What changed in this filing

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Item 1. Financial Statements

2023-05-11 compared with 2022-11-09 · 633 added, 559 removed, 769 unchanged (61% of the section changed)

Financial Statements

Financial Information

1 unchanged sentence

Consolidated Balance Sheets

September 30,

(in thousands, except share and per share data)

9 unchanged sentences

Restricted stock, at cost

Mortgage loans held for sale

Loans, net of unearned income and deferred fees and costs

1 unchanged sentence

852,744  

Less allowance for loan losses

Less allowance for credit losses

846,315  

2 unchanged sentences

10,431  

10,371  

Accrued interest receivable

36 unchanged sentences

Authorized 10,000,000 shares;

issued and outstanding 5,957,275 at September 30, 2022 and 6,063,937 shares at December 31, 2021

issued and outstanding 5,889,687 shares at March 31, 2023 and December 31, 2022

Retained earnings

11 unchanged sentences

Consolidated Statements of Income

Three Months Ended September 30, 2022 and 2021

September 30,

Three Months Ended March 31, 2023 and 2022

(in thousands, except share and per share data)

1 unchanged sentence

Interest and fees on loans

$ 9,333  

$ 8,100  

Interest on interest-bearing deposits

2 unchanged sentences

Total interest income

14,044  

11,050  

Interest Expense

Interest on deposits

Interest on time deposits

Interest on other deposits

Interest on borrowings

Total interest expense

Net interest income

Provision for (recovery of) loan losses

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

Noninterest Income

Service charges on deposit accounts

Other service charges and fees

Credit and debit card fees, net

Gain on sale of mortgage loans

Total noninterest income

Noninterest Expense

Salaries and employee benefits

Occupancy, furniture and fixtures

Data processing and ATM

FDIC assessment

Net costs of other real estate owned

Franchise taxes

Other operating expenses

Total noninterest expense

Income before income taxes

Income tax expense

Basic and fully diluted net income per common share

Weighted average number of common shares outstanding, basic and diluted

Dividends declared per common share

See accompanying notes to consolidated financial statements.

National Bankshares, Inc.

Consolidated Statements of Comprehensive (Loss) Income

Three Months Ended September 30, 2022 and 2021

September 30,

(in thousands)

10,946  

10,395  

Other Comprehensive Loss, Net of Tax

Unrealized holding loss on available for sale securities net of tax of ($7,822) and ($905) for the periods ended September 30, 2022 and September 30, 2021, respectively

Other comprehensive loss, net of tax

Total Comprehensive (Loss) Income

Provision for credit losses

Net interest income after provision for credit losses

10,944  

See accompanying notes to consolidated financial statements.

National Bankshares, Inc.

Consolidated Statements of Income

Nine Months Ended September 30, 2022 and 2021

(in thousands, except share and per share data)

September 30, 2022

September 30, 2021

Interest Income

Interest and fees on loans

Interest on interest-bearing deposits

Interest on securities –

Total interest income

Interest Expense

Interest on deposits

Net interest income

Provision for (recovery of) loan losses

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

10,261  

Noninterest Income

3 unchanged sentences

Gain on sale of mortgage loans

Realized securities gain, net

Gain on sale of securities

Total noninterest income

6 unchanged sentences

Franchise taxes

Professional services

Other operating expenses

2 unchanged sentences

Income tax expense

Basic and fully diluted net income per common share

Weighted average number of common shares outstanding, basic and diluted

Dividends declared per common share

See accompanying notes to consolidated financial statements.

National Bankshares, Inc.

Consolidated Statements of Comprehensive (Loss) Income

Nine Months Ended September 30, 2022 and 2021

September 30,

(in thousands)

$ 4,531  

$ 4,886  

Other Comprehensive Loss, Net of Tax

Unrealized holding loss on available for sale securities net of tax of ($23,431) and ($2,254) for the periods ended September 30, 2022 and September 30, 2021, respectively

Reclassification adjustment for gain included in net income, net of tax of ($1) , for the period ended September 30, 2021

Other comprehensive loss, net of tax

Total Comprehensive (Loss) Income

$ 6,650  

See accompanying notes to consolidated financial statements.

National Bankshares, Inc.

Consolidated Statements of Changes in Stockholders’

Three Months Ended September 30, 2022 and 2021

(in thousands except per share and share data)

Comprehensive

Balances at June 30, 2021

$ 7,713  

$ 185,580  

Basic and fully diluted net income per common share

$ 0.77  

Common stock repurchased, 73,100 shares

Other comprehensive loss, net of tax of ($905)

Balances at September 30, 2021

$ 0.81  

Weighted average number of common shares outstanding, basic and diluted

5,889,687  

6,047,230  

Balances at June 30, 2022

Dividends declared per common share

$ 1.00  

See accompanying notes to consolidated financial statements.

National Bankshares, Inc.

Consolidated Statements of Comprehensive Income (Loss)

Three Months Ended March 31, 2023 and 2022

(in thousands)

$ 4,531  

$ 4,886  

Common stock repurchased, 23,500 shares

Other comprehensive loss, net of tax of ($7,822)

Balances at September 30, 2022

Other Comprehensive Income (Loss), Net of Tax

Unrealized holding gain (loss) on available for sale securities net of tax of $ 3,121 and ( $8,992) for the periods ended March 31, 2023 and March 31, 2022, respectively

11,738  

Reclassification adjustment for gain included in net income, net of tax of ($3) in 2023

Other comprehensive income (loss), net of tax

11,729  

Total Comprehensive Income (Loss) 

$ 16,260  

See accompanying notes to consolidated financial statements.

Nine Months Ended September 30, 2022 and 2021

National Bankshares, Inc.

Consolidated Statements of Changes in Stockholders’

Three Months Ended March 31, 2023 and 2022

(in thousands except per share and share data)

4 unchanged sentences

$ 191,751  

$ 200,607  

15,131  

Common stock repurchased, 41,185 shares

Cash dividend ($ 0.70 per share)

Other comprehensive loss, net of tax of ($8,992)

Balances at September 30, 2021

Balances at March 31, 2022

$ 7,528  

5 unchanged sentences

$ 122,687  

Adoption of ASU 2016-13

Cash dividends of $ 1.00 per share

Other comprehensive income, net of tax of $ 3,118

11,729  

Common stock repurchased, 106,662 shares

Cash dividend ($ 0.72 per share)

Other comprehensive loss, net of tax of ($23,431)

Balances at September 30, 2022

Balances at March 31, 2023

$ 7,362  

4 unchanged sentences

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2022 and 2021

September 30,

Three Months Ended March 31, 2023 and 2022

(in thousands)

1 unchanged sentence

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

Provision for (recovery of) loan losses

Provision for credit losses

Depreciation of bank premises and equipment

Amortization of premiums and accretion of discounts, net

Gain on disposal of fixed asset

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

Losses and write-downs on other real estate owned, net

Gain on sales of securities available for sale, net

Gains on sales of repossessed assets

Increase in cash value of bank-owned life insurance

8 unchanged sentences

Cash Flows from Investing Activities

Net change in interest-bearing deposits

Proceeds from calls, principal payments, sales and maturities of securities available for sale

4 unchanged sentences

Loan originations and principal collections, net

Proceeds from sale of other real estate owned

Proceeds from sale of repossessed assets

Recoveries on loans charged off

Purchase of bank-owned life insurance

Proceeds from sale and purchases of premises and equipment, net

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash Flows from Financing Activities

3 unchanged sentences

Cash dividends paid

Net cash provided by financing activities

Net cash (used in) provided by financing activities

Net change in cash and due from banks

5 unchanged sentences

Supplemental Disclosure of Noncash Activities

Loans charged against the allowance for loan losses

Loans transferred to OREO

Loans charged against the allowance for credit losses

Loans transferred to repossessed assets

Unrealized holding loss on securities available for sale

Unrealized holding gain (loss) on securities available for sale

Lease liabilities arising from obtaining right-of-use assets

2 unchanged sentences

Notes to Consolidated Financial Statements

September 30, 2022

March 31, 2023

$ in thousands, except per share data

2 unchanged sentences

or “NBB”) and National Bankshares Financial Services, Inc.

