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Item 8. Financial Statements and Supplementary Data

2024-03-19 compared with 2023-03-10 · 983 added, 1132 removed, 854 unchanged (71% of the section changed)

3 unchanged sentences

Cash and due from banks

$ 12,403  

$ 8,768  

$ 12,967 $ 12,403

Interest-bearing deposits

59,026  

130,021  

73,636 59,026

Securities available for sale, at fair value

656,852  

686,080  

618,601 656,852

Restricted stock, at cost

1 unchanged sentence

Real estate construction loans

54,579  

48,841  

55,379 54,579

Consumer real estate loans

221,052  

208,977  

241,564 221,052

Commercial real estate loans

437,888  

405,722  

419,130 437,888

Commercial non-real estate loans

57,652  

60,264  

41,555 57,652

Public sector and IDA loans

48,074  

47,899  

60,551 48,074

Consumer non-real estate loans

33,948  

32,026  

853,193  

803,729  

38,996 33,948

857,175 853,193

Less unearned income and deferred fees and costs

( 529 ) ( 449 )

Loans, net of unearned income and deferred fees and costs

852,744  

803,248  

Less allowance for loan losses

844,519  

795,574  

856,646 852,744

Less allowance for credit losses

( 9,094 ) ( 8,225 )

847,552 844,519

Premises and equipment, net

10,371  

11,109 10,371

Accrued interest receivable

1 unchanged sentence

Bank-owned life insurance (BOLI)

43,312  

42,354  

37,616  

16,287  

$ 1,677,551  

$ 1,702,175  

Liabilities and Stockholders ’

43,583 43,312

34,091 37,616

$ 1,655,370 $ 1,677,551

Liabilities and Stockholders ’ Equity

Noninterest-bearing demand deposits

$ 327,713  

$ 317,430  

$ 281,215 $ 327,713

Interest-bearing demand deposits

933,269  

890,124  

821,661 933,269

Savings deposits

214,114  

208,065  

177,856 214,114

Time deposits

67,629  

78,968  

223,240 67,629

Total deposits

1,542,725  

1,494,587  

1,503,972 1,542,725

Accrued interest payable

Other liabilities

12,033  

15,789  

Total liabilities

1,554,864  

1,510,424  

1,514,848 1,554,864

Commitments and contingencies

Stockholders’

Stockholders’ equity:

Preferred stock, no par value, 5,000,000 shares authorized;

none issued and outstanding

Common stock, $ 1.25 par value.

Common stock, $ 1.25 par value and additional paid in capital.

Authorized 10,000,000 shares;

issued and outstanding, 5,889,687 shares at December 31, 2022 and 6,063,937 at December 31, 2021

issued and outstanding, 5,893,782 (including 4,095 unvested) shares as of December 31, 2023 and 5,889,687 as of December 31, 2022

Retained earnings

199,091  

188,229  

197,984 199,091

Accumulated other comprehensive loss, net

Total stockholders’

122,687  

191,751  

Total liabilities and stockholders’

$ 1,677,551  

$ 1,702,175  

( 64,866 ) ( 83,766 )

Total stockholders’ equity

140,522 122,687

Total liabilities and stockholders’ equity

$ 1,655,370 $ 1,677,551

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

Consolidated Statements of Income

Year ended December 31,

Year Ended December 31,

$ in thousands, except per share data

2 unchanged sentences

Interest on interest-bearing deposits

Interest and dividends on securities –

Interest on securities –

Interest and dividends on securities – taxable

Interest on securities – nontaxable

Total interest income

Interest Expense

Interest on deposits

Interest on time deposits

Interest on other deposits

Interest on borrowings

Total interest expense

Net interest income

Provision for (recovery of) loan losses

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

(Recovery of) provision for credit losses

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

Noninterest Income

3 unchanged sentences

Gain on sale of mortgage loans

Gain on sale of investment

Gain on sale of private equity investment

Realized securities gains, net

Realized securities loss, net

Total noninterest income

6 unchanged sentences

Franchise taxes

Professional services

Other operating expenses

2 unchanged sentences

Income tax expense

Basic and fully diluted net income per common share

Basic net income per common share

Fully diluted net income per common share

Dividends declared per common share

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

Consolidated Statements of Comprehensive (Loss) Income

Year ended December 31,

Consolidated Statements of Comprehensive Income (Loss)

Year Ended December 31,

$ in thousands

$ 25,932  

$ 20,382  

Other Comprehensive Loss, Net of Tax

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

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

$ 15,691 $ 25,932

Other Comprehensive Income (Loss), Net of Tax

Unrealized holding gain (loss) on available for sale securities net of tax of $ 4,315 in 2023 and ($ 22,403 ) in 2022

16,233 ( 84,275 )

Reclassification adjustment for loss included in net income, net of tax of $ 700 in 2023

Net pension gain arising during the period, net of tax of $ 9 in 2023 and $ 1,214 in 2022

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

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

Total Comprehensive (Loss) Income

$ 13,304  

Other comprehensive income (loss), net of tax of $ 5,024 in 2023 and ($ 21,189 ) in 2022

18,900 ( 79,708 )

Total Comprehensive Income (Loss)

$ 34,591 $ ( 53,776 )

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

Consolidated Statements of Changes in Stockholders ’

Consolidated Statements of Changes in Stockholders ’ Equity

$ in thousands, except per share data

and Additional

Paid-In Capital

Retained Earnings

Accumulated Other Comprehensive

Income (Loss)

Balance at December 31, 2020

$ 8,040  

$ 189,547  

$ 3,020  

$ 200,607  

20,382  

Accumulated Other

Comprehensive Loss

Balance as of December 31, 2021

$ 7,580 $ 188,229 $ ( 4,058 ) $ 191,751

- 25,932 - 25,932

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

- - ( 79,708 ) ( 79,708 )

Cash dividends of $ 1.50 per share

- ( 8,950 ) - ( 8,950 )

Stock repurchase of 174,250 shares

Balance at December 31, 2021

$ 7,580  

$ 188,229  

$ 191,751  

25,932  

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

( 218 ) ( 6,120 ) - ( 6,338 )

Balance as of December 31, 2022

$ 7,362 $ 199,091 $ ( 83,766 ) $ 122,687

Adoption of ASU 2016-13

- ( 2,014 ) - ( 2,014 )

- 15,691 - 15,691

Other comprehensive income, net of tax of $ 5,024

- - 18,900 18,900

Cash dividends of $ 2.51 per share

Stock repurchase of 174,250 shares

Balance at December 31, 2022

$ 7,362  

$ 199,091  

$ 122,687  

- ( 14,784 ) - ( 14,784 )

Stock based compensation

Balance as of December 31, 2023

$ 7,404 $ 197,984 $ ( 64,866 ) $ 140,522

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

Consolidated Statements of Cash Flows

Year ended December 31,

Year Ended December 31,

$ in thousands

Cash Flows from Operating Activities

$ 25,932  

$ 20,382  

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

Provision for (recovery of) loan losses

Deferred income tax (benefit) expense

(Recovery of) provision for credit losses

Deferred income tax expense (benefit)

Depreciation of premises and equipment

1 unchanged sentence

Gain on disposal of fixed assets

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

Loss and write-down on other real estate owned

Loss on sale of securities available for sale, net

(Gain) loss and write-down on other real estate owned

Loss on sale of repossessed items

Income on investment in BOLI

2 unchanged sentences

Sale of mortgage loans held for sale

18,287  

Equity-based compensation expense

Net change in:

3 unchanged sentences

Net cash provided by operating activities

29,500  

22,882  

Cash Flows from Investing Activities

Proceeds from repayments of mortgage-backed securities

32,664  

44,881  

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

20,377  

Purchases of securities available for sale

2 unchanged sentences

Collections of loan participations

21,452  

15,191  

Loan originations and principal collections, net

2 unchanged sentences

Recoveries on loans charged off

Purchase of BOLI

BOLI settlement

Additions to premises and equipment

Proceeds from sale of premises and equipment

Net cash used in investing activities

Net cash provided by (used in) investing activities

Cash Flows from Financing Activities

1 unchanged sentence

Net change in other deposits

59,477  

208,058  

Cash dividends paid

Shares repurchased

Net cash provided by financing activities

32,850  

175,284  

Net cash (used in) provided by financing activities

Net change in cash and due from banks

( 67,360 )  

Cash and due from banks at beginning of year

138,789  

133,872  

Cash and due from banks at end of year

$ 71,429  

$ 138,789  

Supplemental Disclosures of Cash Flow Information

Interest paid on deposits and borrowed funds

$ 3,025  

$ 3,106  

Income taxes paid

Supplemental Disclosures of Noncash Activities

Loans charged against the allowance for loan losses

Loans transferred to other real estate owned

Loans charged against the allowance for credit losses

Loans transferred to repossessed assets

Unrealized loss on securities available for sale

Unrealized gain (loss) on securities available for sale

Minimum pension liability adjustment

8 unchanged sentences

The accounting and reporting policies of the Company conform to GAAP and to general practices within the banking industry.

Subsequent events have been considered through the date of this Form 10 -K.

Subsequent events have been considered through the filing date of this Form 10 -K.

The following summarizes significant accounting policies.

Use of Estimates

In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period.

Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for credit losses, evaluation of impairment of goodwill, and pension obligations.

Reclassifications

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

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

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and amounts due from banks.

Interest-Bearing Deposits

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and amounts due from banks and interest-bearing deposits.

The Company invests over-night funds in interest-bearing deposits at other banks, including the FHLB, the Federal Reserve and other entities.

Interest-bearing deposits are carried at cost.

Certain debt securities that management has the positive intent and ability to hold to maturity may be classified as “held to maturity”

and recorded at amortized cost.

Certain debt securities that management has the positive intent and ability to hold to maturity may be classified as “held to maturity” and recorded at amortized cost.

Trading securities are recorded at fair value with changes in fair value included in earnings.

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

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

Securities not classified as held to maturity or trading, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss), net of tax.

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

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

The Company follows the accounting guidance related to recognition and presentation of other–than-temporary impairment (“OTTI”).

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

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

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

Allowance for Credit Losses – Available for Sale Securities

For available for sale securities in an unrealized loss position, the Company evaluates the securities 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 (loss), net of applicable taxes.

Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings.

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

However, if the Company intends to sell an impaired available for sale debt 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 is adjusted to fair value, there is no ACL in such a situation.

In evaluating available for sale debt securities in unrealized loss positions for impairment and the criteria regarding its intent or requirement to sell such securities, the Company considers the extent to which fair value is less than amortized cost, 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.

Changes in the allowance for credit losses are recorded as provision for (recovery of) credit loss expense.

Losses are charged against the ACL when management believes the uncollectability of an available for sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

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

Accrued interest receivable on securities of $ 3,281 as of December 31, 2023 and $ 3,485 as of December 31, 2022, along with accrued interested receivable on loans, is included in accrued interest receivable in the Consolidated Balance Sheet.

Equity Securities

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

Changes in fair value are recognized in net income.

5 unchanged sentences

The Company, through its banking subsidiary, provides mortgage, commercial, and consumer loans to customers.

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, any purchase premium or discount, unearned income and deferred fees or costs.

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances adjusted for the allowance for credit losses, any purchase premium or discount, unearned income and deferred fees or costs.

Interest income is accrued on the unpaid principal balance.

1 unchanged sentence

Purchase premium or discount is recognized as an adjustment of the related loan yield using the interest method.

The Bank’s loan policy is updated and approved by the Board of Directors annually and disseminated to lending and loan portfolio management personnel to ensure consistent lending practices.

The policy communicates the Company’s risk tolerance by prescribing underwriting guidelines and procedures, including approval limits and hierarchy, documentation standards, requirements for collateral and loan-to-value limits, debt coverage, overall creditworthiness and guarantor support.

