What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-15 compared with 2023-11-08 · 199 added, 355 removed, 224 unchanged (71% of the section changed)

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$ in thousands, except per share data

The purpose of this discussion and analysis is to provide information about the financial condition and results of operations of the Company.  Please refer to the financial statements and other information included in this report as well as the Company’s 2022 Form 10-K for an understanding of the following discussion and analysis.

References in the following discussion and analysis to “we”

or “us”

refer to the Company unless the context indicates that the reference is to the Bank.

The purpose of this discussion and analysis is to provide information about the financial condition and results of operations of the Company.

Please refer to the financial statements and other information included in this report as well as the Company’s 2023 Form 10-K for an understanding of the following discussion and analysis.

References in the following discussion and analysis to “we” or “us” refer to the Company unless the context indicates that the reference is to the Bank.

Cautionary Statement Regarding Forward-Looking Statements

We make forward-looking statements in this Form 10-Q that are subject to significant risks and uncertainties. 

These forward-looking statements include statements regarding our profitability, liquidity, allowance for credit losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals, and are based upon management’s views and assumptions as of the date of this report. 

The words “believes,”

“expects,”

“may,”

“will,”

“should,”

“projects,”

“contemplates,”

“anticipates,”

“forecasts,”

“intends,”

or other similar words or terms are intended to identify forward-looking statements.

We make forward-looking statements in this Form 10-Q that are subject to significant risks and uncertainties.

The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements.

These forward-looking statements are based upon or are affected by factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements.

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interest rates,

national and local economic conditions,

the ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company’s or banking industry’s reputation becomes damaged,

the adequacy of the level of the Company’s allowance for credit losses, the amount of credit loss provisions required in future periods, and the failure of assumptions underlying the allowance for credit losses,

general and local economic conditions,

monetary and fiscal policies of the U.S.

Government, including policies of the U.S.

Treasury, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation, and the impact of any policies or programs implemented pursuant to financial reform legislation,

unanticipated increases in the level of unemployment in the Company’s market,

Treasury, the Office of the Comptroller of the Currency (“OCC”), the Federal Reserve, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation (“FDIC”), and the impact of any policies or programs implemented pursuant to financial reform legislation,

unanticipated increases in the level of unemployment in the Company’s market,

the quality or composition of the loan and/or investment portfolios,

the sufficiency of the Company’s allowance for credit losses,

demand for loan products,

deposit flows, including impact on liquidity

demand for financial services in the Company’s market,

the real estate market conditions in the Company’s market,

deposit flows,

demand for financial services in the Company’s market,

the real estate market in the Company’s market,

laws, regulations and policies impacting financial institutions,

adverse developments in the financial industry generally, such as the recent bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer behavior,

technological risks and developments, and cyber-threats, attacks or events,

the Company’s technology initiatives,

geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S.

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the Company's ability to identify, attract, and retain experienced management, relationship managers, and support personnel, particularly in a competitive labor environment,

performance by the Company’s counterparties or vendors,

applicable accounting principles, policies and guidelines, and

the impact of public health events, including the adverse impact on our business and operations and on our customers.

risks associated with mergers, acquisitions, and other expansion activities.

On January 23, 2024, the Company and the Bank entered into the Merger Agreement with Frontier Community Bank (“Frontier”), pursuant to which the Company will acquire Frontier in the Merger.

In addition to the factors described above, the Company’s operations, performance, business strategy and results may be affected by the following factors:

the businesses of the Company and Frontier may not be integrated successfully after the Merger or such integration may be more difficult, time-consuming or more costly than expected;

the cost savings and synergies contemplated by the Merger may not be fully realized or realized within the expected timeframe;

revenues following the Merger may be lower than expected;

customer and employee relationships and business operations may be disrupted by the Merger;

the ability to obtain required regulatory and shareholder approvals and meet other closing conditions to the Merger;

the ability to complete the Merger in the expected timeframe may be more difficult, time-consuming or more costly than expected.

These risks and uncertainties should be considered in evaluating the forward-looking statements contained in this report.

We caution readers not to place undue reliance on those statements, which speak only as of the date of this report.

This discussion and analysis should be read in conjunction with the description of our “Risk Factors”

in Item 1A of the most recently filed Form 10-K.

This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A of the most recently filed Form 10-K.

NBI is a financial holding company that was organized in 1986 under the laws of Virginia and is registered under the Bank Holding Company Act of 1956.

NBI common stock is listed on the Nasdaq Capital Market and is traded under the symbol “NKSH.”

NBI has two wholly-owned subsidiaries;

the National Bank of Blacksburg and National Bankshares Financial Services, Inc.

NBB is a community bank and does business as National Bank from 24 office locations and three loan production offices.

NBB is the source of nearly all of the Company’s revenue.

NBB is a community bank and does business as National Bank from 24 office locations and two loan production offices.

NBB is the source of nearly all of the Company’s revenue.

NBFS does business as National Bankshares Investment Services and National Bankshares Insurance Services.

Income from NBFS is not significant at this time, nor is it expected to be so in the near future.

The Company is pleased to announce plans for a new branch in Roanoke, Virginia, expected to open in 2024.

The Company expects construction of a new branch in Roanoke, Virginia to be completed during the latter half of 2024.

The full service branch will expand our already successful loan production office and enhance our service in the Roanoke Valley.

Critical Accounting Policies

The Company’s consolidated financial statements are prepared in accordance with GAAP.

The financial information contained within our statements is, to a significant extent, based on measures of the financial effects of transactions and events that have already occurred.

A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability.

Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change.

Critical accounting policies are most important to the portrayal of the Company’s financial condition or results of operations and require management’s most difficult, subjective, and complex judgments about matters that are inherently uncertain.