(“NBFS”) (collectively, the “Company”), conform to accounting principles generally accepted in the United States of America (“U.S.

GAAP”) and to general practices within the banking industry.

(“NBFS”) (collectively, the “Company”), conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry.

The accompanying interim period consolidated financial statements are unaudited;

however, in the opinion of management, all adjustments consisting of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial statements, have been included.  The results of operations for the three and nine month periods ended September 30, 2022 are not necessarily indicative of results of operations for the full year or any other interim period.  The interim period consolidated financial statements and financial information included in this Form 10 -Q should be read in conjunction with the notes to consolidated financial statements included in the Company’s 2021 Form 10 -K.  The Company posts all reports required to be filed under the Securities Exchange Act of 1934 on its web site at www.nationalbankshares.com .

however, in the opinion of Management, all adjustments consisting of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial statements, have been included.  The results of operations for the three month period ended March 31, 2023 are not necessarily indicative of results of operations for the full year or any other interim period.  The interim period consolidated financial statements and financial information included in this Form 10 -Q should be read in conjunction with the notes to consolidated financial statements included in the Company’s 2022 Form 10 -K.  The Company posts all reports required to be filed under the Securities Exchange Act of 1934 on its web site at www.nationalbankshares.com .

Risks and Uncertainties

The Company is closely monitoring risks that may impact its business, including the ongoing COVID- 19 pandemic and high inflation, along with U.S.

The Company is closely monitoring risks that may impact its business, including high inflation, along with U.S.

monetary policy maneuvers to reduce inflation.

If the pandemic re-escalates, the willingness and ability of the Company’s employees and customers to conduct banking and other financial transactions may be impacted.

Inflation and U.S.

2 unchanged sentences

These risks could adversely affect the Company’s business, financial condition, results of operations, cash flows, credit risk, asset valuations and capital position.

Subsequent Events

During October, 2022, the Company recognized a pre-tax gain of $ 3,823 for the sale of stock of a securities brokerage firm. 

The sale occurred in October and the gain will be reported with results for the fourth quarter of 2022.

Recent Accounting Pronouncements

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

2016 - 13, “Financial Instruments –

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020 - 04 “Reference Rate Reform (Topic 848 ):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting.”

These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform.

The ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued.

It is intended to help stakeholders during the global market-wide reference rate transition period.

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

Subsequently, in January 2021, the FASB issued ASU 2021 - 01 “Reference Rate Reform (Topic 848 ):

Scope.”

This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition.

The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.

An entity may elect to apply ASU 2021 - 01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued.

An entity may elect to apply ASU 2021 - 01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.

The Company has a small number of participation loans that reference LIBOR.

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

In December 2022, the FASB issued ASU 2022 - 06, “Reference Rate Reform (Topic 848 ):

Deferral of the Sunset Date of Topic 848”.

ASU 2022 - 06 extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848.

The objective of the guidance in Topic 848 is to provide relief during the temporary transition period, so the FASB included a sunset provision within Topic 848 based on expectations of when LIBOR would cease being published.

In 2021, the UK Financial Conduct Authority delayed the intended cessation date of certain tenors of LIBOR to June 30, 2023.

To ensure the relief in Topic 848 covers the period of time during which a significant number of modifications may take place, the ASU defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

The ASU is effective for all entities upon issuance.

The Company is assessing ASU 2022 - 06 and its impact on the Company’s transition away from LIBOR.

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.

Recently Adopted Accounting Standards

ASU 2016 - 13

On January 1, 2023, the Company adopted ASU 2016 - 13 “Financial Instruments –

Credit Losses (Topic 326 ):

Measurement of Credit Losses on Financial Instruments”

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

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

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

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

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

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

Smaller reporting companies who file with the U.S.

Securities and Exchange Commission (SEC) and all other entities who do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022.

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

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

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

Policies, procedures and internal controls have been developed and recommendations from external validation are currently being incorporated.

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

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

SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments –

Credit Losses.”

It covers topics including ( 1 ) measuring current expected credit losses;

( 2 ) development, governance, and documentation of a systematic methodology;

( 3 ) documenting the results of a systematic methodology;

and ( 4 ) validating a systematic methodology.

In March 2022, the FASB issued ASU No.

2022 - 02, “Financial Instruments-Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures.”

ASU 2022 - 02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016 - 13 ) that introduced the CECL model.

The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty.

In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures.

The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption.

For entities that have adopted ASU 2016 - 13, ASU 2022 - 02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

For entities that have not yet adopted ASU 2016 - 13, the effective dates for ASU 2022 - 02 are the same as the effective dates in ASU 2016 - 13.

Early adoption is permitted if an entity has adopted ASU 2016 - 13.

An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures.

The Company is currently assessing the impact that ASU 2022 - 02 will have on its consolidated financial statements.

Loan Portfolio

and related ASUs.

Prior to adoption, the Company followed applicable GAAP and used an incurred loss model to estimate an allowance for loan losses and a liability for credit risk on unfunded commitments.

The Company also used a methodology to determine whether securities in an unrealized loss position were other-than-temporarily impaired and whether credit risk was present.

ASU 2016 - 13 makes significant changes to the accounting for credit losses on financial instruments presented on an amortized cost basis and disclosures about them.

The new current expected credit loss (“CECL”) impairment model requires an estimate of expected credit losses, measured over the contractual life of an instrument, which considers historical experience, current conditions and reasonable and supportable forecasts of future economic conditions.

The standard provides significant flexibility and requires a high degree of judgment with regards to pooling financial assets with similar risk characteristics and adjusting the relevant historical loss information in order to develop an estimate of expected lifetime losses.

ASU 2016 - 13 permits the use of estimation techniques that are practical and relevant to the Company’s circumstances, as long as they are applied consistently over time and faithfully estimate expected credit losses in accordance with the standard.

The Company applied the standard’s provisions as a cumulative-effect adjustment of $ 2,014 , net of tax, to retained earnings as of January 1, 2023.

On the adoption date, the allowance for credit losses (“ACL”) on loans increased from $ 8,225 to $ 10,567 and the ACL 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 ACL on securities available for sale.

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 for the time period.

The following presents the Company’s policies governing determination of the ACL on its financial instruments.

ACL on Securities Available for Sale

The Company evaluates securities available for sale that are in an unrealized loss position on the reporting date.

Securities are analyzed to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors.