The Bank’s loan policy is updated and approved by the Board of Directors annually and disseminated to lending and loan portfolio management personnel to ensure consistent lending practices.

Of primary consideration is the repayment ability of the borrowers and (if secured) the collateral value in relation to the principal balance.

Collateral lowers risk and may be used as a secondary source of repayment.

The credit decision must be supported by documentation appropriate to the type of loan, including current financial information, income verification or cash flow analysis, tax returns, credit reports, collateral information, guarantor verification, title reports, appraisals (where appropriate) and other documents.

The Company’s loans are grouped into six segments:

The credit decision must be supported by documentation appropriate to the type of loan, including current financial information, income verification, cash flow analysis, tax returns, credit reports, collateral information, guarantor verification, title reports, appraisals (where appropriate) and other documents.

The Company’s loans are grouped into six segments:

real estate construction, consumer real estate, commercial real estate, commercial non-real estate, public sector and IDA, and consumer non-real estate.

2 unchanged sentences

Real estate construction loans are subject to general risks from changing commercial building and housing market trends and economic conditions that may impact demand for completed properties and the costs of completion.

Completed properties that do not sell or become leased within originally expected timeframes may impact the borrower’s ability to service the debt.

Construction loans are underwritten against projected cash flows from rental income, business and/or personal income from an owner-occupant or the sale of the property to an end-user.

3 unchanged sentences

The Bank offers a variety of first mortgage and junior lien loans secured by primary residences within our markets.

The credit quality of consumer real estate is subject to risks associated with the borrower’s repayment ability and collateral value.

Credit decisions are primarily based on loan-to-value (“LTV”) ratios, debt-to-income (“DTI”) ratios, liquidity and net worth.

The credit quality of consumer real estate is subject to risks associated with the borrower’s repayment ability and collateral value.

Credit decisions are primarily based on loan-to-value (“LTV”) ratios, debt-to-income (“DTI”) ratios, liquidity and net worth.

Income and financial information is obtained from personal tax returns, personal financial statements and employment documentation.

2 unchanged sentences

Consumer real estate mortgages may have fixed interest rates for the entire term of the loan or variable interest rates subject to change after the first, third, or fifth year.

Variable rates are based on the weekly average yield of United States Treasury Securities and are underwritten at fully-indexed rates.         

Home equity loans are secured primarily by second mortgages on residential property.

3 unchanged sentences

We do not offer home equity loan products with reduced documentation.

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

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

7 unchanged sentences

The loan amount is generally limited to 80% of the lower of cost or appraised value and is individually determined based on the property type, quality, location and financial strength of any guarantors.

The property’s projected net cash flows compared to the debt service (often referred to as the “debt service coverage ratio”) is required to be 115% or greater and is computed after deduction for a vacancy factor and property expenses, as appropriate.

Borrower cash flow may be supplemented by a personal guarantee from the principal(s) of the borrower and guarantees from other parties.

5 unchanged sentences

Commercial and agricultural loans primarily finance equipment acquisition, expansion, working capital, and other general business purposes.

Because these loans have a higher degree of risk, the Bank generally obtains collateral such as inventory, accounts receivables or equipment and personal guarantees from the borrowing entity’s principal owners.

The Bank’s policy limits lending up to 60% of the appraised value for inventory, up to 90% of the lower of cost of market value of equipment and up to 70% for accounts receivables less than 90 days old.

Credit decisions are based upon an assessment of the financial capacity of the applicant, including the primary borrower’s ability to repay within proposed terms, a risk assessment, financial strength of guarantors and adequacy of collateral.

Credit agency reports of individual owners’

credit history supplement the analysis.

Credit agency reports of individual owners’ credit history supplement the analysis.

Public Sector and IDA Loans.

Public sector and IDA loans are extended to municipalities and related entities within the Bank’s geographical footprint.

Borrowers include general taxing authorities such as a city or county, industrial/economic development authorities or utility authorities.

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

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

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

Consumer Non-Real Estate Loans.

1 unchanged sentence

Credit cards and certain other consumer loans are unsecured, while collateral is obtained for automobile loans and other consumer loans.

Credit risk stems primarily from the borrower’s ability to repay.

Our procedures for underwriting consumer loans include an assessment of an applicant’s overall financial capacity, including credit history and the ability to meet existing obligations and payments on the proposed loan.

Credit risk stems primarily from the borrower’s ability to repay.

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

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

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

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

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

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

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

Past due status and nonaccrual designation

7 unchanged sentences

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

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

Loans in nonaccrual are reviewed on an individual loan basis to determine whether they may return to accrual status.

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

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

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

Charge-off policy

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

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

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

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

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

1 unchanged sentence

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

Allowance for Loan Losses

The allowance for loan losses is an estimate of probable losses inherent in the loan portfolio.

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

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

The Company evaluates the allowance each quarter through a methodology that estimates losses on individual impaired loans and evaluates the effect of numerous factors on the credit risk of groups of homogeneous loans ("collectively evaluated loans").

Impaired loans

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

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

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

or “special mention.”

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

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

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

Impaired loan measurement methods

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

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

Cash flow method:

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

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

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

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

Collateral method:

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

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

Fair value is based upon the “as-is”

value of independent appraisals or evaluations.

Impaired loans secured by residential 1 - 4 family properties with outstanding principal balances greater than $ 250 are valued using an appraisal.

Appraisals are also used to value impaired loans secured by commercial real estate with outstanding principal balances greater than $ 500 .

Impaired loans secured by residential 1 - 4 family property with outstanding principal balances of $ 250 or less, or secured by commercial real estate with outstanding principal balances of $ 500 or less, are valued using a real estate evaluation prepared by a third party.

Appraisals must conform to the Uniform Standards of Professional Appraisal Practice and are prepared by an independent third -party appraiser who is certified and licensed and who is approved by the Company.

Appraisals may incorporate market analysis, comparable sales analysis, cash flow analysis and market data pertinent to the property to determine market value.

Evaluations are prepared by third party providers and reviewed by employees of the Company who are independent of the loan origination, operation, management and collection functions.

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

Multiple sources of data contribute to the estimate of market value, including physical inspection, independent third -party automated tools, comparable sales analysis and local market information.

Updated appraisals or evaluations are ordered when a loan becomes impaired if the appraisal or evaluation on file is more than 24 months old.

Appraisals and evaluations are reviewed for propriety and reasonableness and may be discounted if the Company determines that the value exceeds reasonable levels.

If an updated appraisal or evaluation has been ordered but has not been received by a reporting date, the fair value may be based on the most recent available appraisal or evaluation, discounted for age.

The appraisal or evaluation value is reduced by selling costs if recovery is expected solely from the sale of collateral.

Results of fair value measurement

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

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

Fair value shortfalls that are not considered uncollectible for loans that are not collateral-dependent are accrued in the allowance as specific reserves.

Impaired loans for which collection of interest or principal is in doubt are placed in nonaccrual status.

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

Nonaccrual status of impaired loans

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

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

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

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

Collectively evaluated loans

General allowances are established for collectively evaluated loans.

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

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

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

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

Two loss rates for each class are calculated:

total net charge-offs for the class as a percentage of average class loan balance (“class loss rate”), and total net charge-offs for the class as a percentage of average classified loans in the class (“classified loss rate”).

Net charge-offs in both calculations include charge-offs and recoveries for all loans within the class, including classified and non-classified loans, as well as impaired and TDR loans.

Class historical loss rates are applied to collectively evaluated pass-rated loan balances and special mention rated loan balances, and classified historical loss rates are applied to collectively evaluated classified loan balances.

Credit quality indicators

Credit quality indicators, which the Company terms risk grades, are assigned through the Company’s credit review function for larger loans and selective review of loans that fall below credit review thresholds.

Credit quality is rated based on the loan’s payment history, the borrower’s current financial situation and value of the underlying collateral.

Loans that do not indicate heightened risk are graded as “pass.”

Loans that appear to have elevated credit risk because of frequent or persistent past due status, which is less than 75 days, or that show weakness in the borrower’s financial condition are risk graded “special mention.”

Loans with frequent or persistent delinquency exceeding 75 days or that have a higher level of weakness in the borrower’s financial condition are graded “classified.”

Classified loans have regulatory risk ratings of “substandard”

and “doubtful.”

Qualitative factor allocations

The analysis of certain factors results in standard allocations to all classes.

These factors include the risk from changes in lending policies, loan officers’

experience, changes in loan review, and economic factors including local unemployment levels, local bankruptcy rates, interest rate environment, and competition/legal/regulatory environments. 

Standard allocations for residential vacancy rates and housing inventory are applied to all real-estate secured classes and state and political subdivision loans.

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

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

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

national unemployment filings.

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

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

Factors analyzed for each class, with resultant allocations based upon the level of risk assessed for each class, include levels of past due loans, levels of nonaccrual loans, current class balance as a percentage of total loans, and the percentage of high risk loans within the class.

High risk loans include junior liens, interest only and high loan to value loans.

High risk loans within each class are analyzed and allocated additional reserves based on current trends.

Allocations for qualitative factors are determined for pass-rated loans.

To reflect the increased risk of criticized assets, qualitative factor allocations are multiplied by 150 % for special mention loans, and multiplied by 200 % for classified loans.

Credit quality is rated based on the loan’s payment history, the borrower’s current financial situation and value of the underlying collateral.

Loans that do not indicate heightened risk are graded as “pass.” Loans that appear to have elevated credit risk because of frequent or persistent past due status, which is less than 75 days, or that show weakness in the borrower’s financial condition are risk graded “special mention.” Loans with frequent or persistent delinquency exceeding 75 days or that have a higher level of weakness in the borrower’s financial condition are graded “classified.” Classified loans have regulatory risk ratings of “substandard” and “doubtful.”

Sales, purchases and reclassification of loans

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

contracts with mortgage purchasers.

The Company finances consumer real estate mortgages under “best efforts” contracts with mortgage purchasers.

The mortgages are designated as held for sale upon initiation.

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

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

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

Occasionally, the Company purchases or sells participations in loans.

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

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

Modified Loans

Prior to January 1, 2023, a loan that had been modified or renewed was considered a troubled debt restructuring (“TDR”) when two conditions were met:

1 ) the borrower was experiencing financial difficulty and 2 ) concessions were made for the borrower's benefit that would not otherwise have been considered for a borrower or transaction with similar credit risk characteristics.

TDRs were evaluated individually to determine the required ACL.

Subsequent to December 31, 2022, the TDR concept, and its impact on the ACL calculation, was eliminated in favor of disclosure of loan modifications made to troubled borrowers.

Modified loans to troubled borrowers are evaluated and risk rated according to credit quality indicators as discussed above, and are subject to the Company's standard ACL process as discussed below.

Allowance for Credit Losses 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.

Accrued interest receivable on loans of $ 3,032 as of December 31, 2023 and $ 2,516 as of December 31, 2022, along with accrued interested receivable on securities, is included in accrued interest receivable in the Consolidated Balance Sheet.

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.

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

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

Real Estate Construction

Construction, residential

Construction, other

Consumer Real Estate

Residential closed-end first liens

Residential closed-end junior liens

Investor-owned residential real estate

Commercial Real Estate

Multifamily residential real estate

Commercial real estate, owner occupied

Commercial real estate, other

Commercial Non-Real Estate

Commercial and industrial

Public Sector and IDA

Public sector and IDA

Consumer Non-Real Estate

Other consumer loans

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

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

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

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

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

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

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

PDs are then adjusted for the forecast.

The Company designated national unemployment as its forecast variable.

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

The forecast is applied over a horizon selected by 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 management, of up to three years.