If conditions occur that differ from our assumptions, depending upon the severity of such differences, the Company’s financial condition or results of operations may be materially impacted.

The Company designated as critical those policies governing the allowance for credit losses, goodwill and the pension plan.

Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change.

If conditions occur that differ from our assumptions, depending upon the severity of such differences, the Company’s financial condition or results of operations may be materially impacted.

The Company has designated three policies as critical, including those governing the allowance for credit losses, goodwill and the pension plan.

The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed.

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

Please refer to the Company’s 2023 Form 10-K, Note 1:

Summary of Significant Accounting Policies for information on these and other accounting policies.

For information on the Company’s policies on the ACLL beginning with adoption of CECL on January 1, 2023, please refer to Note 1:

Cybersecurity

The Company considers cybersecurity risk to be one of the greatest risks to its business.

We have deployed a multi-faceted approach to limit the risk and impact of unauthorized access to customer accounts and to information relevant to customer accounts.

We use digital technology safeguards, internal policies and procedures, and employee training to reduce the exposure of our systems to cyber-intrusions.

The Company also requires assurances from key vendors regarding their cybersecurity.

We control functionalities of online and mobile banking to reduce risk.

We do not offer online account openings or loan originations.

We do not permit customers to submit address changes through online banking, and we limit the dollar amount of online banking transfers to other banks.

We require a special vetting process for commercial customers who wish to originate ACH transfers and for customers who submit wire requests through online banking.

Further, the Company has a program to identify, mitigate and manage its cybersecurity risks. 

The program includes penetration testing and vulnerability assessment, technological defenses such as antivirus software, patch management, firewall management, email and web protections, an intrusion prevention system, a cybersecurity insurance policy which covers some but not all losses arising from cybersecurity breaches, as well as ongoing employee training. 

The cost of these measures was $64 for the three months ended September 30, 2023 and $95 for the three months ended September 30, 2022.

For the nine months ended September 30, 2023 and September 30, 2022, the expense was $192 and $282 respectively.

These costs are included in various categories of noninterest expense.

However, it is not possible to fully eliminate exposure.

The potential for financial and reputational losses due to cyber-breaches is increased by the possibility of human error, unknown system susceptibilities, and the rising sophistication of cyber-criminals to attack systems, disable safeguards and gain access to accounts and related information. We maintain insurance for these risks but insurance policies are subject to exceptions, exclusions and terms whose applications have not been widely interpreted in litigation.

Accordingly, insurance can provide less than complete protection against the losses that result from cybersecurity breaches and pursuing recovery from insurers can result in significant expense.

In addition, some risks such as reputational damage and loss of customer goodwill, which can result from cybersecurity breaches, cannot be insured against.

Non-GAAP Financial Measures

This report refers to certain financial measures that are computed under a basis other than GAAP (“non-GAAP”).

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’

overall understanding of such financial performance.

The methodology for determining these non-GAP measures may differ among companies and are supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP.

This report refers to certain financial measures that are computed under a basis other than GAAP (“non-GAAP”).

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance.

The methodology for determining these non-GAAP measures may differ among companies.

Non-GAAP measures are supplemental and not a substitute for, or more important than, financial measures prepared in accordance with GAAP.

Details on non-GAAP measures follow.

Adjusted Return on Average Assets and Adjusted Return on Average Equity

The adjusted return on average assets and adjusted return on average equity are measures of profitability, calculated by annualizing net income and dividing by average year-to-date assets or equity, respectively.

Larger nonrecurring income or expenses are not annualized, in order to reduce distortion within the ratios.

The tables below present the reconciliation of adjusted annualized net income, which is not a measurement under GAAP, for the three and nine month periods ended September 30, 2023 and 2022.

Three Months Ended September 30,

Annualized Net Income

Net income (GAAP)

items deemed by management to be non-recurring:

Provision recovery, net of tax of $84 for the period ended September 30, 2023

Total non-recurring items

Adjusted net income

Adjusted net income, annualized

total non-recurring items

Annualized net income for ratio calculation (non-GAAP)

Return on average assets (GAAP)

Adjusted return on average assets (non-GAAP)

Return on average equity (GAAP)

Adjusted return on average equity (non-GAAP)

Nine Months Ended September 30,

Annualized Net Income

Net income (GAAP)

items deemed by management to be non-recurring:

Partnership income net of tax of ($44) and ($77) for the periods ended September 30, 2023 and 2022, respectively (1)

Loss on sale of securities, net of tax of $700

Provision recovery, net of tax of $82

Proxy contest-related expense, net of tax of $161 (2)

Gain on sale of investment, net of tax of ($624)

Gain on BOLI settlement (3)

Total non-recurring items

Adjusted net income

Adjusted net income, annualized

total non-recurring items

Annualized net income for ratio calculation (non-GAAP)

Return on average assets (GAAP)

Adjusted return on average assets (non-GAAP)

Return on average equity (GAAP)

Adjusted return on average equity (non-GAAP)

Partnership income is included in other income in the Consolidated Statements of Income.

Proxy contest-related expense is included in professional services in the Consolidated Statements of Income.

Gain on BOLI investment is included in BOLI income in the Consolidated Statements of Income.

Net Interest Margin

The Company uses the net interest margin to measure profit on interest generating activities, as a percentage of total interest-earning assets.

The Company’s net interest margin is calculated on a fully taxable equivalent (“FTE”) basis.

The portion of interest income that is nontaxable is grossed up to the tax equivalent by adding the tax benefit based on a tax rate of 21%.

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The following tables present the reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, for the periods indicated.