Any impairment that is not credit-related is recognized in other comprehensive income, net of applicable taxes.

Credit-related impairment is recognized as an ACL on the consolidated balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings.

Both the ACL and the adjustment to net income may be subsequently reversed if conditions change.

If the Company intends to sell an impaired security, or more likely than not will be required to sell such a security, before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis.

Because the security’s amortized cost basis would be adjusted to fair value, there would be no ACL in this situation.

In evaluating impairment, the Company considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuers’

financial condition, among other factors.

If the Company determines a credit impairment, the ACL on securities available for sale would be established through a provision for credit losses on securities available for sale in the consolidated Statement of Income.

If Management believes it has confirmed that the loss on a security is uncollectible, or when either of the criteria regarding intent or requirement to sell is met, the loss is charged against the ACL.

Accrued interest receivable is excluded from the estimate of credit losses.

ACL on Loans (“ACLL”)

The Company estimates the ACLL based on amortized cost basis, which is the amount at which the loan is originated, adjusted for net deferred fees or costs, collection of cash, and charge-offs.

In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner.

Therefore, the Company has made a policy election to exclude accrued interest from the measurement of the ACLL.

Intrinsic to the Company’s policy on estimating the ACLL are policies regarding loan pools, nonaccruals, past due status, collateral valuation, charge-offs and risk ratings.

Please refer to the Company’s 2022 Form 10 -K, Note 1:

Summary of Significant Accounting Policies for additional information on these policies.

The Company measures expected credit losses on loans on a collective (pool) basis, when the loans share similar risk characteristics, such as collateral type and intended use, repayment source, and (if applicable) the borrower’s business model.

The Company has identified the following pools of loans with similar risk characteristics for measuring expected credit losses:

Real Estate Construction

Construction, residential

Construction, other

Consumer Real Estate

Residential closed-end first liens

Residential closed-end junior liens

Investor-owned residential real estate

Commercial Real Estate

Multifamily real estate

Commercial real estate, owner occupied

Commercial real estate, other

Commercial Non Real Estate

Commercial and industrial

Public Sector and IDA

Public sector and IDA

Consumer Non Real Estate

Other consumer loans

The Company’s methodologies for estimating the ACLL consider available relevant information about the collectability of cash flows, including historical losses, reasonable and supportable forecasts of economic conditions, and current economic and portfolio conditions.

The difference between cash flow estimates and amortized cost is the ACLL.

The Company uses a discounted cash flow (“DCF”) method for all of its pools except for bankcards, which are measured using the historical loss rate adjusted for the forecast.

For loans using the DCF method, cash flows are projected at the instrument level and discounted using the loan’s effective interest rate.

Cash flows are generated using each loan’s payment attributes, adjusted for pool-level information on the probability of default (“PD”), loss given default and prepayment speeds.

Default is defined as full or partial charge-off, nonaccrual status or past due 90 days or more.

PDs for each pool are calculated using the Company’s historical data, modified by peer data, to ensure a full economic cycle is reflected in the estimate.

PDs are then adjusted for the forecast.

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 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 over a period determined by Management, of up to three years. 

The forecast horizon and reversion period are applied consistently to the entire portfolio. 

The results of DCF calculations are modified by allocations for qualitative factors to account for changes in variables that may affect credit risk. 

The Company considers and allocates for changes in lending policies, Management experience, economic conditions, loans past due, competitive, legal and regulatory environments and other factors. 

Qualitative factors are benchmarked to historical data and are adjusted based upon quantitative analysis. 

Loans that do not share risk characteristics are evaluated on an individual basis.

The Company designates loans that have been determined to meet the regulatory definitions of “special mention”

or “classified”

(together known as “criticized”) as individually evaluated.

The fair value of individually evaluated loans is measured using the fair value of collateral (“collateral method”) or the DCF method.

The collateral method is applied to individually evaluated loans for which foreclosure is probable.

The collateral method is also applied to individually evaluated loans when borrowers are experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral (“collateral dependent”).

The ACLL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date.

When repayment is expected to be from the operation of the collateral, the ACLL is calculated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral.

When repayment is expected to be from the sale of the collateral, the ACLL is calculated as the amount by which the loan’s amortized cost basis exceeds the fair value of the underlying collateral less estimated cost to sell.

The ACLL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the loan.

The DCF method is applied to individually evaluated loans that do not meet the criteria for collateral method measurement.

Cash flows are projected and discounted using the same method as for collectively evaluated loans, but the PD is increased to reflect increased risk, up to 100% for nonaccrual loans.

Expected credit losses are reflected in the ACLL through a charge to provision for credit losses on the Consolidated Statements of Income.

When the Company deems all or a portion of a loan to be uncollectible the appropriate amount is written off against the ACLL.

The Company applies judgment to determine when a financial asset is deemed uncollectible;

however, generally speaking, an asset will be considered uncollectible no later than when all efforts at collection have been exhausted.

Subsequent recoveries, if any, are credited to the ACLL when received.

ACL on Unfunded Commitments

Financial instruments include off-balance sheet credit instruments such as undrawn portions of revolving lines of credit, commercial letters of credit, and loan commitments that have not yet been funded. The contractual amount of those instruments represents the Company’s exposure to credit loss in the event of nonperformance by the borrower. 

The Company records an ACL on unfunded commitments, unless the commitments to extend credit are unconditionally cancelable.

The estimate includes consideration of the likelihood that funding will occur, which is based on a historical funding study derived from internal information, and an estimate of expected credit losses on commitments expected to be funded over its estimated life, which are the same loss rates that are used in computing the ACLL.

The ACL on unfunded commitments is recorded as a liability on the Company’s Consolidated Balance Sheets, included in other liabilities, and is adjusted through the provision for credit loss expense in the Company’s Consolidated Statements of Income.

ASU 2022 - 02

On January 1, 2023, concurrent with its adoption of ASU 2016 - 13, the Company adopted ASU 2022 - 02, “Financial Instruments-Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures.”

The amendments eliminate the accounting guidance for troubled debt restructurings (“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.

Disclosures about periods prior to adoption will be presented under GAAP applicable for that period.

Similar to its policy under previous GAAP, the Company continues to identify modifications to loans and to determine whether the borrower is experiencing financial difficulty.

If the Company determines that the borrower is experiencing financial difficulty, the loan’s risk rating is evaluated to determine whether it falls within the regulatory definition of “criticized”

and requires individual evaluation.

Under previous GAAP, modifications to loans when the borrower was experiencing financial difficulty were designated as TDR and were individually evaluated for the duration of the loan.

Under CECL, if a previously modified loan with financial difficulty is subsequently upgraded to a pass rating, it will no longer be individually evaluated.

Loans and Allowance for Credit Losses

The loan portfolio, excluding mortgage loans held for sale, was comprised of the following.

September 30,

Real estate construction

22 unchanged sentences

$ 852,744  

Allowance for Loan Losses, Nonperforming Assets and Impaired Loans

The allowance for loan losses methodology incorporates individual evaluation of impaired loans and collective evaluation of groups of non-impaired loans.

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

Please refer to the Company’s 2021 Form 10 -K, Note 1:

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

Collectively-Evaluated Loans

The loan portfolio is comprised of major segments and smaller classes within each segment.

