.27%, and the net interest margin would have been 2.63%. The vast majority of PPP loans were paid off by December 31, 2021.
 
(5)
Nonaccrual loans are included in average balances for yield computations.
 
(6)
Includes restricted stock.
 
The following table reconciles net interest income on an FTE basis to net interest income on a GAAP basis for the years indicated.
 
 
 
December 31,
 
 
 
2022
 
 
2021
 
Net interest income, GAAP
 
$
47,026
 
 
$
41,889
 
FTE adjustment
 
 
919
 
 
 
961
 
Net interest income, FTE
 
$
47,945
 
 
$
42,850
 
 
 
23
Table of Contents
 
 
Analysis of Changes in Interest Income and Interest Expense
The following table sets forth, for the years indicated, a summary of the changes in interest income and interest expense resulting from changes in average asset and liability balances (volume) and changes in average interest rates (rate).
 
 
 
2022 Over 2021
 
 
 
Changes Due To
 
 
 
 
 
 
 
Rates (2)
 
 
Volume (2)
 
 
Net Dollar Change
 
Interest income: (1)
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
(2,631
)
 
$
1,969
 
 
$
(662
)
Taxable securities
 
 
2,340
 
 
 
2,488
 
 
 
4,828
 
Nontaxable securities
 
 
(126
)
 
 
(143
)
 
 
(269
)
Interest-bearing deposits
 
 
1,257
 
 
 
(74
)
 
 
1,183
 
Increase in income on interest-earning assets
 
$
840
 
 
$
4,240
 
 
$
5,080
 
Interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
 
$
(175
)
 
$
312
 
 
$
137
 
Savings deposits
 
 
(47
)
 
 
21
 
 
 
(26
)
Time deposits
 
 
(102
)
 
 
(24
)
 
 
(126
)
Increase (decrease) in expense of interest-bearing liabilities
 
$
(324
)
 
$
309
 
 
$
(15
)
Increase in net interest income
 
$
1,164
 
 
$
3,931
 
 
$
5,095
 
 
 
(1)
FTE basis using a Federal income tax rate of 21%.
 
(2)
Variances caused by the change in rate multiplied by the change in volume have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each.
 
Total interest income increased when the year ended December 31, 2022 is compared with the year ended December 30, 2021, primarily due to volume.  Rate-related income on loans fell when the year ended December 31, 2022 is compared with the year ended December 31, 2021 due to PPP fees that were received during 2021.  However, increased volume offset much of the impact of lower income from rates. 
Federal Reserve interest rate increases in 2022 improved yield on interest-bearing deposits and yield on variable-rate and new taxable securities, when the year ended December 31, 2022 is compared with the year ended December 31, 2021. Higher volume in taxable securities also increased interest income. Income on nontaxable securities decreased when the year ended December 31, 2022 is compared with the year ended December 31, 2021, as higher-yielding nontaxable securities matured and were not replaced. 
Deposit volume increased interest expense that was mitigated by lower deposit offering rates, when the years ended December 31, 2022 and 2021 are compared. 
The following table sets forth a summary of the changes in interest income and interest expense resulting from changes in average asset and liability balances (volume) and changes in average interest rates (rate), when the year ended December 31, 2021 is compared with the year ended December 31, 2020.
 
 
 
2021 Over 2020
 
 
 
Changes Due To
 
 
 
 
Rates (2)
 
Volume (2)
 
Net Dollar Change
 
Interest income: (1)
 
 
 
 
 
 
 
 
 
 
Loans
 
$
(533
)
$
807
 
$
274
 
Taxable securities
 
 
(1,430
)
 
2,007
 
 
577
 
Nontaxable securities
 
 
(402
)
 
589
 
 
187
 
Interest-bearing deposits
 
 
(226
)
 
120
 
 
(106
)
Increase (decrease) in income on interest-earning assets
 
$
(2,591
)
$
3,523
 
$
932
 
Interest expense:
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
 
$
(1,789
)
$
687
 
$
(1,102
)
Savings deposits
 
 
(312
)
 
72
 
 
(240
)
Time deposits
 
 
(1,077
)
 
(320
)
 
(1,397
)
Increase (decrease) in expense of interest-bearing liabilities
 
$
(3,178
)
$
439
 
$
(2,739
)
Increase in net interest income
 
$
587
 
$
3,084
 
$
3,671
 
 
(1)   Taxable equivalent basis using a Federal income tax rate of 21%.
(2)   Variances caused by the change in rate multiplied by the change in volume have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each.
 
The low interest rate environment reduced interest income when the year ended December 31, 2021 is compared with the year ended December 31, 2020.  However, greater volume more than offset the impact of rates, resulting in a net increase in interest income. 
The Company’s reduced deposit offering rates saved $3,178 in interest expense, slightly offset by increased expense for higher volume when the year ended December 31, 2021 is compared with the year ended December 31, 2020.
 
Interest Rate Sensitivity
Interest rate risk is the risk to earnings or capital arising from movements in market interest rates. When interest-earning assets and interest-bearing liabilities reprice at different times or in different degrees or when call options are exercised, in response to change in market interest rates, future net interest income is impacted. When interest-earning assets mature or re-price more quickly than interest-bearing liabilities, the balance sheet is considered “asset sensitive”. An asset sensitive position will produce relatively more net interest income when interest rates rise and less net interest income when rates decline. Conversely, when interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, the balance sheet is considered “liability sensitive”. A liability sensitive position will produce relatively more net interest income when interest rates fall and less net interest income when rates increase.
The Company considers interest rate risk to be a significant risk and manages its exposure through policies approved by its Asset Liability Committee ("ALCO") and Board of Directors. ALCO reviews periodic reports of the Company's interest rate risk position, including results of simulation analysis. Simulation analysis applies interest rate shocks, hypothetical immediate shifts in interest rates, to the Company’s financial instruments and determines the impact to projected one-year net interest income and other key measures.
The following table shows the results of rate shocks on net interest income projected for one year from the reporting date. For purposes of this analysis, noninterest income and expenses are assumed to be flat.
 