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

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

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

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

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

The Company designates loans that have been determined to meet the regulatory definitions of “special mention” or “classified” (together known as “criticized”) as individually evaluated.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Unallocated surplus

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

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

Estimation of the allowance for loan losses

The estimation of the allowance involves analysis of internal and external variables, methodologies, assumptions and management’s judgment and experience.

Key judgments used in determining the allowance for loan losses include internal risk rating determinations, market and collateral values, discount rates, loss rates, and management’s assessment of current economic conditions.

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

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

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.

Estimation of the allowance for credit losses

The estimation of the allowance involves analysis of internal and external variables, methodologies, assumptions and management’s judgment and experience.

Key judgments used in determining the allowance for credit losses include internal risk rating determinations, market and collateral values, discount rates, loss rates, and management’s assessment of current economic conditions.

These judgments are inherently subjective and actual losses could be greater or less than the estimate.

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Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell.

Revenue and expenses from operations and changes in the valuation allowance are included in other operating expenses.

Revenue and expenses from operations and changes in the valuation allowance are included in net costs of other real estate owned in the Consolidated Statements of Income.

The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired.

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

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

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

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

The Company opted not to perform the preliminary assessment.

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

The first technique uses the Company’s market capitalization as an estimate of fair value, the second technique estimates fair value using current market pricing multiples for companies comparable to NBI, while the third technique uses current market pricing multiples for change-of-control transactions involving companies comparable to NBI.

Certain key judgments were used in the valuation measurement.

Goodwill is held by the Company’s bank subsidiary.

The bank subsidiary is 100 % owned by the Company, and no market capitalization is available.

Because most of the Company’s assets are comprised of the bank subsidiary’s equity, the Company’s market capitalization was used to estimate the Bank’s market capitalization.

Other judgments include the assumption that the companies and transactions used as comparables for the second and third techniques were appropriate to the estimate of the Company’s fair value, and that the comparable multiples are appropriate indicators of fair value, and compliant with accounting guidance.

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

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

For December 31, 2023, the Company performed a qualitative assessment, as permitted by Accounting Standards Codification (“ASC”) 350 - 20 - 35 - 3A, to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of NBB (“reporting unit”) is less than its carrying amount, including goodwill.

The assessment included analysis of macroeconomic conditions, industry and market conditions, overall financial performance, share price considerations, and other relevant entity-specific events and events affecting the reporting unit.

No conditions were identified that would warrant the need for a quantitative impairment analysis, and no impairment was recorded.

Bank Owned Life Insurance

The Company has purchased life insurance policies on certain key employees.

The purchase of these life insurance policies allows the Company to use tax-advantaged rates of return.

The cash surrender value of these policies is included as an asset on the consolidated balance sheets, and any increase in cash surrender value is recorded as income from bank owned life insurance on the consolidated statements of income.

In the event of the death of an insured individual under these policies, the Company receives a death benefit which is also recorded as income from bank owned life insurance.

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

The Company’s actuary determines plan obligations and annual pension expense using a number of key assumptions, including the discount rate, the estimated return on plan assets and the anticipated rate of compensation increases.

Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may impact pension assets, liabilities or expense.

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A tax position that meets the more-likely-than- not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information.

The determination of whether or not a tax position has met the more-likely-than- not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.

Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Company recognizes interest and penalties on income taxes as a component of income tax expense.

The Company recognizes interest and penalties on income taxes, if any, as a component of income tax expense.

Trust Assets and Income

Assets (other than cash deposits) held by NBB’s Trust Department in a fiduciary or agency capacity for customers are not included in the consolidated financial statements since such items are not assets of the Company.

Trust income is recognized on the accrual basis.

Stock Based Compensation

Compensation cost is recognized for stock based payment awards issued to employees and directors, based on the fair value of these awards at the date of grant.

The market price of the Company’s common stock at the date of grant is used to estimate fair value for restricted stock awards, restricted stock units, and other stock awards.

Compensation cost is recognized over the required service period, generally defined as the vesting period.

The Company recognizes forfeitures of nonvested awards as they occur.

Earnings Per Common Share

Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period.

During 2022 and 2021, there were no potential common shares outstanding.

The following shows the weighted average number of shares used in computing earnings per common share for the years indicated.

Average number of common shares outstanding

5,989,601  

6,209,929  

Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period excluding nonvested restricted stock awards.

Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under restricted stock awards that have not yet vested.

Please see Note 21 for additional information.

Loss Contingencies

8 unchanged sentences

Revenue Recognition.

Use of Estimates

Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, evaluation of impairment of goodwill, and pension obligations.

Reclassifications

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

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

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income and other comprehensive income (loss).

Other comprehensive income (loss) includes unrealized gains and losses on debt securities available for sale, net of taxes, which are also recognized as a separate component of equity.

Business Combinations

On January 23, 2024, the Company entered into a merger agreement with Frontier Community Bank for an estimated aggregate purchase price of $ 16,822 of cash and stock.

The merger is projected to close during the second or third quarter of 2024, subject to regulatory approval.

Recent Accounting Pronouncements

ASU 2023 - 09

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

2016 - 13, “Financial Instruments –

Credit Losses (Topic 326 ):

Measurement of Credit Losses on Financial Instruments.” 

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

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

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

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

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

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

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

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

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

January 1, 2023.

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

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

The Company designated national unemployment as its forecast variable.

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

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

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

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

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

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

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

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

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

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

Credit Losses.” 

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

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

( 3 ) documenting the results of a systematic methodology;

and ( 4 ) validating a systematic methodology.

In December 2023, the FASB issued ASU 2023 - 09, “Income Taxes (Topic 740 ):

Improvements to Income Tax Disclosures.” The amendments in this ASU require an entity to disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold, which is greater than five percent of the amount computed by multiplying pretax income by the entity’s applicable statutory rate, on an annual basis.

Additionally, the amendments in this ASU require an entity to disclose the amount of income taxes paid (net of refunds received) disaggregated by federal, state, and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions that are equal to or greater than five percent of total income taxes paid (net of refunds received).

Lastly, the amendments in this ASU require an entity to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign.

This ASU is effective for annual periods beginning after December 15, 2024.

Early adoption is permitted.

The amendments should be applied on a prospective basis;

however, retrospective application is permitted.

The Company does not expect the adoption of ASU 2023 - 09 to have a material impact on its consolidated financial statements.

ASU 2023 - 07

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

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

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

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

In November 2023, the FASB issued ASU 2023 - 07, “Segment Reporting (Topic 280 ):

Improvements to Reportable Segment Disclosures.” The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses.

This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision mark (“CODM”), an amount for other segment items by reportable segment and a description of its composition, all annual disclosures required by FASB ASU Topic 280 in interim periods as well, and the title and position of the CODM and how the CODM uses the reported measures.

Additionally, this ASU requires that at least one of the reported segment profit and loss measures should be the measure that is most consistent with the measurement principles used in an entity’s consolidated financial statements.

Lastly, this ASU requires public business entities with a single reportable segment to provide all disclosures required by these amendments in this ASU and all existing segment disclosures in Topic 280.

This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

The amendments should be applied retrospectively.

The Company does not expect the adoption of ASU 2023 - 07 to have a material impact on its consolidated financial statements.

ASU 2023 - 06

In March 2022, 

the FASB issued ASU No.

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

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

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

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

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

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

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

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

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

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

In October 2023, the FASB issued ASU 2023 - 06, “Disclosure Improvements:

Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.” This ASU incorporates certain SEC disclosure requirements into the FASB ASC.

The amendments in the ASU are expected to clarify or improve disclosure and presentation requirements of a variety of ASC 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 ASC 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 ASC 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.

ASU 2023 - 03

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 ASC for 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 ASC.

The Company does not expect the adoption of ASU 2023 - 03 to have a material impact on its consolidated financial statements.

ASU 2022 - 03

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

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.” ASU 2022 - 03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.

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

Early adoption is permitted.

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

Recently Adopted Accounting Developments

ASU 2016 - 13

In June 2016, the FASB issued ASU No.

2016 - 13, “Financial Instruments – Credit Losses (Topic 326 ):

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

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

ASU 2016 - 13 was effective for the Company on January 1, 2023.

At adoption, the Company recorded an adjustment of $ 2,342 to the allowance for credit losses on loans, as well as an adjustment of $ 207 to the reserve for unfunded loan commitments.

The adjustment net of tax recorded to shareholders’ equity totaled $ 2,014 .

See the Allowance for Credit Losses on Loans above for further details of adoption and changes to the Company’s significant accounting policies.

ASU 2022 - 02

In March 2022, the FASB issued ASU No.

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 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 Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

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 No.

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 No.

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. 

2022 - 02, “Financial Instruments-Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022 - 02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016 - 13 ) that introduced the CECL model.

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

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

ASU 2022 - 02 was effective for the Company on January 1, 2023.

The Company adopted ASU 2022 - 02 effective January 1, 2023 on a prospective basis.

Adoption of ASU 2022 - 02 did not have a material impact on the Company's consolidated financial statements.

See Note 5 – Allowance for Credit Losses on Loans and Nonperforming Assets for new disclosures required by ASU 2022 - 02.

Restriction on Cash

The Company’s subsidiary bank is a member of the Federal Reserve System.

The Federal Reserve does not currently require member banks to hold an average balance in order to purchase services from the Federal Reserve.

1 unchanged sentence

December 31, 2023

Available for sale:

Unrealized Gains

1 unchanged sentence

government agencies and corporations

$ 391,538  

$ 55,002  

$ 336,575  

$ 353,904 $ - $ 42,060 $ 311,844

States and political subdivisions

190,192  

38,018  

152,200  

179,507 - 29,614 149,893

Mortgage-backed securities

170,694  

161,477  

156,875 - 6,724 150,151

Corporate debt securities

6,504 - 754 5,750

Total securities available for sale

$ 759,917  

$ 103,152  

$ 656,852  

$ 697,786 $ - $ 79,185 $ 618,601

December 31, 2022

Available for sale:

Unrealized Gains

1 unchanged sentence

government agencies and corporations

$ 279,934  

$ 2,795  

$ 4,710  

$ 278,019  

$ 391,538 $ 39 $ 55,002 $ 336,575

States and political subdivisions

195,365  

198,672  

190,192 26 38,018 152,200

Mortgage-backed securities

204,164  

206,174  

170,694 22 9,239 161,477

Corporate debt securities

6,501 - 837 5,664

Total securities available for sale

$ 682,467  

$ 10,680  

$ 7,067  

$ 686,080  

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

$ 759,917 $ 87 $ 103,152 $ 656,852

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

The deferred tax asset for the net unrealized loss on securities available for sale was $ 16,629 as of December 31, 2023 and $ 21,644 as of December 31, 2022.

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

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

Mortgage-backed securities are categorized by final maturity.

1 unchanged sentence

December 31, 2023

Available for sale:

Amortized Cost

Due in one year or less

$ 2,779  

$ 2,738  

$ 3,795 $ 3,748

Due after one year through five years

139,168  

129,798  

178,297 166,386

Due after five years through ten years

328,812  

279,880  

277,155 238,409

Due after ten years

289,158  

244,436  

238,539 210,058

Total securities available for sale

$ 759,917  

$ 656,852  

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

$ 697,786 $ 618,601

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

December 31, 2023

2 unchanged sentences

government agencies and corporations

$ 144,574  

$ 12,699  

$ 190,950  

$ 42,303  

$ - $ - $ 311,844 $ 42,060

State and political subdivisions

94,657  

18,373  

52,134  

19,645  

884 1 148,763 29,613

Mortgage-backed securities

144,198  

15,165  

1,616 26 147,922 6,698

Corporate debt securities

- - 5,750 754

Total temporarily impaired securities

$ 389,208  

$ 39,109  

$ 259,070  

$ 64,043  

$ 2,500 $ 27 $ 615,242 $ 79,158

December 31, 2022

2 unchanged sentences

Government agencies and corporations

$ 201,650  

$ 3,530  

$ 26,792  

$ 1,180  

$ 144,574 $ 12,699 $ 190,950 $ 42,303

State and political subdivisions

50,659  

20,542  

94,657 18,373 52,134 19,645

Mortgage-backed securities

13,139  

144,198 7,326 15,165 1,913

Corporate debt securities

4,843 655 821 182

Total temporarily impaired securities

$ 266,414  

$ 4,922  

$ 51,999  

$ 2,145  

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

December 31, 2022.  

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

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

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

December 31, 2022 

for the reasons set out below.

Government agencies.

Unrealized losses of $ 42,303 on 222 securities with a fair value of $ 190,950 were caused by interest rate and market fluctuations.

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

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

States and political subdivisions.

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

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

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

Mortgage-backed securities.

Unrealized losses of $ 1,913 on 8 securities with a fair value of $ 15,165 were caused by interest rate and market fluctuations.

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

Corporate debt securities.

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

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

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

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

Management regularly monitors the credit quality of the investment portfolio.

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

Management intends to carefully monitor any changes in bond quality.

$ 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 December 31, 2023, the Company had 576 securities with a fair value of $ 617,742 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 December 31, 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.

Realized Securities Gains and Losses

During 2023, the Company sold securities and realized a net loss of $ 3,332 .

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

Information pertaining to realized gains and losses on sold securities for the period indicated follows:

For the Year Ended December 31, 2023

Available for sale

$ 43,518 $ 46,850 $ 137 $ 3,469 $ 3,332

Restricted Stock

The Company held restricted stock of $ 941 as of 

December 31, 2022 and $ 845 as of 

December 31, 2021.

The Company held restricted stock of $ 1,264 as of December 31, 2023 and $ 941 as of December 31, 2022.

Restricted stock is reported separately from available for sale securities.

As a member of the Federal Reserve and the 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.

2 unchanged sentences

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 $ 645,539 as of 

December 31, 2022.

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

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

Management regularly monitors the credit quality of the investment portfolio.

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

Management intends to carefully monitor any changes in bond quality.

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

Pledged Securities

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

Realized Securities Gains and Losses

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

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

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

For the year ended December 31, 2021

Available for sale

$ 20,377  

$ 20,371  

As of December 31, 2023 and 2022, securities with a carrying value of $ 534,465 and $ 345,689 , respectively, were pledged to secure municipal deposits and Federal Reserve discount window borrowing capacity.

Related Party Transactions

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

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

Total funded credit extended to related parties amounted to $ 15,409 as of December 31, 2023 and $ 18,187 as of December 31, 2022.

During 2023, total principal additions were $ 4,751 and principal payments were $ 7,529 .

3 unchanged sentences

The lease was terminated during 2022.

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

The Company has also contracted with a director's firm to prepare architectural plans for a new office in Roanoke, Virginia. 

The lease payments totaled $ 2 in 2022.

The Company has also contracted with a director's firm to prepare architectural plans for a new office in Roanoke, Virginia.

The arrangement is at arms-length and the Company paid the director's firm $ 79 in 2023 and $ 39 in 2022.

Allowance for Loan Losses, Nonperforming Assets and Impaired Loans

Allowance for Credit Losses on Loans and Nonperforming Assets

Please refer to Note 1:

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

Portfolio Segments and Classes

The Company determines major segments of loans and smaller classes within each segment based upon characteristics including collateral type and intended use, repayment sources, and (if applicable) the borrower’s business model.

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

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

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

A detailed analysis showing the allowance roll-forward by portfolio segment for the periods indicated follows:

Activity in the Allowance for Credit Losses on Loans for the Year Ended December 31, 2023

Real Estate Construction

Construction, residential

Construction, other

Consumer Real Estate

Residential closed-end first liens

Residential closed-end junior liens

Investor-owned residential real estate

Commercial Real Estate

Multifamily real estate

Commercial real estate, owner-occupied

Commercial real estate, other

Commercial Non Real Estate

Commercial and industrial

Public Sector and IDA

State and political subdivisions

Consumer Non-Real Estate

Other consumer loans

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

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

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

Please refer to Note 1:

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

A detailed analysis showing the allowance roll-forward by portfolio segment follows:

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

Real Estate Construction  

Unallocated  

Consumer Non-

Balance, December 31, 2022

$ 1,930  

$ 3,121  

$ 1,099  

$ 7,674  

Provision for (recovery of) loan losses

$ 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

- ( 17 ) - ( 214 ) - ( 247 ) - ( 478 )

- 103 45 6 - 129 - 283

(Recovery of) provision for credit losses

( 21 ) ( 384 ) ( 811 ) ( 256 ) 29 123 42 ( 1,278 )

Balance, December 31, 2023

$ 2,199  

$ 3,642  

$ 8,225  

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

Real Estate Construction  

Unallocated  

$ 408 $ 3,162 $ 3,576 $ 682 $ 333 $ 583 $ 350 $ 9,094

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

Real Estate Construction

Consumer Non-

Balance, December 31, 2021

$ 2,165  

$ 3,853  

$ 8,481  

$ 422 $ 1,930 $ 3,121 $ 1,099 $ 297 $ 444 $ 361 $ 7,674

- ( 13 ) - ( 2 ) - ( 352 ) - ( 367 )

- 29 49 11 - 123 - 212

Provision for (recovery of) loan losses

28 253 472 ( 178 ) 22 291 ( 182 ) 706

Balance, December 31, 2022

$ 1,930  

$ 3,121  

$ 1,099  

$ 7,674  

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

Allowance for Loan Losses by Segment and Evaluation Method as of

$ 450 $ 2,199 $ 3,642 $ 930 $ 319 $ 506 $ 179 $ 8,225

A detailed analysis showing the allowance and loan portfolio by segment and evaluation method as of the dates indicated follows:

Allowance for Credit Losses on Loans by Segment and Evaluation Method as of

December 31, 2023

2 unchanged sentences

Individually evaluated

$ - $ 74 $ 367 $ 126 $ - $ 5 $ - $ 572

Collectively evaluated

$ 2,199  

$ 3,642  

$ 8,225  

408 3,088 3,209 556 333 578 350 8,522

$ 408 $ 3,162 $ 3,576 $ 682 $ 333 $ 583 $ 350 $ 9,094

Loans by Segment and Evaluation Method as of

December 31, 2023

Real Estate Construction

Individually evaluated

$ 2,583  

$ 3,032  

$ 286 $ 1,183 $ 8,805 $ 227 $ - $ 43 $ 10,544

Collectively evaluated

54,579  

220,866  

435,305  

57,389  

48,074  

33,948  

850,161  

$ 54,579  

$ 221,052  

$ 437,888  

$ 57,652  

$ 48,074  

$ 33,948  

$ 853,193  

55,093 240,381 410,325 41,328 60,551 38,953 846,631

$ 55,379 $ 241,564 $ 419,130 $ 41,555 $ 60,551 $ 38,996 $ 857,175

Allowance for Loan Losses by Segment and Evaluation Method as of

3 unchanged sentences

Individually evaluated

$ - $ - $ - $ - $ - $ - $ - $ -

Collectively evaluated

$ 1,930  

$ 3,121  

$ 1,099  

$ 7,674  

450 2,199 3,642 930 319 506 179 8,225

$ 450 $ 2,199 $ 3,642 $ 930 $ 319 $ 506 $ 179 $ 8,225

Loans by Segment and Evaluation Method as of

December 31, 2022

Real Estate Construction

Consumer Non-

Individually evaluated

$ 5,386  

$ 5,878  

$ - $ 186 $ 2,583 $ 263 $ - $ - $ 3,032

Collectively evaluated

48,841  

208,786  

400,336  

59,963  

47,899  

32,026  

797,851  

$ 48,841  

$ 208,977  

$ 405,722  

$ 60,264  

$ 47,899  

$ 32,026  

$ 803,729  

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

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

54,579 220,866 435,305 57,389 48,074 33,948 850,161

$ 54,579 $ 221,052 $ 437,888 $ 57,652 $ 48,074 $ 33,948 $ 853,193

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

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

1.06 % 0.96 %

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

A summary of nonperforming assets, as of the dates indicated, follows:

Nonperforming assets:

0.02 % 0.02 %

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

Incurred Loss

December 31, 2023

December 31, 2022

Nonaccrual Loans

TDR loans in nonaccrual

Total nonperforming loans

Other real estate owned, net

Total nonperforming assets

$ 3,509  

$ 3,830  

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

Ratio of allowance for loan losses to nonperforming loans (1)

The Company defines nonperforming loans as total nonaccrual and TDR loans that are nonaccrual.

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

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

There is no residential real estate in OREO.

As of December 31, 2022, $ 155 in loans secured by residential real estate are in process of foreclosure.

A summary of loans past due 90 days or more and impaired loans, as of the dates indicated, follows:

Loans past due 90 days or more and still accruing

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

Accruing TDR loans

$ 3,005  

Impaired loans:

Impaired loans with no valuation allowance

$ 3,032  

$ 5,878  

Impaired loans with a valuation allowance

Total impaired loans

$ 3,032  

$ 5,878  

Valuation allowance

Impaired loans, net of allowance

$ 3,032  

$ 5,878  

Average recorded investment in impaired loans (1)

$ 3,047  

$ 5,901  

Income recognized on impaired loans, after designation as impaired

Amount of income recognized on a cash basis

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

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

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

A detailed analysis of investment in impaired loans, associated reserves and interest income recognized, by loan class follows:

Impaired Loans as of December 31, 2022

Total Recorded Investment (1)

Recorded Investment (1)

in (A) for Which There

is No Related

Investment (1) in (A)

for Which There is a Related Allowance

Consumer Real Estate

Investor-owned residential real estate

Residential closed-end first liens

$ - $ - $ - $ 91

Commercial Real Estate

Commercial real estate owner-occupied

2,177 231 2,408 2,493

Commercial Non-Real Estate

Commercial and industrial

$ 3,719  

$ 3,032  

Impaired Loans as of December 31, 2021

Total Recorded Investment (1)

- 221 221 263

$ 2,177 $ 452 $ 2,629 $ 2,847

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

Investment (1)

Recorded Investment (1)

in (A) for Which There

is No Related

Investment (1) in (A)

for Which There is a Related Allowance

for Which There is No

Related Allowance

Investment (1) for

Which There is a

Related Allowance

Consumer Real Estate

Investor-owned residential real estate

$ 186 $ 186 $ 186 $ - $ -

Commercial Real Estate

Commercial real estate, owner occupied

Commercial real estate, other

3,248 2,583 2,583 - -

Commercial Non-Real Estate

Commercial and industrial

$ 6,478  

$ 5,878  

285 263 263 - -

$ 3,719 $ 3,032 $ 3,032 $ - $ -

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

Only classes with impaired loans are shown.

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

For the Year Ended December 31, 2022

Average Recorded 

Investment (1)

Interest Income 

Consumer Real Estate (2)

Investor-owned residential real estate

Commercial Real Estate (2)

Commercial real estate, owner occupied

Commercial real estate, other  

Commercial Non Real Estate (2)

Commercial and industrial

$ 3,776  

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 Year Ended December 31, 2022

Average Recorded Investment (1)

Interest Income 

Interest Income Recognized

Consumer Real Estate

5 unchanged sentences

Commercial and industrial

Consumer Non-Real Estate (2)

$ 5,901  

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

Only classes with impaired loans are shown.

An analysis of past due and nonaccrual loans, as of the dates indicated, follows:

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

December 31, 2023

89 Days Past Due

90 or More Days

Nonaccruals (2)

Real Estate Construction

Construction, 1-4 family residential

$ 13,442 $ - $ - $ - $ 13,442 $ -

Construction, other

41,916 21 - - 41,937 -

Consumer Real Estate

17,178 104 - - 17,282 -

Residential closed-end first liens

124,886 662 131 - 125,679 131

Residential closed-end junior liens

5,027 12 - - 5,039 -

Investor-owned residential real estate

93,564 - - - 93,564 -

Commercial Real Estate

Multifamily residential real estate

119,052 195 - - 119,247 -

Commercial real estate owner-occupied

114,477 336 - 2,408 117,221 231

Commercial real estate, other

182,662 - - - 182,662 -

Commercial Non-Real Estate

Commercial and industrial

41,249 57 28 221 41,555 28

Public Sector and IDA

States and political subdivisions

60,551 - - - 60,551 -

Consumer Non-Real Estate

4,648 17 3 - 4,668 3

12,126 135 - - 12,261 -

Other consumer loans

$ 1,388  

$ 2,847  

Only classes with past due or nonaccrual loans are presented.

Includes current and past due loans in nonaccrual status.

Includes impaired loans in nonaccrual status.

21,934 107 26 - 22,067 26

$ 852,712 $ 1,646 $ 188 $ 2,629 $ 857,175 $ 419

December 31, 2022

89 Days 

90 or More Days

Nonaccruals (2)

Real Estate Construction

Construction, 1-4 family residential

$ 12,538 $ - $ - $ - $ 12,538 $ -

Construction, other

42,041 - - - 42,041 -

Consumer Real Estate

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

4,592 3 2 - 4,597 2

9,833 102 - - 9,935 -

Other consumer loans

$ 2,873  

Only classes with past due or nonaccrual loans are presented.

Includes current and past due loans in nonaccrual status.

Includes impaired loans in nonaccrual status.

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

The following displays non-impaired gross loans by credit quality indicator as of the dates indicated:

19,317 93 6 - 19,416 6

$ 848,950 $ 1,388 $ 8 $ 2,847 $ 853,193 $ 351

Collateral Dependent Loans

Loans are collateral dependent when repayment is expected substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty.

Collateral dependent loans are individually evaluated.

The Company measures the ACL on collateral dependent loans based upon the fair value of the collateral, as permitted by ASU 2016 - 13.

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 December 31, 2023, three of the Company’s individually evaluated loans were considered collateral dependent, and all are secured by real estate.

The following table provides details on collateral dependent loans:

December 31, 2023

Amortized Cost

Related Allowance

Consumer Real Estate

Residential closed-end first lien

Commercial Real Estate

Commercial real estate owner-occupied

Credit Quality

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

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

At origination, each loan is assigned a risk rating.

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

General descriptions of risk ratings are as follows:

loans with acceptable credit quality are rated pass.

Special mention:

Real Estate Construction

Construction, 1-4 family residential

$ 12,538  

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

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

The following 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

December 31, 2023 Prior

Revolving Converted

Construction, residential

$ - $ - $ 246 $ 158 $ 3,275 $ 5,157 $ 4,606 $ - $ 13,442

Construction, other

41,741  

Consumer Real Estate

15,026  

$ 2,741 $ 1,094 $ 1,305 $ 12,671 $ 17,397 $ 4,884 $ 1,559 $ - $ 41,651

- - - 286 - - - - 286

$ 2,741 $ 1,094 $ 1,305 $ 12,957 $ 17,397 $ 4,884 $ 1,559 $ - $ 41,937

$ 51 $ - $ - $ - $ - $ - $ 17,182 $ - $ 17,233

- - - - - - 49 - 49

$ 51 $ - $ - $ - $ - $ - $ 17,231 $ - $ 17,282

Residential closed-end first liens

122,187  

$ 32,404 $ 5,806 $ 14,634 $ 31,414 $ 29,787 $ 11,208 $ - $ - $ 125,253

426 - - - - - - - 426

$ 32,830 $ 5,806 $ 14,634 $ 31,414 $ 29,787 $ 11,208 $ - $ - $ 125,679

YTD gross charge-offs

$ - $ - $ 17 $ - $ - $ - $ - $ - $ 17

Residential closed-end junior liens

$ 1,499 $ 116 $ - $ 172 $ 1,387 $ 1,850 $ - $ 15 $ 5,039

Investor-owned residential real estate

80,143  

Commercial Real Estate

$ 24,556 $ 5,162 $ 23,649 $ 19,062 $ 14,166 $ 4,880 $ 1,283 $ 98 $ 92,856

708 - - - - - - - 708

$ 25,264 $ 5,162 $ 23,649 $ 19,062 $ 14,166 $ 4,880 $ 1,283 $ 98 $ 93,564

Multifamily residential real estate

127,312  

$ 40,092 $ 1,806 $ 2,148 $ 40,544 $ 25,681 $ 8,850 $ 126 $ - $ 119,247

Commercial real estate, owner occupied

126,550  

$ 41,573 $ 11,091 $ 23,407 $ 4,792 $ 16,720 $ 7,914 $ 2,919 $ - $ 108,416

Special mention

6,396 - - - - - - - 6,396

2,409 - - - - - - - 2,409

$ 50,378 $ 11,091 $ 23,407 $ 4,792 $ 16,720 $ 7,914 $ 2,919 $ - $ 117,221

Commercial real estate, other

181,443  

Commercial Non Real Estate

$ 68,889 $ 21,841 $ 19,098 $ 36,157 $ 22,697 $ 13,279 $ 701 $ - $ 182,662

Commercial and industrial

57,381  

$ 6,004 $ 438 $ 1,060 $ 12,667 $ 6,954 $ 6,938 $ 7,267 $ - $ 41,328

220 - - - 7 - - - 227

$ 6,224 $ 438 $ 1,060 $ 12,667 $ 6,961 $ 6,938 $ 7,267 $ - $ 41,555

YTD gross charge-offs

$ - $ 12 $ - $ - $ - $ 12 $ 190 $ - $ 214

Public sector and IDA

States and political subdivisions

48,074  

Consumer Non-Real Estate

$ 20,817 $ - $ 235 $ 26,702 $ 6,335 $ 6,462 $ - $ - $ 60,551

$ - $ - $ - $ - $ - $ - $ 4,668 $ - $ 4,668

YTD gross charge-offs

$ - $ - $ - $ - $ - $ - $ 39 $ - $ 39

$ 78 $ 204 $ 563 $ 1,619 $ 2,750 $ 7,047 $ - $ - $ 12,261

YTD gross charge-offs

$ - $ 3 $ - $ 1 $ 38 $ - $ - $ - $ 42

Other Consumer

19,398  

$ 848,768  

$ 1,393  

$ 93 $ 334 $ 811 $ 1,943 $ 5,815 $ 12,356 $ 672 $ - $ 22,024

Special mention

- - - - - 17 - - 17

- - - - 11 15 - - 26

$ 93 $ 334 $ 811 $ 1,943 $ 5,826 $ 12,388 $ 672 $ - $ 22,067

YTD gross charge-offs

$ - $ - $ - $ 19 $ 52 $ 95 $ - $ - $ 166

$ 238,797 $ 47,892 $ 87,156 $ 187,901 $ 152,964 $ 90,825 $ 40,983 $ 113 $ 846,631

Special mention

6,396 - - - - 17 - - 6,413

3,763 - - 286 18 15 49 - 4,131

$ 248,956 $ 47,892 $ 87,156 $ 188,187 $ 152,982 $ 90,857 $ 41,032 $ 113 $ 857,175

YTD gross charge-offs

$ - $ 15 $ 17 $ 20 $ 90 $ 107 $ 229 $ - $ 478

The following table presents the recorded investment of collectively evaluated loans by loan pool and credit quality as of the date indicated.

December 31, 2022

2 unchanged sentences

Construction, 1-4 family residential

$ 10,008  

$ 12,538 $ - $ -

Construction, other

38,833  

Consumer Real Estate

13,588  

Residential closed-end first liens

106,107  

122,187 - 461

Residential closed-end junior liens

Investor-owned residential real estate

85,460  

Commercial Real Estate

Multifamily residential real estate

106,644  

Commercial real estate owner-occupied

125,605  

Commercial real estate, other

164,324  

Commercial Non-Real Estate

Commercial and industrial

59,953  

Public Sector and IDA

States and political subdivisions

47,899  

Consumer Non-Real Estate

10,990  

Other consumer

16,402  

$ 793,059  

$ 3,728  

$ 1,064  

Sales, Purchases and Reclassification of Loans

The Company finances mortgages under “best efforts”

contracts with mortgage purchasers.

The mortgages are designated as held for sale upon initiation.

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

Occasionally, the Company purchases or sells participations in loans.

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

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

Troubled Debt Restructurings

Total TDRs amounted to $ 3,032 at December 31, 2022 and $ 5,878 at December 31, 2021.

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

TDRs Designated During the Reporting Period

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

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

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

No principal or interest was forgiven.

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

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

TDRs that occurred during the year ended December 31, 2021

Recorded Investment Outstanding

Number of Contracts

Pre-Modification

Post-Modification (1)

$ 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 year ended December 31, 2023.

The following table presents information on the modification.

Interest Only Payments

Year Ended December 31, 2023

% of Portfolio

Financial Effect

Commercial Real Estate

Commercial real estate owner-occupied

Commercial real estate, other

$ 2,826  

Post-modification outstanding recorded investment considers amounts immediately following the modification.

Amounts do not reflect balances at the end of the period.

Defaulted TDRs

The Company analyzed its TDR portfolio for loans that defaulted during 2022 and 2021, and that were modified within 12 months prior to default.

$ 6,396 5.46 % 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 December 31, 2023.

The loan is rated special mention and is individually evaluated using the discounted cash flow method, resulting in a specific reserve of $ 347 .

There were no loans to borrowers experiencing financial difficulty that defaulted during the year ended December 31, 2023 and were modified in the twelve months prior to that default.

The Company designates three circumstances that indicate default:

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

Of the Company’s TDRs at December 31, 2022 and December 31, 2021, none of the defaulted TDRs were modified within 12 months prior to default.

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

Under GAAP in effect for December 31, 2022, the Company reported TDRs totaling $ 3,032 .

No new TDRs were recognized during 2022.

Of the Company’s TDRs in default status as of December 31, 2022, none were modified within 12 months prior to default.

ACL on Unfunded Commitments

The following table presents information on the ACL for unfunded commitments for the year ended December 31, 2023:

Allowance for Credit Losses on Unfunded Commitments

Balance, December 31, 2022

Adoption of ASU 2016-13

Provision for credit losses

Balance, December 31, 2023

Premises and Equipment

A summary of the cost and accumulated depreciation of premises and equipment as of the dates indicated, follows:

$ 15,435  

$ 14,933  

$ 15,724 $ 15,435

Furniture and equipment

Premises and equipment

$ 22,093  

$ 21,752  

23,586 22,093

Accumulated depreciation

( 12,477 ) ( 11,722 )

Premises and equipment, net

$ 10,371  

$ 9,722  

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

Premises includes construction in process. 

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

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

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

At December 31, 2022, the scheduled maturities of time deposits are as follows:

$ 11,109 $ 10,371

Depreciation expense for the years ended December 31, 2023 and 2022 amounted to $ 754 and $ 609 , respectively.

Premises includes construction in process.

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

The amount for the Roanoke location included in construction in process totaled $ 1,822 as of December 31, 2023 and $ 1,586 as of December 31, 2022.

The Company expects the building will be completed and placed in service by the end of 2024.

The aggregate amounts of time deposits in denominations of $250 or more as of December 31, 2023 and 2022 were $ 65,777 and $ 18,610 , respectively.

As of December 31, 2023, the scheduled maturities of time deposits are as follows:

Year of Maturity

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Total time deposits

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

As of December 31, 2023 and 2022, overdraft demand deposits reclassified to loans totaled $ 237 and $ 277 , respectively.

There were no deposit relationships that exceed 5% of total deposits.