Segments and classes are determined based on characteristics such as collateral type and intended use, repayment sources, and (if applicable) the borrower’s business model.

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

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

Portfolio Segments and Classes

The segments and classes used in determining the allowance for loan losses are as follows.

Allowance for credit losses on loans

Total loans, net

$ 846,315  

$ 844,519  

Accrued interest receivable on loans, which is excluded from the amortized cost of loans, totaled $ 2,558  and $ 2,516  at March 31, 2023 and December 

31, 2022, respectively.

Past Due and Nonaccrual Loans

The following tables present the aging of past due loans, by loan pool, as of the dates indicated.

March 31, 2023

Real Estate Construction

Construction, residential

Construction, 1-4 family residential

$ 13,143  

Construction, other

40,909  

Consumer Real Estate

14,503  

14,526  

Residential closed-end first liens

121,466  

122,419  

Residential closed-end junior liens

Investor-owned residential real estate

83,924  

84,017  

Commercial Real Estate

Multifamily real estate

Multifamily residential real estate

131,952  

Commercial real estate owner-occupied

124,882  

127,362  

Commercial real estate, other

179,529  

Commercial Non Real Estate

Commercial and industrial

Public Sector and IDA

60,201  

60,516  

Public Sector and IDA

States and political subdivisions

47,359  

Consumer Non-Real Estate

10,328  

10,403  

Other consumer loans

Collectively-evaluated loans within each class are further stratified by risk rating:

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

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

Please refer to the Company’s 2021 Form 10 -K, Note 1:

Summary of Significant Accounting Policies for a discussion of risk factors pertinent to each class.

A detailed analysis showing the allowance roll-forward by portfolio segment and related loan balance by segment follows.

Activity in the Allowance for Loan Losses for the Nine Months Ended September 30, 2022

Non Real Estate

Balance, December 31, 2021

18,146  

2 unchanged sentences

$ 1,174  

Provision for (recovery of) loan losses

Balance, September 30, 2022

$ 2,814  

$ 857,396  

December 31, 2022

Real Estate Construction

Construction, 1-4 family residential

$ 12,538  

Activity in the Allowance for Loan Losses for the Nine Months Ended September 30, 2021

Non Real Estate

Balance, December 31, 2020

$ 12,538  

Construction, other

42,041  

Provision for (recovery of) loan losses

Balance, September 30, 2021

Consumer Real Estate

15,010  

15,026  

Residential closed-end first liens

121,807  

Activity in the Allowance for Loan Losses for the Year Ended December 31, 2021

Non Real Estate

Balance, December 31, 2020

122,648  

Residential closed-end junior liens

Investor-owned residential real estate

80,524  

80,932  

Provision for (recovery of) loan losses

Balance, December 31, 2021

Commercial Real Estate

Multifamily residential real estate

127,312  

Commercial real estate owner-occupied

126,640  

129,133  

Allowance for Loan Losses as of September 30, 2022

Non Real Estate

Individually evaluated 

Collectively evaluated 

Commercial real estate, other

181,443  

Commercial Non Real Estate

Commercial and industrial

57,373  

Allowance for Loan Losses as of December 31, 2021

Non- Real Estate

Individually evaluated 

Collectively evaluated 

57,652  

Public Sector and IDA

States and political subdivisions

48,074  

Consumer Non-Real Estate

Other consumer loans

19,317  

Loans as of September 30, 2022

Non Real Estate

Individually evaluated 

19,416  

$ 848,950  

Collectively evaluated 

$ 1,388  

1 unchanged sentence

$ 853,193  

The following table presents nonaccrual loans, by loan class, as of the dates indicated:

Incurred Loss

March 31, 2023

December 31, 2022

Nonaccrual Loans

Consumer Real Estate

Residential closed-end first liens

Commercial Real Estate

Commercial real estate owner-occupied

Commercial Non Real Estate

Commercial and industrial

$ 2,814  

1 unchanged sentence

$ 2,847  

During the three months ended March 31, 2023, no accrued interest receivable was reversed against interest income.

The following table presents certain past due indicators as of the dates indicated.

Ratio of ACLL to nonaccrual loans

Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees and costs

Allowance for Credit Losses on Loans

The activity in the ACLL by portfolio segment follows:

Activity in the Allowance for Credit Losses on Loans for the Three Months Ended March 31, 2023

Balance, Dec.

$ 2,199  

1 unchanged sentence

$ 8,225  

Adoption of ASU 2016-13

Provision for (recovery of) credit losses

Balance, March 31, 2023

$ 3,302  

2 unchanged sentences

$ 10,650  

Activity in the Allowance for Loan Losses for the Three Months Ended March 31, 2022

Balance, Dec.

$ 1,930  

Loans as of December 31, 2021

Real Estate Construction

Non- Real Estate

Individually evaluated 

$ 3,121  

$ 1,099  

Collectively evaluated 

$ 7,674  

Provision for (recovery of) loan losses

Balance, March, 31, 2022

$ 1,935  

1 unchanged sentence

$ 7,788  

Activity in the Allowance for Loan Losses for the Year Ended December 31, 2022

Balance, Dec.

$ 1,930  

2 unchanged sentences

$ 7,674  

Provision for (recovery of) loan losses

Balance, Dec.

$ 2,199  

1 unchanged sentence

$ 8,225  

Information about the ACLL for individually evaluated loans and collectively evaluated loans by portfolio segment follows.

Allowance for Credit Losses on Loans as of March 31, 2023

Individually evaluated

Collectively evaluated

10,216  

1 unchanged sentence

$ 4,374  

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

As of and for the

Nine Months Ended

September 30,

Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees and costs (1)

Ratio of net charge-offs to average loans, net of unearned income and deferred fees and costs (1)

( 1 ) Net charge-offs are on an annualized basis.

The Company defines nonperforming loans as nonaccrual loans and restructured loans that are nonaccrual.

Loans 90 days past due and still accruing and accruing restructured loans are not considered nonperforming.

A summary of nonperforming assets follows.

September 30,

Nonperforming assets:

Nonaccrual loans

Restructured loans in nonaccrual

Total nonperforming loans

Other real estate owned, net

Total nonperforming assets

$ 1,194  

$ 10,650  

Allowance for Loan Losses as of December 31, 2022

Consumer Non-

Individually evaluated

Collectively evaluated

$ 2,199  

Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned

Ratio of allowance for loan losses to nonperforming loans

A summary of loans past due 90 days or more and impaired loans follows.

September 30,

Loans past due 90 days or more and still accruing

Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees and costs

Accruing restructured loans

$ 3,642  

$ 8,225  

Impaired loans:

Impaired loans with no valuation allowance

Information about individually evaluated loans and collectively evaluated loans by portfolio segment follows.

Loans as of March 31, 2023

Individually evaluated

$ 1,061  

1 unchanged sentence

$ 4,130  

Impaired loans with a valuation allowance

Total impaired loans

Collectively evaluated

53,758  

1 unchanged sentence

436,363  

Valuation allowance

Impaired loans, net of allowance

60,221  

1 unchanged sentence

33,188  

Average recorded investment in impaired loans (1)

853,266  

1 unchanged sentence

$ 223,438  

Interest income recognized on impaired loans, after designation as impaired

Amount of income recognized on a cash basis

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

No interest income was recognized on nonaccrual loans for the nine months ended September 30, 2022 or September 30, 2021 or for the year ended December 31, 2021.

