NATIONAL BANKSHARES INC 10-K

Item 8. Financial Statements and Supplementary Data Consolidated Balance Sheets December 31, $ in thousands except per share data 2023 2022 Assets Cash and due from banks $ 12,967 $ 12,403 Interest-bearing deposits 73,636 59,026 Securities available for sale, at fair value 618,601 656,852 Restricted stock, at cost 1,264 941 Mortgage loans held for sale 406 - Loans: Real estate construction loans 55,379 54,579 Consumer real estate loans 241,564 221,052 Commercial real estate loans 419,130 437,888 Commercial non-real estate loans 41,555 57,652 Public sector and IDA loans 60,551 48,074 Consumer non-real estate loans 38,996 33,948 Total loans 857,175 853,193 Less unearned income and deferred fees and costs ( 529 ) ( 449 ) Loans, net of unearned income and deferred fees and costs 856,646 852,744 Less allowance for credit losses ( 9,094 ) ( 8,225 ) Loans, net 847,552 844,519 Premises and equipment, net 11,109 10,371 Accrued interest receivable 6,313 6,001 Other real estate owned, net - 662 Goodwill 5,848 5,848 Bank-owned life insurance (BOLI) 43,583 43,312 Other assets 34,091 37,616 Total assets $ 1,655,370 $ 1,677,551 Liabilities and Stockholders ’ Equity Noninterest-bearing demand deposits $ 281,215 $ 327,713 Interest-bearing demand deposits 821,661 933,269 Savings deposits 177,856 214,114 Time deposits 223,240 67,629 Total deposits 1,503,972 1,542,725 Accrued interest payable 1,416 106 Other liabilities 9,460 12,033 Total liabilities 1,514,848 1,554,864 Commitments and contingencies Stockholders’ equity: Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding - - Common stock, $ 1.25 par value and additional paid in capital. Authorized 10,000,000 shares; 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 7,404 7,362 Retained earnings 197,984 199,091 Accumulated other comprehensive loss, net ( 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. 37 Table of Contents Consolidated Statements of Income Year Ended December 31, $ in thousands, except per share data 2023 2022 Interest Income Interest and fees on loans $ 38,924 $ 34,253 Interest on interest-bearing deposits 1,982 1,353 Interest and dividends on securities – taxable 16,536 12,788 Interest on securities – nontaxable 1,391 1,715 Total interest income 58,833 50,109 Interest Expense Interest on time deposits 4,989 141 Interest on other deposits 16,261 2,942 Interest on borrowings 300 - Total 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 Service charges on deposit accounts 2,518 2,425 Other service charges and fees 297 214 Credit and debit card fees, net 1,678 1,916 Trust income 1,901 1,817 Gain on sale of mortgage loans 107 157 BOLI income 2,026 958 Gain on sale of investment 2,971 - Gain on sale of private equity investment 232 3,823 Other income 961 1,091 Realized securities loss, net ( 3,332 ) - Total noninterest income 9,359 12,401 Noninterest Expense Salaries and employee benefits 17,318 16,519 Occupancy, furniture and fixtures 2,005 1,934 Data processing and ATM 3,549 3,186 FDIC assessment 749 477 Net costs of other real estate owned 31 325 Franchise taxes 1,422 1,483 Professional services 1,739 999 Other operating expenses 2,415 2,035 Total 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 Basic net income per common share $ 2.66 $ 4.33 Fully diluted net income per common share $ 2.66 $ 4.33 Dividends declared per common share $ 2.51 $ 1.50 The accompanying notes are an integral part of these consolidated financial statements. 38 Table of Contents Consolidated Statements of Comprehensive Income (Loss) Year Ended December 31, $ in thousands 2023 2022 Net Income $ 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 2,632 - Net pension gain arising during the period, net of tax of $ 9 in 2023 and $ 1,214 in 2022 35 4,567 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 ’ Equity $ in thousands, except per share data Common Stock and Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Loss Total Balance as of December 31, 2021 $ 7,580 $ 188,229 $ ( 4,058 ) $ 191,751 Net income - 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 ( 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 ) Net income - 15,691 - 15,691 Other comprehensive income, net of tax of $ 5,024 - - 18,900 18,900 Cash dividends of $ 2.51 per share - ( 14,784 ) - ( 14,784 ) Stock based compensation 42 - - 42 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. 39 Table of Contents Consolidated Statements of Cash Flows Year Ended December 31, $ in thousands 2023 2022 Cash Flows from Operating Activities Net income $ 15,691 $ 25,932 Adjustment to reconcile net income to net cash provided by operating activities: (Recovery of) provision for credit losses ( 1,261 ) 706 Deferred income tax expense (benefit) 750 ( 109 ) Depreciation of premises and equipment 754 609 Amortization of premiums and accretion of discounts, net 1,077 1,257 Gain on disposal of fixed assets - ( 9 ) Loss on sale of securities available for sale, net 3,332 - (Gain) loss and write-down on other real estate owned ( 1 ) 295 Loss on sale of repossessed items 4 - Income on investment in BOLI ( 982 ) ( 958 ) Gain on sale of mortgage loans held for sale ( 107 ) ( 157 ) Origination of mortgage loans held for sale ( 7,624 ) ( 7,882 ) Sale of mortgage loans held for sale 7,325 8,654 Equity-based compensation expense 42 - Net change in: Accrued interest receivable ( 312 ) ( 897 ) Other assets ( 1,721 ) ( 24 ) Accrued interest payable 1,310 58 Other liabilities ( 2,754 ) 2,025 Net cash provided by operating activities 15,523 29,500 Cash Flows from Investing Activities Proceeds from repayments of mortgage-backed securities 12,984 32,664 Proceeds from calls, sales and maturities of securities available for sale 44,738 5,970 Purchases of securities available for sale - ( 117,341 ) Net change in restricted stock ( 323 ) ( 96 ) Purchases of loan participations ( 7,997 ) ( 19,051 ) Collections of loan participations 7,200 21,452 Loan originations and principal collections, net ( 3,594 ) ( 52,271 ) Proceeds from disposal of other real estate owned 663 - Proceeds from disposal of repossessed assets 14 - Recoveries on loans charged off 283 212 BOLI settlement 712 - Additions to premises and equipment ( 1,492 ) ( 1,258 ) Proceeds from sale of premises and equipment - 9 Net cash provided by (used in) investing activities 53,188 ( 129,710 ) Cash Flows from Financing Activities Net change in time deposits 155,611 ( 11,339 ) Net change in other deposits ( 194,364 ) 59,477 Cash dividends paid ( 14,784 ) ( 8,950 ) Shares repurchased - ( 6,338 ) Net cash (used in) provided by financing activities ( 53,537 ) 32,850 Net change in cash and due from banks 15,174 ( 67,360 ) Cash and due from banks at beginning of year 71,429 138,789 Cash and due from banks at end of year $ 86,603 $ 71,429 (Continued) 40 Table of Contents Supplemental Disclosures of Cash Flow Information Interest paid on deposits and borrowed funds $ 20,240 $ 3,025 Income taxes paid 2,545 3,861 Supplemental Disclosures of Noncash Activities Loans charged against the allowance for credit losses $ 478 $ 367 Loans transferred to repossessed assets 11 7 Unrealized gain (loss) on securities available for sale 23,880 ( 106,678 ) Minimum pension liability adjustment 44 5,781 Lease liabilities arising from obtaining right-of-use assets during the period - 161 The accompanying notes are an integral part of these consolidated financial statements. 41 Table of Contents Notes to Consolidated Financial Statements $ in thousands, except per share data. Note 1: Summary of Significant Accounting Policies The consolidated financial statements include the accounts of National Bankshares, Inc. and its wholly-owned subsidiaries, the National Bank of Blacksburg, and National Bankshares Financial Services, Inc. All intercompany balances and transactions have been eliminated in consolidation. 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 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 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. Securities 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 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. 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. 42 Table of Contents 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. Equity securities without readily-determinable fair values are recorded as other assets at cost less impairment, if any, and adjusted for changes resulting from observable price changes in orderly transactions for identical or similar investment of the same issuer. Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value on an individual loan basis. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The Company releases mortgage servicing rights when loans are sold on the secondary market. Loans 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 credit losses, any purchase premium or discount, unearned income and deferred fees or costs. Interest income is accrued on the unpaid principal balance. Unearned income on dealer-originated loans and loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. 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. 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, 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. Each segment is subject to certain risks that influence pricing, loan structures, approval requirements, reserves, and ongoing credit management. Real Estate Construction Loans. 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. Associated risks may be mitigated by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements. Risks specific to the borrower are also evaluated, including previous repayment history, debt service ability, and current and projected loan-to value ratios for the collateral. Consumer Real Estate Loans. 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. Income and financial information is obtained from personal tax returns, personal financial statements and employment documentation. A maximum LTV ratio of 80% is generally required. The DTI ratio is limited to 43% of gross income. 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. The underwriting policy for home equity loans generally permits aggregate (the total of all liens secured by the collateral property) borrowing availability up to 80% of the appraised value of the collateral. We offer both fixed rate and variable rate home equity loans, with variable rate loans underwritten at fully-indexed rates. Decisions are primarily based on LTV ratios, DTI ratios, liquidity and credit history. 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. Payment option ARMs usually have adjustable rates, for which borrowers choose their monthly payment of either a full payment, interest only, or a minimum payment which may be lower than the payment required to reduce the balance of the loan in accordance with the originally underwritten amortization. 43 Table of Contents Commercial Real Estate Loans. Commercial real estate loans generally are secured by first mortgages on real estate, including multifamily residential real estate, commercial real estate occupied by the owner/borrower, and commercial real estate leased to non-owners. Properties financed include retail centers, office space, hotels and motels, apartments, and industrial properties. Loans in the commercial real estate segment are impacted by economic risks from changing commercial real estate markets, rental markets for multi-family housing and commercial buildings, and economic factors that would impact the businesses housed by the commercial real estate. Underwriting decisions are based upon an analysis of the economic viability of the collateral and creditworthiness of the borrower. The Bank obtains appraisals from qualified certified independent appraisers to establish the value of collateral properties. 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. The Bank may employ stress testing techniques on higher balance loans to determine repayment ability in a changing rate environment before granting loan approval. The Bank requires title insurance, fire, extended coverage casualty insurance and flood insurance, if appropriate, in order to protect the security interest in the underlying property. Commercial Non-Real Estate Loans. Commercial non-real estate loans are secured by collateral other than real estate, or are unsecured. Credit risk for commercial non-real estate loans is subject to economic conditions, borrower repayment ability and collateral value (if secured). 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. 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. Consumer non-real estate includes credit cards, automobile and other consumer loans. 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. 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. Past due status and nonaccrual designation A loan is considered past due when a payment of principal and/or interest is due but not paid. Credit card payments not received within 30 days after the statement date, real estate loan payments not received within the payment cycle and all other non-real estate secured loans for which payment is not made within the required payment cycle are considered 30 days past due. Management closely monitors loans past due 30 - 89 days and loans past due 90 or more days. The Company considers multiple factors when determining whether to discontinue accrual of interest on individual loans. Generally loans are placed in nonaccrual status when collection of interest and/or full principal is considered doubtful. Interest accrual is discontinued at the time a commercial real estate loan or commercial non-real estate loan is 90 days delinquent unless the credit is well secured and in the process of collection. Loans modified to provide relief from payments of interest or principle for more than 90 days are designated nonaccrual. 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. 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 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. Accordingly, secured loans may be charged down to the estimated value of the collateral, with previously accrued unpaid interest reversed. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects. 44 Table of Contents 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.” Sales, purchases and reclassification of loans 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 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 Equity lines 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 Credit cards Automobile Other consumer loans The Company’s methodologies for estimating the ACLL consider available relevant information about the collectability of cash flows, including historical losses, reasonable and supportable forecasts of economic conditions, and current economic and portfolio conditions. The difference between cash flow estimates and amortized cost is the ACLL. 45 Table of Contents 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 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. Future estimates of the allowance could increase or decrease based on changes in the financial condition of individual borrowers, concentrations of various types of loans, economic conditions or the markets in which collateral may be sold. The estimate of the allowance accrual determines the amount of provision expense and directly affects our financial results. Please see Note 5 for additional information. 46 Table of Contents Rate Lock Commitments The Company enters into commitments to originate mortgage loans in which the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 30 to 60 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, by committing to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Company is not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity. The market value of rate lock commitments and best efforts contracts is not readily ascertainable because rate lock commitments and best effort contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the changes in the value of the underlying assets while taking into consideration the probability that the rate lock commitments will close. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss occurs on the rate lock commitments. Premises and Equipment Land is carried at cost. Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is charged to expense over the estimated useful lives of the assets on the straight-line basis. Depreciable lives include 40 years for premises, 3 - 10 years for furniture and equipment, and 3 years for computer software. Costs of maintenance and repairs are charged to expense as incurred and improvements are capitalized. Other Real Estate Owned Real estate acquired through or in lieu of foreclosure is held for sale and is initially recorded at fair value less estimated costs to sell at the date of foreclosure, establishing the cost basis of the asset. 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 net costs of other real estate owned in the Consolidated Statements of Income. Goodwill 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. 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. Pension Plan 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 income (loss). 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. 47 Table of Contents Income Taxes Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the asset and liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. 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, 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 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 Loss contingencies, including claims and legal actions arising in the ordinary course of business are recorded as liabilities when the likelihood of loss is probable and reasonably estimated. Management does not believe there are such matters that will have a material effect on the consolidated financial statements. Advertising The Company charges advertising costs to expenses as incurred. Advertising expenses were $ 109 for the year ended December 31, 2023 and $ 163 for the year ended December 31, 2022. Revenue Recognition The Company accounts for revenue associated with financial instruments, including loans and securities via the accrual method. The Company recognizes noninterest income when it satisfies commitments to customers. Please refer to Note 18: Revenue Recognition. 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. 48 Table of Contents Recent Accounting Pronouncements ASU 2023 - 09 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 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 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. 49 Table of Contents 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. 2022 - 02, “Financial Instruments-Credit Losses (Topic 326 ), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022 - 02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016 - 13 ) that introduced the CECL model. The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of 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. Note 2: 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. Note 3: Securities The amortized cost and fair value of debt securities available for sale, with gross unrealized gains and losses, as of the dates indicated, follows: December 31, 2023 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. government agencies and corporations $ 353,904 $ - $ 42,060 $ 311,844 States and political subdivisions 179,507 - 29,614 149,893 Mortgage-backed securities 156,875 - 6,724 150,151 Corporate debt securities 6,504 - 754 5,750 U.S. treasury 996 - 33 963 Total securities available for sale $ 697,786 $ - $ 79,185 $ 618,601 December 31, 2022 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. government agencies and corporations $ 391,538 $ 39 $ 55,002 $ 336,575 States and political subdivisions 190,192 26 38,018 152,200 Mortgage-backed securities 170,694 22 9,239 161,477 Corporate debt securities 6,501 - 837 5,664 U.S. treasury 992 - 56 936 Total securities available for sale $ 759,917 $ 87 $ 103,152 $ 656,852 No allowance for credit loss on securities available for sale was recorded as of 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. 50 Table of Contents 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. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 2023 Amortized Cost Fair Value Due in one year or less $ 3,795 $ 3,748 Due after one year through five years 178,297 166,386 Due after five years through ten years 277,155 238,409 Due after ten years 238,539 210,058 Total securities available for sale $ 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 Less Than 12 Months 12 Months or More Fair Value Unrealized Loss Fair Value Unrealized Loss U.S. government agencies and corporations $ - $ - $ 311,844 $ 42,060 State and political subdivisions 884 1 148,763 29,613 Mortgage-backed securities 1,616 26 147,922 6,698 Corporate debt securities - - 5,750 754 U.S. treasury - - 963 33 Total temporarily impaired securities $ 2,500 $ 27 $ 615,242 $ 79,158 December 31, 2022 Less Than 12 Months 12 Months or More Fair Value Unrealized Loss Fair Value Unrealized Loss U.S. Government agencies and corporations $ 144,574 $ 12,699 $ 190,950 $ 42,303 State and political subdivisions 94,657 18,373 52,134 19,645 Mortgage-backed securities 144,198 7,326 15,165 1,913 Corporate debt securities 4,843 655 821 182 U.S. treasury 936 56 - - Total temporarily impaired securities $ 389,208 $ 39,109 $ 259,070 $ 64,043 The Company evaluates securities available for sale that are in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to the extent to which the fair value is less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. At 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 Proceeds Book Value Gross Gain Gross Loss Net Loss Available for sale $ 43,518 $ 46,850 $ 137 $ 3,469 $ 3,332 51 Table of Contents Restricted Stock 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. The stock is held by member institutions only and is not actively traded. Redemption of FHLB stock is subject to certain limitations and conditions. At its discretion, the FHLB may declare dividends on the stock. In addition to dividends, NBB also benefits from its membership with FHLB through eligibility to borrow from the FHLB, using as collateral NBB’s capital stock investment in the FHLB and qualifying NBB real estate mortgage loans totaling $ 508,768 as of December 31, 2023. 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 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. Note 4: 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 $ 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 . During 2022, total principal additions totaled $ 5,145 and principal payments were $ 1,780 . The Company held $ 17,117 in deposits for related parties as of December 31, 2023 and $ 9,509 as of December 31, 2022. The Company leased to a director a small office space. The lease was terminated during 2022. 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. Note 5: 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 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 Consumer Real Estate Commercial Real Estate Commercial Non-Real Estate Public Sector and IDA Consumer Non- Real Estate Unallocated Total Balance, December 31, 2022 $ 450 $ 2,199 $ 3,642 $ 930 $ 319 $ 506 $ 179 $ 8,225 Adoption of ASU 2016-13 ( 21 ) 1,261 700 216 ( 15 ) 72 129 2,342 Charge-offs - ( 17 ) - ( 214 ) - ( 247 ) - ( 478 ) Recoveries - 103 45 6 - 129 - 283 (Recovery of) provision for credit losses ( 21 ) ( 384 ) ( 811 ) ( 256 ) 29 123 42 ( 1,278 ) Balance, December 31, 2023 $ 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 Real Estate Commercial Real Estate Commercial Non-Real Estate Public Sector and IDA Consumer Non- Real Estate Unallocated Total Balance, December 31, 2021 $ 422 $ 1,930 $ 3,121 $ 1,099 $ 297 $ 444 $ 361 $ 7,674 Charge-offs - ( 13 ) - ( 2 ) - ( 352 ) - ( 367 ) Recoveries - 29 49 11 - 123 - 212 Provision for (recovery of) loan losses 28 253 472 ( 178 ) 22 291 ( 182 ) 706 Balance, December 31, 2022 $ 450 $ 2,199 $ 3,642 $ 930 $ 319 $ 506 $ 179 $ 8,225 52 Table of Contents 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 Real Estate Construction Consumer Real Estate Commercial Real Estate Commercial Non-Real Estate Public Sector and IDA Consumer Non- Real Estate Unallocated Total Individually evaluated $ - $ 74 $ 367 $ 126 $ - $ 5 $ - $ 572 Collectively evaluated 408 3,088 3,209 556 333 578 350 8,522 Total $ 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 Consumer Real Estate Commercial Real Estate Commercial Non-Real Estate Public Sector and IDA Consumer Non-Real Estate Total Individually evaluated $ 286 $ 1,183 $ 8,805 $ 227 $ - $ 43 $ 10,544 Collectively evaluated 55,093 240,381 410,325 41,328 60,551 38,953 846,631 Total $ 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 December 31, 2022 Real Estate Construction Consumer Real Estate Commercial Real Estate Commercial Non-Real Estate Public Sector and IDA Consumer Non- Real Estate Unallocated Total Individually evaluated $ - $ - $ - $ - $ - $ - $ - $ - Collectively evaluated 450 2,199 3,642 930 319 506 179 8,225 Total $ 450 $ 2,199 $ 3,642 $ 930 $ 319 $ 506 $ 179 $ 8,225 Loans by Segment and Evaluation Method as of December 31, 2022 Real Estate Construction Consumer Real Estate Commercial Real Estate Commercial Non-Real Estate Public Sector and IDA Consumer Non- Real Estate Total Individually evaluated $ - $ 186 $ 2,583 $ 263 $ - $ - $ 3,032 Collectively evaluated 54,579 220,866 435,305 57,389 48,074 33,948 850,161 Total $ 54,579 $ 221,052 $ 437,888 $ 57,652 $ 48,074 $ 33,948 $ 853,193 A summary of ratios for the allowance for credit losses, as of the dates indicated, follows: December 31, 2023 2022 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 0.02 % 0.02 % The following table presents nonaccrual loans, by class, as of the dates indicated: CECL Incurred Loss December 31, 2023 December 31, 2022 Nonaccrual Loans With No Allowance With an Allowance Total Consumer 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 - 221 221 263 Total $ 2,177 $ 452 $ 2,629 $ 2,847 53 Table of Contents In accordance with CECL, the Company identifies individually evaluated loans when their risk characteristics become different from their pool. Under previous GAAP, the Company identified loans for potential impairment through a variety of means, including, but not limited to, ongoing loan review, renewal processes, delinquency data, market communications, and public information. When the Company determined that it was probable all principal and interest amounts due would not be collected in accordance with the contractual terms of the loan agreement, the loan was generally deemed impaired and individually evaluated. For further information on the impairment process under previous GAAP, please refer to the Company’s 2022 Form 10 -K. A summary of individually evaluated loans as of the date indicated follows. Individually Evaluated Loans under Incurred Loss as of December 31, 2022 Principal Balance Recorded Investment (1) Recorded Investment (1) for Which There is No Related Allowance Recorded Investment (1) for Which There is a Related Allowance Related Allowance Consumer Real Estate Investor-owned residential real estate $ 186 $ 186 $ 186 $ - $ - Commercial Real Estate Commercial real estate, owner occupied 3,248 2,583 2,583 - - Commercial Non-Real Estate Commercial and industrial 285 263 263 - - Total $ 3,719 $ 3,032 $ 3,032 $ - $ - ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status. The following table shows the average recorded investment and interest income recognized for individually evaluated loans under the incurred loss model for the period indicated. Only classes with individually evaluated loans are presented. For the Year Ended December 31, 2022 Average Recorded Investment (1) Interest Income Recognized Consumer Real Estate Investor-owned residential real estate $ 188 $ 13 Commercial Real Estate Commercial real estate, owner occupied 2,587 5 Commercial real estate, other 729 - Commercial Non-Real Estate Commercial and industrial 272 - Total $ 3,776 $ 18 ( 1 ) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status. 54 Table of Contents The following tables present the aging of past due loans, by loan pool, as of the dates indicated. December 31, 2023 Accruing Current Loans Accruing Loans 30 – 89 Days Past Due Accruing Loans 90 or More Days Past Due Nonaccrual Loans Total Loans Accruing and Nonaccrual 90 or More Days Past Due Real Estate Construction Construction, 1-4 family residential $ 13,442 $ - $ - $ - $ 13,442 $ - Construction, other 41,916 21 - - 41,937 - Consumer Real Estate Equity line 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 Credit cards 4,648 17 3 - 4,668 3 Automobile 12,126 135 - - 12,261 - Other consumer loans 21,934 107 26 - 22,067 26 Total $ 852,712 $ 1,646 $ 188 $ 2,629 $ 857,175 $ 419 55 Table of Contents December 31, 2022 Accruing Current Loans Accruing Loans 30 – 89 Days Past Due Accruing Loans 90 or More Days Past Due Nonaccrual Loans Total Loans Accruing and Nonaccrual 90 or More Days Past Due Real Estate Construction Construction, 1-4 family residential $ 12,538 $ - $ - $ - $ 12,538 $ - Construction, other 42,041 - - - 42,041 - Consumer Real Estate Equity line 15,010 16 - - 15,026 - Residential closed-end first liens 121,807 750 - 91 122,648 91 Residential closed-end junior liens 2,446 - - - 2,446 - Investor-owned residential real estate 80,524 408 - - 80,932 - Commercial Real Estate Multifamily residential real estate 127,312 - - - 127,312 - Commercial real estate owner-occupied 126,640 - - 2,493 129,133 252 Commercial real estate, other 181,443 - - - 181,443 - Commercial Non-Real Estate Commercial and industrial 57,373 16 - 263 57,652 - Public Sector and IDA States and political subdivisions 48,074 - - - 48,074 - Consumer Non-Real Estate Credit cards 4,592 3 2 - 4,597 2 Automobile 9,833 102 - - 9,935 - Other consumer loans 19,317 93 6 - 19,416 6 Total $ 848,950 $ 1,388 $ 8 $ 2,847 $ 853,193 $ 351 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 $ 7 $ - Commercial Real Estate Commercial real estate owner-occupied 2,177 - Total Loans $ 2,184 $ - Credit Quality The Company categorizes loans by risk based on relevant information about the ability of borrowers to service their debt, including: collateral and financial information, historical payment experience, credit documentation and current economic trends, among other factors. At origination, each loan is assigned a risk rating. Ongoing analysis of the loan portfolio adjusts risk ratings on an individual loan basis to reflect updated information. General descriptions of risk ratings are as follows: ● Pass: loans with acceptable credit quality are rated pass. ● Special mention: loans with potential weaknesses due to challenging economic or financial conditions are rated special mention. ● Classified: loans with well-defined weaknesses that heighten the risk of default are rated classified. 56 Table of Contents The following table presents the amortized cost basis of the loan portfolio, by year of origination, loan class, and credit quality, as of the date indicated. Term Loans Amortized Cost Basis by Origination Year Revolving Loans December 31, 2023 Prior 2019 2020 2021 2022 2023 Revolving Converted to Term Total Construction, residential Pass $ - $ - $ 246 $ 158 $ 3,275 $ 5,157 $ 4,606 $ - $ 13,442 Construction, other Pass $ 2,741 $ 1,094 $ 1,305 $ 12,671 $ 17,397 $ 4,884 $ 1,559 $ - $ 41,651 Classified - - - 286 - - - - 286 Total $ 2,741 $ 1,094 $ 1,305 $ 12,957 $ 17,397 $ 4,884 $ 1,559 $ - $ 41,937 Equity lines Pass $ 51 $ - $ - $ - $ - $ - $ 17,182 $ - $ 17,233 Classified - - - - - - 49 - 49 Total $ 51 $ - $ - $ - $ - $ - $ 17,231 $ - $ 17,282 Residential closed-end first liens Pass $ 32,404 $ 5,806 $ 14,634 $ 31,414 $ 29,787 $ 11,208 $ - $ - $ 125,253 Classified 426 - - - - - - - 426 Total $ 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 Pass $ 1,499 $ 116 $ - $ 172 $ 1,387 $ 1,850 $ - $ 15 $ 5,039 Investor-owned residential real estate Pass $ 24,556 $ 5,162 $ 23,649 $ 19,062 $ 14,166 $ 4,880 $ 1,283 $ 98 $ 92,856 Classified 708 - - - - - - - 708 Total $ 25,264 $ 5,162 $ 23,649 $ 19,062 $ 14,166 $ 4,880 $ 1,283 $ 98 $ 93,564 Multifamily residential real estate Pass $ 40,092 $ 1,806 $ 2,148 $ 40,544 $ 25,681 $ 8,850 $ 126 $ - $ 119,247 Commercial real estate, owner occupied Pass $ 41,573 $ 11,091 $ 23,407 $ 4,792 $ 16,720 $ 7,914 $ 2,919 $ - $ 108,416 Special mention 6,396 - - - - - - - 6,396 Classified 2,409 - - - - - - - 2,409 Total $ 50,378 $ 11,091 $ 23,407 $ 4,792 $ 16,720 $ 7,914 $ 2,919 $ - $ 117,221 Commercial real estate, other Pass $ 68,889 $ 21,841 $ 19,098 $ 36,157 $ 22,697 $ 13,279 $ 701 $ - $ 182,662 Commercial and industrial Pass $ 6,004 $ 438 $ 1,060 $ 12,667 $ 6,954 $ 6,938 $ 7,267 $ - $ 41,328 Classified 220 - - - 7 - - - 227 Total $ 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 Pass $ 20,817 $ - $ 235 $ 26,702 $ 6,335 $ 6,462 $ - $ - $ 60,551 Credit cards Pass $ - $ - $ - $ - $ - $ - $ 4,668 $ - $ 4,668 YTD gross charge-offs $ - $ - $ - $ - $ - $ - $ 39 $ - $ 39 Automobile Pass $ 78 $ 204 $ 563 $ 1,619 $ 2,750 $ 7,047 $ - $ - $ 12,261 YTD gross charge-offs $ - $ 3 $ - $ 1 $ 38 $ - $ - $ - $ 42 Other Consumer Pass $ 93 $ 334 $ 811 $ 1,943 $ 5,815 $ 12,356 $ 672 $ - $ 22,024 Special mention - - - - - 17 - - 17 Classified - - - - 11 15 - - 26 Total $ 93 $ 334 $ 811 $ 1,943 $ 5,826 $ 12,388 $ 672 $ - $ 22,067 YTD gross charge-offs $ - $ - $ - $ 19 $ 52 $ 95 $ - $ - $ 166 Total Loans Pass $ 238,797 $ 47,892 $ 87,156 $ 187,901 $ 152,964 $ 90,825 $ 40,983 $ 113 $ 846,631 Special mention 6,396 - - - - 17 - - 6,413 Classified 3,763 - - 286 18 15 49 - 4,131 Total $ 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 57 Table of Contents 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 Pass Special Mention Classified Real Estate Construction Construction, 1-4 family residential $ 12,538 $ - $ - Construction, other 41,741 - 300 Consumer Real Estate Equity lines 15,026 - - Residential closed-end first liens 122,187 - 461 Residential closed-end junior liens 2,446 - - Investor-owned residential real estate 80,143 - 603 Commercial Real Estate Multifamily residential real estate 127,312 - - Commercial real estate owner-occupied 126,550 - - Commercial real estate, other 181,443 - - Commercial Non-Real Estate Commercial and industrial 57,381 - 8 Public Sector and IDA States and political subdivisions 48,074 - - Consumer Non-Real Estate Credit cards 4,597 - - Automobile 9,932 - 3 Other consumer 19,398 - 18 Total $ 848,768 $ - $ 1,393 Loan Modifications to Borrowers Experiencing Financial Difficulty The Company modifies loans for a variety of reasons. At the date of modification, the Company assesses whether the borrower is experiencing financial difficulty. If the borrower is experiencing financial difficulty, the loan’s risk rating is evaluated and is typically changed to special mention or classified, which results in individual evaluation of the loan for the ACLL. The Company modified one loan to a borrower experiencing financial difficulty during the year ended December 31, 2023. The following table presents information on the modification. Interest Only Payments Year Ended December 31, 2023 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 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 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. 58 Table of Contents 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 $ 35 Adoption of ASU 2016-13 207 Provision for credit losses 17 Balance, December 31, 2023 $ 259 Note 6: Premises and Equipment A summary of the cost and accumulated depreciation of premises and equipment as of the dates indicated, follows: December 31, 2023 2022 Premises $ 15,724 $ 15,435 Furniture and equipment 7,862 6,658 Premises and equipment 23,586 22,093 Accumulated depreciation ( 12,477 ) ( 11,722 ) Premises and equipment, net $ 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. Note 7: Deposits 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 Time Deposits 2024 $ 214,540 2025 2,831 2026 2,110 2027 2,219 2028 1,540 Thereafter - Total time deposits $ 223,240 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. Note 8: Employee Benefit Plans 401 (k) Plan The Company has a Retirement Accumulation Plan qualifying under Internal Revenue Code Section 401 (k), in which NBB and NBFS are participating employers. 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, 2023 and 2022, the Company contributed $ 446 and $ 392 respectively, included in salaries and employee benefits in the Consolidated Statements of Income. 59 Table of Contents 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. Contributions to the ESOP, which are not mandatory, are determined annually by the NBI Board of Directors. Contribution expense amounted to $ 300 for the year ended December 31, 2023 and $ 400 for the year ended December 31, 2022. Dividends on ESOP shares are charged to retained earnings. 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. The ESOP contains a put option which allows a withdrawing participant to require the Company or the ESOP, if the plan administrator agrees, to purchase his or her allocated shares if the shares are not readily tradable on an established market at the time of distribution. Salary Continuation Plan 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 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. 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. Information pertaining to activity in the plan during the years indicated, is as follows: December 31, 2023 2022 Change in benefit obligation Projected benefit obligation at beginning of year $ 23,128 $ 35,312 Service cost (1) 813 1,297 Interest cost (2) 1,091 817 Actuarial loss (gain) (3) 1,542 ( 11,566 ) Benefits paid ( 824 ) ( 2,732 ) Projected benefit obligation at end of year $ 25,750 $ 23,128 Change in plan assets Fair value of plan assets at beginning of year $ 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 $ 32,509 $ 29,746 Funded status at the end of the year $ 6,759 $ 6,618 Amounts recognized in the Consolidated Balance Sheet Deferred tax liabilities $ ( 1,419 ) $ ( 1,390 ) Other assets 6,759 6,618 Total amounts recognized in the Consolidated Balance Sheet $ 5,340 $ 5,228 Amounts recognized in accumulated other comprehensive loss, net Net loss $ ( 2,924 ) $ ( 2,968 ) Deferred tax asset 614 623 Amount recognized $ ( 2,310 ) $ ( 2,345 ) (continued ) 60 Table of Contents Accrued/Prepaid benefit cost, net Benefit obligation $ ( 25,750 ) $ ( 23,128 ) Fair value of assets 32,509 29,746 Unrecognized net actuarial loss 2,924 2,968 Deferred tax liability ( 2,033 ) ( 2,013 ) Prepaid benefit cost included in other assets $ 7,650 $ 7,573 Components of net periodic benefit cost Service cost (1) $ 813 $ 1,297 Interest cost (2) 1,091 817 Expected return on plan assets (2) ( 2,070 ) ( 2,517 ) Recognized net actuarial loss (2) 69 441 Net periodic benefit cost $ ( 97 ) $ 38 Other changes in plan assets and benefit obligations recognized in other comprehensive loss Net gain $ ( 44 ) $ ( 5,781 ) Deferred income tax expense 9 1,214 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 3.00 % 3.00 % ( 1 ) Cost is included in Salaries and Employee Benefits expense on the Consolidated Statements of Income. ( 2 ) Cost is included in other operating expense on the Consolidated Statements of Income. ( 3 ) 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) 2023 2022 Loss due to demographic changes $ 934 $ 66 Gain due to change in mortality table ( 291 ) - 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 25 ( 5,340 ) Long-Term Rate of Return The Company, as plan sponsor, selects the expected long-term rate-of-return-on-assets assumption in consultation with its investment advisors and actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience, which may not continue over the measurement period, but higher significance is placed on current forecasts of future long-term economic conditions. Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, and solely for this purpose, the plan is assumed to continue in force and not terminate during the period during which assets are invested. 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). 61 Table of Contents 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. The guidelines state that, unless otherwise indicated, all investments that are permitted under the prudent investor rule shall be permissible investments for the defined benefit pension plan. All plan assets are to be invested in marketable securities. Certain investments are prohibited, including commodities and future contracts, private placements, repurchase agreements, options and derivatives. The Policy establishes quality standards for fixed income investments and mutual funds included in the pension plan trust. The Policy also outlines diversification standards. The preferred target allocation for the assets of the defined benefit pension plan is 65 % in equity securities and 35 % in fixed income securities. Equity securities include investments in large-cap and mid-cap companies primarily located in the United States, although a small number of international large-cap companies are included. There are also investments in mutual funds holding the equities of large-cap and mid-cap U.S. companies. Fixed income securities include U.S. government agency securities and corporate bonds from companies representing diversified industries. There are no investments in hedge funds, private equity funds or real estate. 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 Total Level 1 Level 2 Level 3 Cash $ 867 $ 867 $ - $ - Equity securities: U. S. companies 17,540 17,540 - - International companies 400 400 - - Equities mutual funds (1) 6,098 6,098 - - State and political subdivisions 51 - 51 - Corporate bonds – investment grade (2) 7,553 - 7,553 - Total pension plan assets $ 32,509 $ 24,905 $ 7,604 $ - Fair Value Measurements as of December 31, 2022 Asset Category Total Level 1 Level 2 Level 3) Cash $ 415 $ 415 $ - $ - Equity securities: U. S. companies 15,459 15,459 - - International companies 770 770 - - Equities mutual funds (1) 6,090 6,090 - - State and political subdivisions 51 - 51 - Corporate bonds – investment grade (2) 6,961 - 6,961 - Total pension plan assets $ 29,746 $ 22,734 $ 7,012 $ - ( 1 ) This category comprises actively managed equity funds invested in large-cap and mid-cap U.S. companies. ( 2 ) This category represents investment grade bonds of U.S. issuers from diverse industries. Estimated future benefit payments, which reflect expected future service, as appropriate, as of December 31, 2023 are as follows: Year Estimated Benefit Payment 2024 $ 4,971 2025 $ 783 2026 $ 1,824 2027 $ 1,746 2028 $ 1,817 2029 - 2033 $ 11,559 62 Table of Contents Note 9: Income Taxes The Company files United States federal income tax returns, and Virginia, West Virginia and North Carolina state income tax returns. With few exceptions, the Company is no longer subject to U.S. 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 for the period indicated is as follows: Year Ended December 31, 2023 2022 Current $ 2,234 $ 5,940 Deferred (benefit) expense 750 ( 109 ) Total income tax expense $ 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, 2023 2022 Computed “expected” income tax expense $ 3,922 $ 6,670 Tax-exempt interest income ( 354 ) ( 728 ) Nondeductible interest expense ( 170 ) 24 Other, net ( 414 ) ( 135 ) Reported income tax expense $ 2,984 $ 5,831 The components of net deferred tax assets, included in other assets as of the dates indicated, are as follows: December 31, 2023 2022 Deferred tax assets: Allowance for credit losses and unearned fee income $ 2,155 $ 1,906 Valuation allowance on other real estate owned - 248 Defined benefit pension plan 614 623 Deferred compensation and other liabilities 889 919 Net unrealized loss on securities available for sale 16,629 21,644 Lease accounting 237 303 Unvested stock-based compensation 5 - Total deferred tax assets $ 20,529 $ 25,643 Deferred tax liabilities: Fixed assets $ ( 597 ) $ ( 463 ) Goodwill ( 1,228 ) ( 1,228 ) Defined benefit pension plan, prepaid portion ( 2,034 ) ( 2,013 ) Lease accounting ( 230 ) ( 297 ) Discount accretion of securities ( 122 ) ( 84 ) Total deferred tax liabilities ( 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. 63 Table of Contents Note 10: 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. 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, 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. Note 11: 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 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 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. 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 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. As of December 31, 2023, the most recent notifications from the Office of the Comptroller of the Currency categorized NBB as well capitalized under the regulatory framework for prompt corrective action. 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 as of the dates indicated are presented in the following tables. December 31, 2023 Actual Minimum Capital Requirement (1) Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets) $ 195,782 18.09 % $ 113,627 10.50 % $ 108,216 10.00 % Tier 1 Capital (to Risk Weighted Assets) $ 186,429 17.23 % $ 91,983 8.50 % $ 86,573 8.00 % Common Equity Tier 1 Capital (to Risk Weighted Assets) $ 186,429 17.23 % $ 75,751 7.00 % $ 70,340 6.50 % Tier 1 Capital (to Average Assets) $ 186,429 11.05 % $ 67,491 4.00 % $ 84,364 5.00 % December 31, 2022 Actual Minimum Capital Requirement (1) Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets) $ 191,883 17.57 % $ 114,671 10.50 % $ 109,210 10.00 % Tier 1 Capital (to Risk Weighted Assets) $ 183,623 16.81 % $ 92,829 8.50 % $ 87,368 8.00 % Common Equity Tier 1 Capital (to Risk Weighted Assets) $ 183,623 16.81 % $ 76,447 7.00 % $ 70,987 6.50 % Tier 1 Capital (to Average Assets) $ 183,623 10.50 % $ 69,925 4.00 % $ 87,406 5.00 % ( 1 ) 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. 64 Table of Contents Note 12: Condensed Financial Statements of Parent Company Financial information pertaining only to NBI (Parent) as of the dates and for the years indicated, is as follows: Condensed Balance Sheets December 31, 2023 2022 Assets Cash due from subsidiaries $ 11,010 $ 14,927 Investments in subsidiaries 129,731 107,746 Refundable income taxes - 70 Other assets 655 648 Total assets $ 141,396 $ 123,391 Liabilities and Stockholders ’ Equity Other liabilities $ 874 $ 704 Stockholders’ equity 140,522 122,687 Total liabilities and stockholders’ equity $ 141,396 $ 123,391 Condensed Statements of Income Year Ended December 31, 2023 2022 Income Dividends from subsidiaries $ 12,000 $ 25,000 Gain on sale of private equity investment 232 3,823 Total income 12,232 28,823 Expenses Other expenses 2,142 1,220 Income before income tax benefit (expense) and equity in undistributed net income of subsidiaries 10,090 27,603 Applicable income tax benefit (expense) 499 ( 491 ) Income before equity (deficit) in undistributed net income of subsidiaries 10,589 27,112 Equity (deficit) in undistributed net income of subsidiaries 5,102 ( 1,180 ) Net income $ 15,691 $ 25,932 Condensed Statements of Cash Flows Year Ended December 31, 2023 2022 Cash Flows from Operating Activities Net income $ 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 70 576 Net change in other assets 38 593 Net change in other liabilities 170 ( 390 ) Net cash provided by operating activities 10,867 27,891 (continued) 65 Table of Contents Cash Flows from Financing Activities Cash dividends paid ( 14,784 ) ( 8,950 ) Shares repurchased - ( 6,338 ) Net cash used in financing activities ( 14,784 ) ( 15,288 ) Net change in cash ( 3,917 ) 12,603 Cash due from subsidiaries at beginning of year 14,927 2,324 Cash due from subsidiaries at end of year $ 11,010 $ 14,927 Note 13: Financial Instruments with Off-Balance Sheet Risk The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and interest rate locks. 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 as of the dates indicated: December 31, 2023 2022 Commitments to extend credit $ 220,656 $ 197,459 Standby letters of credit 20,711 17,021 Mortgage loans sold with potential recourse 7,325 8,654 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. 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. Some of these commitments are uncollateralized and do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. The Company originates mortgage loans for sale to secondary market investors subject to contractually specified and limited recourse provisions. In 2023, the Company originated $ 7,624 and sold $ 7,325 mortgage loans to investors, compared with $ 7,882 originated and $ 8,654 sold in 2022. Every contract with each investor contains certain recourse language. In general, the Company may be required to repurchase a previously sold mortgage loan if there is major noncompliance with defined loan origination or documentation standards, including fraud, negligence or material misstatement in the loan documents. Repurchase may also be required if necessary governmental loan guarantees are canceled or never issued, or if an investor is forced to buy back a loan after it has been resold as a part of a loan pool. In addition, the Company may have an obligation to repurchase a loan if the mortgagor defaults early in the loan term. This potential default period is approximately 12 months after sale of a loan to the investor. 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. The Company does not expect any counterparty to fail to meet its obligations. The Company maintains cash accounts in other commercial banks. The Company had $ 962 in deposits with correspondent institutions as of December 31, 2023 that were not insured by the FDIC. 66 Table of Contents Note 14: 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. 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. 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 $ 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. Management considers the concentration of credit risk to be minimal. Note 15: Fair Value Measurements Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of the observable inputs and minimize the use of the unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are: Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities. Level 2 – Valuation is based on observable inputs including: ● quoted prices in active markets for similar assets and liabilities, ● quoted prices for identical or similar assets and liabilities in less active markets, ● inputs other than quoted prices that are observable, and ● model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. Level 3 – Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. Fair value is best determined by quoted market prices. However, in 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. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from disclosure requirements. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements: 67 Table of Contents Financial Instruments Measured At Fair Value on a Recurring Basis Securities Available for Sale Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1 ). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2 ). The carrying value of restricted Federal Reserve Bank of Richmond and 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 as of the dates indicated: Fair Value Measurement Using December 31, 2023 Balance Level 1 Level 2 Level 3 U.S. government agencies and corporations $ 311,844 $ - $ 311,844 $ - States and political subdivisions 149,893 - 149,893 - Mortgage-backed securities 150,151 - 150,151 - Corporate debt securities 5,750 - 5,750 - U.S. treasury 963 963 Total securities available for sale $ 618,601 $ - $ 618,601 $ - Fair Value Measurement Using December 31, 2022 Balance Level 1 Level 2 Level 3 U.S. Government agencies and corporations $ 336,575 $ - $ 336,575 $ - States and political subdivisions 152,200 - 152,200 - Mortgage-backed securities 161,477 - 161,477 - Corporate debt securities 5,664 - 5,664 - U.S. treasury 936 - 936 - Total securities available for sale $ 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 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 Sale Commitment The Company originates consumer real estate loans which it 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 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 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. 68 Table of Contents 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 Balance (Level 1) (Level 2) (Level 3) 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 100% (1) Forward sale commitment Market approach Pull-through rate 100% (1) Interest rate loan contract Market approach Current reference price 102.64% (2) Forward sale commitment Market approach Current reference price 101.60% - 102.64% (101.98%) (3) ( 1 ) All contracts are valued using the same pull-through rate ( 2 ) Comprised of only one loan. ( 3 ) Current reference prices were weighted by the relative amount of the loan Financial Instruments Measured at Fair Value on a Non-Recurring Basis Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the consolidated financial statements: Loans Held for Sale Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of one -to- four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2 ). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale 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 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 Date Description Balance Level 1 Level 2 Level 3 December 31, 2022 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. Date Valuation Technique Unobservable Input Discount December 31, 2022 Discounted appraised value Selling cost 7.00 % December 31, 2022 Discounted appraised value Discount for lack of marketability 34.72 % 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. 69 Table of Contents 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, 2023 and December 31, 2022. Fair values are estimated using the exit price notion. Estimated Fair Value December 31, 2023 Carrying Amount Level 1 Level 2 Level 3 Financial assets: Cash and due from banks $ 12,967 $ 12,967 $ - $ - Interest-bearing deposits 73,636 73,636 - - Securities available for sale 618,601 - 618,601 - Restricted stock, at cost 1,264 - 1,264 - Mortgage loans held for sale 406 - 406 - Loans, net 847,552 - - 793,800 Accrued interest receivable 6,313 - 6,313 - Bank-owned life insurance 43,583 - 43,583 - Interest rate loan contract 3 - - 3 Financial liabilities: Deposits $ 1,503,972 $ - $ 1,280,732 $ 222,374 Accrued interest payable 1,416 - 1,416 - Forward sale commitment 4 - - 4 Estimated Fair Value December 31, 2022 Carrying Amount Level 1 Level 2 Level 3 Financial assets: Cash and due from banks $ 12,403 $ 12,403 $ - $ - Interest-bearing deposits 59,026 59,026 - - Securities available for sale 656,852 - 656,852 - Restricted stock, at cost 941 - 941 - Loans, net 844,519 - - 781,749 Accrued interest receivable 6,001 - 6,001 - Bank-owned life insurance 43,312 - 43,312 - Financial liabilities: Deposits $ 1,542,725 $ - $ 1,475,096 $ 67,542 Accrued interest payable 106 - 106 - 70 Table of Contents Note 16: 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 Gain (Loss) on Securities Adjustments Related to Pension Benefits Accumulated Other Comprehensive Loss 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) ( 84,275 ) - ( 84,275 ) Net pension gain, net of tax of $1,214 - 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 - 35 35 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: December 31, 2023 2022 Component of Accumulated Other Comprehensive Loss Reclassification out of unrealized losses on available for sale securities: Realized securities loss, net $ ( 3,332 ) $ - Income tax benefit 700 - Realized loss on available for sale securities, net of tax, reclassified out of accumulated other comprehensive loss $ ( 2,632 ) $ - Note 17. Goodwill In accounting for goodwill, the Company conducts an impairment review at least annually and more frequently if certain impairment indicators are evident. As of December 31, 2023 and December 31, 2022, the gross carrying value of goodwill was $ 5,848 . Testing for 2023 and 2022 did not indicate impairment. Note 18: 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”. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as financial guarantees, derivatives, and certain credit card fees are outside the scope of the guidance. Noninterest revenue streams within the scope of Topic 606 are discussed below. Service Charges on Deposit Accounts Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, ATM fees, wire transfer fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Wire transfer fees, overdraft and nonsufficient funds fees and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Other Service Charges and Fees Other service charges include safe deposit box rental fees, check ordering charges, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Check ordering charges are transactional based, and therefore the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. 71 Table of Contents Credit and Debit Card Fees Credit and debit card fees are primarily comprised of interchange fee income and merchant services income. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa and MasterCard. Merchant services income mainly represents commission fees based upon merchant processing volume. The Company’s performance obligation for interchange fee income and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. In compliance with Topic 606, credit and debit card fee income is presented net of associated expense. Trust Income Trust income is primarily comprised of fees earned from the management and administration of trusts and estates and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Estate management fees are based upon the size of the estate. A partial fee is recognized half-way through the estate administration and the remainder of the fee is recognized when remaining assets are distributed and the estate is closed. Insurance and Investment Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. OREO Gains and Losses The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2023 and 2022. December 31, 2023 2022 Noninterest Income In-scope of Topic 606: Service charges on deposit accounts $ 2,518 $ 2,425 Other service charges and fees 297 214 Credit and debit card fees, net 1,678 1,916 Trust income 1,901 1,817 Insurance and Investment (1) 677 622 Gain on sale of OREO (1) 1 - Noninterest Income (in-scope of Topic 606) $ 7,072 $ 6,994 Noninterest Income (out-of-scope of Topic 606) 2,287 5,407 Total noninterest income $ 9,359 $ 12,401 ( 1 ) Included within net costs of other real estate owned on the Consolidated Statements of Income. 72 Table of Contents Note 19: Leases The Company’s leases are recorded under ASC Topic 842, “Leases”. The Company examines its contracts to determine whether they are or contain a lease. A contract with a lease is further examined to determine whether the lease is a short-term, operating or finance lease. As permitted by ASC Topic 842, the Company elected not to capitalize short-term leases, defined by the standard as leases with terms of 12 months or less. The Company also elected the practical expedient not to separate non-lease components from lease components within a single contract. Right-of-use assets and lease liabilities are recognized for operating and finance leases. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Lease payments Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred. Payments for leases with terms longer than 12 months are included in the determination of the lease liability. Payments may be fixed for the term of the lease or variable. Variable payments result when the lease agreement includes a clause providing for escalation of lease payments at specified dates. If the escalation factor is known, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability. If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability. One of the Company’s leases provides a known escalator that is included in the determination of the lease liability. The remaining leases do not have variable payments during the term of the lease. Options to Extend, Residual Value Guarantees, and Restrictions and Covenants Of the Company’s six operating leases as of 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 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 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: December 31, 2023 December 31, 2022 Lease liability $ 1,127 $ 1,444 Right-of-use asset $ 1,096 $ 1,415 Weighted average remaining lease term (in years) 4.39 5.14 Weighted average discount rate 3.29 % 3.29 % For the Year Ended December 31, 2023 2022 Lease Expense Operating lease expense $ 364 $ 331 Short-term lease expense 20 2 Total lease expense $ 384 $ 333 Cash paid for amounts included in lease liabilities $ 382 $ 331 Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period $ - $ 161 73 Table of Contents 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 As of December 31, 2023 Twelve months ending December 31, 202 $ 346 Twelve months ending December 31, 2025 260 Twelve months ending December 31, 2026 211 Twelve months ending December 31, 2027 188 Twelve months ending December 31, 2028 190 Thereafter 16 Total undiscounted cash flows $ 1,211 Less: discount $ ( 84 ) Lease liability $ 1,127 Note 20: 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 Shares Weighted-Average Grant-Date Fair Value Nonvested at January 1, 2023 - $ - Granted 4,095 30.73 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. Note 21: 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, 2023 2022 $ in thousands, except per share amounts Net Income (Numerator) Common Shares (1) (Denominator) Per Share Net Income (Numerator) Common Shares (1) (Denominator) Per Share Basic earnings per share $ 15,691 5,889,687 $ 2.66 $ 25,932 5,989,601 $ 4.33 Dilutive shares for restricted stock awards: 266 - Diluted earnings per share $ 15,691 5,889,953 $ 2.66 $ 25,932 5,989,601 $ 4.33 ( 1 ) Weighted average outstanding RSA grants are disregarded in the computation of diluted earnings per share if they are determined to be anti-dilutive. There were no anti-dilutive RSAs for the year ended December 31, 2023. 74 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of National Bankshares, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of National Bankshares, Inc. 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. 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. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. 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. 75 Table of Contents 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 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 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 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. We have served as the Company's auditor since 2000. Winchester, Virginia March 19, 2024 76 Table of Contents Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None