Three Months Ended September 30,

Net Interest Income, FTE

Total interest income (GAAP)

FTE adjustment

Total interest income (non-GAAP)

Total interest expense (GAAP)

Net interest income, FTE (non-GAAP)

Average balance of interest-earning assets

Net interest margin

Nine Months Ended September 30,

Twelve Months Ended

December 31, 2022

Three Months Ended March 31,

Net Interest Income, FTE

Total interest income (GAAP)

Interest income (GAAP)

FTE adjustment

Total interest income (non-GAAP)

Total interest expense (GAAP)

Interest income, FTE (non-GAAP)

Interest expense (GAAP)

Net interest income, FTE (non-GAAP)

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Efficiency Ratio

The efficiency ratio is computed by dividing noninterest expense by the sum of FTE net interest income and noninterest income, excluding certain items the Company’s management deems unusual or non-recurring.

This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency.

The components of the efficiency ratio calculation for the periods indicated are summarized in the following table.

Three Months Ended September 30,

Noninterest expense (GAAP)

Total Income for Efficiency Ratio

Noninterest income (GAAP)

Net interest income, FTE (non-GAAP)

Total income for efficiency ratio (non-GAAP)

Efficiency ratio

Nine Months Ended September 30,

Twelve Months Ended

December 31, 2022

Noninterest Expense for Efficiency Ratio

Three Months Ended March 31,

Noninterest expense (GAAP)

proxy contest-related expense

Noninterest expense for efficiency ratio (non-GAAP)

Total Income for Efficiency Ratio

merger-related expense

proxy-related expense (1)

Adjusted noninterest expense (non-GAAP)

Noninterest income (GAAP)

Loss on sale of securities

Gain on sale of investment

Gain on BOLI settlement

Noninterest income (non-GAAP)

realized securities gain, net

Adjusted noninterest income (non-GAAP)

Net interest income, FTE (non-GAAP)

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Efficiency ratio

Included in professional services in the Consolidated Statements of Income.

Adjusted Return on Average Assets and Adjusted Return on Average Equity

Larger nonrecurring income or expenses are not annualized, in order to reduce distortion within the ratios.

The tables below present the reconciliation of adjusted annualized net income, which is not a measurement under GAAP, for the periods indicated.

Three Months Ended March 31,

Net income (GAAP)

items not annualized:

Partnership income net of tax of ($35) and ($44) for the periods ended March 31, 2024 and 2023, respectively

Realized securities gain, net of tax of ($3) for the period ended March 31, 2023

Proxy-related expense, net of tax of $93 for the period ended March 31, 2023

Merger-related expense, (non-deductible)

Recovery of credit losses, net of tax of ($2) for the period ended March 31, 2024

Total non-annualized items

Adjusted net income

Adjusted net income, annualized

total non-annualized items

Annualized net income for ratio calculation (non-GAAP)

Return on average assets (GAAP)

Adjusted return on average assets (non-GAAP)

Return on average equity (GAAP)

Adjusted return on average equity (non-GAAP)

Performance Summary

The following tables presents the Company’s key performance indicators for the three and nine month periods ended September 30, 2023 and September 30, 2022 and the year ended December 31, 2022.

Three Months Ended September 30,

Return on average assets

Adjusted return on average assets (1)

Return on average equity

Adjusted return on average equity (1) (2)

Basic diluted earnings per share (2)

Fully diluted earnings per share (2) (4)

Net interest margin (1)

Efficiency ratio (1)

Nine Months Ended

September 30, 2023

Nine Months Ended

September 30, 2022

Twelve Months Ended

December 31, 2022

The following table presents the Company’s key performance indicators for the periods indicated.

Three Months Ended March 31,

Return on average assets

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Adjusted return on average equity (1)

Basic earnings per share (3)

Fully diluted earnings per share (3) (4)

Basic diluted earnings per common share

Fully diluted earnings per common share (2)

Net interest margin (1)

Efficiency ratio (1)

See “Non-GAAP Financial Measures” above.

During the three months ended September 30, 2022, the Company repurchased 23,500 shares under its publicly announced stock repurchase plan.

The repurchase reduced stockholders equity by $795.

During the nine months ended September 30, 2022, the Company repurchased 106,662 shares under its publicly announced stock repurchase plan.

The repurchase reduced stockholders equity by $3,724.

During the second quarter of 2023, the Company granted 2,052 of restricted stock awards with a one year vesting period.

Net income for the three and nine month periods ended September 30, 2023 decreased when compared with the three and nine month periods ended September 30, 2022.

Results for 2023 reflected the impact of the Federal Reserve’s interest rate increases as well as key noninterest income and expense items that are discussed below.

Results for the year ended December 31, 2022 included pre-tax income of $3,823 from the sale of a private equity investment.

See “Non-GAAP Financial Measures” above.

During 2023, the Company granted 4,095 of restricted stock awards with a one year vesting period.

Net income for the three months ended March 31, 2024 decreased when compared with the comparable period of 2023, primarily due to higher interest expense.

The net interest margin as well as key noninterest income and expense items are discussed below.

Net Interest Income

The following tables show interest‑earning assets and interest‑bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net yield on average interest‑earning assets for the periods indicated.

Three Months Ended September 30,

Interest-earning assets:

Loans (1)(2)(4)(5)

Taxable securities (6)(7)

Nontaxable securities (1)(6)

Interest-bearing deposits

Total interest-earning assets

Interest-bearing liabilities:

Interest-bearing demand deposits

Savings deposits

Time deposits

Total interest-bearing liabilities

Net interest income and interest rate spread

Net yield on average interest‑earning assets

Nine Months Ended September 30,

Three Months Ended March 31,

Interest-earning assets:

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Net interest income and interest rate spread

Net yield on average interest‑earning assets

Net interest margin

Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a Federal income tax rate of 21%.

