Item 5. Market for Registrant’s Common Equity
Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Common Stock Information and Dividends
NBI’s common stock is traded on the Nasdaq Capital Market under the symbol “NKSH.” As of December 31, 2023, there were 544 record stockholders of NBI common stock.
NBI’s primary source of funds for dividend payments is dividends from its bank subsidiary, NBB. Bank dividend payments are restricted by regulators, as more fully disclosed in “Regulation, Supervision and Government Policy” contained in Part I, Item 1, “Business” and Note 10 of Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.
In May 2023, NBI’s Board of Directors approved the repurchase of up to 250,000 shares of the Company’s common stock. The authorization extends from June 1, 2023 to May 31, 2024. During 2023, the Company did not repurchase any shares. The Company’s share repurchase program does not obligate it to acquire any specific number of shares or any shares at all. During 2022, the Company repurchased 174,250 shares under prior repurchase authorizations.
Item 6. [Reserved]
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Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations
$ in thousands, except per share data.
The purpose of this discussion and analysis is to provide information about the results of operations, financial condition, liquidity and capital resources of the Company. The discussion should be read in conjunction with the material presented in Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K.
Subsequent events have been considered through the date of this Form 10-K.
Cautionary Statement Regarding Forward-Looking Statements
We make forward-looking statements in this Form 10-K that are subject to significant risks and uncertainties. These forward-looking statements include statements regarding our profitability, liquidity, allowance for credit losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals, and are based upon our management’s views and assumptions as of the date of this report. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements.
These forward-looking statements are based upon or are affected by factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. These factors include, but are not limited to, effects of or changes in:
●
interest rates,
●
the ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company’s or banking industry’s reputation becomes damaged,
●
the adequacy of the level of the Company’s allowance for credit losses, the amount of credit loss provisions required in future periods, and the failure of assumptions underlying the allowance for credit losses,
●
general and local economic conditions,
●
monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury, the OCC, the Federal Reserve, the CFPB and the FDIC, and the impact of any policies or programs implemented pursuant to financial reform legislation,
●
unanticipated increases in the level of unemployment in the Company’s market,
●
the quality or composition of the loan and/or investment portfolios,
●
demand for loan products,
●
deposit flows,
●
competition,
●
demand for financial services in the Company’s market,
●
the real estate market in the Company’s market,
●
laws, regulations and policies impacting financial institutions,
●
technological risks and developments, and cyber-threats, attacks or events,
●
the Company’s technology initiatives,
●
geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts,
●
the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events,
●
the Company's ability to identify, attract, and retain experienced management, relationship managers, and support personnel, particularly in a competitive labor environment,
●
performance by the Company’s counterparties or vendors,
●
applicable accounting principles, policies and guidelines, and
●
risks associated with mergers, acquisitions, and other expansion activities.
On January 23, 2024, the Company and the Bank entered into the Merger Agreement with Frontier, pursuant to which the Company will acquire Frontier in the Merger. In addition to the factors described above, the Company’s operations, performance, business strategy and results may be affected by the following factors:
●
the businesses of the Company and Frontier may not be integrated successfully after the Merger or such integration may be more difficult, time-consuming or costly than expected;
●
the cost savings and synergies contemplated by the Merger may not be fully realized or realized within the expected timeframe;
●
revenues following the Merger may be lower than expected;
●
customer and employee relationships and business operations may be disrupted by the Merger; and
●
the ability to obtain required regulatory and shareholder approvals and meet other closing conditions to the Merger; and
●
the ability to complete the Merger on the expected timeframe may be more difficult, time-consuming or costly than expected.
20
Table of Contents
These risks and uncertainties should be considered in evaluating the forward-looking statements contained in this report. We caution readers not to place undue reliance on those statements, which speak only as of the date of this report. This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A. of this Form 10-K.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with GAAP. The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change.
Critical accounting policies are most important to the portrayal of the Company’s financial condition or results of operations and require management’s most difficult, subjective, and complex judgments about matters that are inherently uncertain. If conditions occur that differ from our assumptions, depending upon the severity of such differences, the Company’s financial condition or results of operations may be materially impacted. The Company has designated three policies as critical, including those governing the allowance for credit losses, goodwill and the pension plan. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Please refer to Note 1 of Notes to Consolidated Financial Statements for information on these and other accounting policies.
Non-GAAP Financial Measures
This report refers to certain financial measures that are computed under a basis other than GAAP (“non-GAAP”). The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAAP measures may differ among companies. Non-GAAP measures are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP. Details on non-GAAP measures follow.
Net Interest Margin
The Company uses the net interest margin to measure profit on interest generating activities, as a percentage of total interest-earning assets. The Company’s net interest margin is calculated on a fully taxable equivalent (“FTE”) basis. The portion of interest income that is nontaxable is grossed up to the tax equivalent by adding the tax benefit based on a tax rate of 21%. Annualized FTE net interest income is divided by total average earning assets to calculate the net interest margin. The following tables present the reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, for the periods indicated.
Year Ended December 31,
Net Interest Income, FTE
2023
2022
Interest income (GAAP)
$
58,833
$
50,109
Add: FTE adjustment
890
919
Interest income, FTE (non-GAAP)
59,723
51,028
Interest expense (GAAP)
21,550
3,083
Net interest income, FTE (non-GAAP)
$
38,173
$
47,945
Average balance of interest-earning assets
$
1,606,667
$
1,667,191
Net interest margin
2.38
%
2.88
%
Efficiency Ratio
The efficiency ratio is computed by dividing noninterest expense by the sum of FTE net interest income and noninterest income, excluding certain items the Company’s management deems unusual or non-recurring. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. The components of the efficiency ratio calculation for the periods indicated are summarized in the following table.
21
Table of Contents
Year Ended December 31,
Noninterest Expense for Efficiency Ratio
2023
2022
Noninterest expense (GAAP)
$
29,228
$
26,958
Less: proxy contest-related expense
(786
)
-
Noninterest expense for efficiency ratio (non-GAAP)
$
28,442
$
26,958
Total Income for Efficiency Ratio
Noninterest income (GAAP)
$
9,359
$
12,401
Less: Loss on sale of securities
3,332
-
Less: Gain on sale of investment (1)
(3,203
)
(3,823
)
Less: BOLI settlement
(1,044
)
-
Noninterest income (non-GAAP)
8,444
8,578
Net interest income, FTE (non-GAAP)
38,173
47,945
Total income for efficiency ratio (non-GAAP)
$
46,617
$
56,523
Efficiency ratio
61.01
%
47.69
%
(1)
Amount presented for 2022 reflects the gain on sale of a private equity investment. In 2023, amount reflects $232 recognized upon receipt of a contract contingency payment associated with the 2022 sale of a private equity investment and $2,971 gain on the sale of the Company’s VISA Class B shares.
Performance Summary
Key to understanding the Company’s results of operations and financial position is the impact of changes in the interest rate environment. Between March 2022 and July 2023, the Federal Reserve increased interest rates 525 basis points. The rapidity and magnitude of the change was unprecedented and spurred intense competitive pressure for deposits, affected the fair value of the Company’s securities, and dampened loan demand. While these challenges are ongoing, the Company’s response successfully addressed deposit levels, while developing strategies for future growth.