A detailed analysis of investment in impaired loans and associated reserves, segregated by loan class follows.

Only classes with impaired loans are presented.         

Impaired Loans as of September 30, 2022

Total Recorded

Investment (1)

Investment (1) for

Which There is No

Related Allowance

Investment (1) for

Which There is a

Related Allowance

Consumer Real Estate

Investor-owned residential real estate

Commercial Real Estate

Commercial real estate, owner occupied

Commercial Non Real Estate

Commercial and industrial

$ 438,843  

1 unchanged sentence

$ 47,359  

Impaired Loans as of December 31, 2021

Total Recorded

$ 33,188  

$ 857,396  

Loans as of December 31, 2022

Consumer Non-

Individually evaluated

$ 2,583  

$ 3,032  

Collectively evaluated

54,579  

220,866  

435,305  

57,389  

48,074  

33,948  

850,161  

$ 54,579  

$ 221,052  

$ 437,888  

$ 57,652  

$ 48,074  

$ 33,948  

$ 853,193  

A summary of ratios pertaining to the ACLL follows.

As of and for the

Three Months Ended

Ratio of ACLL to the end of period loans, net of unearned income and deferred fees and costs

Ratio of net charge-offs (recoveries), annualized, to average loans, net of unearned income and deferred fees and costs

( 0.04 )%  

In accordance with CECL, the Company identifies individually evaluated loans when their risk characteristics become different from their pool.

Under previous GAAP, the Company identified loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information.

When the Company determined that it was probable all principal and interest amounts due would not be collected in accordance with the contractual terms of the loan agreement, the loan was generally deemed impaired and individually evaluated.

For further information on the impairment process under previous GAAP, please refer to the Company’s 2022 Annual Report on Form 10 -K.

A summary of individually evaluated loans for the dates indicated follows.

Individually Evaluated Loans under Incurred Loss as of December 31, 2022

Investment (1)

Investment (1) for

Which There is No

Recorded Investment (1)

for Which There is No

Related Allowance

6 unchanged sentences

Commercial real estate, owner occupied

Commercial real estate, other

Commercial Non Real Estate

4 unchanged sentences

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

The following tables show the average recorded investment and interest income recognized for impaired loans.

Only classes with impaired loans are presented.

For the Nine Months Ended September 30, 2022

Average Recorded

Investment (1)

Interest Income

Consumer Real Estate

Investor-owned residential real estate

Commercial Real Estate

Commercial real estate, owner occupied

Commercial Non Real Estate

Commercial and industrial

$ 3,067  

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

For the Nine Months Ended September 30, 2021

The following tables show the average recorded investment and interest income recognized for individually evaluated loans.

Only classes with individually evaluated loans are presented.

For the Three Months Ended

March 31, 2022

Average Recorded

8 unchanged sentences

Commercial and industrial

Consumer Non Real Estate

$ 5,842  

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

For the Year Ended December 31, 2021

Average Recorded

Investment (1)

Interest Income

Consumer Real Estate

Investor-owned residential real estate

Commercial Real Estate

Commercial real estate, owner occupied

Commercial real estate, other

Commercial Non Real Estate

Commercial and industrial

Consumer Non Real Estate

Collateral Dependent Loans

The Company reviews individually evaluated loans for collateral dependency.

As of March 31, 2023, none of the Company’s individually evaluated loans were considered collateral dependent.

Credit Quality

The Company categorizes loans by risk based on relevant information about the ability of borrowers to service their debt, including:

collateral and financial information, historical payment experience, credit documentation and current economic trends, among other factors.

At origination, each loan is assigned a risk rating.

Ongoing analysis of the loan portfolio adjusts risk ratings on an individual loan basis to reflect updated information.

General descriptions of risk ratings are as follows:

loans with acceptable credit quality are rated pass.

Special mention:

loans with potential weaknesses due to challenging economic or financial conditions are rated special mention.

loans with well-defined weaknesses that heighten the risk of default are rated classified.

The following tables present the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated.

Term Loans Amortized Cost Basis by Origination Year

Balance at March 31, 2023

Construction, residential

$ 1,370  

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

An analysis of past due and nonaccrual loans, including impaired and collectively-evaluated loans, follows.

Nonaccrual loans include those in both current and past due status.

Only classes with past due or nonaccrual loans are shown.

September 30, 2022

90 or More Days

Days Past Due

Real Estate Construction

Construction, other

Consumer Real Estate

Residential closed-end first liens

Investor-owned residential real estate

Commercial Real Estate

Commercial real estate, owner occupied

Commercial Non Real Estate

Commercial and industrial

Consumer Non Real Estate

Other consumer loans

$ 5,000  

$ 6,006  

December 31, 2021

90 or More Days

Real Estate Construction

Construction, other

Consumer Real Estate

Residential closed-end first liens

Commercial Real Estate

Commercial real estate, owner occupied

Commercial Non Real Estate

Commercial and industrial

Consumer Non Real Estate

Other consumer loans

$ 13,143  

( 1 ) Includes accruing and nonaccrual loans past due 90 days or more.

The following displays collectively-evaluated loans by credit quality indicator.

Impaired loans are not included.