Included in interest income are loan fees of $56 and $82 for the three months ended September 30, 2023 and 2022, respectively.

Included interest income are loan fees of $162 and $195 for the nine months ended September 30, 2023 and 2022, respectively.

Included in interest income are loan fees of $48 and $40 for the three months ended March 31, 2024 and 2023, respectively.

Nonaccrual loans are included in average balances for yield computations.

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Includes restricted stock.

The 525 basis point increase in the Federal Reserve’s benchmark interest rate between March 2022 and July 2023 expanded the yield on earning assets when the three months and nine month periods ended September 30, 2023 and September 30, 202 are compared.

Many of the Company’s loans are adjustable with repricing dates in the future.

If rates remain at the current level or increase, repricing will continue to contribute to improved interest income.

The rapidity and magnitude of the Federal Reserve’s rate increases stimulated competition for deposits that resulted in higher cost of funds and compressed net interest margin when results for 2023 are compared with 2022.

Interest income and the yield on earning assets continues to grow in response to the Federal Reserve’s interest rate increases between March 2022 and July 2023.

Many of the Company’s loans are adjustable with repricing dates in the future.

If rates remain at the current level or do not decrease substantially, repricing will continue to contribute to improved interest income.

The competitive pressure for deposits that first began affecting the Company in the first quarter of 2023 and increased throughout 2023 has moderated, but continues to contribute to higher cost of funds and compressed net interest margin when results for the first quarter of 2024 are compared with the first quarter of 2023.

The Company continuously monitors its deposit base and funding costs.

Further information on the Company’s funds management and deposit strategy is discussed under the Deposits section below.

Noninterest Income

Three Months Ended September 30,

Percent Change

Service charges on deposits

Other service charges and fees

Credit and debit card fees, net

Gain on sale of mortgage loans

Total noninterest income

Nine Months Ended September 30,

Three Months Ended March 31,

Percent Change

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Gain on sale of mortgage loans

Gain on sale of investment

Loss on sale of securities

Gain on sale of securities

Total noninterest income

Noninterest income decreased slightly when the three months ended September 30, 2023 are compared with the three months ended September 30, 2022, but increased when the nine month periods are compared.

Information on key drivers follows.

Service charges on deposits include fees for non-sufficient funds and overdrafts.

During the third quarter of 2023, the Company modified its policy to exempt from charge small overdrafts on deposit accounts, and small items that overdraw deposit accounts.

The policy change is intended to address recent industry-wide regulatory comments and build goodwill with the Company’s deposit base.

The increase from 2022 in other service charges and fees reflected a loan transaction-related fee recorded during the three months ended September 30, 2023.

Lower volume in both credit and debit card activity and in mortgage origination decreased the related income, when results for 2023 are compared with those of 2022.

During the second quarter of 2023, the Company recognized a gain on the sale of its VISA Class B securities, as well as a gain of $1,037 included in BOLI income above from the settlement of a policy.

The Company also recorded a loss on the sale of securities during the second quarter.

Service charges on deposit accounts increased when the three months ended March 31, 2024 is compared with the comparable period of 2023, primarily due to fees generated from increased customer use of the Bank’s overdraft program.

Service charges on deposit accounts also include account maintenance fees, ATM fees and wire transfer fees.

Other service charges and fees decreased when the three months ended March 31, 2024 is compared with the comparable period of 2023 due to lower fees associated with letters of credit.

Credit and debit card fees, net, decreased when the three months ended March 31, 2024 are compared with the comparable period of 2023, due to higher processing costs.

Trust income increased due to higher volume and BOLI reflected normal increase, when the three months ended March 31, 2024 are compared with the comparable period of 2023.

Other income includes revenue from investment and insurance sales, adjustments to partnership basis and other miscellaneous components.

These areas fluctuate with market conditions and competitive factors.

Other income decreased for the three month period ended March 31, 2024 compared to the same period in 2023 due to a decrease in income from partnership interests.

The Company also recorded a gain on the sale of securities during the first quarter of 2023.

The sale of securities is discussed in more detail under the Securities section below.

Noninterest Expense

Three Months Ended September 30,

Percent Change

Salaries and employee benefits

Occupancy, furniture and fixtures

Data processing and ATM

FDIC assessment

Net costs of other real estate owned

Franchise taxes

Professional services

Other operating expenses

Total noninterest expense

Nine Months Ended September 30,

Three Months Ended March 31,

Percent Change

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Professional services

Merger-related expenses

Other operating expenses

Total noninterest expense

Noninterest expense increased when the three and nine months ended September 30, 2023 are compared with the same periods of 2022.

Information on key drivers follows.

The Company increased its base compensation during 2022 in order to attract and retain talent, which is reflected in 2023 salaries and employee benefits expense.

Occupancy, furniture and fixtures expense includes annual increases to lease expense based upon inflation measures and also higher depreciation and utilities expense.

Data processing and ATM expense reflects support for new products and investment in new technology.

FDIC insurance expense increased due to an increase in the FDIC’s general assessment rate from 2022 to 2023.

Professional services include legal and other expenses for the Company’s response to a threatened proxy contest from an activist shareholder during 2023, which amounted to $768 for the nine months ended September 30, 2023.

The Company does not anticipate any further material expense for this matter.

Pension non-service cost, which is included in other operating expense, increased $87 and $261, respectively, when three and nine month periods ended September 30, 2023 and September 30, 2022 are compared.

The expense is determined by actuarial calculations.

The Company’s effective tax rate was 16.72% and 18.43% for the three month periods ended September 30, 2023 and 2022, respectively.

For the nine months ended September 30, 2023 and 2022, the Company’s effective tax rate was 15.47% and 17.95%, respectively.