Also affecting the Company’s results of operations were significant one-time noninterest income and expense items. During 2023, the Company paid a special one-time dividend of $1 per common share, in addition to its usual bi-annual dividends. The dividend rewarded stockholders for the Company’s positive performance during 2022, which included a one-time pre-tax gain of $3,823 on the sale of a private equity investment. Related to the 2022 gain on the sale of a private equity investment, the Company recorded in 2023 pre-tax income of $232 upon receipt of a contract contingency payment. Also in 2023, the Company sold its VISA Class B shares and recognized a pre-tax gain of $2,971, and strategically sold securities, recording a pre-tax loss of $3,332. The Company recognized tax-free income of $1,044 for the settlement of a bank owned life insurance policy (“BOLI”) policy in 2023, and incurred expense in 2023 of $786 to respond to a threatened proxy contest from an activist investor.
Summary information on results of operations, changes in key balances and asset quality is presented below. Expanded discussion is provided in subsequent sections.
Summary Results of Operations
The following tables present summary income, expenses and key performance indicators for the years indicated. Key performance indicators provide a summary of the Company’s results and allow comparison with results from prior years.
Year Ended December 31,
Summary Income and Expenses
2023
2022
Interest income
$
58,833
$
50,109
Interest expense
21,550
3,083
Net interest income
37,283
47,026
(Recovery of) provision for credit losses
(1,261
)
706
Net interest income after (recovery of) provision for credit losses
38,544
46,320
Noninterest income
9,359
12,401
Noninterest expense
29,228
26,958
Income before income taxes
18,675
31,763
Income tax expense
2,984
5,831
Net income
$
15,691
$
25,932
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Year Ended December 31,
Key Performance Indicators
2023
2022
Return on average assets
0.97
%
1.52
%
Return on average equity (1)(2)
12.59
%
17.81
%
Basic and fully diluted net earnings per common share
$
2.66
$
4.33
Net interest margin (3)
2.38
%
2.88
%
Efficiency ratio (4)
61.01
%
47.69
%
(1)
During the year ended December 31, 2022, the Company repurchased 174,250 shares under its publicly announced stock repurchase plan. The repurchased shares reduced shareholder equity by $6,338 during 2022.
(2)
Average unrealized losses on securities reduced average stockholders’ equity by $76,827 for 2023 and $48,109 for 2022.
(3)
The net interest margin is a non-GAAP financial measure. Please see “Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to GAAP.
(4)
The efficiency ratio is a non-GAAP financial measure. Please see “Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to GAAP.
Net income for the year ended December 31, 2023 decreased when compared with the year ended December 31, 2022. In response to competitive pressure for deposits, the Company increased its offering rates, giving rise to substantially higher interest expense in 2023 when compared with 2022. Results for 2023 and 2022 also reflected key noninterest income and expense items. Details are discussed in under “Income Statement” below.
Summary Change in Key Balances
Key balances are presented in the following table as of the dates indicated:
December 31,
Change
2023
2022
Dollars
Percent
Loans, net of unearned income and deferred fees and costs, and the ACLL
$
847,552
$
844,519
$
3,033
0.36
%
Securities available for sale
618,601
656,852
(38,251
)
(5.82
)%
Deposits
1,503,972
1,542,725
(38,753
)
(2.51
)%
Total assets
1,655,370
1,677,551
(22,181
)
(1.32
)%
Stockholders’ equity
140,522
122,687
17,835
14.54
%
Loans, net of unearned income and deferred fees and costs and the ACLL, grew slightly when December 31, 2023 is compared with December 31, 2022. The Company is positioned to continue to make every loan that meets its underwriting standards.
Securities available for sale are reported at fair value, which moves inversely to interest rate changes. The Federal Reserve’s interest rate increases during 2022 and 2023 reduced the fair value of the Company’s securities portfolio, though the percentage of unrealized loss improved when December 31, 2023 is compared with December 31, 2022. The portfolio decreased during 2023 due to sales and maturities. Further detail is provided in the “Balance Sheet” section below.
Customer deposits decreased when December 31, 2023 is compared with December 31, 2022, as competition pressured deposits. The Company continues to closely monitor deposits and evaluate its pricing and retention strategy.
Total assets decreased from December 31, 2022 to December 31, 2023, primarily due to the decrease in the securities portfolio. Stockholders’ equity increased from December 31, 2022 to December 31, 2023 due to improvements in accumulated other comprehensive loss related to the market value of securities.
Summary Asset Quality
Key indicators of the Company’s asset quality are presented in the following table as of the dates indicated:
December 31,
2023
2022
Nonaccrual loans
$
2,629
$
2,847
Loans past due 90 days or more and accruing
188
8
Other real estate owned
-
662
ACLL as a percentage of loans, net of unearned income and deferred fees and costs
1.06
%
0.96
%
Net charge-off ratio, net of unearned income and deferred fees and costs
0.02
%
0.02
%
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The Company monitors asset quality indicators in managing credit risk and in determining the ACLL and provision for credit losses. When December 31, 2023 is compared with December 31, 2022, nonaccrual loans and other real estate owned (“OREO”) improved, the net charge-off ratio remained the same, and accruing loans past due 90 days or more increased.
The Company believes that sufficient resources have been dedicated to resolving problem assets, and exposure to loss is somewhat mitigated by sufficient collateralization. More information about nonaccrual and past due loans is provided in Note 1 and Note 5 of Notes to Consolidated Financial Statements. The Company continues to carefully monitor risk levels within the loan portfolio.
Income Statement
The following provides information on the results of operations for the years ended December 31, 2023 and December 31, 2022.
Net Interest Income
The Company’s primary source of revenue is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on customer deposits and other interest-bearing liabilities. Net interest income is affected by various factors, including the Federal Reserve’s monetary policy, U.S. fiscal policy, competitive pressure, the level and composition of the interest-earning assets and the composition of interest-bearing liabilities. Changes in the Federal Reserve’s target interest rate immediately affect the yield on the Company’s interest-bearing deposits in correspondent banks and affect other interest-earning assets over time. The primary source of funds used to support the Company’s interest-earning assets is deposits. When the interest rate environment changes, the Company assesses competition for deposits in determining changes to its offering rates.
The net interest margin for the year ended December 31, 2023 decreased when compared with the year ended December 31, 2022. Federal Reserve rate increases during 2022 and 2023 improved yields on interest-bearing deposits in correspondent banks, on adjustable-rate mortgage backed securities, and on loans originated or repriced since the Federal Reserve started to increase rates. In response to high levels of competition during 2023, the Company increased deposit rates, resulting in a higher cost of funds and compressed net interest margin for the year ended December 31, 2023, compared with the year ended December 31, 2022.
The frequency and/or magnitude of future changes in market interest are difficult to predict and may have a greater short-term impact on net interest income than adjustments by management. Please refer to the section titled “Analysis of Changes In Interest Income and Interest Expense” for further information related to rate and volume changes.