24
Table of Contents
 
 
Rate Shift
(basis points)
 
 
Change in Projected Net Interest Income
as of December 31,
 
 
 
 
2022
 
 
2021
 
300
 
 
 
-10.7
%
 
 
2.5
%
200
 
 
 
-7.0
%
 
 
2.9
%
100
 
 
 
-3.4
%
 
 
2.5
%
(-)100
 
 
 
1.3
%
 
 
0.0
%
(-)200
 
 
 
0.6
%
 
NA
 
(-)300
 
 
 
-1.78
%
 
NA
 
 
Results of the net interest income simulation as of December 31, 2022 indicate that the Company is liability sensitive, a change from the asset sensitive position as of December 31, 2021.  The simulation process requires certain estimates and assumptions including, but not limited to, asset growth, the mix of assets and liabilities, the interest rate environment and local and national economic conditions. Asset growth and the mix of assets can, to a degree, be influenced by management. Other areas, such as the interest rate environment and economic factors, cannot be controlled. In addition, competitive pressures can make it difficult to price deposits and loans in a manner that optimally minimizes interest rate risk. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes; changes in market conditions and customer behavior; and changes in management strategies.
While the asset/liability management program is designed to protect the Company over the long term, it does not provide near-term protection from interest rate shocks, as interest rate sensitive assets and liabilities do not by their nature move up or down in tandem in response to changes in the overall rate environment. The Company’s profitability in the near term may be temporarily negatively affected in a period of rapidly rising or rapidly falling rates, because it takes some time for the Company’s portfolio to reflect changes to offering rates in response to a new interest rate environment.
 
Provision for (Recovery of) Loan Loss
Provision for loan loss for the year ended December 31, 2022 was $706, compared with a recovery of $398 for the year ended December 31, 2021.  The ratio of the allowance for loan loss to total loans was 0.96% as of December 31, 2022 and December 31, 2021.  The provision for the year ended December 31, 2022 reflects loan portfolio growth and changes in factors detailed in “Balance Sheet – Loans – Allowance for Loan Losses” below.  The recovery in 2021 reflected improved economic indicators from those in 2020.  More information about the level and calculation methodology of the allowance for loan losses is provided in Notes 1 and 5 of Notes to Consolidated Financial Statements.
 
Noninterest Income
The following table presents the Company’s noninterest income for the years indicated.
 
 
 
Year Ended December 31,
 
 
Change
 
 
 
2022
 
 
2021
 
 
Dollar
 
 
Percent
 
Service charges on deposits
 
$
2,425
 
 
$
2,045
 
 
$
380
 
 
 
18.58
%
Other service charges and fees
 
 
214
 
 
 
179
 
 
 
35
 
 
 
19.55
%
Credit card fees, net
 
 
1,916
 
 
 
1,869
 
 
 
47
 
 
 
2.51
%
Trust income
 
 
1,817
 
 
 
1,792
 
 
 
25
 
 
 
1.40
%
Bank-owned life insurance income
 
 
958
 
 
 
910
 
 
 
48
 
 
 
5.27
%
Gain on sale of mortgage loans
 
 
157
 
 
 
364
 
 
 
(207
)
 
 
(56.87
)%
Gain on sale of private equity investment
 
 
3,823
 
 
 
-
 
 
 
3,823
 
 
 
100.00
%
Other income
 
 
1,091
 
 
 
1,261
 
 
 
(170
)
 
 
(13.48
)%
Realized securities gains, net
 
 
-
 
 
 
6
 
 
 
(6
)
 
 
(100.00
)%
Total noninterest income
 
$
12,401
 
 
$
8,426
 
 
$
3,975
 
 
 
47.18
%
 
Service charges on deposit accounts increased when the year ended December 31, 2022 is compared with the year ended December 31, 2021, primarily due to fees generated from increased customer use of the Bank’s overdraft program. Service charges on deposit accounts also include account maintenance fees, ATM fees and wire transfer fees.
Other service charges and fees increased due to higher volume of letters of credit and associated fees, when the year ended December 31, 2022 is compared with the year ended December 31, 2021. Other service charges and fees also include charges for official checks, income from the sale of checks to customers, safe deposit box rent, and income from commissions on the sale of credit life, accident and health insurance.
Increased transaction volume improved credit card fees when the year ended December 31, 2022 is compared with the year ended December 31, 2021. Credit card fees are presented net of certain processing expenses and are dependent on the volume of transactions.
Trust income increased when the year ended December 31, 2022 is compared with the year ended December 31, 2021. Trust fees are generated from a number of different types of accounts, including estates, personal trusts, employee benefit trusts, investment management accounts, attorney-in-fact accounts and guardianships. Trust income varies depending on the number and type of accounts under management and financial market conditions.
 
25
Table of Contents
 
 
The Company purchased an additional $5,000 in bank-owned life insurance (“BOLI”) during 2021, contributing to increased income compared with 2021.
The Federal Reserve’s rate increases in 2022 slowed the level of consumer real estate purchase and refinance activity, decreasing the sale of mortgage loans when compared to 2021.
The Company held an ownership interest in Infinex Investments, Inc. (“Infinex”), through which NBFS provides investment services.  During the fourth quarter of 2022, the Company recognized a gain on the sale of its shares when Infinex was acquired by a larger holding company.  Infinex continues as a division of its new parent company and NBFS continues to work through Infinex to provide investment services .
Other income includes dividends and increases in the Company’s equity-method investments, which decreased when the year ended December 31, 2022 is compared with the year ended December 31, 2021. Other income also includes net gains from the sale of fixed assets and revenue from investment and insurance sales.
 
Noninterest Expense
The following table presents the Company’s noninterest expense for the years indicated.
 
 
 
Year Ended December 31,
 
 
Change
 
 
 
2022
 
 
2021
 
 
Dollar
 
 
Percent
 
Salaries and employee benefits
 
$
16,519
 
 
$
15,747
 
 
$
772
 
 
 
4.90
%
Occupancy, furniture and fixtures
 
 
1,934
 
 
 
1,842
 
 
 
92
 
 
 
4.99
%
Data processing and ATM
 
 
3,186
 
 
 
3,039
 
 
 
147
 
 
 
4.84
%
FDIC assessment
 
 
477
 
 
 
422
 
 
 
55
 
 
 
13.03
%
Net costs of OREO
 
 
325
 
 
 
51
 
 
 
274
 
 
 
537.25
%
Franchise taxes
 
 
1,483
 
 
 
1,425
 
 
 
58
 
 
 
4.07
%
Other operating expenses
 
 
3,034
 
 
 
3,554
 
 
 
(520
)
 
 
(14.63
)%
Total noninterest expense
 
$
26,958
 
 
$
26,080
 
 
$
878
 
 
 