The Company’s effective tax rate is lower than the statutory rate of 21% due to investments in tax-advantaged loans and securities, and in 2023, the gain from settlement of a BOLI policy.

Noninterest expense increased when the three months ended March 31, 2024 are compared with the comparable period of 2023.

Key noninterest expense items include FDIC insurance, professional services and merger-related expenses.

FDIC insurance expense increased due to an increase in the FDIC’s general assessment rate.

Professional services include legal and other expenses for the Company’s response to a threatened proxy contest from an activist shareholder during 2023, which amounted to $441 for the three months ended March 31, 2023.

The Company also recognized expenses associated with its planned merger with Frontier Community Bank in 2024.

Included in various categories of noninterest expense are expenses to manage cybersecurity risk.

The cost of these measures was $89 for the three months ended March 31, 2024 and $133 for the three months ended March 31, 2023.

The Company’s effective tax rate was 19.24% and 17.30% for the three month periods ended March 31, 2024 and 2023, respectively.

The increase in the Company’s effective tax rate was primarily due to recognition of non-deductible merger-related expenses.

Asset Quality

Key indicators of the Company’s asset quality are presented in the following table.

September 30, 2023

September 30, 2022

Key indicators of the Company’s asset quality are presented in the following table.

March 31, 2024

March 31, 2023

December 31, 2023

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Ratio of ACLL to nonperforming loans

The Company adopted the CECL model on January 1, 2023, resulting in an increase to the Allowance for Credit Losses for Loans (“ACLL”) of $2,342, from $8,225 at December 31, 2022.

For information on the Company’s policies on the ACLL, please refer to Note 1:

General of this Form 10-Q.

For information on the Company’s application of previous GAAP in determining the allowance for loan losses, please refer to the Company’s 2022 Form 10-K, Note 1:

For information on the Company’s policies on the ACLL, please refer to the Company’s 2023 Form 10-K, Note 1:

Summary of Significant Accounting Policies.

The Company’s risk analysis under the CECL model at September 30, 2023 determined an ACLL of $10,181, or 1.20% of loans net of unearned income and deferred fees and costs.

The Company’s risk analysis as of March 31, 2024 determined an ACLL of $9,055, or 1.05% of loans net of unearned income and deferred fees and costs.

This compares with an allowance of $9,094 as of December 31, 2023, or 1.06% of loans.

The allowance for loan losses at September 30, 2022 was $8,207 or 0.96% of loans.

To determine the appropriate level of the ACLL, the Company considers credit risk for individually evaluated loans and for groups of loans evaluated collectively.

Individually Evaluated Loans

Individually evaluated loans were $10,658 as of September 30, 2023, an increase from $3,032 as of December 31, 2022.

The increase was due to a change in the way that the Company identifies individually evaluated loans under CECL.

Please refer to Note 1:

General for information on the Company’s identification of individually evaluated loans.

As of September 30, 2023, one individually evaluated loan was collateral dependent but was adequately collateralized and did not result in an individual allocation.

The remaining individually evaluated loans were measured using the DCF method, resulting in an allocation of $875.

Individually evaluated loans were $10,565 as of March 31, 2024, a slight increase from $10,544 as of December 31, 2023.

As of March 31, 2024, five individually evaluated loans were collateral dependent but were adequately collateralized and did not result in an individual allocation.

The remaining individually evaluated loans were measured using the discounted cash flow method, resulting in an allocation of $568.

Collectively Evaluated Loans

Collectively evaluated loans totaled $838,759, with an ACLL of $9,306 as of September 30, 2023.

Collectively evaluated loans totaled $853,526, with an ACLL of $8,487 as of March 31, 2024.

At December 31, 2023, collectively evaluated loans totaled $846,631, with an allowance of $8,522.

Collectively evaluated loans are divided into pools based upon risk characteristics.

Utilizing historical loss information, the Company calculates a probability of default and loss given default for each pool, which is adjusted for a reasonable and supportable forecast.

Loan pools are allocated additional loss estimates based upon the Company’s analysis of qualitative factors including economic measures, asset quality indicators, loan characteristics, and changes to internal Company policies and management.

Collectively evaluated loans are divided into classes based upon risk characteristics.

Utilizing historical loss information and peer data, the Company calculates a probability of default and loss given default for each class, which is adjusted for a reasonable and supportable forecast.

Cash flow projections based on each loan’s contractual terms are modified by the adjusted probability of default and loss given default for its class.

Loan classes are allocated additional loss estimates based upon the Company’s analysis of qualitative factors including economic measures, asset quality indicators, loan characteristics, and changes to internal Company policies and management.

Reasonable and Supportable Forecast

To estimate cash flows, the Company adjusted its historical loss information with a forecast of the national unemployment rate.

The forecast applied at September 30, 2023 projects that unemployment will rise over the next 12 months, which increases the loss estimate.

The Company determined that 12 months represents a reasonable and supportable forecast period as of September 30, 2023, and set a period of 12 months to revert to historical losses on a straight-line basis.

The Company applies national unemployment forecasts to project cash flows.

The Company determined that 12 months represents a reasonable and supportable forecast period as of March 31, 2024, and set a period of 12 months to revert to historical losses on a straight-line basis.

The forecast applied at March 31, 2024 projects that unemployment will rise over the next 12 months, to a higher level than the forecast applied as of December 31, 2023.

The higher unemployment forecast increased the required level of the ACLL when March 31, 2024 is compared with December 31, 2023.

Qualitative Factors:

1 unchanged sentence

Higher bankruptcy filings indicate heightened credit risk and increase the ACLL, while lower bankruptcy filings have a beneficial impact on credit risk.

Compared with data available at December 31, 2022, business and personal bankruptcy filings increased.