September 30, 2022

Special Mention

Real Estate Construction

Construction, 1-4 family residential

$ 1,370  

$ 5,000  

$ 6,006  

$ 13,143  

Construction, other

$ 1,253  

Consumer Real Estate

$ 1,502  

$ 26,880  

$ 5,229  

$ 1,573  

$ 2,807  

$ 1,371  

$ 40,615  

$ 1,253  

$ 1,502  

$ 27,174  

$ 5,229  

$ 1,573  

$ 2,807  

$ 1,371  

$ 40,909  

$ 14,465  

$ 14,526  

$ 14,465  

$ 14,526  

Residential closed-end first liens

$ 6,191  

$ 15,467  

$ 32,829  

$ 27,691  

$ 4,381  

$ 35,532  

$ 122,091  

$ 6,191  

$ 15,494  

$ 32,829  

$ 27,691  

$ 4,381  

$ 35,833  

$ 122,419  

Residential closed-end junior liens

$ 1,895  

$ 2,476  

$ 1,895  

$ 2,476  

Investor-owned residential real estate

$ 5,379  

Commercial Real Estate

$ 15,052  

$ 20,412  

$ 14,414  

$ 2,301  

$ 24,079  

$ 1,547  

$ 83,284  

$ 5,379  

$ 15,052  

$ 20,412  

$ 14,414  

$ 2,301  

$ 24,812  

$ 1,547  

$ 84,017  

Multifamily residential real estate

$ 1,856  

$ 11,973  

$ 41,285  

$ 27,249  

$ 4,851  

$ 44,731  

$ 131,952  

$ 1,856  

$ 11,973  

$ 41,285  

$ 27,249  

$ 4,851  

$ 44,731  

$ 131,952  

Commercial real estate, owner occupied

$ 19,563  

$ 24,191  

$ 5,088  

$ 16,648  

$ 1,899  

$ 54,991  

$ 2,452  

$ 124,882  

$ 19,563  

$ 24,191  

$ 5,088  

$ 16,648  

$ 1,899  

$ 57,471  

$ 2,452  

$ 127,362  

Commercial real estate, other

$ 22,410  

Commercial Non Real Estate

$ 19,838  

$ 36,961  

$ 23,541  

$ 76,142  

$ 179,529  

$ 22,410  

$ 19,838  

$ 36,961  

$ 23,541  

$ 76,142  

$ 179,529  

Commercial and industrial

$ 1,064  

$ 10,123  

$ 15,106  

$ 8,959  

$ 2,258  

$ 6,691  

$ 16,020  

$ 60,221  

$ 1,100  

$ 10,123  

$ 15,106  

$ 8,966  

$ 2,258  

$ 6,943  

$ 16,020  

$ 60,516  

YTD gross charge-offs

Public sector and IDA

States and political subdivisions

$ 18,419  

Consumer Non Real Estate

$ 6,650  

$ 22,001  

$ 47,359  

$ 18,419  

$ 6,650  

$ 22,001  

$ 47,359  

$ 4,563  

YTD gross charge-offs

$ 1,119  

$ 2,453  

$ 4,255  

$ 1,884  

$ 10,403  

$ 1,119  

$ 2,453  

$ 4,255  

$ 1,884  

$ 10,403  

YTD gross charge-offs

Other consumer

2 unchanged sentences

$ 9,416  

$ 2,577  

$ 18,222  

$ 1,412  

$ 3,245  

$ 9,416  

$ 2,577  

$ 18,222  

YTD gross charge-offs

$ 58,826  

$ 101,136  

$ 204,134  

$ 149,458  

$ 22,622  

$ 273,833  

$ 43,098  

$ 853,266  

$ 58,862  

$ 101,163  

$ 204,428  

$ 149,465  

$ 22,622  

$ 277,599  

$ 43,098  

$ 857,396  

YTD gross charge-offs

The following table presents the recorded investment by loan pool and credit quality as of December 31, 2022.

December 31, 2022

26 unchanged sentences

Consumer Non-Real Estate

10,990  

Other consumer

2 unchanged sentences

$ 1,393  

$ 1,064  

Determination of risk ratings was completed for the portfolio as of September 30, 2022 and December 31, 2021.

Please refer to the Company's 2021 Annual Report on Form 10 -K for risk rating definitions and characteristics.

Troubled Debt Restructurings

Total TDRs amounted to $ 3,049 at September 30, 2022, $ 5,878 at December 31, 2021, and $ 6,084 at September 30, 2021.

All of the Company’s TDR loans are fully funded and no further increase in credit is available.

TDRs Designated During the Reporting Period

The Company did not designate any new TDRs during the three or nine month periods ended September 30, 2022.

During the three months ended September 30, 2021, the Company did not designate any loans as a TDR.

During the nine months ended September 30, 2021, the Company designated three loans as a TDR.

One loan was modified to shift the payment structure from interest-only to amortizing and reduce the interest rate to provide cash flow relief.

Two loans were re-amortized at lower interest rates to provide cash flow relief.

No principal or interest was forgiven.

The impairment measurement for all three loans at September 30, 2021 was based upon the collateral method and did not result in a specific allocation.

The following table presents restructurings by class that occurred during the nine month period ended September 30, 2021.

Pre-Modification

Principal Balance

Post-Modification

Principal Balance

Commercial Real Estate

Commercial real estate owner occupied

Commercial real estate, other

$ 2,826  

Defaulted TDRs

The Company analyzed its TDR portfolio for loans that defaulted during the three and nine month periods ended September 30, 2022 and September 30, 2021, and that were modified within 12 months prior to default.

Loan Modifications to Borrowers Experiencing Financial Difficulty

There were no loans to borrowers experiencing financial difficulty that were modified during the three months ended March 31, 2023.

The Company analyzed its modified loan portfolio for loans that defaulted during the three month period ended March 31 2023, and that were modified within 12 months prior to default.

The Company designates three circumstances that indicate default:

one or more payments that occur more than 90 days past the due date, charge-off, or foreclosure after the date of restructuring.

Of the Company’s TDRs at September 30, 2022 and September 30, 2021, none of the defaulted TDRs were modified within 12 months prior to default.

All of the defaulted TDRs were in nonaccrual status as of September 30, 2022 and September 30, 2021.

The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities available for sale by major security type are as follows.

September 30, 2022

one or more payments that occur more than 90 days past the due date, charge-off, or foreclosure after the date of modification.

Of the Company’s modifications at March 31, 2023, none of the defaulted modifications were modified within 12 months prior to default.

ACL on Unfunded Commitments

The following table presents the balance and activity in the ACL for unfunded commitments for the three months ended March 31, 2023:

Allowance for Credit Losses on Unfunded Commitments

Balance, December 31, 2022

Adoption of ASU 2016-13

Provision for credit losses

Balance, March 31, 2023

The amortized cost and estimated fair value of securities available for sale along with gross unrealized gains and losses are summarized as follows:

March 31, 2023

Available for Sale:

21 unchanged sentences

336,575  

$ 278,019  

States and political subdivisions

1 unchanged sentence

38,018  

152,200  

Mortgage-backed securities

6 unchanged sentences

$ 656,852  

$ 686,080  

The amortized cost and fair value of single maturity securities available for sale at September 30, 2022, by contractual maturity, are shown below.

No allowance for credit loss on securities available for sale was recorded as of March 31, 2023.

The deferred tax asset for the net unrealized loss on securities available for sale was $ 18,526 as of March 31, 2023 and $ 21,644 as of December 31, 2022.

The deferred tax asset is included in other assets on the Consolidated Balance Sheets.

The amortized cost and fair value of single maturity securities available for sale at March 31, 2023, by contractual maturity, are shown below.

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

Mortgage-backed securities included in these totals are categorized by final maturity.

September 30, 2022

March 31, 2023

Amortized Cost

15 unchanged sentences

$ 651,047  

Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows.

September 30, 2022

Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that the individual securities have been in a continuous loss position, follows.

March 31, 2023

Less Than 12 Months

4 unchanged sentences

46,616  

31,692  

States and political subdivisions

1 unchanged sentence

30,041  

43,622  

17,482  

Mortgage-backed securities

2 unchanged sentences

Corporate debt securities

Total temporarily impaired securities

Total available for sale securities

$ 79,750  

3 unchanged sentences

December 31, 2022

Less Than 12 Months

12 Months or More

Less Than 12 Months  

12 Months or More  

Government agencies and corporations

6 unchanged sentences

18,373  

52,134  

19,645  

Mortgage-backed securities

144,198  

15,165  

Corporate debt securities

4 unchanged sentences

$ 64,043  

The Company has 614 securities with a fair value of $ 647,648 that are temporarily impaired at September 30, 2022.  

The total unrealized loss on these securities is $ 108,057 .

Of the temporarily impaired securities, 207 securities with a fair value of $ 182,187 and an unrealized loss of $ 50,582 have been in a continuous loss position for 12 months or more.

The Company determined that these securities are temporarily impaired at September 30, 2022 for the reasons set out below.

Government agencies and corporations:

Unrealized losses of $ 31,692 on 150 securities with a fair value of $ 124,968 were caused by interest rate and market fluctuations.

The Company evaluates securities available for sale that are in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors.

Consideration is given to the extent to which the fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

At March 

31, 2023, the Company had 

602 securities with a fair value of $ 649,878 in an unrealized loss position.