Analysis of Net Interest Earnings
The following table shows the major categories of interest‑earning assets and interest‑bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net yield on average interest‑earning assets for the years indicated.
December 31, 2023
December 31, 2022
Average
Balance
Interest
Average
Yield/
Rate
Average
Balance
Interest
Average
Yield/
Rate
Interest-earning assets:
Loans (1)(2)(3)(4)
$
851,221
$
39,320
4.62
%
$
833,226
$
34,579
4.15
%
Taxable securities, at amortized cost (5)
652,477
16,536
2.53
%
669,515
12,788
1.91
%
Nontaxable securities, at amortized cost (2)
65,309
1,885
2.89
%
75,487
2,308
3.06
%
Interest-bearing deposits
37,660
1,982
5.26
%
88,963
1,353
1.52
%
Total interest-earning assets
$
1,606,667
$
59,723
3.72
%
$
1,667,191
$
51,028
3.06
%
Interest-bearing liabilities:
Interest-bearing demand deposits
$
826,112
$
15,515
1.88
%
$
910,989
$
2,794
0.31
%
Savings deposits
195,592
746
0.38
%
216,414
148
0.07
%
Time deposits
150,395
4,989
3.32
%
77,686
141
0.18
%
Borrowings
6,198
300
4.84
%
-
-
-
Total interest-bearing liabilities
$
1,178,297
$
21,550
1.83
%
$
1,205,089
$
3,083
0.26
%
Net interest income (2) and interest rate spread
$
38,173
1.89
%
$
47,945
2.80
%
Net yield on average interest‑earning assets
2.38
%
2.88
%
(1)
Loans are net of unearned income and deferred fees and costs. Loans include loans held in portfolio and loans held for sale.
(2)
Interest on nontaxable loans and securities is computed on an FTE basis using a Federal income tax rate of 21%.
(3)
Net loan fees included in interest income in 2023 were $214. Net loan fees included in interest income in 2022 were $230.
(4)
Nonaccrual loans are included in average balances for yield computations.
(5)
Includes restricted stock.
24
Table of Contents
The following table reconciles net interest income on an FTE basis to net interest income on a GAAP basis for the years indicated.
December 31,
2023
2022
Net interest income, GAAP
$
37,283
$
47,026
FTE adjustment
890
919
Net interest income, FTE
$
38,173
$
47,945
Analysis of Changes in Interest Income and Interest Expense
The following table sets forth a summary of the changes in interest income and interest expense resulting from changes in average asset and liability balances (volume) and changes in average interest rates (rate), when the year ended December 31, 2023 is compared with the year ended December 31, 2022, and the year ended December 31, 2022 is compared with the year ended December 31, 2021.
2023 Over 2022
2022 Over 2021
Increase (Decrease) Due to
Changes in:
Increase (Decrease) Due to
Changes in:
Rates (2)
Volume (2)
Net Dollar
Change
Rates (2)
Volume (2)
Net Dollar
Change
Interest income: (1)
Loans
$
3,981
$
760
$
4,741
$
(2,631
)
$
1,969
$
(662
)
Taxable securities
4,081
(333
)
3,748
2,340
2,488
4,828
Nontaxable securities
(124
)
(299
)
(423
)
(126
)
(143
)
(269
)
Interest-bearing deposits
1,773
(1,144
)
629
1,257
(74
)
1,183
Interest income on interest-earning assets
$
9,711
$
(1,016
)
$
8,695
$
840
$
4,240
$
5,080
Interest expense:
Interest-bearing demand deposits
$
13,005
$
(284
)
$
12,721
$
(175
)
$
312
$
137
Savings deposits
613
(15
)
598
(47
)
21
(26
)
Time deposits
4,599
249
4,848
(102
)
(24
)
(126
)
Short-term borrowings
-
300
300
-
-
-
Interest expense on interest-bearing liabilities
$
18,217
$
250
$
18,467
$
(324
)
$
309
$
(15
)
Net interest income
$
(8,506
)
$
(1,266
)
$
(9,772
)
$
1,164
$
3,931
$
5,095
(1)
FTE basis using a Federal income tax rate of 21%.
(2)
Variances caused by the change in rate multiplied by the change in volume have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each.
2023 over 2022
The rising rate environment increased total interest income and, to a greater extent, total interest expense when 2023 is compared with 2022. A portion of the Company’s taxable securities portfolio is subject to monthly repricing, while many of the Company’s loans are adjustable with repricing dates in the future. Increases to interest income from rates were partially offset by lower volume of securities from sales and maturities, and lower volume of interest-bearing deposits due to lower customer deposits. Special offering rates on time deposits attracted deposits from existing non-time deposit products and from outside competitors.
2022 over 2021
The Federal Reserve’s interest rate increases in 2022 benefitted adjustable taxable securities but did not result in increased interest income on other interest earning assets, when the year ended December 31, 2022 is compared with the year ended December 31, 2021. Rate-related income on loans fell when the year ended December 31, 2022 is compared with the year ended December 31, 2021 due to PPP fees received during 2021. Interest rate increases did not meaningfully impact deposit competition or pricing during 2022. Higher deposit volume was mitigated by lower deposit offering rates, when the years ended December 31, 2022 and 2021 are compared.
25
Table of Contents
Interest Rate Sensitivity
Interest rate risk is the risk to earnings or capital arising from movements in market interest rates. When interest-earning assets and interest-bearing liabilities reprice at different times or in different degrees or when call options are exercised, in response to change in market interest rates, future net interest income is impacted. When interest-earning assets mature or re-price more quickly than interest-bearing liabilities, the balance sheet is considered “asset sensitive”. An asset sensitive position will produce relatively more net interest income when interest rates rise and less net interest income when rates decline. Conversely, when interest-bearing liabilities mature or re-price more quickly than interest-earning assets in a given period, the balance sheet is considered “liability sensitive”. A liability sensitive position will produce relatively more net interest income when interest rates fall and less net interest income when rates increase.
The Company considers interest rate risk to be a significant risk and manages its exposure through policies approved by its Asset Liability Committee ("ALCO") and Board of Directors. ALCO reviews periodic reports of the Company's interest rate risk position, including results of simulation analysis. Simulation analysis applies interest rate shocks, hypothetical immediate shifts in interest rates, to the Company’s financial instruments and determines the impact to projected one-year net interest income and other key measures. The following table shows the results of rate shocks on net interest income projected for one year from the reporting date. For purposes of this analysis, noninterest income and expenses are assumed to be flat.
Rate Shift
(basis points)
Change in Projected Net Interest Income
as of December 31,
2023
2022
300
-10.6
%
-10.7
%
200
-6.8
%
-7.0
%
100
-3.2
%
-3.4
%
(-)100
8.4
%
1.3
%
(-)200
15.7
%
0.6
%
(-)300
22.1
%
-1.78
%
Results of the net interest income simulation indicate that the Company is liability sensitive as of December 31, 2023 and December 31, 2022. The simulation process requires certain estimates and assumptions including, but not limited to, asset growth, the mix of assets and liabilities, the interest rate environment and local and national economic conditions. Asset growth and the mix of assets can, to a degree, be influenced by management. Other areas, such as the interest rate environment and economic factors, cannot be controlled. In addition, competitive pressures can make it difficult to price deposits and loans in a manner that optimally minimizes interest rate risk. Actual results will differ from simulated results due to the timing, magnitude, and frequency of interest rate changes; changes in market conditions and customer behavior; and changes in management strategies.