3.37
%
 
Salaries and employee benefits expense, which includes payroll taxes, health insurance, contributions to the employee stock ownership plan and employee 401(k), pension expense, incentives and salary continuation increased when 2022 is compared with 2021, due to normal compensation and staffing decisions.
When the year ended December 31, 2022 is compared with the year ended December 31, 2021, occupancy, furniture and fixtures expense and data processing and ATM expense increased slightly, as did FDIC assessment expense. The FDIC assessment is accrued based on a method provided by the FDIC.
Net costs of OREO include write-downs, maintenance costs, and net gains or losses on the sale of OREO property. This expense category varies with the number of foreclosed properties owned by NBB and with the costs associated with each. During 2022, the Company wrote down a property by $295 to reflect reduction in list price taken as part of a marketing strategy. Other costs for these properties in 2022 were $30. In 2021, the Company recorded a loss on sale of $26 and other expenses of $25. 
Franchise tax expense increased when the years ended December 31, 2022 and 2021 are compared. Franchise taxes are levied by the states in which NBB operates and are based upon NBB’s total equity at the prior year-end, adjusted for real estate taxes and certain other items.
The category of other operating expenses includes noninterest expense items such as professional services, stationery and supplies, telephone costs, non-service pension cost and charitable donations. Other operating expenses decreased when the years ended December 31, 2022 and 2021 are compared, primarily due to a decrease of $597 in non-service pension cost. Non-service pension cost is determined by actuarial assumptions and projections. During 2022 and 2021, the calculations resulted in a credit to expense, due to the expected return on plan assets.  For more information on non-service pension cost, please refer to Note 8 of Notes to Consolidated Financial Statements.
 
Income Taxes
Income tax expense for 2022 was $5,831 compared to $4,251 in 2021. The Company’s statutory tax rate was 21% for such years. The Company’s effective tax rates for 2022 and 2021 were 18.36% and 17.26%, respectively. The expected income tax expense based on the Company’s statutory tax rate differs from the actual income tax expense due to tax exempt income on municipal securities and loans. See Note 9 of Notes to Consolidated Financial Statements for information relating to income taxes.
 
 
26
Table of Contents
 
 
Balance Sheet
The following provides information on the Company’s financial position as of December 31, 2022 and December 31, 2021.
 
Loans
The Company’s loan categorization reflects its approach to loan portfolio management and includes six groups. Real estate construction loans include construction loans for residential and commercial properties, as well as land. Consumer real estate loans include conventional and junior lien mortgages, equity lines and investor-owned residential real estate. Commercial real estate loans are comprised of owner-occupied and leased nonfarm, nonresidential properties, multi-family residence loans and farmland. Commercial non real estate loans include agricultural loans, operating capital lines and loans secured by capital assets. Public sector and industrial development authority (“IDA”) loans are extended to municipalities. Consumer non-real estate loans include automobile loans, personal loans, credit cards and consumer overdrafts.
 
A.
Maturities and Interest Rate Sensitivities
The following table presents maturities and interest rate sensitivities for total loans, loans with predetermined interest rates and loans with adjustable interest rates. Predetermined interest rates do not adjust throughout the life of the loan. Loans are presented on a gross basis.
 
 
December 31, 2022
 
< 1 Year
1 – 5 Years
6-15 Years
>15 Years
Total
Total loans:
 
 
 
 
 
 
 
 
 
 
Real estate construction
$
22,781
$
20,165
$
6,023
$
5,610
$
54,579
Consumer real estate
 
4,316
 
9,207
 
58,402
 
149,127
 
221,052
Commercial real estate
 
7,118
 
17,469
 
79,063
 
334,238
 
437,888
Commercial non real estate
 
14,820
 
38,746
 
3,778
 
308
 
57,652
Public sector and IDA
 
-
 
4,174
 
27,213
 
16,687
 
48,074
Consumer non-real estate 
 
9,759
 
23,150
 
956
 
83
 
33,948
Total
$
58,794
$
112,911
$
175,435
$
506,053
$
853,193
Loans with predetermined interest rates:
 
 
 
 
 
 
 
 
 
 
Real estate construction
$
15,844
$
14,459
$
358
$
892
$
31,553
Consumer real estate
 
728
 
2,309
 
11,921
 
28,116
 
43,074
Commercial real estate
 
3,828
 
1,226
 
4,418
 
-
 
9,472
Commercial non real estate
 
2,492
 
31,487
 
1,849
 
-
 
35,828
Public sector and IDA
 
-
 
4,058
 
9,590
 
-
 
13,648
Consumer non-real estate
 
3,903
 
23,103
 
686
 
-
 
27,692
Total loans with predetermined interest rates:
$
26,795
$
76,642
$
28,822
$
29,008
$
161,267
Loans with adjustable interest rates:
 
 
 
 
 
 
 
 
 
 
Real estate construction
$
6,937
$
5,706
$
5,665
$
4,718
$
23,026
Consumer real estate
 
3,588
 
6,898
 
46,481
 
121,011
 
177,978
Commercial real estate
 
3,290
 
16,243
 
74,645
 
334,238
 
428,416
Commercial non real estate
 
12,328
 
7,259
 
1,929
 
308
 
21,824
Public sector and IDA
 
-
 
116
 
17,623
 
16,687
 
34,426
Consumer non-real estate
 
5,856
 
47
 
270
 
83
 
6,256
Total loans with adjustable interest rates
$
31,999
$
36,269
$
146,613
$
477,045
$
691,926
 
B.
Modifications
In the ordinary course of business the Company modifies loan terms on a case-by-case basis, including consumer and commercial loans, for a variety of reasons. Modifications may include rate reductions, payment extensions of varying lengths of time, a change in amortization term or method or other arrangements. Payment extensions allow borrowers temporary payment relief and result in extending the original contractual maturity by the number of months for which the extension was granted. The Company may grant payment extensions to borrowers who have demonstrated a willingness and ability to repay their loan but who are experiencing consequences of a specific unforeseen temporary hardship. If the temporary event is not expected to impact a borrower’s ability to repay the debt, and if the Company expects to collect all amounts due including interest accrued at the contractual interest rate for the extension period at contractual maturity, the modification is not designated a TDR.
Modifications to consumer loans generally involve short-term payment extensions to accommodate specific, temporary circumstances. Modifications to commercial loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants. If the modified terms are consistent with competitive market conditions and representative of terms the borrower could otherwise obtain in the open market, the modified loan is not categorized as a TDR. The Company codes modifications to assist in identifying TDRs.
During the year ended December 31, 2022, the Company provided modifications for competitive reasons to 840 loans totaling $120,241. During the year ended December 31, 2021, the Company provided modifications for competitive reasons to 875 loans totaling $112,718. The modifications were not TDRs and were not related to COVID-19.
During 2021, the Company provided modifications to borrowers experiencing COVID-19 related hardship. The modification met criteria specified by the CARES Act, the CAA and regulatory guidance and were not designated TDR, including 37 payment extensions to loans totaling $16,426 and 8 amortizing loans granted temporary interest-only periods totaling $22,135. The Company followed its normal risk rating and nonaccrual designation procedures and did not automatically downgrade or designate as nonaccrual if the loan was modified for COVID-19 related difficulty.
 