The Company does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.

The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the cost basis of the investments.

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

States and political subdivisions:

The unrealized loss of $ 17,482 on state and political subdivision securities stemmed from 50 securities with a fair value of $ 43,622 .

The Company reviewed financial statements and cash flows for each of the securities in a continuous loss position for more than 12 months.

The Company’s analysis determined that the unrealized losses are primarily the result of interest rate and market fluctuations and not associated with impaired financial status.

The contractual terms of the investments do not permit the issuers to settle the securities at a price less than the cost basis of each investment.

The Company is monitoring bond market trends to develop strategies to address unrealized losses.

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

Mortgage-backed securities:

The unrealized loss of $ 1,200 on mortgage-backed securities stemmed from six securities with a fair value of $ 12,802 .

The unrealized loss was caused by interest rate and market fluctuations.

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

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

Corporate debt securities:

One corporate debt security with a fair value of $ 795 presented an unrealized loss of $ 208 .

The Company reviewed the corporation's financial position and determined that the unrealized loss is primarily the result of interest rate and market fluctuations and not associated with impaired financial status.

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

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

Management regularly monitors the credit quality of the investment portfolio.

Changes in ratings are noted and follow-up research on the issuer is undertaken when warranted.

Management intends to carefully monitor any changes in bond quality.

The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline.

Accordingly, the unrealized losses are attributed to noncredit-related factors, including changes in interest rates and other market conditions.

No allowance for credit losses on securities available for sale was recorded as of March 

Restricted Stock.

The Company held restricted stock of $ 941 as of September 30, 2022 and $ 845 at December 31, 2021.

The Company held restricted stock of $ 929 as of March 31, 2023 and $ 941 at December 31, 2022.

Restricted stock is reported separately from available for sale securities.

As a member bank of the Federal Reserve system and the Federal Home Loan Bank of Atlanta (“FHLB”), NBB is required to maintain certain minimum investments in the common stock of those entities.

Required levels of investment are based upon NBB’s capital, current borrowings, and a percentage of qualifying assets.

The correspondents provide calculations that require the Company purchase or sell stock back to the correspondents.

As a member of the Federal Reserve and the Federal Home Loan Bank of Atlanta (“FHLB”), NBB is required to maintain certain minimum investments in the common stock of those entities.

Required levels of investment are based upon NBB’s capital and a percentage of qualifying assets.

The Company purchases stock from or sells stock back to the correspondents based on their calculations.

The stock is held by member institutions only and is not actively traded.

1 unchanged sentence

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

In addition to dividends, NBB also benefits from its membership with FHLB through eligibility to borrow from the FHLB, using as collateral NBB’s capital stock investment in the FHLB and qualifying NBB real estate mortgage loans totaling $ 641,798 at September 30, 2022.

Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at September 30, 2022, management did not determine any impairment.

Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at March 31, 2023, did not determine any impairment.

Realized Securities Gains and Losses

During the first three months of 2023, the Company realized net securities gains of $ 12 on the sale of securities with an amortized cost basis of $ 17,987 .

The sales were part of the Company’s interest rate risk management strategy.

There were no sales of securities during 2022.

Defined Benefit Plan          

1 unchanged sentence

Pension Benefits

Three Months Ended September 30,

Interest cost

Expected return on plan assets

Amortization of prior service cost

Recognized net actuarial loss

Net periodic benefit cost

Pension Benefits

Nine Months Ended September 30,

$ 1,083  

Three Months Ended March 31,

Interest cost

2 unchanged sentences

Recognized net actuarial loss

Net periodic benefit cost

Net periodic benefit (income) cost

The service cost component of net periodic benefit cost is included in salaries and employee benefits expense in the consolidated statements of income.

All other components are included in other noninterest expense in the consolidated statements of income.

For the nine months ended September 30, 2022, the Company did not make a contribution to the defined benefit plan.

For the three months ended March 31, 2023, the Company did not make a contribution to the defined benefit plan.

Fair Value Measurements

4 unchanged sentences

These levels are:

Level 1 – 

Level 1  

– 

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

Level 2 –

Level 2  

Valuation is based on observable inputs including:

●     quoted prices in active markets for similar assets and liabilities,

●     quoted prices for identical or similar assets and liabilities in less active markets,

●     inputs other than quoted prices that are observable, and

●     model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 – 

quoted prices in active markets for similar assets and liabilities,

quoted prices for identical or similar assets and liabilities in less active markets,

inputs other than quoted prices that are observable, and

model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3  

– 

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

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However, in many instances, there are no quoted market prices for the Company’s various financial instruments.

When quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.

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Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from disclosure requirements.

Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.         

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:

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Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2 ).

The carrying value of restricted Federal Reserve Bank of Richmond and Federal Home Loan Bank of Atlanta stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following tables.

The carrying value of restricted Federal Reserve Bank of Richmond and FHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following tables.

The following tables present the balances of financial assets measured at fair value on a recurring basis as of the dates indicated.

September 30, 2022

March 31, 2023

Fair Value Measurements Using

 $ -  

Government agencies and corporations

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Changes in fair value measurement impacts net income.

At December 31, 2021, there were no interest rate loan contracts or forward contracts. 

At September 30, 2022, the Company had one rate-lock commitment that resulted in an interest rate loan contract and forward contract, as presented in the following table:

September 30, 2022

At December 31, 2022, there were no interest rate loan contracts or forward contracts.

The following table presents the Company’s interest rate loan contracts and forward contracts as of March 31, 2023:

March 31, 2023

Fair Value Measurements Using

Interest rate loan contracts

$ ( 9 )  

 $ -  

 $ ( 9 ) 

Forward contracts

September 30, 2022

March 31, 2023

Valuation Technique

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81.30 %  

Interest rate loan contracts Market approach Current reference price  

94.83 %  

Interest rate loan contracts

Market approach

Current reference price

100.83 % –

102.22 % ( 101.24 %)

Forward contracts

Market approach Current reference price

94.83 %  

Market approach

Current reference price

100.83 % –

102.22 % ( 101.24 %)

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

Certain financial instruments are measured at fair value on a nonrecurring basis in accordance with U.S.

Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.

Certain financial instruments are measured at fair value on a nonrecurring basis in accordance with GAAP.

Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value.

These loans consist of one -to- four family residential loans originated for sale in the secondary market.

These loans currently consist of one -to- four family residential loans originated for sale in the secondary market.

Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2 ).

As such, the Company records any fair value adjustments on a nonrecurring basis.

No nonrecurring fair value adjustments were recorded on loans held for sale at September 30, 2022 or December 31, 2021.

Impaired Loans

Impaired loans are measured at fair value on a nonrecurring basis.

If an individually evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses.

Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

The fair value of an impaired loan may be measured using one of three methods.

Each method falls within a different level of the fair value hierarchy.

The observable market price of a loan is categorized as a Level 1 input.

The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a TDR.

Loans measured using the fair value of collateral may be categorized in Level 2 or Level 3.

Loans valued using the collateral method may be secured by real estate or business assets including equipment, inventory, and accounts receivable.

Real estate collateral secures most loans and valuation is based upon the “as-is”

value of independent appraisals or evaluations.

Appraisals are prepared by independent, licensed appraisers using observable market data analyzed through an income or sales valuation approach.

