NATIONAL BANKSHARES INC 10-Q

Item 1. Financial Statements Financial Information     National Bankshares, Inc.     Consolidated Balance Sheets         (Unaudited)               September 30,     December 31,   (in thousands, except share and per share data)   2023     2022   Assets                 Cash and due from banks   $ 13,089     $ 12,403   Interest-bearing deposits     40,353       59,026   Securities available for sale, at fair value     591,552       656,852   Restricted stock, at cost     1,264       941   Mortgage loans held for sale     82       -   Loans:                 Loans, net of unearned income and deferred fees and costs     848,975       852,744   Less allowance for credit losses     ( 10,181 )     ( 8,225 ) Loans, net     838,794       844,519   Premises and equipment, net     11,091       10,371   Accrued interest receivable     6,180       6,001   Other real estate owned, net     662       662   Goodwill     5,848       5,848   Bank-owned life insurance     43,327       43,312   Other assets     39,660       37,616   Total assets   $ 1,591,902     $ 1,677,551                     Liabilities and Stockholders' Equity                 Noninterest-bearing demand deposits   $ 303,166     $ 327,713   Interest-bearing demand deposits     789,148       933,269   Savings deposits     184,801       214,114   Time deposits     187,885       67,629   Total deposits     1,465,000       1,542,725   Accrued interest payable     551       106   Other liabilities     10,238       12,033   Total liabilities     1,475,789       1,554,864   Commitments and contingencies                     Stockholders' Equity                 Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding     -       -   Common stock of $ 1.25 par value and additional paid in capital. Authorized 10,000,000 shares; issued and outstanding 5,891,739 (including 2,052 unvested) shares at September 30, 2023 and 5,889,687 at December 31, 2022     7,383       7,362   Retained earnings     198,394       199,091   Accumulated other comprehensive loss, net     ( 89,664 )     ( 83,766 ) Total stockholders' equity     116,113       122,687   Total liabilities and stockholders' equity   $ 1,591,902     $ 1,677,551     See accompanying notes to consolidated financial statements.   3 Table of Contents       National Bankshares, Inc. Consolidated Statements of Income (Unaudited)       Three Months Ended September 30,   (in thousands, except share and per share data)   2023     2022   Interest Income                 Interest and fees on loans   $ 9,816     $ 8,816   Interest on interest-bearing deposits     439       506   Interest on securities – taxable     4,084       3,425   Interest on securities – nontaxable     340       408   Total interest income     14,679       13,155   Interest Expense                 Interest on time deposits     1,452       31   Interest on other deposits     4,584       722   Interest on borrowings     3       -   Total interest expense     6,039       753   Net interest income     8,640       12,402   (Recovery of) provision for credit losses     ( 401 )     252   Net interest income after (recovery of) provision for credit losses     9,041       12,150                     Noninterest Income                 Service charges on deposit accounts     642       661   Other service charges and fees     151       51   Credit and debit card fees, net     395       448   Trust income     505       492   BOLI income     253       239   Gain on sale of mortgage loans     22       40   Other income     147       209   Total noninterest income     2,115       2,140                     Noninterest Expense                 Salaries and employee benefits     4,462       4,144   Occupancy, furniture and fixtures     547       476   Data processing and ATM     978       774   FDIC assessment     190       114   Net costs of other real estate owned     14       68   Franchise taxes     339       375   Professional services     251       254   Other operating expenses     684       531   Total noninterest expense     7,465       6,736   Income before income taxes     3,691       7,554   Income tax expense     617       1,392   Net Income   $ 3,074     $ 6,162   Basic net income per common share   $ 0.52     $ 1.03   Diluted net income per common share   $ 0.52     $ 1.03   Weighted average number of common shares outstanding, basic     5,889,687       5,974,961   Weighted average number of common shares outstanding, diluted     5,889,939       5,974,961   Dividends declared per common share   $ -     $ -     See accompanying notes to consolidated financial statements.   4 Table of Contents       National Bankshares, Inc. Consolidated Statements of Comprehensive Loss Three Months Ended September 30, 2023 and 2022 (Unaudited)       September 30,   (in thousands)   2023     2022   Net Income   $ 3,074     $ 6,162                     Other Comprehensive Loss, Net of Tax                 Unrealized holding loss on available for sale securities net of tax of ( $4,099 ) and ($ 7,822 ) for the periods ended September 30, 2023 and September 30, 2022, respectively     ( 15,421 )     ( 29,424 ) Other comprehensive loss, net of tax     ( 15,421 )     ( 29,424 ) Total Comprehensive Loss   $ ( 12,347 )   $ ( 23,262 )   See accompanying notes to consolidated financial statements.   5 Table of Contents       National Bankshares, Inc. Consolidated Statements of Income (Unaudited)       Nine Months Ended September 30,   (in thousands, except share and per share data)   2023     2022   Interest Income                 Interest and fees on loans   $ 28,793     $ 25,240   Interest on interest-bearing deposits     1,207       757   Interest on securities – taxable     12,268       8,847   Interest on securities – nontaxable     1,052       1,283   Total interest income     43,320       36,127                     Interest Expense                 Interest on time deposits     2,865       105   Interest on other deposits     11,352       1,950   Interest on borrowings     300       -   Total interest expense     14,517       2,055   Net interest income     28,803       34,072   (Recovery of) provision for credit losses     ( 389 )     696   Net interest income after (recovery of) provision for credit losses     29,192       33,376                     Noninterest Income                 Service charges on deposit accounts     1,871       1,826   Other service charges and fees     253       157   Credit and debit card fees, net     1,276       1,423   Trust income     1,431       1,374   BOLI income     1,771       718   Gain on sale of investment     2,971       -   Gain on sale of mortgage loans     93       136   Loss on sale of securities     ( 3,332 )     -   Other income     771       909   Total noninterest income     7,105       6,543                     Noninterest Expense                 Salaries and employee benefits     13,361       12,133   Occupancy, furniture and fixtures     1,500       1,432   Data processing and ATM     2,730       2,354   FDIC assessment     561       336   Net costs of other real estate owned     29       78   Franchise taxes     1,072       1,108   Professional services     1,555       693   Other operating expenses     1,878       1,526   Total noninterest expense     22,686       19,660   Income before income taxes     13,611       20,259   Income tax expense     2,105       3,637   Net Income   $ 11,506     $ 16,622   Basic net income per common share   $ 1.95     $ 2.77   Fully diluted net income per common share   $ 1.95     $ 2.77   Weighted average number of common shares outstanding, basic     5,889,687       6,008,607   Weighted average number of common shares outstanding, diluted     5,889,778       6,008,607   Dividends declared per common share   $ 1.73     $ 0.72     6 Table of Contents       National Bankshares, Inc. Consolidated Statements of Comprehensive Income (Loss) Nine Months Ended September 30, 2023 and 2022 (Unaudited)       September 30,   (in thousands)   2023     2022   Net Income   $ 11,506     $ 16,622                     Other Comprehensive Loss, Net of Tax                 Unrealized holding loss on available for sale securities net of tax of ($ 2,268 ) and ($ 23,431 ) for the periods ended September 30, 2023 and September 30, 2022, respectively     ( 8,530 )     ( 88,143 ) Reclassification adjustment for loss included in net income, net of tax of $ 700 in 2023     2,632       -   Other comprehensive loss, net of tax     ( 5,898 )     ( 88,143 ) Total Comprehensive Income (Loss)   $ 5,608     $ ( 71,521 )   See accompanying notes to consolidated financial statements.   7 Table of Contents       National Bankshares, Inc. Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) Three Months Ended September 30, 2023 and 2022   (in thousands except share data)   Common Stock and Additional Paid-in Capital     Retained Earnings     Accumulated Other Comprehensive Loss     Total   Balances at June 30, 2022   $ 7,476     $ 191,545     $ ( 62,777 )   $ 136,244   Net income     -       6,162       -       6,162   Common stock repurchased, 23,500 shares     ( 29 )     ( 766 )     -       ( 795 ) Other comprehensive loss, net of tax of ($ 7,822 )     -       -       ( 29,424 )     ( 29,424 ) Balances at September 30, 2022   $ 7,447     $ 196,941     $ ( 92,201 )   $ 112,187                                     Balances at June 30, 2023   $ 7,367     $ 195,320     $ ( 74,243 )   $ 128,444   Net income     -       3,074       -       3,074   Other comprehensive loss, net of tax of ($ 4,099 )     -       -       ( 15,421 )     ( 15,421 ) Stock based compensation     16       -       -       16   Balances at September 30, 2023   $ 7,383     $ 198,394     $ ( 89,664 )   $ 116,113     See accompanying notes to consolidated financial statements.     Nine Months Ended September 30, 2023 and 2022   (in thousands except share data)   Common Stock and Additional Paid-in Capital     Retained Earnings     Accumulated Other Comprehensive Loss     Total   Balances at December 31, 2021   $ 7,580     $ 188,229     $ ( 4,058 )   $ 191,751   Net income     -       16,622       -       16,622   Common stock repurchased, 106,662 shares     ( 133 )     ( 3,591 )     -       ( 3,724 ) Cash dividends of $ 0.72 per share     -       ( 4,319 )     -       ( 4,319 ) Other comprehensive loss, net of tax of ($ 23,431 )     -       -       ( 88,143 )     ( 88,143 ) Balances at September 30, 2022   $ 7,447     $ 196,941     $ ( 92,201 )   $ 112,187                                     Balances at December 31, 2022   $ 7,362     $ 199,091     $ ( 83,766 )   $ 122,687   Adoption of ASU 2016-13     -       ( 2,014 )     -       ( 2,014 ) Net income     -       11,506       -       11,506   Cash dividends of $ 1.73 per share     -       ( 10,189 )     -       ( 10,189 ) Other comprehensive loss, net of tax of ($ 1,568 )     -       -       ( 5,898 )     ( 5,898 ) Stock based compensation     21       -       -       21   Balances at September 30, 2023   $ 7,383     $ 198,394     $ ( 89,664 )   $ 116,113     See accompanying notes to the consolidated financial statements.   8 Table of Contents       National Bankshares, Inc. Consolidated Statements of Cash Flows Nine Months Ended September 30, 2023 and 2022 (Unaudited)   (in thousands)   September 30, 2023     September 30, 2022   Cash Flows from Operating Activities                 Net income   $ 11,506     $ 16,622   Adjustments to reconcile net income to net cash provided by operating activities:                 (Recovery of) provision for credit losses     ( 389 )     696   Depreciation of bank premises and equipment     544       449   Amortization of premiums and accretion of discounts, net     806       972   Gain on disposal of fixed assets     -       ( 4 ) Loss on sales of securities available for sale, net     3,332       -   Losses and write-downs on other real estate owned, net     -       50   Loss on sales of repossessed assets     5       -   Increase in cash value of bank-owned life insurance     ( 734 )     ( 718 ) Origination of mortgage loans held for sale     ( 6,689 )     ( 6,348 ) Proceeds from sale of mortgage loans held for sale     6,700       7,099   Gain on sale of mortgage loans held for sale     ( 93 )     ( 136 ) Equity based compensation expense     21       -   Net change in:                 Accrued interest receivable     ( 179 )     ( 718 ) Other assets     59       33   Accrued interest payable     445       ( 8 ) Other liabilities     ( 2,002 )     282   Net cash provided by operating activities     13,332       18,271                     Cash Flows from Investing Activities                 Proceeds from calls, principal payments, sales and maturities of securities available for sale     53,696       33,465   Purchase of securities available for sale     -       ( 117,341 ) Net change in restricted stock     ( 323 )     ( 96 ) Purchase of loan participations     ( 5,118 )     ( 10,965 ) Collection of loan participations     6,686       4,513   Loan originations and principal collections, net     1,958       ( 43,479 ) Proceeds from sale of repossessed assets     13       -   Recoveries on loans charged off     235       153   Proceeds from sale and purchases of premises and equipment, net     ( 1,264 )     ( 906 ) BOLI settlement     712       -   Net cash provided by (used in) investing activities     56,595       ( 134,656 )                   Cash Flows from Financing Activities                 Net change in time deposits     120,256       ( 1,945 ) Net change in other deposits     ( 197,981 )     78,007   Common stock repurchased     -       ( 3,724 ) Cash dividends paid     ( 10,189 )     ( 4,319 ) Net cash (used in) provided by financing activities     ( 87,914 )     68,019   (Continued)   9 Table of Contents     Net change in cash and due from banks     ( 17,987 )     ( 48,366 ) Cash and due from banks at beginning of period     71,429       138,789   Cash and due from banks at end of period   $ 53,442     $ 90,423                     Supplemental Disclosures of Cash Flow Information                 Interest paid on deposits and borrowings   $ 14,072     $ 2,063   Income taxes paid     3,997       3,441                     Supplemental Disclosure of Noncash Activities                 Loans charged against the allowance for credit losses   $ 232     $ 316   Loans transferred to repossessed assets     11       -   Unrealized holding loss on securities available for sale     ( 7,466 )     ( 111,574 ) Lease liabilities arising from obtaining right-of-use assets     -       104     See accompanying notes to consolidated financial statements.   10 Table of Contents     National Bankshares, Inc. Notes to Consolidated Financial Statements September 30, 2023 (Unaudited)   $ in thousands, except per share data     Note 1: General   The consolidated financial statements of National Bankshares, Inc. (“NBI”) and its wholly-owned subsidiaries, The National Bank of Blacksburg (the “Bank” or “NBB”) and National Bankshares Financial Services, Inc. (“NBFS”) (collectively, the “Company”), conform to accounting principles generally accepted in the United States of America (“GAAP”) and to general practices within the banking industry. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of the Company’s 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, 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 Annual Report on Form 10 -K for the year ended December 31, 2022 ( “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 high inflation, along with U.S. monetary policy maneuvers to reduce inflation. Inflation and U.S. monetary policy maneuvers to reduce it may impact the Company’s customers’ demand for banking services and ability to qualify for and/or repay loans. These risks could adversely affect the Company’s business, financial condition, results of operations, cash flows, credit risk, asset valuations and capital position.   Recent Accounting Pronouncements In October 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023 - 06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative”. This ASU incorporates certain U.S. Securities and Exchange Commission (SEC) disclosure requirements into the FASB Accounting Standards Codification. The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of Codification Topics, allow users to more easily compare entities subject to the SEC’s existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the Codification with the SEC’s regulations. For entities subject to the SEC’s existing disclosure requirements and for entities required to file or furnish financial statements with or to the SEC in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer, the effective date for each amendment will be the date on which the SEC removes that related disclosure from its rules. For all other entities, the amendments will be effective two years later. However, if by June 30, 2027, the SEC has not removed the related disclosure from its regulations, the amendments will be removed from the Codification and not become effective for any entity. The Company does not expect the adoption of ASU 2023 - 06 to have a material impact on its consolidated financial statements.   In July 2023, the FASB issued ASU 2023 - 03, “Presentation of Financial Statements (Topic 205 ), Income Statement—Reporting Comprehensive Income (Topic 220 ), Distinguishing Liabilities from Equity (Topic 480 ), Equity (Topic 505 ), and Compensation—Stock Compensation (Topic 718 )”. This ASU amends the FASB Accounting Standards Codification for Securities and Exchange Commission (“SEC”) paragraphs pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S- X: Income or Loss Applicable to Common Stock. ASU 2023 - 03 is effective upon addition to the FASB Codification. The Company does not expect the adoption of ASU 2023 - 03 to have a material impact on its consolidated financial statements.   In March 2020, the FASB issued 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.   11 Table of Contents     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 for its loan and other financial instruments.   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” 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 Sheets, 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 Statements of Income. If the Company’s 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.   12 Table of Contents     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 Equity lines Residential closed-end first liens Residential closed-end junior liens Investor-owned residential real estate   Commercial Real Estate Multifamily real estate Commercial real estate, owner occupied Commercial real estate, other Commercial Non Real Estate Commercial and industrial   Public Sector and IDA Public sector and IDA   Consumer Non Real Estate Credit cards Automobile Other consumer loans   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 the Company’s 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 the Company’s 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.   13 Table of Contents     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 is designated for financial reporting purposes. Loans that are modified for borrowers experiencing financial difficulty are evaluated to determine whether the credit risk 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.     Note 2: Loans and Allowance for Credit Losses   Loans   The following table presents the composition of the loan portfolio, excluding mortgage loans held for sale, as of the dates indicated.       September 30, 2023     December 31, 2022   Real estate construction   $ 64,181     $ 54,579   Consumer real estate     226,671       221,052   Commercial real estate     424,765       437,888   Commercial non real estate     42,940       57,652   Public sector and IDA     51,591       48,074   Consumer non real estate     39,269       33,948   Gross loans     849,417       853,193   Less unearned income and deferred fees and costs     ( 442 )     ( 449 ) Loans, net of unearned income and deferred fees and costs   $ 848,975     $ 852,744   Allowance for credit losses on loans     ( 10,181 )     ( 8,225 ) Total loans, net   $ 838,794     $ 844,519     Accrued interest receivable on loans, which is excluded from the amortized cost of loans, totaled $ 2,760 at September 30, 2023 and $ 2,516  at December  31, 2022.   14 Table of Contents     Past Due and Nonaccrual Loans   The following tables present the aging of past due loans, by loan pool, as of the dates indicated.       September 30, 2023       Accruing Current Loans     Accruing Loans 30 – 89 Days Past Due     Accruing Loans 90 or More Days Past Due     Nonaccrual Loans     Total Loans     Accruing and Nonaccrual 90 or More Days Past Due   Real Estate Construction                                                 Construction, 1-4 family residential   $ 16,995     $ -     $ -     $ -     $ 16,995     $ -   Construction, other     47,165       21       -       -       47,186       -   Consumer Real Estate                                                 Equity line     16,631       23       -       -       16,654       -   Residential closed-end first liens     122,839       679       7       85       123,610       92   Residential closed-end junior liens     5,009       13       -       -       5,022       -   Investor-owned residential real estate     81,385       -       -       -       81,385       -   Commercial Real Estate                                                 Multifamily residential real estate     133,188       -       -       -       133,188       -   Commercial real estate owner-occupied     116,089       288       -       2,429       118,806       236   Commercial real estate, other     172,771       -       -       -       172,771       -   Commercial Non Real Estate                                                 Commercial and industrial     42,452       4       17       467       42,940       252   Public Sector and IDA                                                 States and political subdivisions     51,591       -       -       -       51,591       -   Consumer Non-Real Estate                                                 Credit cards     4,570       4       -       -       4,574       -   Automobile     11,933       42       2       -       11,977       3   Other consumer loans     22,615       98       5       -       22,718       5   Total   $ 845,233     $ 1,172     $ 31     $ 2,981     $ 849,417     $ 588     15 Table of Contents         December 31, 2022       Accruing Current Loans     Accruing Loans 30 – 89 Days Past Due     Accruing Loans 90 or More Days Past Due     Nonaccrual Loans     Total Loans     Accruing and Nonaccrual 90 or More Days Past Due   Real Estate Construction                                                 Construction, 1-4 family residential   $ 12,538     $ -     $ -     $ -     $ 12,538     $ -   Construction, other     42,041       -       -       -       42,041       -   Consumer Real Estate                                                 Equity line     15,010       16       -       -       15,026       -   Residential closed-end first liens     121,807       750       -       91       122,648       91   Residential closed-end junior liens     2,446       -       -       -       2,446       -   Investor-owned residential real estate     80,524       408       -       -       80,932       -   Commercial Real Estate                                                 Multifamily residential real estate     127,312       -       -       -       127,312       -   Commercial real estate owner-occupied     126,640       -       -       2,493       129,133       252   Commercial real estate, other     181,443       -       -       -       181,443       -   Commercial Non Real Estate                                                 Commercial and industrial     57,373       16       -       263       57,652       -   Public Sector and IDA                                                 States and political subdivisions     48,074       -       -       -       48,074       -   Consumer Non-Real Estate                                                 Credit cards     4,592       3       2       -       4,597       2   Automobile     9,833       102       -       -       9,935       -   Other consumer loans     19,317       93       6       -       19,416       6   Total   $ 848,950     $ 1,388     $ 8     $ 2,847     $ 853,193     $ 351     The following table presents nonaccrual loans, by loan class, as of the dates indicated:       CECL     Incurred Loss       September 30, 2023     December 31, 2022       Nonaccrual Loans     Nonaccrual Loans       With No Allowance     With an Allowance     Total           Consumer Real Estate                                 Residential closed-end first liens   $ -     $ 85     $ 85     $ 91   Commercial Real Estate                                 Commercial real estate owner-occupied     -       2,429       2,429       2,493   Commercial Non Real Estate                                 Commercial and industrial     -       467       467       263   Total   $ -     $ 2,981     $ 2,981     $ 2,847     During the three and nine months ended September 30, 2023, no accrued interest receivable was reversed against interest income.   16 Table of Contents     The following table presents certain past due indicators as of the dates indicated.       September 30,     December 31,       2023     2022     2022   Ratio of ACLL to nonaccrual loans     341.53 %     284.18 %     288.90 % Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees and costs     0.00 %     0.01 %     0.00 %   Allowance for Credit Losses on Loans   The following tables present the activity in the ACLL by portfolio segment for the periods indicated:       Activity in the Allowance for Credit Losses on Loans for the Nine Months Ended September 30, 2023       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non Real Estate     Unallocated     Total   Balance, December 31, 2022   $ 450     $ 2,199     $ 3,642     $ 930     $ 319     $ 506     $ 179     $ 8,225   Adoption of ASU 2016-13     ( 21 )     1,261       700       216       ( 15 )     72       129       2,342   Charge-offs     -       ( 17 )     -       ( 11 )     -       ( 204 )     -       ( 232 ) Recoveries     -       103       37       4       -       91       -       235   Provision for (recovery of) credit losses     133       ( 353 )     ( 212 )     ( 300 )     10       156       177       ( 389 ) Balance, September 30, 2023   $ 562     $ 3,193     $ 4,167     $ 839     $ 314     $ 621     $ 485     $ 10,181         Activity in the Allowance for Loan Losses for the Nine Months Ended September 30, 2022       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non Real Estate     Unallocated     Total   Balance, December 31, 2021   $ 422     $ 1,930     $ 3,121     $ 1,099     $ 297     $ 444     $ 361     $ 7,674   Charge-offs     -       ( 13 )     -       ( 2 )     -       ( 301 )     -       ( 316 ) Recoveries     -       29       36       10       -       78       -       153   Provision for (recovery of) loan losses     225       266       452       ( 329 )     39       263       ( 220 )     696   Balance, September 30, 2022   $ 647     $ 2,212     $ 3,609     $ 778     $ 336     $ 484     $ 141     $ 8,207         Activity in the Allowance for Loan Losses for the Year Ended December 31, 2022       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non Real Estate     Unallocated     Total   Balance, December 31, 2021   $ 422     $ 1,930     $ 3,121     $ 1,099     $ 297     $ 444     $ 361     $ 7,674   Charge-offs     -       ( 13 )     -       ( 2 )     -       ( 352 )     -       ( 367 ) Recoveries     -       29       49       11       -       123       -       212   Provision for (recovery of) loan losses     28       253       472       ( 178 )     22       291       ( 182 )     706   Balance, December 31, 2022   $ 450     $ 2,199     $ 3,642     $ 930     $ 319     $ 506     $ 179     $ 8,225     17 Table of Contents     The following tables present information about the ACLL for individually evaluated loans and collectively evaluated loans by portfolio segment as of the dates indicated.       Allowance for Credit Losses on Loans as of September 30, 2023       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non Real Estate     Unallocated     Total   Individually evaluated   $ -     $ 78     $ 548     $ 248     $ -     $ 1     $ -     $ 875   Collectively evaluated     562       3,115       3,619       591       314       620       485       9,306   Total   $ 562     $ 3,193     $ 4,167     $ 839     $ 314     $ 621     $ 485     $ 10,181         Allowance for Loan Losses as of December 31, 2022       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non- Real Estate     Unallocated     Total   Individually evaluated   $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -   Collectively evaluated     450       2,199       3,642       930       319       506       179       8,225   Total   $ 450     $ 2,199     $ 3,642     $ 930     $ 319     $ 506     $ 179     $ 8,225     The following tables present information about individually evaluated loans and collectively evaluated loans by portfolio segment as of the dates indicated.       Loans as of September 30, 2023       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non Real Estate     Total   Individually evaluated   $ 288     $ 1,059     $ 8,826     $ 473     $ -     $ 12     $ 10,658   Collectively evaluated     63,893       225,612       415,939       42,467       51,591       39,257       838,759   Total   $ 64,181     $ 226,671     $ 424,765     $ 42,940     $ 51,591     $ 39,269     $ 849,417         Loans as of December 31, 2022       Real Estate Construction     Consumer Real Estate     Commercial Real Estate     Commercial Non Real Estate     Public Sector and IDA     Consumer Non- Real Estate     Total   Individually evaluated   $ -     $ 186     $ 2,583     $ 263     $ -     $ -     $ 3,032   Collectively evaluated     54,579       220,866       435,305       57,389       48,074       33,948       850,161   Total   $ 54,579     $ 221,052     $ 437,888     $ 57,652     $ 48,074     $ 33,948     $ 853,193     The following table presents ratios pertaining to the ACLL as of the dates and for the periods indicated.       As of and for the       Nine Months Ended September 30,     Year Ended December 31,       2023     2022     2022   Ratio of ACLL to the end of period loans, net of unearned income and deferred fees and costs     1.20 %     0.96 %     0.96 % Ratio of net charge-offs, annualized, to average loans, net of unearned income and deferred fees and costs     0.00 %     0.03 %     0.02 %   18 Table of Contents     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 Form 10 -K. A summary of individually evaluated loans as of the date indicated follows.       Individually Evaluated Loans under Incurred Loss as of December 31, 2022       Principal Balance     Recorded Investment (1)     Recorded Investment (1) for Which There is No Related Allowance     Recorded Investment (1) for Which There is a Related Allowance     Related Allowance   Consumer Real Estate                                         Investor-owned residential real estate   $ 186     $ 186     $ 186     $ -     $ -   Commercial Real Estate                                         Commercial real estate, owner occupied     3,248       2,583       2,583       -       -   Commercial Non Real Estate                                         Commercial and industrial     285       263       263       -       -   Total   $ 3,719     $ 3,032     $ 3,032     $ -     $ -       ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   The following table shows the average recorded investment and interest income recognized for individually evaluated loans under the incurred loss model for the period indicated. Only classes with individually evaluated loans are presented.       For the Nine Months Ended September 30, 2022       Average Recorded Investment (1)     Interest Income Recognized   Consumer Real Estate                 Investor-owned residential real estate   $ 189     $ 9   Commercial Real Estate                 Commercial real estate, owner occupied     2,601       4   Commercial Non-Real Estate                 Commercial and industrial     277       -   Total   $ 3,067     $ 13       ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.   Collateral Dependent Loans   The Company reviews individually evaluated loans to identify collateral dependency. Loans are collateral dependent when repayment is expected substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. The Company adopted the practical expedient provided by ASU 2016 - 13 to measure the ACL on collateral dependent loans based upon the fair value of the collateral. Fair value of the collateral is adjusted for liquidation costs/discounts. If the fair value of the collateral falls below the amortized cost of the loan, the shortfall is recognized in the ACLL. If the fair value of the collateral exceeds the amortized cost, no ACL is required. As of September 30, 2023, one of the Company’s individually evaluated loans was considered collateral dependent.   All collateral loans are secured by real estate as of September 30, 2023. The following table details the amortized cost of the collateral dependent loan as of the date indicated:   September 30, 2023   Balance     Related Allowance   Consumer Real Estate                 Residential closed-end first lien   $ 7       -   Total Loans   $ 7       -     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:   ● Pass: 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.   ● Classified: loans with well-defined weaknesses that heighten the risk of default are rated classified.   19 Table of Contents     The following table presents 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             Revolving Loans           September 30, 2023   Prior     2019     2020     2021     2022     2023     Revolving     Converted to Term     Total   Construction, residential                                                                         Pass   $ -     $ -     $ 233     $ 121     $ 3,787     $ 2,705     $ 10,149     $ -     $ 16,995                                                                             Construction, other                                                                         Pass   $ 3,196     $ 1,111     $ 1,411     $ 23,163     $ 11,577     $ 4,375     $ 2,065     $ -     $ 46,898   Classified     -       -       -       288       -       -       -       -       288   Total   $ 3,196     $ 1,111     $ 1,411     $ 23,451     $ 11,577     $ 4,375     $ 2,065     $ -     $ 47,186                                                                             Equity lines                                                                         Pass   $ 53     $ -     $ -     $ -     $ -     $ -     $ 16,553     $ 6     $ 16,612   Classified     -       -       -       -       -       -       42       -       42   Total   $ 53     $ -     $ -     $ -     $ -     $ -     $ 16,595     $ 6     $ 16,654                                                                             Residential closed-end first liens                                                                   Pass   $ 33,129     $ 5,874     $ 14,784     $ 32,074     $ 28,768     $ 8,681     $ -     $ -     $ 123,310   Classified     300       -       -       -       -       -       -       -       300   Total   $ 33,429     $ 5,874     $ 14,784     $ 32,074     $ 28,768     $ 8,681     $ -     $ -     $ 123,610   YTD gross charge-offs   $ -     $ -     $ 17     $ -     $ -     $ -     $ -     $ -     $ 17                                                                             Residential closed-end junior liens                                                                   Pass   $ 1,749     $ 118     $ -     $ 175     $ 1,395     $ 1,570     $ -     $ 15     $ 5,022                                                                             Investor-owned residential real estate                                                                   Pass   $ 23,141     $ 5,215     $ 14,348     $ 19,475     $ 13,888     $ 3,093     $ 1,409     $ 99     $ 80,668   Classified     717       -       -       -       -       -       -       -       717   Total   $ 23,858     $ 5,215     $ 14,348     $ 19,475     $ 13,888     $ 3,093     $ 1,409     $ 99     $ 81,385                                                                             Multifamily residential real estate                                                                   Pass   $ 42,874     $ 1,823     $ 11,820     $ 40,944     $ 26,874     $ 8,853     $ -     $ -     $ 133,188                                                                             Commercial real estate, owner occupied                                                                   Pass   $ 43,438     $ 11,295     $ 23,661     $ 4,843     $ 16,731     $ 7,757     $ 2,255     $ -     $ 109,980   Special mention     6,396       -       -       -       -       -       -       -       6,396   Classified     2,430       -       -       -       -       -       -       -       2,430   Total   $ 52,264     $ 11,295     $ 23,661     $ 4,843     $ 16,731     $ 7,757     $ 2,255     $ -     $ 118,806                                                                             Commercial real estate, other                                                                   Pass   $ 70,064     $ 22,033     $ 19,300     $ 36,272     $ 22,600     $ 1,957     $ 545     $ -     $ 172,771                                                                             Commercial and industrial                                                                         Pass   $ 6,100     $ 494     $ 1,189     $ 13,059     $ 7,439     $ 6,634     $ 7,552     $ -     $ 42,467   Classified     231       -       -       -       7       -       235       -       473   Total   $ 6,331     $ 494     $ 1,189     $ 13,059     $ 7,446     $ 6,634     $ 7,787     $ -     $ 42,940   YTD gross charge-offs   $ -     $ 11     $ -     $ -     $ -     $ -     $ -     $ -     $ 11                                                                             Public sector and IDA                                                                         Pass   $ 20,942     $ 14     $ 239     $ 17,683     $ 6,438     $ 6,275     $ -     $ -     $ 51,591                                                                             Credit cards                                                                         Pass   $ -     $ -     $ -     $ -     $ -     $ -     $ 4,574     $ -     $ 4,574   YTD gross charge-offs   $ -     $ -     $ -     $ -     $ -     $ -     $ 35     $ -     $ 35                                                                             Automobile                                                                         Pass   $ 95     $ 307     $ 680     $ 1,846     $ 3,146     $ 5,900     $ -     $ -     $ 11,974   Classified     -       3       -       -       -       -       -       -       3   Total   $ 95     $ 310     $ 680     $ 1,846     $ 3,146     $ 5,900     $ -     $ -     $ 11,977   YTD gross charge-offs   $ -     $ -     $ -     $ 1     $ 38     $ -     $ -     $ -     $ 39                                                                             Other consumer                                                                         Pass   $ 136     $ 380     $ 941     $ 2,273     $ 6,770     $ 11,206     $ 1,003     $ -     $ 22,709   Classified     -       -       -       -       1       8       -       -       9   Total   $ 136     $ 380     $ 941     $ 2,273     $ 6,771     $ 11,214     $ 1,003     $ -     $ 22,718   YTD gross charge-offs   $ -     $ -     $ -     $ 19     $ 42     $ 6     $ 63     $ -     $ 130                                                                             Total Loans                                                                         Pass   $ 244,917     $ 48,664     $ 88,606     $ 191,928     $ 149,413     $ 69,006     $ 46,105     $ 120     $ 838,759   Special Mention     6,396       -       -       -       -       -       -       -       6,396   Classified     3,678       3       -       288       8       8       277       -       4,262   Total   $ 254,991     $ 48,667     $ 88,606     $ 192,216     $ 149,421     $ 69,014     $ 46,382     $ 120     $ 849,417   YTD gross charge-offs   $ -     $ 11     $ 17     $ 20     $ 80     $ 6     $ 98     $ -     $ 232     20 Table of Contents     The following table presents the recorded investment by loan pool and credit quality as of December 31, 2022.       December 31, 2022       Pass     Special Mention     Classified   Real Estate Construction                         Construction, 1-4 family residential   $ 12,538     $ -     $ -   Construction, other     41,741       -       300   Consumer Real Estate                         Equity lines     15,026       -       -   Residential closed-end first liens     122,187       -       461   Residential closed-end junior liens     2,446       -       -   Investor-owned residential real estate     80,143       -       603   Commercial Real Estate                         Multifamily residential real estate     127,312       -       -   Commercial real estate owner-occupied     126,550       -       -   Commercial real estate, other     181,443       -       -   Commercial Non Real Estate                         Commercial and industrial     57,381       -       8   Public Sector and IDA                         States and political subdivisions     48,074       -       -   Consumer Non-Real Estate                         Credit cards     4,597       -       -   Automobile     9,932       -       3   Other consumer     19,398       -       18   Total   $ 848,768     $ -     $ 1,393     Loan Modifications to Borrowers Experiencing Financial Difficulty   The Company modifies loans for a variety of reasons. At the date of modification, the Company assesses whether the borrower is experiencing financial difficulty. If the borrower is experiencing financial difficulty, the loan’s risk rating is evaluated and is typically changed to special mention or classified, which results in individual evaluation of the loan for the ACLL. The Company modified one loan to a borrower experiencing financial difficulty during the nine month period ended September 30, 2023. No loans were modified for borrowers experiencing financial difficulty during the three months period ended September 30, 2023. During the three and nine month periods ended September 30, 2022, no loans were modified for borrowers experiencing financial difficulty.   The following table presents the amortized cost basis as of September 30, 2023 of the loan modified for a borrower experiencing financial difficulty.       Interest Only Payments     Amortized Cost Basis     % of Portfolio   Financial Effect Commercial Real Estate                   Commercial real estate owner-occupied   $ 6,396       5.38 % 6 months of interest only payments, after which remaining balance will be re-amortized to the contractual maturity date.   The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty. The commercial real estate owner-occupied loan is in current status as of September 30, 2023.   The Company analyzed its modified loan portfolio for loans that defaulted during the three and nine month period ended September 30, 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 modification. Of the Company’s modifications at September 30, 2023, none were modified within 12 months prior to default.   21 Table of Contents     ACL on Unfunded Commitments   The following table presents the balance and activity in the ACL for unfunded commitments for the nine months ended September 30, 2023:   Allowance for Credit Losses on Unfunded Commitments   Balance, December 31, 2022   $ 35   Adoption of ASU 2016-13     207   Provision for credit losses     21   Balance, September 30, 2023   $ 263       Note 3: Securities   The amortized cost and estimated fair value of securities available for sale along with gross unrealized gains and losses as of the dates indicated are summarized as follows:       September 30, 2023       Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Allowance for Credit Losses     Fair Value   Available for Sale:                                         U.S. Treasuries   $ 995     $ -     $ 47     $ -     $ 948   U.S. Government agencies and corporations     353,845       -       57,856       -       295,989   States and political subdivisions     179,672       -       42,603       -       137,069   Mortgage-backed securities     161,067       -       8,955       -       152,112   Corporate debt securities     6,504       -       1,070       -       5,434   Total securities available for sale   $ 702,083     $ -     $ 110,531     $ -     $ 591,552         December 31, 2022       Amortized Cost     Gross Unrealized Gains     Gross Unrealized Losses     Fair Value   Available for Sale:                                 U.S. Treasuries   $ 992     $ -     $ 56     $ 936   U.S. Government agencies and corporations     391,538       39       55,002       336,575   States and political subdivisions     190,192       26       38,018       152,200   Mortgage-backed securities     170,694       22       9,239       161,477   Corporate debt securities     6,501       -       837       5,664   Total securities available for sale   $ 759,917     $ 87     $ 103,152     $ 656,852     No allowance for credit loss on securities available for sale was recorded as of September 30, 2023.   Accrued interest receivable on securities, included in accrued interest receivable on the Consolidated Balance Sheets, totaled $ 3,420 at September 30, 2023 and $ 3,485  at December  31, 2022.   The deferred tax asset for the net unrealized loss on securities available for sale was $ 23,211 as of September 30, 2023 and $ 21,644 as of December 31, 2022. The deferred tax asset is included in other assets on the Consolidated Balance Sheets.   22 Table of Contents     The amortized cost and fair value of single maturity securities available for sale at September 30, 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, 2023       Amortized Cost     Fair Value   Available for Sale:                 Due in one year or less   $ 1,755     $ 1,730   Due after one year through five years     154,209       140,650   Due after five years through ten years     293,046       239,668   Due after ten years     253,073       209,504   Total securities available for sale   $ 702,083     $ 591,552     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, as of the dates indicated, follows.       September 30, 2023       Less Than 12 Months     12 Months or More       Fair Value     Unrealized Loss     Fair Value     Unrealized Loss   U.S. Treasuries   $ -     $ -     $ 948     $ 47   U.S. Government agencies and corporations     -       -       295,989       57,856   States and political subdivisions     845       41       135,979       42,562   Mortgage-backed securities     1,664       39       150,448       8,916   Corporate debt securities     -       -       5,434       1,070   Total temporarily impaired securities   $ 2,509     $ 80     $ 588,798     $ 110,451         December 31, 2022       Less Than 12 Months     12 Months or More       Fair Value     Unrealized Loss     Fair Value     Unrealized Loss   U.S. Treasuries   $ 936     $ 56     $ -     $ -   U.S. Government agencies and corporations     144,574       12,699       190,950       42,303   States and political subdivisions     94,657       18,373       52,134       19,645   Mortgage-backed securities     144,198       7,326       15,165       1,913   Corporate debt securities     4,843       655       821       182   Total temporarily impaired securities   $ 389,208     $ 39,109     $ 259,070     $ 64,043     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 September 30, 2023, the Company had 577 securities with a fair value of $ 591,307 in an unrealized loss position. The Company reviews securities in an unrealized loss position to evaluate credit risk. The Company considers payment history, risk ratings from external parties, financial statements for municipal and corporate securities, public statements from issuers and other available credible published sources in evaluating credit risk. No credit risk was found and no ACL on securities available for sale was recorded as of September 30, 2023. The unrealized losses are attributed to noncredit-related factors, including changes in interest rates and other market conditions. 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. 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.   23 Table of Contents     Restricted Stock. The Company holds restricted stock that is reported separately from available for sale securities. 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. Redemption of FHLB stock is subject to certain limitations and conditions. At its discretion, the FHLB may declare dividends on the stock. In addition to dividends, NBB also benefits from its membership with FHLB through eligibility to borrow from the FHLB, using as collateral NBB’s capital stock investment in the FHLB and qualifying NBB real estate mortgage loans totaling $ 510,786 at September 30, 2023. The Company’s management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at September 30, 2023, did not determine any impairment.     Note 4: Defined Benefit Plan             The following tables present components of Net Periodic Benefit Cost for the periods indicated:       Pension Benefits Three Months Ended September 30,       2023     2022   Service cost   $ 203     $ 324   Interest cost     273       204   Expected return on plan assets     ( 518 )     ( 629 ) Amortization of prior service cost     -       -   Recognized net actuarial loss     17       110   Net periodic benefit (income) cost   $ ( 25 )   $ 9         Pension Benefits Nine Months Ended September 30,       2023     2022   Service cost   $ 609     $ 972   Interest cost     819       612   Expected return on plan assets     ( 1,553 )     ( 1,887 ) Amortization of prior service cost     -       -   Recognized net actuarial loss     52       330   Net periodic benefit (income) cost   $ ( 73 )   $ 27     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. No contributions to the defined benefit plan have been made during 2023.   24 Table of Contents       Note 5: Fair Value Measurements   Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of the observable inputs and minimize the use of the unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:   Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities.   Level 2 – Valuation is based on observable inputs including:   ● quoted prices in active markets for similar assets and liabilities,   ● quoted prices for identical or similar assets and liabilities in less active markets,   ● inputs other than quoted prices that are observable, and   ● model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.   Level 3 – Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.   Fair value is best determined by quoted market prices. However, in 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. Accordingly, fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from disclosure requirements. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements.   Financial Instruments Measured at Fair Value on a Recurring Basis   Securities Available for Sale Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1 ). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2 ). The carrying value of restricted Federal Reserve Bank of Richmond and 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, 2023           Fair Value Measurements Using   Description   Balance     Level 1     Level 2     Level 3   U.S. Treasuries   $ 948     $ -     $ 948     $ -   U.S. Government agencies and corporations     295,989       -       295,989       -   States and political subdivisions     137,069       -       137,069       -   Mortgage-backed securities     152,112       -       152,112       -   Corporate debt securities     5,434       -       5,434       -   Total securities available for sale   $ 591,552     $ -     $ 591,552     $ -     December 31, 2022           Fair Value Measurements Using   Description   Balance     Level 1     Level 2     Level 3   U.S. Treasuries   $ 936     $ -     $ 936     $ -   U.S. Government agencies and corporations     336,575       -       336,575       -   States and political subdivisions     152,200       -       152,200       -   Mortgage-backed securities     161,477       -       161,477       -   Corporate debt securities     5,664       -       5,664       -   Total securities available for sale   $ 656,852     $ -     $ 656,852     $ -     25 Table of Contents     The Company’s securities portfolio is valued using Level 2 inputs. The Company relies on an independent third party vendor to provide market valuations. The inputs used to determine value include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two -sided markets, benchmark securities, bids, offers and reference data including market research publications. The third party vendor also monitors market indicators, industry activity and economic events as part of the valuation process. Central to the final valuation is the assumption that the indicators used are representative of the fair value of securities held within the Company’s portfolio. Level 2 inputs are subject to a certain degree of uncertainty and changes in these assumptions or methodologies in the future, if any, may impact securities fair value, deferred tax assets or liabilities, or expense.   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 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 consolidated financial statements.   Loans Held for Sale Loans held for sale are carried at the lower of cost or fair value. 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, 2023 or December 31, 2022.   Collateral Dependent Loans Loans that do not share risk characteristics with the rest of their class and that are collateral dependent are individually evaluated on a non-recurring basis using the fair value of collateral. If the fair value of the collateral is lower than the loan’s amortized cost basis, the shortfall is recognized in the ACLL. When repayment is expected from the operation of the collateral, fair value is estimated as the present value of expected cash flows from the operation of the collateral. When repayment is expected from the sale of the collateral, fair value is estimated using measurement techniques discussed below and discounted by the 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 financial asset. For loans secured by real estate, fair value of collateral is determined by the “as-is” value of appraisals or third party evaluations that are less than 24 months of age. Appraisals are prepared by independent, licensed appraisers. Appraisals are based upon observable market data analyzed through an income or sales valuation approach. 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’ financial statements (Level 3 ) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3 ). As of September 30, 2023, one consumer real estate loan with a balance of $ 7 was collateral dependent. The valuation was based upon a third party evaluation (Level 2 ) and did not result in a specific allocation. 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. 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 as of the dates indicated.   Date Description   Balance     Level 1     Level 2     Level 3   September 30, 2023 OREO, net of valuation allowance   $ 662     $ -     $ -     $ 662   December 31, 2022 OREO, net of valuation allowance     662       -       -       662     26 Table of Contents     The following table presents information about OREO and Level 3 Fair Value Measurements as of the dates indicated.   Date Valuation Technique Unobservable Input   Range (Weighted Average) September 30, 2023 Discounted appraised value Selling cost     7.00%   September 30, 2023 Discounted appraised value Discount for lack of marketability     34.72%                 December 31, 2022 Discounted appraised value Selling cost     7.00%   December 31, 2022 Discounted appraised value Discount for lack of marketability     34.72 %     At September 30, 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. Ultimate proceeds from the sale of OREO property may be less than the estimated fair value, reducing net income.   Fair Value Summary The following presents the recorded amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of the dates indicated. Fair values are estimated using the exit price notion.       September 30, 2023       Recorded Amount     Level 1     Level 2     Level 3   Financial Assets:                                 Cash and due from banks   $ 13,089     $ 13,089     $ -     $ -   Interest-bearing deposits     40,353       40,353       -       -   Securities available for sale, at fair value     591,552       -       591,552       -   Restricted securities     1,264       -       1,264       -   Mortgage loans held for sale     82       -       82       -   Loans, net     838,794       -       -       792,126   Accrued interest receivable     6,180       -       6,180       -   Bank-owned life insurance     43,327       -       43,327       -   Financial Liabilities:                                 Deposits   $ 1,465,000     $ -     $ 1,277,115     $ 186,480   Accrued interest payable     551       -       551       -         December 31, 2022       Recorded Amount     Level 1     Level 2     Level 3   Financial Assets:                                 Cash and due from banks   $ 12,403     $ 12,403     $ -     $ -   Interest-bearing deposits     59,026       59,026       -       -   Securities available for sale, at fair value     656,852       -       656,852       -   Restricted securities     941       -       941       -   Loans, net     844,519       -       -       781,749   Accrued interest receivable     6,001       -       6,001       -   Bank-owned life insurance     43,312       -       43,312       -   Financial Liabilities:                                 Deposits   $ 1,542,725     $ -     $ 1,475,096     $ 67,542   Accrued interest payable     106       -       106       -     27 Table of Contents       Note 6: Components of Accumulated Other Comprehensive Loss   The following tables provide information about components of accumulated other comprehensive loss as of the dates indicated:       Net Unrealized Loss on Securities     Adjustments Related to Pension Benefits     Accumulated Other Comprehensive Loss   Balance at June 30, 2022   $ ( 55,865 )   $ ( 6,912 )   $ ( 62,777 ) Unrealized holding loss on available for sale securities, net of tax of ($ 7,822 )     ( 29,424 )     -       ( 29,424 ) Balance at September 30, 2022   $ ( 85,289 )   $ ( 6,912 )   $ ( 92,201 )                           Balance at June 30, 2023   $ ( 71,898 )   $ ( 2,345 )   $ ( 74,243 ) Unrealized holding loss on available for sale securities, net of tax of ($ 4,099 )     ( 15,421 )     -       ( 15,421 ) Balance at September 30, 2023   $ ( 87,319 )   $ ( 2,345 )   $ ( 89,664 )       Net Unrealized Gain (Loss) on Securities     Adjustments Related to Pension Benefits     Accumulated Other Comprehensive Loss   Balance at December 31, 2021   $ 2,854     $ ( 6,912 )   $ ( 4,058 ) Unrealized holding loss on available for sale securities, net of tax of ($ 23,431 )     ( 88,143 )     -       ( 88,143 ) Balance at September 30, 2022   $ ( 85,289 )   $ ( 6,912 )   $ ( 92,201 )                           Balance at December 31, 2022   $ ( 81,421 )   $ ( 2,345 )   $ ( 83,766 ) Unrealized holding loss on available for sale securities, net of tax of ($ 2,268 )     ( 8,530 )     -       ( 8,530 ) Reclassification adjustment, net of tax of $ 700     2,632       -       2,632   Balance at September 30, 2023   $ ( 87,319 )   $ ( 2,345 )   $ ( 89,664 )     Note 7: Revenue Recognition   Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams such as service charges on deposit accounts, other service charges and fees, credit and debit card fees, trust income, and annuity and insurance commissions are recognized in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as financial guarantees, derivatives, and certain credit card fees are outside the scope of the guidance. Noninterest revenue streams within the scope of Topic 606 are discussed below.    Service Charges on Deposit Accounts Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, ATM fees, wire transfer fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Wire transfer fees, overdraft and nonsufficient funds fees and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.   