While the asset/liability management program is designed to protect the Company over the long term, it does not provide near-term protection from interest rate shocks, as interest rate sensitive assets and liabilities do not by their nature move up or down in tandem in response to changes in the overall rate environment. The Company’s profitability in the near-term may be temporarily negatively affected in a period of rapidly rising or rapidly falling rates, because it takes some time for the Company’s portfolio to reflect changes to offering rates in response to a new interest rate environment.
(Recovery of) Provision for Credit Losses
The calculation of the ACLL resulted in a recovery of previously recognized provision of $1,278 on funded loans and a provision of $17 for unfunded loan balances, for a net recovery of $1,261 for the year ended December 31, 2023. For the year ended December 31, 2022, the Company recorded a provision of $706. The recovery in 2023 reflects an improvement in factors and economic conditions detailed in “Balance Sheet – Loans – Allowance for Credit Losses” below. The provision in 2022 was the result of loan portfolio growth. More information about the ACLL is provided in Notes 1 and 5 of Notes to Consolidated Financial Statements.
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Table of Contents
Noninterest Income
The following table presents the Company’s noninterest income for the years indicated.
Year Ended December 31,
Change
2023
2022
Dollar
Percent
Service charges on deposits
$
2,518
$
2,425
$
93
3.84
%
Other service charges and fees
297
214
83
38.79
%
Credit and debit card fees, net
1,678
1,916
(238
)
(12.42
)%
Trust income
1,901
1,817
84
4.62
%
Gain on sale of mortgage loans
107
157
(50
)
(31.85
)%
BOLI income
2,026
958
1,068
111.48
%
Gain on sale of investment
2,971
-
2,971
N/M
Gain on sale of private equity investment
232
3,823
(3,591
)
(93.93
)%
Other income
961
1,091
(130
)
(11.92
)%
Realized securities losses, net
(3,332
)
-
(3,332
)
N/M
Total noninterest income
$
9,359
$
12,401
$
(3,042
)
(24.53
)%
Service charges on deposit accounts increased when the year ended December 31, 2023 is compared with the year ended December 31, 2022, primarily due to fees generated from increased customer use of the Bank’s overdraft program. Service charges on deposit accounts also include account maintenance fees, ATM fees and wire transfer fees.
Other service charges and fees increased when 2023 is compared with 2022, reflecting a loan transaction-related fee recorded during 2023. Other service charges and fees also include charges for official checks, income from the sale of checks to customers, safe deposit box rent, and income from commissions on the sale of credit life, accident and health insurance.
Decreased transaction volume lowered credit and debit card fees when the year ended December 31, 2023 is compared with the year ended December 31, 2022. Credit and debit card fees are presented net of certain processing expenses and are dependent on the volume of transactions.
Trust income increased when the year ended December 31, 2023 is compared with the year ended December 31, 2022. Trust fees are generated from a number of different types of accounts, including estates, personal trusts, employee benefit trusts, investment management accounts, attorney-in-fact accounts and guardianships. Trust income varies depending on the number and type of accounts under management and financial market conditions.
The Federal Reserve’s rate increases in 2023 constrained demand for consumer real estate purchase and refinance activity, decreasing income from the sale of mortgage loans when compared to 2022.
BOLI income increased when 2023 is compared with 2022, due to a gain of $1,044 for settlement of a policy during 2023.
During 2023, the Company sold its VISA Class B securities, recognizing a gain of $2,971.
During 2022, the Company recorded a gain on the sale of a private equity investment in Infinex Investments, Inc. when its shares were acquired by Osaic, Inc. Infinex, and now Osaic, provide investment services to NBFS. During 2023, the Company recognized income of $232 upon receipt of a contract contingency payment associated with the 2022 transaction.
Other income includes dividends and increases in the Company’s equity-method investments, which were lower for 2023 when compared with 2022. Other income also includes revenue from investment and insurance sales, which increased when the year ended December 31, 2023 is compared with the year ended December 31, 2022.
The Company recorded a net loss on the sale of securities during 2023, discussed in further detail under the “Securities” section below.
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Table of Contents
Noninterest Expense
The following table presents the Company’s noninterest expense for the years indicated.
Year Ended December 31,
Change
2023
2022
Dollar
Percent
Salaries and employee benefits
$
17,318
$
16,519
$
799
4.84
%
Occupancy, furniture and fixtures
2,005
1,934
71
3.67
%
Data processing and ATM
3,549
3,186
363
11.39
%
FDIC assessment
749
477
272
57.02
%
Net costs of other real estate owned
31
325
(294
)
(90.46
)%
Franchise taxes
1,422
1,483
(61
)
(4.11
)%
Professional services
1,739
999
740
74.07
%
Other operating expenses
2,415
2,035
380
18.67
%
Total noninterest expense
$
29,228
$
26,958
$
2,270
8.42
%
Salaries and employee benefits expense, which includes payroll taxes, health insurance, contributions to the employee stock ownership plan and employee 401(k), pension expense, incentives and salary continuation increased when 2023 is compared with 2022. The Company increased its base compensation during 2022 in order to attract and retain talent, which is reflected in 2023 results.
When the year ended December 31, 2023 is compared with the year ended December 31, 2022, occupancy, furniture and fixtures expense and data processing and ATM expense increased due to ATM upgrades and higher maintenance costs.
FDIC assessment expense increased from 2022 to 2023, due to an industry-wide assessment increase implemented by the FDIC.
Net costs of OREO include write-downs, maintenance costs, and net gains or losses on the sale of OREO property. This expense category varies with the number of foreclosed properties owned by NBB and with the costs associated with each. During 2022, the Company recorded a write-down of $295 to reflect reduction in list price taken as part of a marketing strategy.
Franchise tax expense decreased from 2022 to 2023. Franchise taxes are levied by the states in which NBB operates and are based upon NBB’s total equity at the prior year-end, adjusted for real estate taxes and certain other items.
Professional services include legal and other expenses for the Company’s response to a threatened proxy contest from an activist shareholder during 2023, which totaled $786. The Company does not anticipate any further material expense for this matter.
Other operating expenses increased when the years ended December 31, 2023 and 2022 are compared. The category of other operating expenses includes expense for stationery and supplies, telephone costs, non-service pension cost and charitable donations. Non-service pension cost is determined by actuarial assumptions and projections and increased $348 from 2022. For more information on non-service pension cost, please refer to Note 8 of Notes to Consolidated Financial Statements.
Included within other operating expense and data processing and ATM expense are expenses related to cybersecurity. These expenses include testing and vulnerability assessment, technological defenses, insurance and employee training. The cost of these measures was $529 for 2023 and $418 for 2022.
Income Taxes
Income tax expense for 2023 was $2,984 compared to $5,831 in 2022. The Company’s statutory tax rate was 21% for each year. The Company’s effective tax rates for 2023 and 2022 were 15.98% and 18.36%, respectively. The Company’s effective tax rate is lower than the statutory rate of 21% due to investments in tax-advantaged loans and securities, and in 2023, the tax-exempt gain from settlement of a BOLI policy. See Note 9 of Notes to Consolidated Financial Statements for information relating to income taxes.
Balance Sheet
The following provides information on the Company’s financial position as of December 31, 2023 and December 31, 2022.
Loans
The Company’s loan categorization reflects its approach to loan portfolio management and includes six groups. Real estate construction loans include construction loans for residential and commercial properties, as well as land. Consumer real estate loans include conventional and junior lien mortgages, equity lines and investor-owned residential real estate. Commercial real estate loans are comprised of owner-occupied and leased nonfarm, nonresidential properties, multi-family residence loans and farmland. Commercial non-real estate loans include agricultural loans, operating capital lines and loans secured by capital assets. Public sector and industrial development authority (“IDA”) loans are extended to municipalities. Consumer non-real estate loans include automobile loans, personal loans, credit cards and consumer overdrafts.
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Table of Contents
A.
Maturities and Interest Rate Sensitivities
The following table presents maturities and interest rate sensitivities for total loans, loans with predetermined interest rates and loans with adjustable interest rates as of the dates indicated. Predetermined interest rates do not adjust throughout the life of the loan. Loans are presented on a gross basis.
December 31, 2023
< 1 Year
1 – 5 Years
6-15 Years
>15 Years
Total
Total loans:
Real estate construction
$
21,507
$
4,668
$
9,322
$
19,882
$
55,379
Consumer real estate
2,877
9,876
62,594
166,217
241,564
Commercial real estate
6,354
6,667
91,762
314,347
419,130
Commercial non-real estate
8,432
29,367
3,458
298
41,555
Public sector and IDA
-
8,970
32,153
19,428
60,551
Consumer non-real estate
11,745
25,883
1,289
79
38,996
Total loans
$
50,915
$
85,431
$
200,578
$
520,251
$
857,175
Loans with predetermined interest rates:
Real estate construction
$
10,553
$
3,629
$
118
$
3,253
$
17,553
Consumer real estate
-
-
-
-
-
Commercial real estate
2,432
917
3,521
-
6,870
Commercial non-real estate
1,936
22,158
1,224
-
25,318
Public sector and IDA
-
-
-
-
-
Consumer non-real estate
-
-
-
-
-
Total loans with predetermined interest rates
$
14,921
$
26,704
$
4,863
$
3,253
$
49,741
Loans with adjustable interest rates:
Real estate construction
$
10,954
$
1,039
$
9,204
$
16,629
$
37,826
Consumer real estate
2,877
9,876
62,594
166,217
241,564
Commercial real estate
3,922
5,750
88,241
314,347
412,260
Commercial non-real estate
6,496
7,209
2,234
298
16,237
Public sector and IDA
-
8,970
32,153
19,428
60,551
Consumer non-real estate
11,745
25,883
1,289
79
38,996
Total loans with adjustable interest rates
$
35,994
$
58,727
$
195,715
$
516,998
$
807,434
B.
Modifications
In the ordinary course of business the Company modifies loan terms on a case-by-case basis for a variety of reasons. Modifications may include rate reductions, payment extensions of varying lengths of time, a change in amortization term or method or other arrangements. Modifications to consumer loans generally involve short-term payment extensions to accommodate specific, temporary circumstances. Modifications to commercial loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants.
The Company reviews modifications to determine whether the borrower is experiencing financial difficulty, including indicators of default, bankruptcy, going concern, insufficient projected cash flows and inability to obtain financing from other sources. If a modification is made to a borrower experiencing financial difficulty, the loan’s risk rating is downgraded to special mention or classified, resulting in individual evaluation for the ACL. During the year ended December 31, 2023, the Company modified one loan totaling $6,396 for a borrower who was experiencing financial difficulty. The loan was individually evaluated for the ACLL as of December 31, 2023. During the twelve month period ended December 31, 2022, no loans were modified for borrowers experiencing financial difficulty.
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Table of Contents
The following table presents the amortized cost basis as of December 31, 2023 of the loan modified for a borrower experiencing financial difficulty.
Interest Only Payments
Amortized
Cost Basis
% of Portfolio
Financial Effect
Commercial Real Estate
Commercial real estate owner-occupied
$
6,396
5.46
%
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 for borrowers experiencing financial difficulty. The loan presented above is in current status as of December 31, 2023. The Company analyzed its modified loan portfolio for loans that defaulted during the 12 month period ended December 31, 2023, and that were modified within 12 months prior to default. The Company designates three circumstances that indicate default: one or more payments that occur more than 90 days past the due date, charge-off, or foreclosure after the date of modification. There were no loans previously modified that defaulted during the year ended December 31, 2023.
Modifications for Borrowers Who Were Not Experiencing Financial Difficulty
During the years ended December 31, 2023 and 2022, the Company modified loans in the normal course of business for borrowers who were not experiencing financial difficulty. During the 2023, the Company modified 757 loans totaling $89,006. During 2022, the Company provided modifications for competitive purposes to 840 loans totaling $120,241.
C.
Summary of Loan Loss Experience
The following table provides information about the allowance for credit losses on loans, nonperforming assets and accruing loans past due 90 days or more as of the dates indicated:
December 31,
2023
2022
ACLL
$
9,094
$
8,225
Total loans, net of unearned income and deferred fees
856,646
852,744
ACLL to loans, net of unearned income and deferred fees and costs
1.06
%
0.96
%
Nonaccrual loans
$
2,629
$
2,847
Other real estate owned, net
-
662
Total nonperforming assets
$
2,629
$
3,509
Nonperforming loans to total loans, net of unearned income and deferred fees and costs
0.31
%
0.33
%
ACLL to nonperforming loans
345.91
%
288.90
%
Nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned
0.31
%
0.41
%
ACLL to nonperforming assets
345.91
%
234.40
%
Accruing loans past due 90 days or more
$
188
$
8
More information about the level and calculation methodology of the allowance for credit losses on loans is provided in the sections “Allowance for Credit Losses on Loans” as well as Notes 1 and 5 of Notes to Consolidated Financial Statements.
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Table of Contents
D.
Analysis of Net Charge-Offs
The following tables show net charge-offs, average loan balance and the percentage of charge-offs to average loan balance for each of the Company’s loan segments at the end of each period. Average loans are presented net of unearned income and net deferred fees.
December 31, 2023
Net Charge-Offs (Recoveries)
Average Loans
Percentage of Net Charge-Offs
(Recoveries) to Average Loans
Real estate construction
$
-
$
58,214
-
Consumer real estate
(86
)
226,555
(0.04
)%
Commercial real estate
(45
)
428,757
(0.01
)%
Commercial non-real estate
208
50,529
0.41
%
Public Sector and IDA
-
51,278
-
Consumer non-real estate
118
35,754
0.33
%
Total
$
195
$
851,087
0.02
%
December 31, 2022
Net Charge-Offs (Recoveries)
Average Loans
Percentage of Net Charge-Offs
(Recoveries) to Average Loans
Real estate construction
$
-
$
62,197
-
Consumer real estate
(16
)
213,578
(0.01
)%
Commercial real estate
(49
)
422,259
(0.01
)%
Commercial non-real estate
(9
)
53,742
(0.02
)%
Public Sector and IDA
-
48,112
-
Consumer non-real estate
229
33,183
0.69
%
Total
$
155
$
833,071
0.02
%
The Company charges off commercial real estate loans at the time that a loss is confirmed. When delinquency status or other information indicates that the borrower will not repay the loan, the Company considers collateral value based upon a current appraisal or internal evaluation. Any loan amount in excess of collateral value is charged off and the collateral is taken into OREO.
E.
Allowance for Credit Losses on Loans
The Company adopted the CECL model on January 1, 2023, resulting in an increase to the ACLL of $2,342, from $8,225 at December 31, 2022. For information on the Company’s policies on the ACLL, please refer to Note 1 and Note 5 of Notes to Consolidated Financial Statements. For information on the Company’s application of previous GAAP in determining the ACLL, please refer to the Company’s 2022 Form 10-K, Note 1: Summary of Significant Accounting Policies.
The Company’s risk analysis under the CECL model at December 31, 2023 determined an ACLL of $9,094, or 1.06% of loans net of unearned income and deferred fees and costs. This compares with an allowance of $8,225 as of December 31, 2022, or 0.96% of loans. To determine the appropriate level of the ACLL, the Company considers credit risk for individually evaluated loans and for groups of loans evaluated collectively.
Individually Evaluated Loans
Individually evaluated loans were $10,544 as of December 31, 2023, an increase from $3,032 as of December 31, 2022. The increase was due to a change in the way that the Company identifies individually evaluated loans under CECL. Please refer to Note 1 of Notes to Consolidated Financial Statements for information on the Company’s identification of individually evaluated loans. As of December 31, 2023, three individually evaluated loans were collateral dependent but were adequately collateralized and did not result in an individual allocation. The remaining individually evaluated loans were measured using the discounted cash flow method, resulting in an allocation of $572.
Collectively Evaluated Loans
Collectively evaluated loans totaled $846,631, with an ACLL of $8,522 as of December 31, 2023. At December 31, 2022, collectively evaluated loans totaled $850,161, with an allowance of $8,225.
Collectively evaluated loans are divided into pools based upon risk characteristics. Utilizing historical loss information, the Company calculates a probability of default and loss given default for each pool, which is adjusted for a reasonable and supportable forecast. Loan pools are allocated additional loss estimates based upon the Company’s analysis of qualitative factors including economic measures, asset quality indicators, loan characteristics, and changes to internal Company policies and management.
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Table of Contents
Reasonable and Supportable Forecast
To estimate cash flows, the Company adjusted its historical loss information with a forecast of the national unemployment rate. The Company determined that 12 months represents a reasonable and supportable forecast period as of December 31, 2023, and set a period of 12 months to revert to historical losses on a straight-line basis. The forecast applied at December 31, 2023 projects that unemployment will rise over the next 12 months, but to a smaller extent than the forecast applied as of December 31, 2022. The lower unemployment forecast reduced the required level of the ACLL when December 31, 2023 is compared with December 31, 2022.
Qualitative Factors: Economic
The Company sources economic data pertinent to its market from the most recently available publications, including business and personal bankruptcy filings, the residential vacancy rate and the inventory of new and existing homes.
Higher bankruptcy filings indicate heightened credit risk and increase the ACLL, while lower bankruptcy filings have a beneficial impact on credit risk. Compared with data available at December 31, 2022, business bankruptcy filings decreased slightly while personal bankruptcy filings increased slightly.
Residential vacancy rates and housing inventory impact the Company’s residential construction customers and the consumer real estate market. Higher levels increase credit risk. The residential vacancy rate available at December 31, 2023 improved from the data incorporated into the December 31, 2022 calculation, resulting in a lower allocation. Housing data available as of December 31, 2023 showed higher inventory than at December 31, 2022, resulting in a higher allocation.
Qualitative Factors: Asset Quality Indicators
Accruing past due loans are analyzed at the class level and compared with previous levels. Increases in past due loans indicate heightened credit risk. Accruing loans past due 30-89 days were 0.19% of total loans at December 31, 2023, an increase from 0.16% at December 31, 2022.
Qualitative Factors: Other Considerations
The Company considers other factors that impact credit risk, including the interest rate environment, the competitive, legal and regulatory environments, changes in lending policies and loan review, changes in lending management, and high risk loans.
The interest rate environment impacts variable rate loans. The Federal Reserve’s aggressive interest rate increases beginning in March 2022 have increased payments on certain adjustable rate loans, which may increase credit risk. The Company allocates additional reserve each time the Federal Reserve increases rates. After the rate increase has been in effect for one year, the allocation may be removed under the assumption that the impact of the change has become integrated to the portfolio. For the calculation as of December 31, 2023, the Company removed allocations for interest rate increases that occurred between March and December 2022.
The competitive, legal and regulatory environments were evaluated for changes that would affect credit risk. Higher competition for loans increases credit risk, while lower competition decreases credit risk. Competition remained at similar levels to those at December 31, 2022. The legal and regulatory environments also remain in a similar posture to December 31, 2022.
Lending policies, loan review procedures and management’s experience influence credit risk. Except for the adoption of CECL, policies and procedures remain similar to those at December 31, 2022. The Company recorded allocation for the retirement of a long-term credit administration manager in the third quarter.
Levels of high risk loans are considered in the determination of the level of the ACLL. A decrease in the level of high risk loans within a class decreases the required allocation for the loan class, and an increase in the level of high risk loans within a class increases the required allocation for the loan class. Total high risk loans increased from the level at December 31, 2022, resulting in an increased allocation.
Unallocated Surplus
The unallocated surplus as of December 31, 2023 is $350, or 4.00% in excess of the calculated requirement. The unallocated surplus at December 31, 2022 was $179, or 2.23% in excess of the calculated requirement. The surplus provides some mitigation of current economic uncertainty that may impact credit risk.
Conclusion
The calculation of the appropriate level for the ACLL incorporates analysis of multiple factors and requires management’s prudent and informed judgment. The Company augmented the calculated requirement with an unallocated surplus. Based on analysis of historical indicators, asset quality and economic factors, management believes the level of ACLL is reasonable for the credit risk in the loan portfolio as of December 31, 2023.
Please refer to Note 5 of Notes to Consolidated Financial Statements for further information on collectively evaluated loans, individually evaluated impaired loans and the unallocated portion of the allowance for credit losses on loans.
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Table of Contents
G.
Allocation of the Allowance for Credit Losses on Loans
The allowance for credit losses on loans has been allocated according to the amount deemed necessary to provide for anticipated losses within the categories of loans as of the dates indicated. Loans are presented net of unearned income and net deferred fees and costs. The following table presents information on the ACLL as of the dates indicated:
December 31, 2023
December 31, 2022
Allowance
Amount
Percent of
Loans to
Total
Loans
Percent of
Allowance to
Loans
Allowance
Amount
Percent of
Loans to
Total
Loans
Percent of
Allowance to
Loans
Real estate construction
$
408
6.45
%
0.74
%
$
450
6.40
%
0.82
%
Consumer real estate
3,162
28.20
%
1.31
%
2,199
25.93
%
0.99
%
Commercial real estate
3,576
48.92
%
0.85
%
3,642
51.33
%
0.83
%
Commercial non-real estate
682
4.85
%
1.64
%
930
6.76
%
1.61
%
Public sector and IDA
333
7.07
%
0.55
%
319
5.64
%
0.66
%
Consumer non-real estate
583
4.51
%
1.51
%
506
3.94
%
1.50
%
Unallocated
350
-
-
179
-
-
$
9,094
100.00
%
1.06
%
$
8,225
100.00
%
0.96
%
Securities
The Company’s securities are designated as available for sale and as such, are reported at fair value. The following table presents information on securities available for sale as of the dates indicated.
Change
December 31, 2023
December 31, 2022
Dollar
Percent
Securities available for sale at amortized cost
$
697,786
$
759,917
$
(62,131
)
(8.18
)%
Unrealized loss, net
(79,185
)
(103,065
)
23,880
23.17
%
Securities available for sale
$
618,601
656,852
(38,251
)
(5.82
)%
The securities portfolio is subject to the volatility and risk in the financial markets. The risk in financial markets, including interest rate risk and credit risk, affects the Company in the same way that it affects other institutional and individual investors. The fair value of available for sale securities is reflected on the Company's balance sheet. The unrealized loss in the Company’s investment portfolio is due to interest rate risk, the result of increases in the Federal Reserve’s target interest rate during 2022 and 2023. The Company’s Asset Liability Management Committee is closely monitoring all of the Company’s financial assets and liabilities in order to manage interest rate risk.
As part of its interest rate risk management, the Company periodically evaluates its position in financial assets. During the first half of 2023, the Company strategically selected and sold securities with an amortized cost of $46,850, realizing a loss of $3,332. The strategy for the sales prioritized enhancement of long-term earnings. Though not a primary objective, proceeds from the sales also bolstered liquidity.
Credit risk in the Company’s investment portfolio is evaluated on an individual security basis. The Company’s investment portfolio includes corporate bonds. If the corporate issuers were to default, there could be a delay in the payment of interest, or there could be a loss of principal and accrued interest. To date, there have been no defaults in any of the corporate bonds held in the portfolio. The Company’s investment portfolio also contains a large percentage of municipal bonds. If economic forces reduce the ability of states and municipalities to make scheduled principal and interest payments on their outstanding indebtedness, or if their income from taxes and other sources declines significantly, states and municipalities could default on their bond obligations. There have been no defaults among the municipal bonds in the Company’s investment portfolio. As of December 31, 2023, there are no credit risk concerns with any of the Company’s securities.
The majority of mortgage-backed securities and collateralized mortgage obligations were backed by U.S. government agencies. Certain holdings are required to be periodically subjected to the FFIEC’s high risk mortgage security test. These tests address possible fluctuations in the average life and variances caused by the change in rate times the change in volume that have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each.
In making investment decisions, management follows internal policy guidelines that help to limit risk by specifying parameters for both security quality and industry and geographic concentrations. Management regularly monitors the quality of the investment portfolio as part of its risk management function. An allowance for credit risk will be recorded if analysis indicates the presence of credit risk.
Additional information about securities available for sale can be found in Note 3 of Notes to Consolidated Financial Statements.
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Table of Contents
Deposits
The following table presents deposits by category as of the dates indicated:
Change
December 31, 2023
December 31, 2022
Dollar
Percent
Noninterest-bearing demand deposits
$
281,215
$
327,713
$
(46,498
)
(14.19
)%
Interest-bearing demand deposits
821,661
933,269
(111,608
)
(11.96
)%
Saving deposits
177,856
214,114
(36,258
)
(16.93
)%
Time deposits
223,240
67,629
155,611
230.10
%
Total deposits
$
1,503,972
$
1,542,725
$
(38,753
)
(2.51
)%
Deposits, including noninterest-bearing demand deposits, interest-bearing deposits and interest-bearing time deposits are obtained in the Company’s markets through traditional marketing techniques. The Company’s deposits do not include any brokered deposits. Competition for deposits began impacting the Company during the latter part of 2022 and continued during 2023. The Company implemented competitive pricing on CDs, raised offering rates on other deposits and negotiated with depositors to strengthen the deposit base, at costs well below the cost of borrowing.
A.
Average Amounts of Deposits and Average Rates Paid
Average amounts and average rates paid on deposit categories during the periods indicated are presented below:
Year Ended December 31,
2023
2022
Average
Amounts
Average
Rates
Paid
Average
Amounts
Average
Rates
Paid
Noninterest-bearing demand deposits
$
299,748
-
$
338,269
-
Interest-bearing demand deposits
826,112
1.88
%
910,989
0.31
%
Savings deposits
195,592
0.38
%
216,414
0.07
%
Time deposits
150,395
3.32
%
77,686
0.18
%
Average total deposits
$
1,471,847
1.44
%
$
1,543,358
0.20
%
B.
Uninsured Deposits
FDIC insurance covers deposits of up to $250 per depositor. As of December 31, 2023, $672,063 of the Bank’s deposits were uninsured. Municipal deposits, which account for 25.43% of the Company’s deposits, have additional security from bonds pledged as collateral, in accordance with state regulation. Of the Company’s non-municipal deposits, 19.65% are uninsured.
The following table presents time deposits that exceed $250 as of the date indicated.
December 31, 2023
3 Months or
Less
Over 3 Months
Through 6 Months
Over 6 Months
Through 12 Months
Over 12
Months
Total
Total time deposits exceeding $250
$
37,206
$
12,306
$
8,464
$
3,551
$
61,527
Derivatives and Market Risk Exposures
The Company engages in derivative financial instruments associated with its secondary market operation, recorded within other assets and other liabilities. Please refer to Note 1 of Notes to Consolidated Financial Statements for information on derivative valuation. The Company is not a party to derivatives with off-balance sheet risks such as futures, forwards, swaps, and options.
The Company is a party to financial instruments with off-balance sheet risks such as commitments to extend credit, standby letters of credit, and recourse obligations in the normal course of business to meet the financing needs of its customers. See Note 13 of Notes to Consolidated Financial Statements for additional information relating to financial instruments with off-balance sheet risk. Management does not plan any future involvement in high risk derivative products.
The Company’s investments in mortgage-backed securities are primarily through the Government National Mortgage Association and Federal National Mortgage Association. See Note 3 of Notes to Consolidated Financial Statements for information on securities.
The Company’s securities and loans are subject to credit and interest rate risk, and its deposits are subject to interest rate risk. Management considers credit risk when a loan is granted and monitors credit risk after the loan is granted. The Company maintains an allowance for credit losses to absorb losses in the collection of its loans. See Note 5 of Notes to Consolidated Financial Statements for information relating to the allowance for credit losses on loans. See Note 14 of Notes to Consolidated Financial Statements for information relating to concentrations of credit risk.
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The effects of changing interest rates are primarily managed through adjustments to the loan portfolio and deposit base, to the extent competitive factors allow. Adjustments for asset and liability management are made when securities are called or mature and funds are subsequently reinvested. Securities may be sold for reasons related to credit quality, to maintain compliance with regulatory limitations or for interest rate risk management. No trading activity is planned in the foreseeable future.
See Interest Rate Sensitivity for further details on asset liability management and Note 15 of Notes to Consolidated Financial Statements for information relating to fair value of financial instruments.
Liquidity
Liquidity measures the Company’s ability to meet its financial commitments at a reasonable cost. Demands on the Company’s liquidity include funding additional loan demand and accepting withdrawals of existing deposits. The Company has diverse liquidity sources, including customer and purchased deposits, customer repayments of loan principal and interest, sales, calls and maturities of securities, Federal Reserve discount window borrowing, short-term borrowing, and Federal Home Loan Bank of Atlanta (“FHLB”) advances.
As of December 31, 2023, the Company had borrowing capacity of $301,020 from the FHLB and an unsecured federal funds line of credit with an unaffiliated bank of $10,000, with no amounts advanced against those lines. Additionally, the Company had $182,037 of borrowing capacity at the Federal Reserve discount window. Periodically during 2023, the Company accessed FHLB and Federal Reserve discount window borrowings to reinforce liquidity. The advances were fully repaid, due to the success of the Company’s deposit strategy. As of December 31, 2023, the Company did not have purchased deposits, discount window borrowings or short-term borrowings.
The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters. Portions of the securities portfolio are pledged to meet state requirements for public funds deposits. Discount window borrowings also require pledged securities. Increased/decreased liquidity from public funds deposits or discount window borrowings results in increased/decreased liquidity from pledging requirements. The Company monitors public funds pledging requirements and unpledged available for sale securities accessible for liquidity needs.
Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve discount window. As of December 31, 2023, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve discount window.
The Company monitors factors that may increase its liquidity needs. Some of these factors include deposit trends, large depositor activity, maturing deposit promotions, interest rate sensitivity, maturity and repricing timing gaps between assets and liabilities, the level of unfunded loan commitments and loan growth. As of December 31, 2023, the Company’s liquidity is sufficient to meet projected trends.
To monitor and estimate liquidity levels, the Company performs stress testing under varying assumptions on credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows. The Company’s Contingency Funding Plan sets forth avenues for rectifying liquidity shortfalls. As of December 31, 2023, the analysis indicated adequate liquidity under the tested scenarios.
The Company utilizes several other strategies to maintain sufficient liquidity. Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s internally-set target range. As of December 31, 2023, the loan to deposit ratio was 56.96%. The investment strategy takes into consideration the term of the investment, and securities in the available for sale portfolio are laddered based upon projected funding needs.
In the normal course of business, we enter into certain contractual obligations, including obligations to make future payments on lease arrangements, contractual commitments with depositors, and service contracts. The table below presents our significant contractual obligations as of the dates indicated, except for pension and other postretirement benefit plans, which are included in Note 8 of Notes to Consolidated Financial Statements.
Payments Due by Period
December 31, 2023
Total
Less Than
1 Year
1-3 Years
4-5 Years
More Than
5 Years
Time deposits
$
223,240
$
214,393
$
4,941
$
-
$
3,906
Purchase obligations (1)
31,067
4,525
8,430
5,472
12,640
Operating leases
1,211
346
471
378
16
Total
$
255,518
$
219,264
$
13,842
$
5,850
$
16,562
(1)
Includes contracts with a minimum annual payment of $100.
As of December 31, 2023, the Company was not aware of any other known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of December 31, 2023, the Company has no material commitments for long-term debt or for capital expenditures, other than commitments for capital expenditures associated with building the Roanoke branch location.
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Capital Resources
The following table presents components of stockholders’ equity:
Change
December 31, 2023
December 31, 2022
Dollar
Percent
Common stock and additional paid in capital
$
7,404
$
7,362
$
42
0.57
%
Retained earnings
197,984
199,091
(1,107
)
(0.56
)%
Accumulated other comprehensive loss, net
(64,866
)
(83,766
)
18,900
22.56
%
Total stockholders’ equity
$
140,522
$
122,687
$
17,835
14.54
%
Total stockholders’ equity increased when December 31, 2023 is compared with December 31, 2022, due to improved market value of the securities portfolio reflected in accumulated other comprehensive loss. The largest component of stockholders’ equity, retained earnings, decreased from December 31, 2022 to December 31, 2023 due to dividend payments and an adjustment for the adoption of Accounting Standards Update (“ASU”) 2016-13, largely offset by net income.
The Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement, which exempts bank holding companies with less than $3 billion in assets from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements. NBB is subject to various capital requirements administered by banking agencies, including an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments. Risk-based capital ratios are calculated in compliance with OCC rules based on the Basel III Capital Rules and presented below.
Ratios at
December 31, 2023
Ratios at
December 31, 2022
Regulatory
Capital
Minimum Ratios
Regulatory Capital Minimum
Ratios with Capital
Conservation Buffer
Total Capital Ratio
18.09
%
17.57
%
8.00
%
10.50
%
Tier I Capital Ratio
17.23
%
16.81
%
6.00
%
8.50
%
Common Equity Tier I Capital Ratio
17.23
%
16.81
%
4.50
%
7.00
%
Leverage Ratio
11.05
%
10.50
%
4.00
%
4.00
%
Off-Balance Sheet Arrangements
The Company’s off-balance sheet arrangements as of December 31, 2023 are detailed in the table below. All are due in less than one year.
Payments Due by Period
Total
Less Than 1 Year
Commitments to extend credit
$
220,656
$
220,656
Standby letters of credit
20,711
20,711
Mortgage loans with potential recourse
7,325
7,325
Total
$
248,692
$
248,692
In the normal course of business the Company’s banking affiliate extends lines of credit to its customers. The Bank also issues two types of standby letters of credit to customers: financial standby letters of credit that guarantee payment to facilitate customer purchases and performance letters of credit that guarantee payment if the customer fails to perform a specific obligation. Associated revenue from letters of credit was $51 in 2023. Amounts drawn upon these lines and letters of credit vary at any given time depending on the business needs of the customers. While it would be possible for customers to fully draw on approved lines of credit and for beneficiaries to call all letters of credit, historically this has not occurred. In the event of a sudden and substantial draw on these lines, the Company would manage liquidity using cash on hand, borrowing capacity, or sale of investments or loans.
The Company sells mortgages on the secondary market subject to recourse agreements. The mortgages originated must meet strict underwriting and documentation requirements for the sale to be completed. The Company estimates a potential loss reserve for recourse provisions. The amount is not material as of December 31, 2023. To date, no recourse provisions have been invoked.
Operating leases are for buildings used in the Company’s day-to-day operations.
Recent Accounting Pronouncements
See Note 1 of Notes to Consolidated Financial Statements for information relating to recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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