27
Table of Contents
 
 
C.
TDRs
Modifications are evaluated to determine whether they meet requirements for designation as TDR. Please refer to Notes 1 and 5 of Notes to Consolidated Financial Statements for information on designation of TDRs during the reporting periods and the effect of default on the allowance for loan losses. The Company’s TDRs, by delinquency status, are presented below:
 
 
 
 
TDR Delinquency Status as of December 31, 2022
 
 
 
 
 
 
 
Accruing
 
 
 
 
 
 
 
Total TDR
Loans
 
 
Current
 
 
30-89 Days
Past Due
 
 
90+ Days
Past Due
 
 
Nonaccrual
 
Consumer real estate
 
$
186
 
 
$
-
 
 
$
186
 
 
$
-
 
 
$
-
 
Commercial real estate
 
 
2,583
 
 
 
90
 
 
 
-
 
 
 
-
 
 
 
2,493
 
Commercial non real estate
 
 
263
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
263
 
Total TDR Loans
 
$
3,032
 
 
$
90
 
 
$
186
 
 
$
-
 
 
$
2,756
 
 
 
 
 
 
TDR Delinquency Status as of December 31, 2021
 
 
 
 
 
 
 
Accruing
 
 
 
 
 
 
 
Total TDR Loans
 
 
Current
 
 
30-89 Days
Past Due
 
 
90+ Days
Past Due
 
 
Nonaccrual
 
Consumer real estate
 
$
191
 
 
$
191
 
 
$
-
 
 
$
-
 
 
$
-
 
Commercial real estate
 
 
5,386
 
 
 
2,814
 
 
 
-
 
 
 
-
 
 
 
2,572
 
Commercial non real estate
 
 
301
 
 
 
-
 
 
 
-
 
 
 
-
 
 
 
301
 
Total TDR Loans
 
$
5,878
 
 
$
3,005
 
 
$
-
 
 
$
-
 
 
$
2,873
 
 
 
D.
Summary of Loan Loss Experience
The following table provides information about the allowance for loan losses, nonperforming assets and accruing loans past due 90 days or more:
 
 
 
December 31,
 
 
 
2022
 
 
2021
 
Allowance for loan losses
 
$
8,225
 
 
$
7,674
 
Total loans, net of unearned income and deferred fees
 
 
852,744
 
 
 
803,248
 
Allowance for loan losses to loans, net of unearned income and deferred fees and costs
 
 
0.96
%
 
 
0.96
%
 
 
 
 
 
 
 
 
 
Nonaccrual loans
 
$
91
 
 
$
-
 
TDR loans in nonaccrual status
 
 
2,756
 
 
 
2,873
 
Total nonperforming loans
 
$
2,847
 
 
$
2,873
 
Other real estate owned, net
 
 
662
 
 
 
957
 
Total nonperforming assets
 
$
3,509
 
 
$
3,830
 
Nonperforming loans to total loans, net of unearned income and deferred fees and costs
 
 
0.33
%
 
 
0.36
%
Allowance for loan losses to nonperforming loans
 
 
288.90
%
 
 
267.11
%
Nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned
 
 
0.41
%
 
 
0.48
%
Allowance for loan losses to nonperforming assets
 
 
234.40
%
 
 
200.37
%
 
 
 
 
 
 
 
 
 
Accruing loans past due 90 days or more
 
$
8
 
 
$
90
 
 
 More information about the level and calculation methodology of the allowance for loan losses is provided in the sections “Allowance for Loan Losses” as well as Notes 1 and 5 of Notes to Consolidated Financial Statements.
 
28
Table of Contents
 
 
E.
Analysis of Net Charge-Offs
The following tables show net charge-offs, average loan balance and the percentage of charge-offs to average loan balance for each of the Company’s loan segments at the end of each period. Average loans are presented net of unearned income and net deferred fees.
 
 
 
December 31, 2022
 
 
 
Net Charge-Offs (Recoveries)
 
 
Average Loans
 
 
Percentage of Net Charge-Offs (Recoveries) to Average Loans
 
Real estate construction
 
$
-
 
 
$
67,197
 
 
 
-
 
Consumer real estate
 
 
(16
)
 
 
213,578
 
 
 
(0.01
)%
Commercial real estate
 
 
(49
)
 
 
422,259
 
 
 
(0.01
)%
Commercial non real estate
 
 
(9
)
 
 
53,742
 
 
 
(0.02
) %
Public Sector and IDA
 
 
-
 
 
 
48,112
 
 
 
-
 
Consumer non-real estate
 
 
229
 
 
 
33,183
 
 
 
0.69
%
Total
 
$
155
 
 
$
833,071
 
 
 
0.02
%
 
 
 
December 31, 2021
 
 
 
Net Charge-Offs (Recoveries)
 
 
Average Loans
 
 
Percentage of Net Charge-Offs (Recoveries) to Average Loans
 
Real estate construction
 
$
-
 
 
$
45,463
 
 
 
-
 
Consumer real estate
 
 
(7
)
 
 
193,159
 
 
 
-
 
Commercial real estate
 
 
(159
)
 
 
402,146
 
 
 
(0.04
)%
Commercial non real estate
 
 
493
 
 
 
68,917
 
 
 
0.72
%
Public Sector and IDA
 
 
-
 
 
 
45,829
 
 
 
-
 
Consumer non-real estate
 
 
82
 
 
 
31,589
 
 
 
0.26
%
Total
 
$
409
 
 
$
787,103
 
 
 
0.05
%
 
The Company charges off commercial real estate loans at the time that a loss is confirmed. When delinquency status or other information indicates that the borrower will not repay the loan, the Company considers collateral value based upon a current appraisal or internal evaluation. Any loan amount in excess of collateral value is charged off and the collateral is taken into OREO.
 
F.
Allowance for Loan Losses
The Company’s risk analysis as of December 31, 2022 determined an allowance for loan losses of $8,225 or 0.96% of loans net of unearned income and deferred fees and costs. The allowance as of December 31, 2021 was $7,674 or 0.96% of loans net of unearned income and deferred fees and costs. To determine the appropriate level of the allowance for loan losses, the Company considers credit risk for certain loans designated as impaired and for non-impaired (“collectively evaluated”) loans.
 
Individually Evaluated Impaired Loans
Individually evaluated impaired loans decreased from December 31, 2021 to December 31, 2022, due to the payoff of one relationship. As of December 31, 2022 individually evaluated loans were $3,032 on a gross basis and $3,033 net of unearned income and deferred fees and costs. Individually evaluated impaired loans as of December 31, 2021 were $5,878 gross and $5,880 net of unearned income and deferred fees and costs. Measurement as of December 31, 2022 and December 31, 2021 did not result in specific allocations to the allowance for loan losses.
 
Collectively Evaluated Loans
Collectively evaluated loans totaled $850,161 gross and $849,711 net of unearned income and deferred fees and costs, with an allowance of $8,225 or 0.97% of collectively evaluated loans net of unearned income and deferred fees and costs as of December 31, 2022. As of December 31, 2021, collectively evaluated loans totaled $797,851 gross and $797,368 net of unearned income and deferred fees and costs, with an allowance of $7,674 or 0.96% of collectively evaluated loans net of unearned income and deferred fees and costs.
Collectively evaluated loans are divided into classes based upon risk characteristics. In order to calculate the allowance for collectively evaluated loans, the Company applies to each loan class a historical net charge-off rate for the class, adjusted for qualitative factors that influence credit risk. Qualitative factors evaluated for impact to credit risk include economic measures, asset quality indicators, loan characteristics, and changes to internal Company policies and management.
 
Net Charge-Offs
Increases in the net charge-off rate require the allowance for collectively evaluated loans to be increased, while decreases in the net charge-off rate require the allowance for collectively evaluated loans to be decreased. On a portfolio level, net charge-offs were $155 for the year ended December 31, 2022, or 0.02% of average loans. For the year ended December 31, 2021, net charge-offs were $409 or 0.05% of average loans. The 8-quarter average historical loss rate was 0.03% for the year ended December 31, 2022 and 0.05% for the year ended December 31, 2021.
 
29
Table of Contents
 
 
Economic Factors
Economic factors influence credit risk and impact the allowance for loan loss. The Company sources economic data pertinent to its market from the most recently available publications, including unemployment, business and personal bankruptcy filings, the residential vacancy rate and the inventory of new and existing homes.
As of December 31, 2022, the unemployment rate for the Company’s market area was measured as of November 2022 and increased from the measurement available as of December 31, 2021, leading management to increase the allocation to the allowance for loan losses.
Business and personal bankruptcy filing data was available as of September 2022. Higher bankruptcy filings indicate heightened credit risk and increase the allowance for loan losses, while lower bankruptcy filings have a beneficial impact on credit risk. Compared with data available as of December 31, 2021, business bankruptcy filings slightly decreased and personal bankruptcy filings slightly increased.
Residential vacancy rates and housing inventory impact the Company’s residential construction customers and the consumer real estate market. Higher levels increase credit risk. The residential vacancy rate as of December 31, 2022 was measured as of the third quarter of 2022 and worsened slightly from the data incorporated into the December 31, 2021 calculation, resulting in a higher allocation. Housing inventory data was available as of December 31, 2022. The level was slightly higher than as of December 31, 2021, resulting in a higher allocation.
Economic factors in 2021 included an allocation for national unemployment filings. This factor was added early in the COVID-19 pandemic to capture risk that may not have been reflected by the Company’s standard economic indicators. By the beginning of 2022, national unemployment filings had returned to pre-pandemic levels for a sustained period and the Company removed the allocation.
 
Asset Quality Indicators
Asset quality indicators, including past due levels, nonaccrual levels and internal risk ratings, are evaluated at the class level. Loans past due and loans designated nonaccrual indicate heightened credit risk. Increases in past due and nonaccrual loans increase the required level of the allowance for loan losses and decreases in past due and nonaccrual loans reduce the required level of the allowance for loan losses.
Accruing loans past due 30-89 days were 0.16% of total loans net of unearned income and deferred fees and costs as of December 31, 2022, an increase from 0.12% as of December 31, 2021. As of December 31, 2022, accruing loans past due 90 days were $8, compared with $90 or 0.01% of total loans, net of unearned income and deferred fees and costs as of December 31, 2021. Nonaccrual loans as a percentage of total loans net of unearned income and deferred fees and costs were 0.33% as of December 31, 2022 and 0.36% as of December 31, 2021.
Loans rated special mention and classified (together, “criticized assets”) indicate heightened credit risk. Higher levels of criticized assets increase the required level of the allowance for collectively evaluated loans, while lower levels of criticized assets reduce the required level of the allowance for collectively evaluated loans. There were no collectively evaluated loans rated special mention as of December 31, 2022, compared with $3,728 as of December 31, 2021, due to improvement in credit quality of a large relationship. Collectively evaluated loans rated classified were $1,393 as of December 31, 2022 and $1,064 as of December 31, 2021.
 
Other Factors
The Company considers other factors that impact credit risk, including the interest rate environment, the competitive, legal and regulatory environments, changes in lending policies and loan review, changes in management, and high risk loans.
The interest rate environment impacts variable rate loans. When interest rates increase, the payment on variable rate loans increases, which may increase credit risk. The Federal Reserve increased the target Fed Funds rate seven times, totaling 425 basis points during 2022, resulting in an increased allocation for December 31, 2022 compared with the allocation for December 31, 2021.
The competitive, legal and regulatory environments were evaluated for changes that would impact credit risk. Higher competition for loans may increase credit risk, while lower competition may decrease credit risk. Competition remained at a similar level to that as of December 31, 2021. The legal and regulatory environments remain in a similar posture to that as of December 31, 2021.
Lending policies, loan review procedures and management’s experience influence credit risk. During 2022, appraisal requirements on residential real estate changed, resulting in an increased allocation from December 31, 2021. Loan review procedures remained similar to those as of December 31, 2021 and no allocation was taken. The allocation for management experience declined from December 31, 2021 to December 31, 2022, due to the hiring of a seasoned Chief Credit Officer to replace the former Chief Credit Officer who left at the end of 2021.
Levels of high risk loans are considered in the determination of the level of the allowance for loan loss. A decrease in the level of high risk loans within a class decreases the required allocation for the loan class, and an increase in the level of high risk loans within a class increases the required allocation for the loan class. Total high risk loans decreased 7.67% from the level as of December 31, 2021.
 
Unallocated Surplus
The unallocated surplus as of December 31, 2022 was $179 or 2.23% in excess of the calculated requirement. The unallocated surplus as of December 31, 2021 was $361 or 4.94% in excess of the calculated requirement. The surplus provides some mitigation of current economic uncertainty that may impact credit risk.
 
30
Table of Contents
 
 
Conclusion
The calculation of the appropriate level for the allowance for loan losses incorporates analysis of multiple factors and requires management’s prudent and informed judgment. The Company augmented the calculated requirement with an unallocated surplus. Based on analysis of historical indicators, asset quality and economic factors, management believes the level of allowance for loan losses is reasonable for the credit risk in the loan portfolio as of December 31, 2022.
Please refer to Note 5 of Notes to Consolidated Financial Statements for further information on collectively evaluated loans, individually evaluated impaired loans and the unallocated portion of the allowance for loan losses.
 
G.
Allocation of the Allowance for Loan Losses
The allowance for loan losses has been allocated according to the amount deemed necessary to provide for anticipated losses within the categories of loans as of the dates indicated. Loans are presented net of unearned income and net deferred fees and costs.
 
 
 
December 31, 2022
 
 
December 31, 2021
 
 
 
Allowance
Amount
 
 
Percent of
Loans to
Total
Loans
 
 
Percent of
Allowance to
Loans
 
 
Allowance
Amount
 
 
Percent of
Loans to
Total
Loans
 
 
Percent of
Allowance to
Loans
 
Real estate construction
 
$
450
 
 
 
6.40
%
 
 
0.82
%
 
$
422
 
 
 
6.07
%
 
 
0.87
%
Consumer real estate
 
 
2,199
 
 
 
25.93
%
 
 
0.99
%
 
 
1,930
 
 
 
26.02
%
 
 
0.92
%
Commercial real estate
 
 
3,642
 
 
 
51.33
%
 
 
0.83
%
 
 
3,121
 
 
 
50.49
%
 
 
0.77
%
Commercial non real estate
 
 
930
 
 
 
6.76
%
 
 
1.61
%
 
 
1,099
 
 
 
7.50
%
 
 
1.82
%
Public sector and IDA
 
 
319
 
 
 
5.64
%
 
 
0.66
%
 
 
297
 
 
 
5.97
%
 
 
0.62
%
Consumer non-real estate
 
 
506
 
 
 
3.94
%
 
 
1.50
%
 
 
444
 
 
 
3.95
%
 
 
1.40
%
Unallocated
 
 
179
 
 
 
-
 
 
 
-
 
 
 
361
 
 
 
-
 
 
 
-
 
 
 
$
8,225
 
 
 
100.00
%
 
 
0.96
%
 
$
7,674
 
 
 
100.00
%
 
 
0.96
%
 
 
 
An analysis of the allowance for loan losses by impairment basis follows. Loans are presented on a gross basis.
 
 
 
December 31,
 
 
 
2022
 
 
2021
 
Impaired loans
 
$
3,032
 
 
$
5,878
 
Allowance related to impaired loans
 
 
-
 
 
 
-
 
Allowance to impaired loans
 
 
-
 
 
 
-
 
 
 
 
 
 
 
 
 
 
Non-impaired loans
 
 
850,161
 
 
 
797,851
 
Allowance related to non-impaired loans
 
 
8,225
 
 
 
7,674
 
Allowance to non-impaired loans
 
 
0.97
%
 
 
0.96
%
 
 
 
 
 
 
 
 
 
Total gross loans
 
 
853,193
 
 
 
803,729
 
Less: unearned income and deferred fees and costs
 
 
(449
)
 
 
(481
)
Loans, net of unearned income and deferred fees and costs
 
 
852,744
 
 
 
803,248
 
Allowance for loan losses, total
 
 
8,225
 
 
 
7,674
 
Allowance as a percentage of loans, net of unearned income and deferred fees and costs
 
 
0.96
%
 
 
0.96
%
 
Please refer to the discussion under “Allowance for Loan Losses” for additional information on the determination of the allowance for loan loss.
 
Securities
The Company's securities are designated as available for sale and as such, are reported at fair value. The following table presents information on securities available for sale as of the dates indicated.
 
 
 
 
 
 
 
 
 
 
 
Change
 
 
 
December 31, 2022
 
 
December 31, 2021
 
 
Dollar
 
 
Percent
 
Securities available for sale at amortized cost
 
$
759,917
 
 
$
682,467
 
 
$
77,450
 
 
 
11.35
%
Unrealized (loss) gain
 
 
(103,065
)
 
 
3,613
 
 
 
(106,678
)
 
 
NM
 
Securities available for sale 
 
$
656,852
 
 
$
686,080
 
 
$
29,228
 
 
 
(4.26
)%
 
 
31
Table of Contents
 
 
The securities portfolio is subject to the volatility and risk in the financial markets. The risk in financial markets, including interest rate risk and credit risk, affects the Company in the same way that it affects other institutional and individual investors. The fair value of available for sale securities is reflected on the Company's balance sheet. The unrealized loss in the Company’s investment portfolio is due to interest rate risk, the result of increases in the Federal Reserve’s target interest rate during 2022.  The Company’s Asset Liability Management Committee is closely monitoring all of the Company’s financial assets and liabilities in order to manage interest rate risk.
Credit risk in the Company’s investment portfolio is evaluated on an individual security basis.  The Company’s investment portfolio includes corporate bonds. If the corporate issuers were to default, there could be a delay in the payment of interest, or there could be a loss of principal and accrued interest. To date, there have been no defaults in any of the corporate bonds held in the portfolio. The Company’s investment portfolio also contains a large percentage of municipal bonds. If economic forces reduce the ability of states and municipalities to make scheduled principal and interest payments on their outstanding indebtedness, or if their income from taxes and other sources declines significantly, states and municipalities could default on their bond obligations. There have been no defaults among the municipal bonds in the Company’s investment portfolio.  As of December 31, 2022, there are no credit risk concerns with any of the Company’s securities.
The majority of mortgage-backed securities and collateralized mortgage obligations were backed by U.S. government agencies. Certain holdings are required to be periodically subjected to the Federal Financial Institution Examination Council’s (FFIEC) high risk mortgage security test. These tests address possible fluctuations in the average life and variances caused by the change in rate times the change in volume that have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each.
In making investment decisions, management follows internal policy guidelines that help to limit risk by specifying parameters for both security quality and industry and geographic concentrations. Management regularly monitors the quality of the investment portfolio and tracks changes in financial markets. The value of individual securities will be written down if a decline in fair value is considered to be other than temporary, given the totality of the circumstances.
Additional information about securities available for sale can be found in Note 3 of Notes to Consolidated Financial Statements.
 
Deposits
 
The following table presents deposits by category:
 
 
 
 
 
 
 
 
 
 
 
Change
 
 
 
December 31, 2022
 
 
December 31, 2021
 
 
Dollar
 
 
Percent
 
Noninterest-bearing demand deposits
 
$
327,713
 
 
$
317,430
 
 
$
10,283
 
 
 
3.24
%
Interest-bearing demand deposits
 
 
933,269
 
 
 
890,124
 
 
 
43,145
 
 
 
4.85
%
Saving deposits
 
 
214,114
 
 
 
208,065
 
 
 
6,049
 
 
 
2.91
%
Time deposits
 
 
67,629
 
 
 
78,968
 
 
 
(11,339
)
 
 
(14.36
)%
Total deposits
 
$
1,542,725
 
 
$
1,494,587
 
 
$
48,138
 
 
 
3.22
%
 
Deposits, including noninterest-bearing demand deposits, interest-bearing deposits and interest-bearing time deposits are obtained in the Company’s markets through traditional marketing techniques. The Company’s deposits do not include any brokered deposits. Time deposits decreased due to decreased offering rates. All other categories of deposits increased, due in large part to government stimulus funds received by municipal depositors and other depositors.
 
32
Table of Contents
 
 
A.
Average Amounts of Deposits and Average Rates Paid
Average amounts and average rates paid on deposit categories are presented below:
 
 
 
Year Ended December 31,
 
 
 
2022
 
 
2021
 
 
 
Average
Amounts
 
 
Average
Rates
Paid
 
 
Average
Amounts
 
 
Average
Rates
Paid
 
Noninterest-bearing demand deposits
 
$
338,269
 
 
 
-
 
 
$
316,976
 
 
 
-
 
Interest-bearing demand deposits
 
 
910,989
 
 
 
0.31
%
 
 
811,661
 
 
 
0.33
%
Savings deposits
 
 
216,414
 
 
 
0.07
%
 
 
190,997
 
 
 
0.09
%
Time deposits
 
 
77,686
 
 
 
0.18
%
 
 
86,089
 
 
 
0.31
%
Average total deposits
 
$
1,543,358
 
 
 
0.20
%
 
$
1,405,723
 
 
 
0.22
%
 
B.
Uninsured Deposits
FDIC insurance covers deposits of up to $250 per depositor. As of December 31, 2022, $665,002 of the Bank’s deposits were uninsured. The following table sets forth time deposits that exceed $250.
 
 
 
December 31, 2022
 
 
 
3 Months or
Less
 
 
Over 3 Months
Through 6 Months
 
 
Over 6 Months
Through 12 Months
 
 
Over 12
Months
 
 
Total
 
Total time deposits exceeding $250
 
$
-
 
 
$
7,454
 
 
$
8,600
 
 
$
2,556
 
 
$
18,610
 
 
Derivatives and Market Risk Exposures
The Company engages in derivative financial instruments associated with its secondary market operation. The derivatives are recorded within other assets and other liabilities. Please refer to Note 1 of Notes to Consolidated Financial Statements for information on derivative valuation. The Company is not a party to derivatives with off-balance sheet risks such as futures, forwards, swaps, and options.
The Company is a party to financial instruments with off-balance sheet risks such as commitments to extend credit, standby letters of credit, and recourse obligations in the normal course of business to meet the financing needs of its customers. See Note 13 of Notes to Consolidated Financial Statements for additional information relating to financial instruments with off-balance sheet risk. Management does not plan any future involvement in high risk derivative products.
The Company’s investments in mortgage-backed securities are primarily through the Government National Mortgage Association and Federal National Mortgage Association. See Note 3 of Notes to Consolidated Financial Statements for additional information relating to securities.
The Company’s securities and loans are subject to credit and interest rate risk, and its deposits are subject to interest rate risk. Management considers credit risk when a loan is granted and monitors credit risk after the loan is granted. The Company maintains an allowance for loan losses to absorb losses in the collection of its loans. See Note 5 of Notes to Consolidated Financial Statements for information relating to the allowance for loan losses. See Note 14 of Notes to Consolidated Financial Statements for information relating to concentrations of credit risk.
The effects of changing interest rates are primarily managed through adjustments to the loan portfolio and deposit base, to the extent competitive factors allow. Adjustments for asset and liability management are made when securities are called or mature and funds are subsequently reinvested. Securities may be sold for reasons related to credit quality, to maintain compliance with regulatory limitations or for interest rate risk management. No trading activity is planned in the foreseeable future.
See Interest Rate Sensitivity for further details on asset liability management and Note 15 of Notes to Consolidated Financial Statements for information relating to fair value of financial instruments.
 
Liquidity
Liquidity measures the Company’s ability to meet its financial commitments at a reasonable cost. Demands on the Company’s liquidity include funding additional loan demand and accepting withdrawals of existing deposits. The Company has diverse liquidity sources, including customer and purchased deposits, customer repayments of loan principal and interest, sales, calls and maturities of securities, Federal Reserve discount window borrowing, short-term borrowing, and FHLB advances. As of December 31, 2022, the Bank did not have purchased deposits, discount window borrowings, short-term borrowings, or FHLB advances.  To assure that short-term borrowing is readily available, the Company tests accessibility annually.
The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters. Portions of the securities portfolio are pledged to meet state requirements for public funds deposits. Discount window borrowings also require pledged securities. Increased/decreased liquidity from public funds deposits or discount window borrowings results in increased/decreased liquidity from pledging requirements. The Company monitors public funds pledging requirements and unpledged available for sale securities accessible for liquidity needs.
 