Employee Benefit Plans

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Eligible participants may contribute up to 100 % of their total annual compensation to the plan, subject to certain limits based on federal tax laws.

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

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

Employee Stock Ownership Plan          

The Company has a non-leveraged Employee Stock Ownership Plan (“ESOP”) which enables employees of NBI and its subsidiaries who have one year of service and who have attained the age of 21 prior to the plan’s January 1 and July 1 enrollment dates to own NBI common stock.

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

For the years ended December 31, 2023 and 2022, the Company contributed $ 446 and $ 392 respectively, included in salaries and employee benefits in the Consolidated Statements of Income.

Employee Stock Ownership Plan

Contributions to the ESOP, which are not mandatory, are determined annually by the NBI Board of Directors.

2 unchanged sentences

As of December 31, 2023, the number of shares held by the ESOP was 189,869 .

All shares held by the ESOP are treated as outstanding in computing the Company’s basic net income per share.

Upon reaching age 55 with 10 years of plan participation, a vested participant has the right to diversify 50 % of his or her allocated ESOP shares, and NBI or the ESOP, with the agreement of the trustee, is obligated to purchase those shares.

2 unchanged sentences

The Company has a non-qualified Salary Continuation Plan for certain key officers.

The plan provides the participating officers with supplemental retirement income, payable for the greater of 15 years after retirement or the officer’s lifetime.

The expense accrued for the plans in 2022 and 2021, based on the present value of the retirement benefits, amounted to $ 326 and $ 296 respectively.

The plan provides the participating officers with supplemental retirement income, payable for the greater of 15 years after retirement or the officer’s lifetime.

The associated liability, included in other liabilities in the Consolidated Balance Sheets, was $ 3,371 as of December 31, 2023 and $ 3,339 as of December 31, 2022.

The expense accrued for the plans in 2023 and 2022, based on the present value of the retirement benefits, amounted to $ 317 and $ 326 respectively, included in salaries and employee benefits on the Consolidated Statements of Income.

The plan is unfunded.

However bank-owned life insurance has been acquired on the life of the key employees in amounts sufficient to discharge the obligations of the agreement.

Defined Benefit Plan          

The Company’s defined benefit pension plan covers substantially all employees.

Defined Benefit Plan

The Company’s defined benefit pension plan covers substantially all employees.

The plan benefit formula is based upon the length of service of retired employees and a percentage of qualified W- 2 compensation during their final years of employment.

2 unchanged sentences

Projected benefit obligation at beginning of year

$ 35,312  

$ 34,852  

$ 23,128 $ 35,312

Service cost (1)

Interest cost (2)

Actuarial gain 

Actuarial loss (gain) (3)

1,542 ( 11,566 )

Benefits paid

( 824 ) ( 2,732 )

Projected benefit obligation at end of year

$ 23,128  

$ 35,312  

$ 25,750 $ 23,128

Change in plan assets

Fair value of plan assets at beginning of year

$ 36,187  

$ 32,415  

$ 29,746 $ 36,187

Actual return on plan assets

3,587 ( 3,709 )

Benefits paid

( 824 ) ( 2,732 )

Fair value of plan assets at end of year

$ 29,746  

$ 36,187  

$ 32,509 $ 29,746

Funded status at the end of the year

$ 6,618  

$ 6,759 $ 6,618

Amounts recognized in the Consolidated Balance Sheet

Deferred tax liabilities

$ ( 1,419 ) $ ( 1,390 )

Total amounts recognized in the Consolidated Balance Sheet

$ 5,228  

$ 5,340 $ 5,228

Amounts recognized in accumulated other comprehensive loss, net

$ ( 2,924 ) $ ( 2,968 )

Deferred tax asset

Amount recognized

$ ( 2,310 ) $ ( 2,345 )

Accrued/Prepaid benefit cost, net

Benefit obligation

$ ( 25,750 ) $ ( 23,128 )

Fair value of assets

29,746  

36,187  

32,509 29,746

Unrecognized net actuarial loss

Deferred tax liability

( 2,033 ) ( 2,013 )

Prepaid benefit cost included in other assets

$ 7,573  

$ 7,603  

$ 7,650 $ 7,573

Components of net periodic benefit cost

Service cost 

$ 1,297  

$ 1,445  

Interest cost 

Expected return on plan assets 

Amortization of prior service cost 

Recognized net actuarial loss 

Service cost (1)

$ 813 $ 1,297

Interest cost (2)

Expected return on plan assets (2)

( 2,070 ) ( 2,517 )

Recognized net actuarial loss (2)

Net periodic benefit cost

$ ( 97 ) $ 38

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

Amortization of prior service cost

Deferred income tax expense 

$ ( 44 ) $ ( 5,781 )

Deferred income tax expense

Total recognized

$ ( 35 ) $ ( 4,567 )

Total recognized in net periodic benefit cost and other comprehensive loss

$ ( 141 ) $ ( 5,743 )

Weighted average assumptions at end of the year

Discount rate used for net periodic pension cost

5.00 % 2.50 %

Discount rate used for disclosure

4.75 % 5.00 %

Expected return on plan assets

7.50 % 7.50 %

Rate of compensation increase

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

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

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

3.00 % 3.00 %

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

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

Please see table below for detail on the components of actuarial loss (gain).

The following table presents the components of actuarial loss (gain):

For the Year Ended December 31,

Components of actuarial loss (gain)

Loss due to demographic changes

Gain due to change in mortality table

Loss (gain) due to change in discount rate

899 ( 11,632 )

Actuarial loss (gain)

1,542 ( 11,566 )

(Gain) loss due to asset return

( 1,517 ) 6,226

Actuarial loss (gain) with asset return

Long-Term Rate of Return

6 unchanged sentences

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

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

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

10 unchanged sentences

There are no investments in hedge funds, private equity funds or real estate.

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

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

Fair Value Measurements at December 31, 2022

The Company’s required minimum pension contribution for 2024 has not yet been determined.

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

Fair Value Measurements as of December 31, 2023

Asset Category

$ 867 $ 867 $ - $ -

Equity securities:

15,459  

17,540 17,540 - -

International companies

Equities mutual funds (1)

6,098 6,098 - -

State and political subdivisions

Corporate bonds –

investment grade (2)

Corporate bonds – investment grade (2)

7,553 - 7,553 -

Total pension plan assets

$ 29,746  

$ 22,734  

$ 7,012  

Fair Value Measurements at December 31, 2021

$ 32,509 $ 24,905 $ 7,604 $ -

Fair Value Measurements as of December 31, 2022

Asset Category

$ 1,390  

$ 415 $ 415 $ - $ -

Equity securities:

19,758  

15,459 15,459 - -

International companies

Equities mutual funds (1)

6,090 6,090 - -

State and political subdivisions

Corporate bonds –

investment grade (2)

Corporate bonds – investment grade (2)

6,961 - 6,961 -

Total pension plan assets

$ 36,187  

$ 29,127  

$ 7,060  

$ 29,746 $ 22,734 $ 7,012 $ -

This category comprises actively managed equity funds invested in large-cap and mid-cap U.S.

1 unchanged sentence

issuers from diverse industries.

Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows:

$ 2,802  

$ 1,494  

$ 1,877  

$ 1,801  

2028 - 2032  

$ 11,054  

Estimated future benefit payments, which reflect expected future service, as appropriate, as of December 31, 2023 are as follows:

Year Estimated Benefit Payment

2029 - 2033 $ 11,559

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

1 unchanged sentence

federal, state and local income tax examinations by tax authorities for years prior to 2020.

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

Year ended December 31,

$ 5,940  

$ 4,099  

Allocation of income tax expense between current and deferred portions for the period indicated is as follows:

Year Ended December 31,

$ 2,234 $ 5,940

Deferred (benefit) expense

Total income tax expense

$ 5,831  

$ 4,251  

The following reconciles the “expected”

income tax expense, computed by applying the U.S.

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

Year ended December 31,

Computed “expected”

income tax expense

$ 6,670  

$ 5,173  

$ 2,984 $ 5,831

The following reconciles the “expected” income tax expense, computed by applying the U.S.

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

Year Ended December 31,

Computed “expected” income tax expense

$ 3,922 $ 6,670

Tax-exempt interest income

( 354 ) ( 728 )

Nondeductible interest expense

( 414 ) ( 135 )

Reported income tax expense

$ 5,831  

$ 4,251  

The components of net deferred tax assets, included in other assets, are as follows:

$ 2,984 $ 5,831

The components of net deferred tax assets, included in other assets as of the dates indicated, are as follows:

Deferred tax assets:

Allowance for loan losses and unearned fee income

$ 1,906  

$ 1,774  

Allowance for credit losses and unearned fee income

$ 2,155 $ 1,906

Valuation allowance on other real estate owned

2 unchanged sentences

Net unrealized loss on securities available for sale

21,644  

16,629 21,644

Lease accounting

Unvested stock-based compensation

Total deferred tax assets

$ 25,643  

$ 5,032  

$ 20,529 $ 25,643

Deferred tax liabilities:

$ ( 597 ) $ ( 463 )

( 1,228 ) ( 1,228 )

Defined benefit pension plan, prepaid portion

Net unrealized loss on securities available for sale

( 2,034 ) ( 2,013 )

Lease accounting

( 230 ) ( 297 )

Discount accretion of securities

( 122 ) ( 84 )

Total deferred tax liabilities

Net deferred tax assets (liabilities)

$ 21,558  

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

( 4,211 ) ( 4,085 )

Net deferred tax assets

$ 16,318 $ 21,558

The Company determined that no valuation allowance for gross deferred tax assets was necessary as of December 31, 2023 and 2022.

Restrictions on Dividends

The Company’s principal source of funds for dividend payments is dividends received from its subsidiary bank.

For the years ended December 31, 2023 and 2022, dividends received from the subsidiary bank were $ 12,000 and $ 25,000 , respectively.

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

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

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

During 2023 and 2022, the Bank applied to its primary regulator and was approved to dividend to NBI an amount in excess of the regulatory maximum.

The purpose in the excess dividend was to provide cash for stock repurchases.

At December 31, 2022, NBB had no retained net income free of restriction.

The purpose in the excess dividend was to provide cash for stock repurchases, pay regular dividends and a special one -time dividend, and provide operating cash for NBI.

As of December 31, 2023, NBB’s retained net income, which was free of such restriction, amounted to approximately $ 9,456 .

The Bank remains in a highly capitalized position and the Company intends to request approval for additional dividends in 2024.

Minimum Regulatory Capital Requirement

Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is exempt from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements.

NBB is subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on NBI’s and NBB’s financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, NBB must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices.

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

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

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

designed to absorb losses during periods of economic stress.

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

The Basel III Capital Rules require the Bank to comply with minimum capital ratios plus a “capital conservation buffer” designed to absorb losses during periods of economic stress.

The rules set forth minimum amounts and ratios for CET1 capital, Tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

NBB’s CET1 capital includes common stock and related surplus and retained earnings.

The Basel III Capital Rules provide an option to exclude components of accumulated other comprehensive income (loss) from CET1 capital.

Once made, the election is final and cannot be changed.

NBB elected to exclude components of accumulated other comprehensive income from CET1 capital.

NBB’s CET1 capital includes common stock and related surplus and retained earnings.

The Basel III Capital Rules provide an option to exclude components of accumulated other comprehensive loss from CET1 capital.

NBB elected to exclude components of accumulated other comprehensive loss from CET1 capital.

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

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

As of December 31, 2023 and 2022, NBB did not hold any additional Tier 1 capital beyond CET1 capital.

Total capital includes Tier 1 capital and Tier 2 capital.

Tier 2 capital includes the allowance for loan losses.

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

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

Tier 2 capital includes the allowance for credit losses.