Appraisals of less than 24 months of age result in Level 2 categorization.

If a current appraisal cannot be obtained prior to a reporting date and an existing appraisal is discounted to estimate value, or if declines in value are identified after the date of the appraisal, or if an appraisal is discounted for estimated selling costs, or if the appraisal uses unobservable market data, the valuation of real estate collateral is categorized as Level 3.

Loans valued using an independent real estate evaluations are categorized as Level 3.

No nonrecurring fair value adjustments were recorded on loans held for sale at March 31, 2023 or December 31, 2022.

Collateral Dependent Loans

Loans the Company has identified as collateral dependent that do not share risk characteristics are individually evaluated on a non-recurring basis.

For collateral dependent loans, the ACL is measured as the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date.

When repayment is expected from the operation of the collateral, credit losses are estimated as the amount by which the amortized cost basis of the loan exceeds the present value of expected cash flows from the operation of the collateral.

When repayment is expected from the sale of the collateral, credit losses are measured as the amount by which the amortized costs basis of the loan exceeds the fair value of the underlying collateral less estimated cost to sell.

The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

For real estate loans, fair value of collateral is determined by the “as-is”

value of appraisals that are less than 24 months of age and are prepared by independent, licensed appraisers.

Appraisals are based upon observable market data analyzed through an income or sales valuation approach, and adjusted by estimated selling costs.

Valuation falls within Level 2 categorization.

The Company may further discount appraisals for marketing strategies, which results in Level 3 categorization.

The value of business equipment is based upon an outside appraisal (Level 2 ) if deemed significant, or the net book value on the applicable business’

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Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3 ).

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

At September 30, 2022 and December 31, 2021, measurement of the Company’s impaired loans did not result in any specific allocations.

Other Real Estate Owned

Certain assets such as other real estate owned (“OREO”) are measured at fair value less cost to sell.

At March 31, 2023, none of the Company’s individually evaluated loans were measured using the collateral method.

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

Other Real Estate Owned ( “

OREO ”

Certain assets such as OREO are measured at fair value less cost to sell.

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

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

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

The 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 that was measured at fair value on a nonrecurring basis.

September 30, 2022

March 31, 2023

OREO, net of valuation allowance

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(Weighted Average)

September 30, 2022

March 31, 2023

Discounted appraised value

7.19% (1)  

September 30, 2022

March 31, 2023

Discounted appraised value

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Discounted appraised value

December 31, 2022

Discounted appraised value

Discount for lack of marketability

34.72%  

As of September 30, 2022 and December 31, 2021, OREO was composed of a single property.

At September 30, 2022 and December 31, 2021, OREO was measured using appraised value, discounted by selling cost.

At September 30, 2022, the appraised value was also discounted for lack of marketability.

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

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

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

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

At March 31, 2023 and December 31, 2022, the Company held a single OREO property, measured using appraised value, discounted for marketability and selling cost.

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.

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Fair values are estimated using the exit price notion.

September 30, 2022

March 31, 2023

Recorded Amount

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43,551  

Forward loan contracts  

Interest rate loan contracts

Financial Liabilities:

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Accrued interest payable

Interest rate loan contracts  

Forward loan contracts

December 31, 2022

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Restricted securities

Mortgage loans held for sale

844,519  

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Accrued interest payable

Components of Accumulated Other Comprehensive Loss

Components of Accumulated Other Comprehensive Income (Loss)

The following tables provide information about components of accumulated other comprehensive loss as of the dates indicated:

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Comprehensive

Balance at June 30, 2021

$ 8,089  

Unrealized holding loss on available for sale securities, net of tax of ($905)

Balance at September 30, 2021

Balance at December 31, 2021

$ 2,854  

Balance at June 30, 2022

Unrealized holding loss on available for sale securities, net of tax of ($ 8,992 )

Balance at September 30, 2022

Net Unrealized

Gain (Loss) on

Pension Benefits

Accumulated Other

Comprehensive

Income (Loss)

Balance at March 31, 2022

Balance at December 31, 2022

Unrealized holding gain on available for sale securities, net of tax of $ 3,121

11,738  

Unrealized holding loss on available for sale securities, net of tax of ($2,254)

Reclassification adjustment, net of tax of ($3)

Balance at September 30, 2021

$ 4,686  

Balance at December 31, 2021

$ 2,854  

Unrealized holding loss on available for sale securities, net of tax of ($23,431)

Balance at September 30, 2022

Balance at March 31, 2023

Revenue Recognition

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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.

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Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue.

Investment income consists of recurring revenue streams such as commissions from sales of mutual funds, annuities and other investments.

Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments.

Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation.

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

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and nine months ended September 30, 2022 and September 30, 2021.

Three Months Ended September 30,

Noninterest Income

In-scope of Topic 606:

Service charges on deposit accounts

Other service charges and fees

Credit and debit card fees, net

Insurance and Investment (included within Other Income on the Consolidated Statements of Income)

Noninterest Income (in-scope of Topic 606)

$ 1,795  

$ 1,590  

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

Total noninterest income

$ 2,140  

$ 1,992  

Nine Months Ended September 30,

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 three months ended March 31, 2023 and March 31, 2022

Three Months Ended March 31,

Noninterest Income

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Service charges on deposit accounts

$ 1,826  

$ 1,488  

Other service charges and fees

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

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

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

The remaining leases do not have variable payments during the term of the lease.

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

Of the Company’s six operating leases, four leases provide options to extend the lease term.

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

One lease has two options of three years each.

At the time of capitalization, the Company was not reasonably certain whether it would exercise the options and did not include the optional time period in the calculation of the lease liability.

One of the leases has one option to extend the term for an additional five years. 

At the time of capitalization, the Company was not reasonably certain whether it would exercise the option and did not include the optional time period in the calculation of the lease liability. The Company exercised a previous option in 2020 that was included in the calculation of the lease liability.

The lease agreement provides that the lease payment will increase at the exercise date based on the Consumer Price Index for All Urban Consumers (“CPI-U”).

Because the CPI-U at the exercise date is unknown, the increase is not included in the cash flows determining the lease liability.

Of the Company’s seven operating leases as of March 31, 2023, 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. 

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

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

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. 

The lease agreements provide that the lease payment will increase at the exercise date based on the Consumer Price Index for All Urban Consumers (“CPI-U”). 

Because the CPI-U at the exercise date is unknown, the increase is not included in the cash flows determining the lease liability. 

None of the Company’s leases provide for residual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The 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.

The following tables present information about leases:

September 30, 2022

March 31, 2023

December 31, 2022

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Weighted average discount rate

For the Three Months Ended September 30,

Lease Expense

Operating lease expense

Short-term lease expense

Total lease expense

Cash paid for amounts included in lease liabilities

Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

Lease Expense

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Undiscounted Cash Flow for the Period

September 30, 2022

Twelve months ending September 30, 2023

Twelve months ending September 30, 2024

Twelve months ending September 30, 2025

Twelve months ending September 30, 2026

Twelve months ending September 30, 2027

March 31, 2023

Twelve months ending March 31, 2024

Twelve months ending March 31, 2025

Twelve months ending March 31, 2026

Twelve months ending March 31, 2027

Twelve months ending March 31, 2028

Total undiscounted cash flows

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$ 1,365  

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

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

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-Q

Item 1. Financial Statements