33
Table of Contents
 
 
Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve discount window. As of December 31, 2022, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve discount window.
The Company monitors factors that may increase its liquidity needs. Some of these factors include deposit trends, large depositor activity, maturing deposit promotions, interest rate sensitivity, maturity and repricing timing gaps between assets and liabilities, the level of unfunded loan commitments and loan growth. As of December 31, 2022, the Company’s liquidity is sufficient to meet projected trends.
To monitor and estimate liquidity levels, the Company performs stress testing under varying assumptions on credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows. The Company’s Contingency Funding Plan sets forth avenues for rectifying liquidity shortfalls. As of December 31, 2022, the analysis indicated adequate liquidity under the tested scenarios.
The Company utilizes several other strategies to maintain sufficient liquidity. Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s internally-set target range. As of December 31, 2022, the loan to deposit ratio was 55.28%. The investment strategy takes into consideration the term of the investment, and securities in the available for sale portfolio are laddered based upon projected funding needs.
In the normal course of business, we enter into certain contractual obligations, including obligations to make future payments on lease arrangements, contractual commitments with depositors, and service contracts. The table below presents our significant contractual obligations, except for pension and other postretirement benefit plans, which are included in Note 8 of Notes to Consolidated Financial Statements.
 
December 31, 2022
 
Payments Due by Period
 
 
 
Total
 
 
Less Than
1 Year
 
 
1-3 Years
 
 
4-5 Years
 
 
More Than
5 Years
 
Time deposits
 
$
67,629
 
 
$
53,891
 
 
$
8,186
 
 
$
5,395
 
 
$
157
 
Purchase obligations (1)
 
 
10,763
 
 
 
4,831
 
 
 
5,232
 
 
 
700
 
 
 
-
 
Operating leases
 
 
1,571
 
 
 
360
 
 
 
606
 
 
 
399
 
 
 
206
 
Total
 
$
79,963
 
 
$
59,082
 
 
$
14,024
 
 
$
6,494
 
 
$
363
 
 
 
(1)
Includes contracts with a minimum annual payment of $100.
 
As of December 31, 2022, the Company was not aware of any other known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of December 31, 2022, the Company has no material commitments for long term debt or for capital expenditures.
 
Capital Resources
Total stockholders’ equity as of December 31, 2022 was $122,687, a decrease of $69,064, or 36.02%, from $191,751 as of December 31, 2021. The decline in stockholders’ equity is due to the change in market value of the securities portfolio, which was in a gain position as of December 31, 2021 and ended December 31, 2022 in a loss position. Unrealized gains and losses in the securities portfolio are reflected in the equity component, accumulated other comprehensive income (loss). The largest component of stockholders’ equity, retained earnings, increased from $188,229 as of December 31, 2021 to $199,091 as of December 31, 2022. The increase stemmed from net income of $25,932, offset by dividends of $8,950 and repurchases of shares of $6,120.
The Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement, which exempts bank holding companies with less than $3 billion in assets from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements. NBB is subject to various capital requirements administered by banking agencies, including an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments. Risk-based capital ratios are calculated in compliance with OCC rules based on the Basel III Capital Rules. The Bank’s ratios are well above the required minimums as of December 31, 2022 and December 31, 2021. Risk based capital ratios for NBB are shown in the following tables.
 
 
 
Ratios at
December 31, 2022
 
 
Ratios at
December 31, 2021
 
 
Regulatory Capital Minimum Ratios
 
 
Regulatory Capital Minimum
Ratios with Capital Conservation
Buffer
 
Total Capital Ratio
 
 
17.57
%
 
 
19.50
%
 
 
8.00
%
 
 
10.50
%
Tier I Capital Ratio
 
 
16.81
%
 
 
18.72
%
 
 
6.00
%
 
 
8.50
%
Common Equity Tier I Capital Ratio
 
 
16.81
%
 
 
18.72
%
 
 
4.50
%
 
 
7.00
%
Leverage Ratio
 
 
10.50
%
 
 
11.16
%
 
 
4.00
%
 
 
4.00
%
 
34
Table of Contents
 
 
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements as of December 31, 2022 are detailed in the table below.
 
 
 
Payments Due by Period
 
 
 
Total
 
 
Less Than 1 Year
 
 
1-3 Years
 
 
4-5 Years
 
 
More Than 5 Years
 
Commitments to extend credit
 
$
197,459
 
 
$
197,459
 
 
$
-
 
 
$
-
 
 
$
-
 
Standby letters of credit
 
 
17,021
 
 
 
17,021
 
 
 
-
 
 
 
-
 
 
 
-
 
Mortgage loans with potential recourse
 
 
8,654
 
 
 
8,654
 
 
 
-
 
 
 
-
 
 
 
-
 
Operating leases
 
 
1,571
 
 
 
360
 
 
 
606
 
 
 
399
 
 
 
206
 
Total
 
$
224,705
 
 
$
223,494
 
 
$
606
 
 
$
399
 
 
$
206
 
 
In the normal course of business the Company’s banking affiliate extends lines of credit to its customers. Amounts drawn upon these lines vary at any given time depending on the business needs of the customers.
Standby letters of credit are also issued to the Bank’s customers. There are two types of standby letters of credit. The first is a guarantee of payment to facilitate customer purchases. The second type is a performance letter of credit that guarantees a payment if the customer fails to perform a specific obligation. Revenue from these letters was approximately $71 in 2022.
While it would be possible for customers to fully draw on approved lines of credit and for beneficiaries to call all letters of credit, historically this has not occurred. In the event of a sudden and substantial draw on these lines, the Company has its own lines of credit from which it can draw funds. A sale of loans or investments would also be an option to meet liquidity demands.
The Company sells mortgages on the secondary market subject to recourse agreements. The mortgages originated must meet strict underwriting and documentation requirements for the sale to be completed. The Company estimates a potential loss reserve for recourse provisions. The amount is not material as of December 31, 2022. To date, no recourse provisions have been invoked.
Operating leases are for buildings used in the Company’s day-to-day operations.
 
Recent Accounting Pronouncements
See Note 1 of Notes to Consolidated Financial Statements for information relating to recent accounting pronouncements.
 
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
 
Not applicable.
 
35
Table of Contents
 
 
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.