Residential vacancy rates and housing inventory impact the Company’s residential construction customers and the consumer real estate market.

Compared with data available at December 31, 2023, business bankruptcy filings decreased slightly while personal bankruptcy filings increased slightly.

Residential vacancy rates and housing inventory impact the Company’s residential construction customers and the consumer real estate market.

Higher levels increase credit risk.

The residential vacancy rate available at September 30, 2023 improved from the data incorporated into the December 31, 2022 calculation, resulting in a lower allocation.

Housing data available as of September 30, 2023 showed higher inventory than at December 31, 2022, resulting in a higher allocation.

The residential vacancy rate available at March 31, 2024 remained at the same level as the data incorporated into the December 31, 2023 calculation.

Housing data available as of March 31, 2024 showed lower inventory than at December 31, 2023, resulting in a lower allocation.

Qualitative Factors:

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Increases in past due loans indicate heightened credit risk.

Accruing loans past due 30-89 days were 0.14% of total loans at September 30, 2023, a decrease from 0.16% at December 31, 2022.

Accruing loans past due 30-89 days were 0.14% of total loans at March 31, 2024, a decrease from 0.19% at December 31, 2023.

Qualitative Factors:

1 unchanged sentence

The Company considers other factors that impact credit risk, including the interest rate environment, the competitive, legal and regulatory environments, changes in lending policies and loan review, changes in lending management, and high risk loans.

The interest rate environment impacts variable rate loans.

The Federal Reserve’s aggressive interest rate increases beginning in March 2022 have increased payments on certain adjustable rate loans, which may increase credit risk.

The interest rate environment affects variable rate loans.

The Federal Reserve’s interest rate increases between March 2022 and July 2023 have increased and are expected to continue to increase payments on variable rate loans as they reach contractual repricing dates.

Higher payments may increase credit risk.

The Company allocates additional reserve each time the Federal Reserve increases rates.

After the rate increase has been in effect for one year, the allocation may be removed under the assumption that the impact of the change has become integrated to the portfolio.

For the calculation as of September 30, 2023, the Company removed allocations for interest rate increases that occurred between March and September 2022.

For the calculation as of March 31, 2024, the Company opted to maintain the allocation at December 31, 2023 to account for uncertainty surrounding the impact of loans that will reprice in the future.

The competitive, legal and regulatory environments were evaluated for changes that would affect credit risk.

2 unchanged sentences

The legal and regulatory environments also remain in a similar posture to December 31, 2023.

Lending policies, loan review procedures and management’s experience influence credit risk.

Except for the adoption of CECL, policies and procedures remain similar to those at December 31, 2022.

The Company added an allocation for the retirement of a long term credit administration manager.

Lending policies, loan review procedures and management’s experience influence credit risk.

Policies and procedures remain similar to those at December 31, 2023.

Levels of high risk loans are considered in the determination of the level of the ACLL.

A decrease in the level of high risk loans within a class decreases the required allocation for the loan class, and an increase in the level of high risk loans within a class increases the required allocation for the loan class.

Total high risk loans increased from the level at December 31, 2022, resulting in an increased allocation.

Total high risk loans decreased from the level at December 31, 2023, resulting in a lower allocation.

Unallocated Surplus

The unallocated surplus as of September 30, 2023 is $485, or 5.00% in excess of the calculated requirement.

The unallocated surplus as of March 31, 2024 is $381, or 4.39% in excess of the calculated requirement.

The unallocated surplus at December 31, 2023 was $350, or 4.00% in excess of the calculated requirement.

The surplus provides some mitigation of current economic uncertainty that may impact credit risk.

The calculation of the appropriate level for the ACLL incorporates analysis of multiple factors and requires management’s prudent and informed judgment.

The Company augmented the calculated requirement with an unallocated surplus.

Based on analysis of historical indicators, asset quality and economic factors, management believes the level of ACLL is reasonable for the credit risk in the loan portfolio as of September 30, 2023.

Based on analysis of historical indicators, asset quality and economic factors, management believes the level of ACLL is reasonable for the credit risk in the loan portfolio as of March 31, 2024.

ACL on Unfunded Commitments

The ACL on unfunded commitments as a percentage of unfunded commitments decreased from 0.16% as of December 31, 2023 to 0.14% as of March 31, 2024 primarily due to lower loss rates derived from the calculations for the ACLL.

(Recovery of) Provision for Credit Losses

The calculation of the ACLL resulted in a recovery of previously recognized provision of $401 for the three month period ended September 30, 2023, compared with a provision of $252 for the three month period ended September 30, 2022.

The recovery for the nine month period ended September 30, 2023 was $389, compared with provision of $696 for the nine months ended September 30, 2022.

The recovery in 2023 reflected reversal of allocations for interest rate increases taken in 2022, forecast projections for lower unemployment than that forecasted at December 31, 2022, a slight decrease in total loans, and changes in factors detailed in “Asset Quality”

The Company recorded a provision for credit losses on loans of $5 and a recovery of credit losses on unfunded commitments of $15 for the three months ended March 31, 2024, compared with a provision for credit losses on loans of $2 for the three months ended March 31, 2023.

Loan Modifications

4 unchanged sentences

The Company reviews modifications to determine whether the borrower is experiencing financial difficulty, including indicators of default, bankruptcy, going concern, insufficient projected cash flows and inability to obtain financing from other sources.

If a modification is made to a borrower experiencing financial difficulty, the loan’s risk rating is downgraded to special mention or classified, resulting in individual evaluation for the ACL.

During the nine months ended September 30, 2023, the Company modified one loan totaling $6,396 for a borrower who was experiencing financial difficulty.

The loan was individually evaluated for the ACLL as of September 30, 2023.