NBB’s risk-weighted assets were $ 1,082,158 as of December 31, 2023 and $ 1,092,101 as of December 31, 2022.

Management believes, as of December 31, 2023 and 2022, that NBB met all capital adequacy requirements to which it is subject.

1 unchanged sentence

To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, CET1 risk-based and Tier 1 leverage ratios, as set forth in the following tables.

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

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

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

NBB’s capital amounts and ratios as of the dates indicated are presented in the following tables.

December 31, 2023

6 unchanged sentences

Total Capital (to Risk Weighted Assets)

$ 191,883  

$ 114,671  

$ 109,210  

$ 195,782 18.09 % $ 113,627 10.50 % $ 108,216 10.00 %

Tier 1 Capital (to Risk Weighted Assets)

$ 183,623  

$ 92,829  

$ 87,368  

$ 186,429 17.23 % $ 91,983 8.50 % $ 86,573 8.00 %

Common Equity Tier 1 Capital (to Risk Weighted Assets)

$ 183,623  

$ 76,447  

$ 70,987  

$ 186,429 17.23 % $ 75,751 7.00 % $ 70,340 6.50 %

Tier 1 Capital (to Average Assets)

$ 183,623  

$ 69,925  

$ 87,406  

$ 186,429 11.05 % $ 67,491 4.00 % $ 84,364 5.00 %

December 31, 2022

6 unchanged sentences

Total Capital (to Risk Weighted Assets)

$ 192,907  

$ 103,898  

$ 98,950  

$ 191,883 17.57 % $ 114,671 10.50 % $ 109,210 10.00 %

Tier 1 Capital (to Risk Weighted Assets)

$ 185,187  

$ 84,108  

$ 79,160  

$ 183,623 16.81 % $ 92,829 8.50 % $ 87,368 8.00 %

Common Equity Tier 1 Capital (to Risk Weighted Assets)

$ 185,187  

$ 69,265  

$ 64,318  

$ 183,623 16.81 % $ 76,447 7.00 % $ 70,987 6.50 %

Tier 1 Capital (to Average Assets)

$ 185,187  

$ 66,348  

$ 82,935  

Except with regard to NBB’s Tier 1 capital to average assets ratio, the minimum capital requirement includes the Basel III Capital Rules’ capital conservation buffer ( 2.50% ) which is added to the minimum capital requirements for capital adequacy purposes.

NBB’s capital conservation buffer consists of additional CET1 above regulatory minimum requirement.

$ 183,623 10.50 % $ 69,925 4.00 % $ 87,406 5.00 %

Except with regard to NBB’s Tier 1 capital to average assets ratio, the minimum capital requirement includes the Basel III Capital Rules’ capital conservation buffer ( 2.50% ) which is added to the minimum capital requirements for capital adequacy purposes.

NBB’s capital conservation buffer consists of additional CET1 above regulatory minimum requirement.

Failure to maintain the prescribed levels would result in limitations on capital distributions and discretionary bonuses to executives.

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Cash due from subsidiaries

$ 14,927  

$ 2,324  

$ 11,010 $ 14,927

Investments in subsidiaries

107,746  

189,027  

129,731 107,746

Refundable income taxes

$ 123,391  

$ 192,845  

Liabilities and Stockholders ’

$ 141,396 $ 123,391

Liabilities and Stockholders ’ Equity

Other liabilities

$ 1,094  

Stockholders’

122,687  

191,751  

Total liabilities and stockholders’

$ 123,391  

$ 192,845  

Stockholders’ equity

140,522 122,687

Total liabilities and stockholders’ equity

$ 141,396 $ 123,391

Condensed Statements of Income

Years ended December 31,

Year Ended December 31,

Dividends from subsidiaries

$ 25,000  

$ 14,508  

Gain on sale of private equity investments  

28,823  

14,509  

$ 12,000 $ 25,000

Gain on sale of private equity investment

12,232 28,823

Other expenses

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

27,604  

13,374  

Applicable income tax (expense) benefit

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

10,090 27,603

Applicable income tax benefit (expense)

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

27,112  

13,667  

10,589 27,112

Equity (deficit) in undistributed net income of subsidiaries

$ 25,932  

$ 20,382  

5,102 ( 1,180 )

$ 15,691 $ 25,932

Condensed Statements of Cash Flows

Years ended December 31,

Year Ended December 31,

Cash Flows from Operating Activities

$ 25,932  

$ 20,382  

$ 15,691 $ 25,932

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

(Equity) deficit in undistributed net income of subsidiaries

( 5,102 ) 1,180

Net change in refundable income taxes due from subsidiaries

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Net cash provided by operating activities

27,891  

13,470  

Cash Flows from Investing Activities

Net change in interest-bearing deposits

10,027  

Net cash provided by investing activities

10,027  

10,867 27,891

Cash Flows from Financing Activities

Cash dividends paid

Shares repurchased  

( 14,784 ) ( 8,950 )

Shares repurchased

Net cash used in financing activities

( 14,784 ) ( 15,288 )

Net change in cash

12,603  

( 3,917 ) 12,603

Cash due from subsidiaries at beginning of year

Cash due from subsidiaries at end of year

$ 14,927  

$ 2,324  

$ 11,010 $ 14,927

Financial Instruments with Off-Balance Sheet Risk

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These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

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

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

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

Commitments to extend credit

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Therefore, the total commitment amounts do not necessarily represent future cash requirements.

The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

The amount of collateral obtained, if deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit.

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

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

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

As of December 31, 2023, the Company had locked-rate commitments to originate mortgage loans of $ 233 and loans held for sale of $ 406 .

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

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The Company maintains cash accounts in other commercial banks.

The Company had $ 15 in deposits with correspondent institutions at December 31, 2022 that were not insured by the FDIC.

The Company had $ 962 in deposits with correspondent institutions as of December 31, 2023 that were not insured by the FDIC.

Concentrations of Credit Risk

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Loans secured by residential real estate were $ 241,564 , or approximately 28 % of the portfolio, and $ 221,052 , or 26 % of the portfolio as of December 31, 2023 and 2022, respectively.

Commercial real estate as of December 31, 2023 and 2022 represented approximately 49 % and 51 %, respectively, of the loan portfolio, at $ 419,130 and $ 437,888 , respectively.

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

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

December 31, 2021.

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

December 31, 2022 and 2021, respectively.

Included in commercial real estate are loans for college housing and professional office buildings that comprised $ 167,794 and $ 196,398 as of December 31, 2023 and 2022, respectively, corresponding to approximately 20 % of the loan portfolio as of December 31, 2023 and 23 % of the loan portfolio as of December 31, 2022.

Professional office buildings house a variety of businesses, including medical, dental, engineering, attorneys, and higher education.

Many of the properties are mixed-use and include residential and retail space along with professional businesses.

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

Loans to purchase real and personal property are generally collateralized by the related property and with loan amounts established based on certain percentage limitations of the property’s total stated or appraised value.

Credit approval is primarily a function of cash flow, collateral and the evaluation of the creditworthiness of the individual borrower or project based on available financial information.

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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 – 

● 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.

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

Fair value is best determined by quoted market prices.

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

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

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

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

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

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

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

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

Fair Value Measurement Using

December 31, 2022  

December 31, 2023

government agencies and corporations

$ 336,575  

$ 311,844 $ - $ 311,844 $ -

States and political subdivisions

152,200  

149,893 - 149,893 -

Mortgage-backed securities

161,477  

150,151 - 150,151 -

Corporate debt securities

5,750 - 5,750 -

Total securities available for sale

$ 656,852  

$ 618,601 $ - $ 618,601 $ -

Fair Value Measurement Using

December 31, 2021  

December 31, 2022

Government agencies and corporations

$ 278,019  

$ 336,575 $ - $ 336,575 $ -

States and political subdivisions

198,672  

152,200 - 152,200 -

Mortgage-backed securities

206,174  

161,477 - 161,477 -

Corporate debt securities

5,664 - 5,664 -

Total securities available for sale

$ 686,080  

The Company’s securities portfolio is valued using Level 2 inputs.

$ 656,852 $ - $ 656,852 $ -

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 inputs used to determine value include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two -sided markets, benchmark securities, bids, offers and reference data including market research publications.

The third party vendor also monitors market indicators, industry activity and economic events as part of the valuation process.

Central to the final valuation is the assumption that the indicators used are representative of the fair value of securities held within the Company’s portfolio.

Level 2 inputs are subject to a certain degree of uncertainty and changes in these assumptions or methodologies in the future, if any, may impact securities fair value, deferred tax assets or liabilities, or expense.

Interest Rate Loan Contracts and Forward Contracts

Interest Rate Loan Contracts and Forward Sale Commitment

The Company originates consumer real estate loans which it intends to sell to a correspondent lender.

Interest rate loan contracts and forward contracts result from originating loans held for sale and are derivatives reported at fair value.

The Company enters interest rate lock commitments with customers who apply for a loan which the Company intends to sell to a correspondent lender.

Interest rate loan contracts and forward sale commitments result from originating loans held for sale and are derivatives reported at fair value.

The Company enters interest rate lock commitments with customers who apply for a loan which the Company intends to sell to a correspondent lender.

The interest rate loan contract ends when the loan closes or the customer withdraws their application.

Fair value of the interest rate loan contract is based upon the correspondent lender’s pricing quotes at the report date.

Fair value is adjusted for the estimated probability of the loan closing with the borrower.

At the time the Company enters into an interest rate loan contract with a customer, it also enters into a best efforts forward sales commitment with the correspondent lender.

If the loan has been closed and funded, the best efforts commitment converts to a mandatory forward sales commitment.

At the time the Company enters into an interest rate loan contract with a customer, it also enters into a best efforts forward sales commitment with the correspondent lender.

If the loan is closed and funded, the best efforts commitment converts to a mandatory forward sales commitment.

Fair value is based on the gain or loss that would occur if the Company were to pair-off the transaction with the investor at the measurement date.

This is a Level 3 input.

The Company has elected to measure and report best efforts commitments at fair value.

Interest rate loan contracts and forward contracts are valued based on quotes from the correspondent lender at the reporting date.

The Company measures and reports best efforts commitments at fair value.

Interest rate loan contracts and forward sale commitments are valued based on quotes from the correspondent lender at the reporting date.

Pricing changes daily and if a loan has not been sold to the correspondent by the next reporting date, the fair value may be different from that reported currently.

Changes in fair value measurement impacts net income.

The Company had one rate lock commitment as of December 31, 2023, resulting in an interest rate loan contract and a forward sales commitment.

The interest rate lock commitment gave rise to an asset and the forward loan sales contracts gave rise to a liability.

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

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

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

The following tables present information on the interest rate loan contracts and forward sale commitments as of the date indicated:

Fair Value Measurement Using

December 31, 2023

Interest rate loan contract

$ 3 $ - $ - $ 3

Forward sale commitment

$ ( 4 ) $ - $ - $ ( 4 )

December 31, 2023

Valuation Technique

Unobservable Input

Range (Weighted Average)

Interest rate loan contract

Market approach

Pull-through rate

Forward sale commitment

Market approach

Pull-through rate

Interest rate loan contract

Market approach

Current reference price

Forward sale commitment

Market approach

Current reference price

101.60% - 102.64% (101.98%) (3)

All contracts are valued using the same pull-through rate

Comprised of only one loan.

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

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

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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 financial assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:

4 unchanged sentences

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 during the years ended December 31, 2022 and 2021.

Impaired Loans

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

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

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

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

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

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

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

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

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

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

value of independent appraisals or evaluations.

Appraisals are used to value loans secured by residential 1 - 4 family properties with outstanding principal balances greater than $ 250 and commercial real estate loans with outstanding principal balances greater than $ 500 .

Appraisals or real estate evaluations prepared by a third party may be used to value loans with principal balances below these thresholds.

Appraisals of less than 24 months of age, conducted by independent, licensed appraisers using observable market data analyzed through an income or sales valuation approach result in Level 2 categorization.

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

Valuations based on evaluations are categorized as Level 3.

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

financial statements (Level 3 ) if not considered significant.

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

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

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

Other Real Estate Owned          

No nonrecurring fair value adjustments were recorded on loans held for sale as of December 31, 2022.

Collateral Dependent Loans

Collateral dependent loans are measured on a non-recurring basis for the ACL.

As of December 31, 2023, the Company evaluated three collateral dependent loans.

None of the loans had a specific allocation.

Other Real Estate Owned

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 measured at fair value on a nonrecurring basis as of the dates indicated.

The Company did not have any OREO as of December 31, 2023.

The following table summarizes the Company’s OREO measured at fair value on a nonrecurring basis as of December 31, 2022.

Carrying Value

1 unchanged sentence

OREO net of valuation allowance

December 31, 2021

OREO net of valuation allowance

$ 662 $ - $ - $ 662

The following table presents information about OREO and Level 3 fair value measurements as of the dates indicated.

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Discount for lack of marketability

December 31, 2021

Discounted appraised value

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

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

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

There is uncertainty in determining discounts to appraised value.

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

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

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

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2023 and December 31, 2022.

Fair values are estimated using the exit price notion.

Estimated Fair Value

December 31, 2022  

December 31, 2023

Carrying Amount

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Cash and due from banks

$ 12,403  

$ 12,967 $ 12,967 $ - $ -

Interest-bearing deposits

59,026  

73,636 73,636 - -

Securities available for sale

656,852  

618,601 - 618,601 -

Restricted stock, at cost

844,519  

781,749  

1,264 - 1,264 -

Mortgage loans held for sale

847,552 - - 793,800

Accrued interest receivable

6,313 - 6,313 -

Bank-owned life insurance

43,312  

43,583 - 43,583 -

Interest rate loan contract

Financial liabilities:

$ 1,542,725  

$ 1,475,096  

$ 67,542  

$ 1,503,972 $ - $ 1,280,732 $ 222,374

Accrued interest payable

1,416 - 1,416 -

Forward sale commitment

Estimated Fair Value

December 31, 2021  

December 31, 2022

Carrying Amount

1 unchanged sentence

Cash and due from banks

$ 8,768  

$ 12,403 $ 12,403 $ - $ -

Interest-bearing deposits

130,021  

59,026 59,026 - -

Securities available for sale

686,080  

656,852 - 656,852 -

Restricted stock, at cost

Mortgage loans held for sale

795,574  

791,335  

844,519 - - 781,749

Accrued interest receivable

6,001 - 6,001 -

Bank-owned life insurance

42,354  

43,312 - 43,312 -

Financial liabilities:

$ 1,494,587  

$ 1,415,619  

$ 79,115  

$ 1,542,725 $ - $ 1,475,096 $ 67,542

Accrued interest payable

Components of Accumulated Other Comprehensive Income (Loss)

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

Components of Accumulated Other Comprehensive Loss

The following table summarizes the activity related to each component of accumulated other comprehensive loss for the years ended December 31, 2023 and 2022:

Net Unrealized

4 unchanged sentences

Comprehensive

Income (Loss)

Balance as of December 31, 2020

Balance as of December 31, 2021

$ 2,854 $ ( 6,912 ) $ ( 4,058 )

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

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

( 84,275 ) - ( 84,275 )

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

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

Balance as of December 31, 2021

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

- 4,567 4,567

Balance as of December 31, 2022

$ ( 81,421 ) $ ( 2,345 ) $ ( 83,766 )

Unrealized holding gain on available for sale securities net of tax of $4,315

16,233 - 16,233

Reclassification adjustment, net of tax of $700

2,632 - 2,632

Net pension gain, net of tax of $9

Balance as of December 31, 2022

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

Component of Accumulated Other Comprehensive Income (Loss)

Balance as of December 31, 2023

$ ( 62,556 ) $ ( 2,310 ) $ ( 64,866 )

The following table provides detail on reclassifications out of accumulated other comprehensive loss for the years indicated:

Component of Accumulated Other Comprehensive Loss

Reclassification out of unrealized losses on available for sale securities:

Realized securities gain, net

Income tax benefit

Realized gain on available for sale securities, net of tax, reclassified out of accumulated other comprehensive loss

Amortization of defined benefit pension items:

Prior service costs (1)

Realized securities loss, net

$ ( 3,332 ) $ -

Income tax benefit

Amortization of defined benefit pension items, net of tax, reclassified out of accumulated other comprehensive loss

This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost.

(For additional information, see Note 8, Employee Benefit Plans.)

Realized loss on available for sale securities, net of tax, reclassified out of accumulated other comprehensive loss

$ ( 2,632 ) $ -

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

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Revenue Recognition

Substantially all of the Company’s revenue is generated from contracts with customers.

Noninterest revenue streams such as service charges on deposit accounts, other service charges and fees, credit and debit card fees, trust income, and annuity and insurance commissions are recognized in accordance with ASC Topic 606, “Revenue from Contracts with Customers”.

Substantially all of the Company’s revenue is generated from contracts with customers.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities.

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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’

The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided.

Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM.

Wire transfer fees, overdraft and nonsufficient funds fees and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

Other Service Charges and Fees

2 unchanged sentences

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.

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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’

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.

3 unchanged sentences

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.

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.

11 unchanged sentences

Service charges on deposit accounts

$ 2,518 $ 2,425

Other service charges and fees

Credit and debit card fees

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

Credit and debit card fees, net

Insurance and Investment (1)

Gain on sale of OREO (1)

Noninterest Income (in-scope of Topic 606)

$ 7,072 $ 6,994

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

Total noninterest income

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

$ 9,359 $ 12,401

Included within net costs of other real estate owned on the Consolidated Statements of Income.

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.

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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 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

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

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

Two of the leases have two options of five years each and one lease has two options of three years each. 

Of the Company’s six operating leases as of December 31, 2023, four leases offer the option to extend the lease term.

Two of the leases have two options of five years each and one lease has two options of three years each.

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.

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

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

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

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

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

The Company terminated a lease prior to maturity during 2021.

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

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

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

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

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

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

The 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 Company’s lease right of use asset as of the dates and for the periods indicated is included in other assets and the lease liability is included in other liabilities.

The following tables present information about leases:

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Lease liability

$ 1,127 $ 1,444

Right-of-use asset

Weighted average remaining lease term (years)

$ 1,096 $ 1,415

Weighted average remaining lease term (in years)

Weighted average discount rate

For the Years Ended December 31,

3.29 % 3.29 %

For the Year Ended December 31,

Lease Expense

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

The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability:

The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability as of the dates indicated:

Undiscounted Cash Flow for the

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Lease liability

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 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 year ended December 31, 2023 follows:

Year Ended December 31, 2023

Weighted-Average Grant-Date Fair Value

Nonvested at January 1, 2023

Nonvested at December 31, 2023

4,095 $ 30.73

The RSAs vest on the one year anniversary of the grant date.

The RSAs are fair valued on the grant date and expense recognized over the vesting period.

Stock based compensation expense was $ 42 for the year ended December 31, 2023.

As of December 31, 2023, expense of $ 84 related to the non-vested RSAs is expected to be recognized over the coming 11 months.

Earnings Per Share

The factors used in the earnings per share computation for the periods indicated are presented below:

For the Year Ended December 31,

$ in thousands, except per share amounts

(Denominator)

Basic earnings per share

$ 15,691 5,889,687 $ 2.66 $ 25,932 5,989,601 $ 4.33

Dilutive shares for restricted stock awards:

Diluted earnings per share

$ 15,691 5,889,953 $ 2.66 $ 25,932 5,989,601 $ 4.33

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 year ended December 31, 2023.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

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

and its subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Adoption of New Accounting Standard

As discussed in Notes 1 and 5 to the financial statements, the Company changed its method of accounting for credit losses in 2023 due to the adoption of Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments , including all related amendments.

Basis for Opinion

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

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

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

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

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

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

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

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The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

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

Accordingly, we express no such opinion.

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses –

Loans Collectively Evaluated for Impairment –

Qualitative Factors

Allowance for Credit Losses – Collectively Evaluated Loans

Description of the Matter

As described in Note 1 (Summary of Significant Accounting Policies) and Note 5 (Allowance for Loan Losses, Nonperforming Assets and Impaired Loans) to the consolidated financial statements, the Company maintains an allowance for loan losses to provide for probable losses inherent in the loan portfolio.

The Company’s allowance for loan losses has two basic components, the general allowance and the specific allowance.

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

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

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

As of December 31, 2022, the qualitative factor adjustments represented $7.44 million of the total allowance for loan losses of $8.23 million.

Qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio.

Management evaluates qualitative factors by loan class.

The primary factors considered are internal risk ratings, delinquency and nonperforming rates, product mix, changes in loan policies and procedures, changes in loan review systems, changes in economic conditions, changes in management experience, industry trends, interest rate trends, and changes in competitive, legal and regulatory environment.

The analysis of certain factors results in standard allocations to all classes and other factors are analyzed for each class.

Management exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses.

We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.

How We Addressed the Matter in Our Audit

As described in Note 1 (Summary of Significant Accounting Policies) and Note 5 (Allowance for Credit Losses on Loans and Nonperforming Assets) to the consolidated financial statements, the Company changed its method of accounting for credit losses on January 1, 2023, due to the adoption of Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, as amended.

The allowance for credit losses on loans (ACLL) is a valuation allowance that represents management’s best estimate of expected credit losses on loans measured at amortized cost considering available information, from internal and external sources, relevant to assessing collectability over the loans’ contractual terms.

Loans which share common risk characteristics are pooled and collectively evaluated by the Company using historical data, modified by peer data, as well as assessments of current conditions and reasonable and supportable forecasts of future conditions.

The Company’s ACLL related to collectively evaluated loans represented $8.5 million of the total recorded ACLL of $9.1 million as of December 31, 2023.

The collectively evaluated ACLL consists of quantitative and qualitative components.

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

These estimates consider large amounts of data in tabulating default, loss given default, and prepayment speeds and require complex calculations as well as management judgment in the selection of appropriate inputs.

In addition to the quantitative component, the collectively evaluated ACLL also includes a qualitative component which aggregates management’s assessment of available information relevant to assessing collectability that is not captured in the quantitative loss estimation process.

Factors considered by management in developing its qualitative estimates include:

changes in lending policies;

management experience;

economic conditions;

loans past due;

competitive, legal and regulatory environment;

and other loan characteristics.

This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

Management exercised significant judgment when estimating the ACLL on collectively evaluated loans.

We identified the estimation of the collectively evaluated ACLL as a critical audit matter as auditing the collectively evaluated ACLL involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.

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

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

● 

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

Obtaining an understanding of the Company’s process for determining its ACLL, including the underlying methodology and significant inputs to the calculation.

Substantively testing management’s process for measuring the collectively evaluated ACLL, including:

Evaluating the conceptual soundness, assumptions, and key data inputs of the Company’s discounted cash flow methodology, including the identification of loan pools, the probability of default and loss given default rate inputs, and the prepayment/curtailment rate inputs for each pool.

Evaluating management’s selection of forecasting inputs and testing the accuracy of management’s incorporation of its forecasts in the collectively evaluated ACLL estimate.

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

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

Evaluating the qualitative factors for directional consistency and for reasonableness.

Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.

Evaluating the qualitative factors for directional consistency in comparison to prior periods and for reasonableness in comparison to underlying supporting data.

Testing the mathematical accuracy of the ACLL for collectively evaluated loans including both the discounted cashflow and qualitative factor components of the calculations.

/s/ Yount, Hyde & Barbour, P.C.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data