28 Table of Contents     Other Service Charges and Fees 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. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Check ordering charges are transactional based, and therefore the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.   Credit and Debit Card Fees Credit and debit card fees are primarily comprised of interchange fee income and merchant services income. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa and MasterCard. Merchant services income mainly represents commission fees based upon merchant processing volume. The Company’s performance obligation for interchange fee income and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. In compliance with Topic 606, credit and debit card fee income is presented net of associated expense.   Trust Income Trust income is primarily comprised of fees earned from the management and administration of trusts and estates and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Estate management fees are based upon the size of the estate. A partial fee is recognized half-way through the estate administration and the remainder of the fee is recognized when remaining assets are distributed and the estate is closed.   Insurance and Investment Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined.   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 periods indicated.       Three Months Ended September 30,   Noninterest Income   2023     2022   In-scope of Topic 606:                 Service charges on deposit accounts   $ 642     $ 661   Other service charges and fees     151       51   Credit and debit card fees, net     395       448   Trust income     505       492   Insurance and Investment (included within Other Income on the Consolidated Statements of Income)     142       143   Noninterest Income (in-scope of Topic 606)   $ 1,835     $ 1,795   Noninterest Income (out-of-scope of Topic 606)     280       345   Total noninterest income   $ 2,115     $ 2,140     29 Table of Contents         Nine Months Ended September 30,   Noninterest Income   2023     2022   In-scope of Topic 606:                 Service charges on deposit accounts   $ 1,871     $ 1,826   Other service charges and fees     253       157   Credit and debit card fees, net     1,276       1,423   Trust income     1,431       1,374   Insurance and Investment (included within Other Income on the Consolidated Statements of Income)     539       491   Noninterest Income (in-scope of Topic 606)   $ 5,370     $ 5,271   Noninterest Income (out-of-scope of Topic 606)     1,735       1,272   Total noninterest income   $ 7,105     $ 6,543       Note 8: Leases The Company’s leases are recorded under ASC Topic 842, “Leases”. The Company examines its contracts to determine whether they are or contain a lease. A contract with a lease is further examined to determine whether the lease is a short-term, operating or finance lease. As permitted by ASC Topic 842, the Company elected not to capitalize short-term leases, defined by the standard as leases with terms of 12 months or less. The Company also elected the practical expedient not to separate non-lease components from lease components within a single contract. Right-of-use assets and lease liabilities are recognized for operating and finance leases. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease.    Lease payments Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred. Payments for leases with terms longer than 12 months are included in the determination of the lease liability. Payments may be fixed for the term of the lease or variable. Variable payments result when the lease agreement includes a clause providing for escalation of lease payments at specified dates. If the escalation factor is known, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability. If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability. 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 as of September 30, 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 as of the dates and for the periods indicated:       September 30, 2023     December 31, 2022   Lease liability   $ 1,205     $ 1,444   Right-of-use asset   $ 1,175     $ 1,415   Weighted average remaining lease term (in years)     4.58       5.14   Weighted average discount rate     3.29 %     3.29 %   30 Table of Contents         For the Three Months Ended September 30,   Lease Expense   2023     2022   Operating lease expense   $ 91     $ 84   Short-term lease expense     10       1   Total lease expense   $ 101     $ 85   Cash paid for amounts included in lease liabilities   $ 100     $ 83   Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period   $ -     $ 79         For the Nine Months Ended September 30,   Lease Expense   2023     2022   Operating lease expense   $ 275     $ 238   Short-term lease expense     11       2   Total lease expense   $ 286     $ 240   Cash paid for amounts included in lease liabilities   $ 286     $ 239   Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period   $ -     $ 104     The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability:   Undiscounted Cash Flow for the Period   As of September 30, 2023   Twelve months ending September 30, 2024   $ 351   Twelve months ending September 30, 2025     289   Twelve months ending September 30, 2026     219   Twelve months ending September 30, 2027     187   Twelve months ending September 30, 2028     189   Thereafter     64   Total undiscounted cash flows   $ 1,299   Less: discount     ( 94 ) Lease liability   $ 1,205     The contracts in which the Company is lessee are not with related parties.     Note 9: Stock Based Compensation   The Company’s 2023 Stock Incentive Plan (“the Plan”) was approved by shareholders at the annual shareholder’s meeting on May 9, 2023. The Plan provides for the grant of various forms of stock-based compensation awards that may be settled in, or based upon the value of, the Company’s common stock. The maximum number of shares available for issuance under the Plan is 120,000 shares. For further information on the Plan, refer to the Company’s Proxy Statement filed with the SEC on March 10, 2023 and the Company’s S- 8 filed with the SEC on June 7, 2023.   Restricted Stock Awards Under the Plan, part of the June 2023 semi-annual retainer for non-employee directors was paid in restricted stock awards (“RSAs”). A summary of changes in the Company’s nonvested RSAs under the Plan for the three months ended September 30, 2023 follows:       Shares     Weighted-Average Grant- Date Fair Value   Nonvested at July 1, 2023     2,052     $ 30.70   Granted     -       -   Nonvested at September 30, 2023     2,052     $ 30.70     31 Table of Contents     The RSAs have a one year vesting period. Expense for the RSAs will be recognized over the vesting period based on the fair value of the stock at the issue date. Stock based compensation expense charged against income was $ 16 for the three months ended September 30, 2023 and $ 21 for the nine months ended September 30, 2023. As of September 30, 2023, expense of $ 42 related to the nonvested RSAs is expected to be recognized over the coming 8 months.     Note 10: Earnings Per Share   The factors used in the earnings per share computation for the periods indicated are presented below:       For the Three Months Ended September 30,       2023     2022   $ in thousands, except per share amounts   Net Income (Numerator)     Common Shares 1 (Denominator)   Per Share     Net Income (Numerator)     Common Shares 1 (Denominator)   Per Share   Basic earnings per share   $ 3,074       5,889,687     $ 0.52     $ 6,162       5,974,961     $ 1.03   Dilutive shares for restricted stock awards:             252                       -           Diluted earnings per share   $ 3,074       5,889,939     $ 0.52     $ 6,162       5,974,961     $ 1.03         For the Nine Months Ended September 30,       2023     2022   $ in thousands, except per share amounts   Net Income (Numerator)     Common Shares 1 (Denominator)   Per Share     Net Income (Numerator)     Common Shares 1 (Denominator)   Per Share   Basic earnings per share   $ 11,506       5,889,687     $ 1.95     $ 16,622       6,008,607     $ 2.77   Dilutive shares for restricted stock awards:             91                       -           Diluted earnings per share   $ 11,506       5,889,778     $ 1.95     $ 16,622       6,008,607     $ 2.77       ( 1 ) Weighted average outstanding   RSA grants are disregarded in the computation of diluted earnings per share if they are determined to be anti-dilutive. There were no anti-dilutive RSAs for the three or nine month periods ended September 30, 2023.   32 Table of Contents