If a modification is made to a borrower experiencing financial difficulty, the loan’s risk rating is downgraded to special mention or classified, resulting in individual evaluation for the ACL.

During the three months ended March 31, 2024, the Company modified two loans totaling $6,403 for borrowers who were experiencing financial difficulty.

Both loans were individually evaluated for the ACLL in previous periods and as of March 31, 2024, using the discounted cash flow methodology.

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

Modifications for Borrowers Who Were Not Experiencing Financial Difficulty

During the three and nine month periods ended September 30, 2023 and 2022, the Company modified loans in the normal course of business for borrowers who were not experiencing financial difficulty.

During the three months ended September 30, 2023, the Company modified 186 loans totaling $23,054.

During the nine months ended September 30, 2023, the Company modified 581 loans totaling $65,089.

During the three months ended September 30, 2022, the Company provided 187 modifications to loans totaling $27,389.

For the nine months ended September 30, 2022, the Company provided 652 modifications to loans totaling $101,347.

Other Real Estate Owned

As of September 30, 2023, OREO of $662 is comprised of one construction property.

One loan secured by real estate of $7 was in process of foreclosure, which may increase OREO in future quarters.

It is not possible to accurately predict the future total of OREO because property sold at foreclosure may be acquired by third parties and OREO properties are regularly marketed and sold.

The Company continues to monitor risk levels within the loan portfolio.

If the Company’s market experiences an economic downturn, real estate values could decline and foreclosure activity could increase.

A decline in value may result in loss recognition for OREO, while an increase in foreclosures may increase the number of OREO properties.

During the three month periods ended March 31, 2024 and 2023, the Company modified loans in the normal course of business for borrowers who were not experiencing financial difficulty.

During the three months ended March 31, 2024, the Company modified 216 loans totaling $22,322.

During the three months ended March 31, 2023, the Company provided 201 modifications to loans totaling $30,508.

Key Assets and Liabilities

NBI’s key assets and liabilities and their change from December 31, 2022 are shown in the following table.

September 30, 2023

NBI’s key assets and liabilities and their change from December 31, 2023 are shown in the following table.

March 31, 2024

December 31, 2023

1 unchanged sentence

Interest-bearing deposits

Securities available for sale, at fair value

Securities available for sale, at fair value and restricted stock

Average Balances

Year-to-date daily averages for the major balance sheet categories are as follows:

September 30, 2023

March 31, 2024

December 31, 2023

2 unchanged sentences

Securities available for sale, at fair value

Liabilities and stockholders ’

Liabilities and stockholders ’ equity

Noninterest-bearing demand deposits

2 unchanged sentences

Time deposits

Stockholders’

Increased competition resulted in decreased customer deposits and reduced the funds available for the Company to invest in interest bearing deposits.

Changes in securities, loans, deposits and stockholders’

equity are discussed below.

September 30, 2023

Stockholders’ equity

Increased customer deposits resulted in increased investment in interest bearing deposit assets.

Changes in securities, loans, deposits and stockholders’ equity are discussed below.

March 31, 2024

December 31, 2023

1 unchanged sentence

Amortized cost

Unrealized loss

Unrealized loss, net

Securities available for sale, at fair value

As part of its interest rate risk management, the Company periodically evaluates its position in financial assets.

During the first half of 2023, the Company strategically selected and sold securities with an amortized cost of $46,850, realizing a loss of $3,332.

The strategy for the sales prioritized enhancement of long-term earnings.

Though not a primary objective, proceeds from the sales also bolstered liquidity.

There were no sales of securities during 2022.

Securities available for sale are presented at fair value as of each reporting date.

Most of the Company’s securities were purchased during periods prior to the Federal Reserve’s interest rate increases that began in March of 2022.

The fair value of bonds moves inversely to interest rate changes, as well as expectations of interest rate changes.

The Company’s Asset Liability Management Committee is closely monitoring interest rate risk on all of the Company’s financial assets and liabilities.

At this time, there are no credit risk concerns on securities available for sale and no associated ACL.

The fair value of bonds moves inversely to interest rate changes and expectations of interest rate changes.

Most of the Company’s securities were purchased during periods prior to the Federal Reserve’s interest rate increases that began in March of 2022.

The Company’s analysis of the securities portfolio determined no identifiable credit risk as of March 31, 2024 and no ACL has been recorded.

Please refer to Note 1:

General and Note 3:

General and Summary of Significant Accounting Policies and Note 3:

Securities for additional information.

September 30, 2023

March 31, 2024

December 31, 2023

7 unchanged sentences

Loans, net of unearned income and deferred fees and costs

Loans decreased slightly from December 31, 2022, as higher interest rates decreased demand.

The Company is positioned to continue to make every loan that meets its underwriting standards.

September 30, 2023

The higher interest rate environment continues to restrain loan demand.

The Company is positioned to make every loan that meets its underwriting standards.

March 31, 2024

December 31, 2023

1 unchanged sentence

Interest-bearing demand deposits

Saving deposits

Savings deposits

Time deposits

Total deposits

Competition for deposits began impacting the Company during the latter part of 2022 and has continued during 2023.

The Company implemented competitive pricing on CDs, raised offering rates on other deposits and negotiated with depositors to strengthen the deposit base, at costs well below the cost of borrowing.

The Company’s depositors within its market area are diverse, including individuals, businesses and municipalities.

The Company does not have any brokered deposits.

Depositors are insured up to the FDIC maximum of $250 thousand.

Municipal deposits, which account for approximately 24% of the Company’s deposits, have additional security from bonds pledged as collateral, in accordance with state regulation.

Of the Company’s non-municipal deposits, approximately 20% are uninsured.

Municipal deposits, which account for approximately 25% of the Company’s deposits, have additional security from bonds pledged as collateral, in accordance with state regulation.

Of the Company’s non-municipal deposits, approximately 21.5% are uninsured.

Capital Resources

September 30, 2023

March 31, 2024

December 31, 2023

2 unchanged sentences

Accumulated other comprehensive loss

Total stockholders’

The decrease in stockholders’

equity reflects an increase in the unrealized loss on securities available for sale, the adoption of CECL at January 1, 2023, payment of a special one-time cash dividend and the Company’s normal semi-annual dividend, partially offset by net income for the nine months ended September 30, 2023.

The Company’s stockholders approved a new equity compensation plan at the annual meeting held in May 2023.

Under the plan, part of the June 2023 semi-annual retainer for non-employee directors was paid in a restricted stock grant.

The equity compensation plan aims to align decision making with long-term value creation for the Company’s shareholders.

The Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement, which exempts bank holding companies with less than $3 billion in assets from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements.

Total stockholders’ equity

The decrease in stockholders’ equity reflects an increase in the unrealized loss on securities available for sale, partially offset by net income for the three months ended March 31, 2024.

NBB is subject to various capital requirements administered by banking agencies, including an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments.

Risk-based capital ratios are calculated in compliance with OCC rules based on the Basel III Capital Rules.

The Bank’s ratios are well above the required minimums as of September 30, 2023.

The Bank’s ratios are well above the required minimums as of March 31, 2024.

Risk based capital ratios for NBB are shown in the following tables.

7 unchanged sentences

Leverage Ratio

Liquidity measures the Company’s ability to meet its financial commitments at a reasonable cost.

Demands on the Company’s liquidity include funding additional loan demand and accepting withdrawals of existing deposits.

Liquidity measures the Company’s ability to meet its financial commitments at a reasonable cost.

Demands on the Company’s liquidity include funding additional loan demand and accepting withdrawals of existing deposits.

The Company has diverse liquidity sources, including customer and purchased deposits, customer repayments of loan principal and interest, sales, calls and maturities of securities, Federal Reserve discount window borrowing, short-term borrowing, and FHLB advances.

Periodically during 2023, the Company accessed FHLB borrowings to reinforce liquidity.

The advances were fully repaid, due to the success of the Company’s deposit strategy.

As of September 30, 2023, the Company did not have purchased deposits, discount window borrowings or short-term borrowings.

As of March 31, 2024, the Company had $308,943 of borrowing capacity from the FHLB and an unsecured federal funds line of credit with an unaffiliated bank of $10,000, with no amounts advanced against those lines.

Additionally, the Company had $180,839 of unused capacity at the Federal Reserve Bank discount window.

Periodically during 2023, the Company accessed FHLB borrowings.

The advances were fully repaid, due to the success of the Company’s deposit strategy.

As of March 31, 2024, the Company did not have purchased deposits, discount window borrowings or short-term borrowings.

The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters.

3 unchanged sentences

The Company monitors public funds pledging requirements and unpledged available for sale securities accessible for liquidity needs.

Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve discount window.

As of September 30, 2023, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve discount window.

As of September 30, 2023, the Company had $301,515 of borrowing capacity from the FHLB and an unsecured federal funds line of credit with an unaffiliated bank of $10,000, with no amounts advanced against those lines.

Additionally, the Company had $176,210 of unused capacity at the Federal Reserve Bank discount window.

Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve discount window.

As of March 31, 2024, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve discount window.

The Company monitors factors that may increase its liquidity needs.

Some of these factors include deposit trends, large depositor activity, maturing deposit promotions, interest rate sensitivity, maturity and repricing timing gaps between assets and liabilities, the level of unfunded loan commitments and loan growth.

As of September 30, 2023, the Company’s liquidity is sufficient to meet projected trends.

As of March 31, 2024, the Company’s liquidity is sufficient to meet projected trends.

To monitor and estimate liquidity levels, the Company performs stress testing under varying assumptions on credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows.

The Company’s Contingency Funding Plan sets forth avenues for rectifying liquidity shortfalls.

As of September 30, 2023, the analysis indicated adequate liquidity under the tested scenarios.

The Company’s Contingency Funding Plan sets forth avenues for rectifying liquidity shortfalls.

As of March 31, 2024, the analysis indicated adequate liquidity under the tested scenarios.

The Company utilizes several other strategies to maintain sufficient liquidity.

Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s internally-set target range.

As of September 30, 2023, the loan to deposit ratio was 57.95%.

Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s internally-set target range.

As of March 31, 2024, the loan to deposit ratio was 56.15%.

The investment strategy takes into consideration the term of the investment, and securities in the available for sale portfolio are laddered based upon projected funding needs.

11 unchanged sentences

The Company has determined that its risk in this area is not significant because of a low volume of secondary market mortgage loans and high underwriting standards.

The Company estimates a potential loss reserve for recourse provisions that is not material as of September 30, 2023.

The Company estimates a potential loss reserve for recourse provisions that is not material as of March 31, 2024.

To date, no recourse provisions have been invoked.

If funds were needed, the Company would access the same sources as noted above for funding lines and letters of credit.

There were no material changes in off-balance sheet arrangements during the nine months ended September 30, 2023.

There were no material changes in off-balance sheet arrangements during the three months ended March 31, 2024.

Contractual Obligations

The Company had no finance lease or purchase obligations and no long-term debt at September 30, 2023.

The Company had no finance lease or purchase obligations and no long-term debt at March 31, 2024.

Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4.  

Controls and Procedures

The Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report.

Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of September 30, 2023 to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended September 30, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Because of the inherent limitations in all control systems, the Company believes that no system of controls, no matter how well designed and operated, can provide absolute assurance that all control issues have been detected.

Other Information

Legal Proceedings

There are no pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis