What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-15 · 235 added, 99 removed, 324 unchanged (51% of the section changed)

2 unchanged sentences

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.

Please refer to the financial statements and other information included in this report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (the "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.

28 unchanged sentences

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.

On June 1, 2024, the Company and the Bank acquired Frontier Community Bank (“FCB”).

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

3 unchanged sentences

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 2023 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.

15 unchanged sentences

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 has designated the following policies as critical:

those governing the allowance for credit losses, goodwill, the pension plan, core deposit intangibles and loans acquired in a business combination.

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

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 allowance for credit losses, goodwill and the pension plan, please refer to the Company’s 2023 Form 10-K, Note 1:

Summary of Significant Accounting Policies.

For information on policies governing core deposit intangibles and loans acquired in a business combination, please refer to Note 1:

General and Summary of Significant Accounting Policies of this Form 10-Q report.

Acquisition of Frontier Community Bank

On June 1, 2024, the Company and the Bank acquired FCB, a Virginia chartered commercial bank headquartered in Waynesboro, Virginia.

FCB’s results of operations are included in the Company’s consolidated results since the Acquisition Date, and accordingly the Company’s second quarter and first half of 2024 results reflect increased levels of average balances, net interest income, and expense compared to the prior quarter and first half of 2024 results.

The acquisition was made pursuant to an Agreement and Plan of Merger, dated January 23, 2024, by and among the Company, the Bank and FCB under which FCB merged with and into the Bank (the “FCB Merger Agreement”).

Pursuant to the terms of the FCB Merger Agreement, at the effective time of the acquisition, each share of FCB common stock was converted into either $14.48 in cash or 0.4250 shares of the Company’s common stock, with FCB shareholders having the ability to elect the merger consideration to be received, subject to the allocation and proration procedures set forth in the FCB Merger Agreement.

The Company issued 464,855 shares of common stock and paid $2,050 to former FCB shareholders in the acquisition.

As a result of the transaction, the Bank expanded its operations into the Waynesboro, Staunton and Lynchburg, Virginia markets.

Please refer to Note 2:

Business Combination in Part I, Item 1 of this report for additional information of the acquisition of FCB.

Non-GAAP Financial Measures

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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 March 31,

Three Months Ended June 30,

Net Interest Income, FTE

6 unchanged sentences

Net interest margin

Further detail on the net interest margin is provided under the Net Interest Income discussion.

Six Months Ended June 30,

Net Interest Income, FTE

Interest income (GAAP)

FTE adjustment

Interest income, FTE (non-GAAP)

Interest expense (GAAP)

Net interest income, FTE (non-GAAP)

Average balance of interest-earning assets

Net interest margin

Efficiency Ratio

2 unchanged sentences

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

Three Months Ended March 31,

Three Months Ended June 30,

Noninterest expense (GAAP)

merger-related expense

contract termination expense (1)

proxy-related expense (2)

1 unchanged sentence

Noninterest income (GAAP)

realized securities gain, net

realized securities loss, net

gain on sale of investment (3)

gain on BOLI settlement

Adjusted noninterest income (non-GAAP)

2 unchanged sentences

Efficiency ratio

Six Months Ended June 30,

Noninterest expense (GAAP)

merger-related expense

contract termination expense (1)

proxy-related expense (2)

Adjusted noninterest expense (non-GAAP)

Noninterest income (GAAP)

realized securities loss, net

gain on sale of investment (3)

gain on BOLI settlement

Adjusted noninterest income (non-GAAP)

Net interest income, FTE (non-GAAP)

Total income for efficiency ratio (non-GAAP)

Efficiency ratio

Contract termination expense was recorded to reflect the Company’s notification to a vendor that it intends to end its relationship in 2025.

Included in professional services in the Consolidated Statements of Income.

Sale of VISA Class B shares.

Adjusted Return on Average Assets and Adjusted Return on Average Equity

2 unchanged sentences

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)

Three Months Ended June 30,

Net (loss) income per 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

Realized securities loss, net of tax of $702 for the period ended June 30, 2023

Proxy-related expense, net of tax of $72 for the period ended June 30, 2023

Gain on sale of investment, net of tax of ($624) for the period ended June 30, 2023

Gain on BOLI settlement

ACL provision, net of tax of $271 for the period ended June 30, 2024 (1)

Merger-related expense, net of tax of $411 for the period ended June 30, 2024

Contract termination expense, net of tax of $36 for the period ended June 30, 2024

Total non-annualized items

7 unchanged sentences

Adjusted return on average equity (non-GAAP)

Six Months Ended June 30,

Net income per GAAP

items not annualized:

Partnership income net of tax of ($35) and ($44) for the periods ended June 30, 2024 and 2023, respectively

Realized securities gain, net of tax of $700 for the period ended June 30, 2023

Proxy-related expense, net of tax of $165 for the period ended June 30, 2023

Gain on sale of investment, net of tax of ($624) for the period ended June 30, 2023

Gain on BOLI settlement

ACL provision, net of tax of $271 for the period ended June 30, 2024 (1)

Merger-related expense, net of tax of $411 for the period ended June 30, 2024

Contract termination expense, net of tax of $36 for the period ended June 30, 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)

Upon acquisition of FCB, the Company recorded a provision for credit losses of $1,290 to establish an ACL for non-PCD loans.

Performance Summary

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

Three Months Ended March 31,

Three Months Ended June 30,

Return on average assets

2 unchanged sentences

Adjusted return on average equity (1)

Basic diluted earnings per common share

Fully diluted earnings per common share (2)

Basic net (loss) income per common share

Fully diluted net (loss) income per common share (2)

Net interest margin (1)

Efficiency ratio (1)

Six Months Ended

June 30, 2024

Six Months Ended

June 30, 2023

Twelve Months Ended

December 31, 2023

Return on average assets

Adjusted return on average assets (1)

Return on average equity

Adjusted return on average equity (1)

Basic net income per common share

Fully diluted net income per common share (2)

Net interest margin (1)

Efficiency ratio (1)

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.

As of June 30, 2024, the Company had 4,839 unvested shares of restricted stock outstanding with a one year vesting period.

Net income for the three and six months ended June 30, 2024 decreased when compared with the comparable periods of 2023, due to net interest margin compression, merger related expenses and contract termination expense.

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

1 unchanged sentence

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 interest margin for the periods indicated.

Three Months Ended March 31,

Three Months Ended June 30,

Interest-earning assets:

2 unchanged sentences

Nontaxable securities (1)(6)

Federal funds sold

Interest-bearing deposits

7 unchanged sentences

Net interest margin

Six Months Ended June 30,

Interest-earning assets:

Loans (1)(3)(4)(5)

Taxable securities (6)(7)

Nontaxable securities (1)(6)

Federal funds sold

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 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 $48 and $40 for the three months ended March 31, 2024 and 2023, respectively.

Included in interest income are loan fees of $55 and $66 for the three months ended June 30, 2024 and 2023, respectively.

Included in interest income are loan fees of $103 and $106 for the six months ended June 30, 2024 and 2023, respectively.

Nonaccrual loans are included in average balances for yield computations.

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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.

If rates remain at the current level or do not decrease substantially, the Company expects that 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 three and six months ended June 30, 2024 are compared with the same periods of 2023.

The Company continuously monitors its deposit base and funding costs.

1 unchanged sentence

Noninterest Income

Three Months Ended March 31,

Three Months Ended June 30,

Percent Change

2 unchanged sentences

Credit and debit card fees, net

Gain on sale of investment

Gain on sale of mortgage loans

Gain on sale of securities

Realized securities loss, net

Total noninterest income

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.

Six Months Ended June 30,

Percent Change

Service charges on deposits

Other service charges and fees

Credit and debit card fees, net

Gain on sale of investment

Gain on sale of mortgage loans

Realized securities loss, net

Total noninterest income

Service charges on deposit accounts increased when the three and six months ended June 30, 2024 are compared with the comparable periods of 2023, due to changes in fee structure.

Other service charges and fees decreased when the three and six months ended June 30, 2024 are compared with the comparable periods of 2023, due to lower fees associated with letters of credit.

Credit and debit card fees, net, increased when the three months ended June 30, 2024 are compared with the comparable period of 2023, due an increase in customer use.

When the six months ended June 30, 2024 and June 30, 2023 are compared, credit and debit card fees, net, decreased due to higher processing expense.

Trust income increased due to higher volume, when the three and six months ended June 30, 2024 are compared with the comparable periods of 2023.

BOLI income decreased when compared over the same periods due to the settlement of a policy in the second quarter of 2023.

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

During 2023, the Company recognized an incentive payment from a vendor.

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 Company also recorded a gain on the sale of an investment and a loss on the sale of securities during the second quarter of 2023.

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

Noninterest Expense

Three Months Ended March 31,

Three Months Ended June 30,

Percent Change

3 unchanged sentences

FDIC assessment

Intangible asset amortization

Net costs of other real estate owned

2 unchanged sentences

Merger-related expenses

Contract termination expenses

Other operating expenses

Total noninterest expense

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.

Six Months Ended June 30,

Percent Change

Salaries and employee benefits

Occupancy, furniture and fixtures

Data processing and ATM

FDIC assessment

Intangible asset amortization

Net costs of other real estate owned

Franchise taxes

Professional services

Merger-related expenses

Contract termination expenses

Other operating expenses

Total noninterest expense

Noninterest expense increased when the three and six months ended June 30, 2024 are compared with the comparable periods of 2023.

Key noninterest expense items include occupancy, furniture and fixtures, professional services, merger-related expenses, and contract termination expenses.

Occupancy, furniture and fixtures expense increased when compared with 2023 due to receipt of a one-time insurance reimbursement during 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 $327 and $768 for the three and six months ended June 30, 2023, respectively.

During 2024, the Company recorded expenses associated with its acquisition of FCB, including executive and employee severance benefits and legal and consulting fees.

During the second quarter of 2024, the Company recorded a contract termination expense when it gave formal notification to a vendor that it intends to end its relationship in 2025.

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.

The cost of these measures was $94 for the three months ended June 30, 2024 and $150 for the three months ended June 30, 2023.

For the six months ended June 30, 2024, the total cybersecurity expense was $184 compared to $283 for the six months ended June 30, 2023.

The Company’s income tax benefit for the three months ended June 30, 2024 was $177.

For the three months ended June 30, 2023, the Company recorded an income tax expense of $540.

For the six months ended June 30, 2024, the Company’s income tax expense was $341 and effective tax rate was 15.44%.

For the six months ended June 30, 2023, the Company’s income tax expense was $1,488 and effective tax rate was 15.00%.

A significant portion of the merger related expense was not tax deductible, resulting in an increase to the Company’s effective tax rate for 2024.

During 2023, the Company recognized a gain on the settlement of a BOLI policy that was not taxable.

Asset Quality

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

March 31, 2024

March 31, 2023

June 30, 2024

June 30, 2023

December 31, 2023

8 unchanged sentences

Summary of Significant Accounting Policies.

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.

The Company’s risk analysis as of June 30, 2024 determined an ACLL of $10,502, or 1.06% 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.

1 unchanged sentence

Individually Evaluated Loans

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.

Individually evaluated loans were $13,471 as of June 30, 2024, a slight increase from $10,544 as of December 31, 2023.

As of June 30, 2024, four 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 $644.

Collectively Evaluated Loans

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

Collectively evaluated loans totaled $976,427, with an ACLL of $9,858 as of June 30, 2024.

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

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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.

The Company determined that 12 months represents a reasonable and supportable forecast period as of June 30, 2024, and set a period of 12 months to revert to historical losses on a straight-line basis.

The forecast applied at June 30, 2024 projects that unemployment will rise over the next 12 months, to a slightly higher level than the forecast applied as of December 31, 2023.

The higher unemployment forecast increased the required level of the ACLL when June 30, 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, 2023, business bankruptcy filings decreased slightly while personal bankruptcy filings increased slightly.

Compared with data available at December 31, 2023, business bankruptcy filings remained the same 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 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.

The residential vacancy rate available at June 30, 2024 increased from the data incorporated into the December 31, 2023 calculation.

Housing data available as of June 30, 2024 showed higher inventory than at December 31, 2023, resulting in a higher allocation.

Qualitative Factors:

2 unchanged sentences

Increases in past due loans indicate heightened credit risk.

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.

Accruing loans past due 30-89 days were 0.25% of total loans at June 30, 2024, an increase 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 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.

The interest rate environment impacts 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 the Company’s variable rate loans as they reach contractual repricing dates.

Higher payments may increase credit risk.

1 unchanged sentence

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 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.

As of June 30, 2024, the Company reduced its allocation from the December 31, 2023 allocation to reflect improvement in inflationary pressures.

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

4 unchanged sentences

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

The Company added an allocation to account for absorption of FCB acquired loans and integration of FCB lenders.

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 decreased from the level at December 31, 2023, resulting in a lower allocation.

Total high risk loans increased from the level at December 31, 2023.

Unallocated Surplus

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

The unallocated surplus as of June 30, 2024 is $400, or 3.96% in excess of the calculated requirement.

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

2 unchanged sentences

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 March 31, 2024.

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 June 30, 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 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.

The ACL on unfunded commitments was $251, or 0.14% of unfunded commitments as of June 30, 2024.

The ACL on unfunded commitments was $259, or 0.16% as of December 31, 2023..

Provision for (Recovery of) Credit Losses

The provision for credit losses represents charges to earnings necessary to maintain an adequate allowance.

The adequacy of the ACLL is reviewed quarterly and adjustments are made as considered necessary.

The Company recorded a provision for credit losses on loans of $1,307 and a recovery of credit losses on unfunded commitments of $15 for the six months ended June 30, 2024, compared with provision for credit losses on loans of $12 for the six months ended June 30, 2023 and a recovery of $9 for unfunded commitments.

Upon acquisition of FCB in June 2024, the Company recorded a provision for credit losses of $1,290 to establish an allowance on non-PCD loans.

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 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.

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 ACLL.

During the three months ended June 30, 2024, the Company modified one loan totaling $7 for a borrower who was experiencing financial difficultly.

During the six months ended June 30, 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 June 30, 2024, using the discounted cash flow methodology.

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

The loan was individually evaluated using the discounted cash flow methodology for the ACLL as of June 30, 2023.

Modifications for Borrowers Who Were Not Experiencing Financial Difficulty

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.

During the three and six months ended June 30, 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 June 30, 2024, the Company modified 216 loans totaling $21,704.

During the six months ended June 30, 2024, the Company modified 432 loans totaling $43,936.

During the three months ended June 30, 2023, the Company provided 194 modifications to loans totaling $11,528.

For the six months ended June 30, 2023, the Company provided 395 modifications to loans totaling $42,036.

Key Assets and Liabilities

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

March 31, 2024

June 30, 2024

December 31, 2023

4 unchanged sentences

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

March 31, 2024

June 30, 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

Liabilities and stockholders ’ equity

6 unchanged sentences

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

March 31, 2024

June 30, 2024

December 31, 2023

6 unchanged sentences

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.

The Company’s analysis of the securities portfolio determined no identifiable credit risk as of June 30, 2024 and no ACL has been recorded.

Please refer to Note 1:

General and Summary of Significant Accounting Policies and Note 3:

Securities for additional information.

March 31, 2024

General and Summary of Significant Accounting Policies of the 2023 Form 10-K and Note 4:

Securities in Part I, Item 1 of this report for additional information on the securities portfolio.

June 30, 2024

December 31, 2023

7 unchanged sentences

Loans, net of unearned income and deferred fees and costs

The increase from December 31, 2023 reflects the acquisition of FCB.

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

June 30, 2024

December 31, 2023

9 unchanged sentences

Of the Company’s non-municipal deposits, approximately 21% are uninsured.

The Company acquired FHLB borrowings in the FCB merger, which were repaid upon completion of the merger.

Capital Resources

March 31, 2024

June 30, 2024

December 31, 2023

3 unchanged sentences

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.

The increase in stockholders’ equity reflects the stock consideration issued to acquire FCB.

The Company paid dividends to shareholders in June 2024.

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.

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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 March 31, 2024.

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

The Bank’s ratios are well above the required minimums as of June 30, 2024.

Capital ratios for NBB are shown in the following tables.

Capital Minimum

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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.

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.

As of June 30, 2024, the Company had $297,917 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 $180,278 of unused capacity at the Federal Reserve Bank discount window.

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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.

As of June 30, 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.

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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 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.

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

As of June 30, 2024, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve Bank 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 March 31, 2024, the Company’s liquidity is sufficient to meet projected trends.

As of June 30, 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 March 31, 2024, the analysis indicated adequate liquidity under the tested scenarios.

As of June 30, 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 March 31, 2024, the loan to deposit ratio was 56.15%.

As of June 30, 2024, the loan to deposit ratio was 60.14%.

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.

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In the event of a sudden and substantial draw on these lines, the Company would be able to access multiple options, including its lines of credit with correspondents, raising additional deposits, or selling securities available for sale or loans.

The Company estimates an ACL on unfunded loan commitments under the CECL model.

The Company estimates an ACL on unfunded loan commitments under the current expected credit losses ("CECL") model.

The Company sells mortgages on the secondary market.

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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 March 31, 2024.

The Company estimates a potential loss reserve for recourse provisions that is not material as of June 30, 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 three months ended March 31, 2024.

There were no material changes in off-balance sheet arrangements during the three and six months ended June 30, 2024.

Contractual Obligations

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

The Company had no finance lease or purchase obligations and no long-term debt at June 30, 2024.

Quantitative and Qualitative Disclosures About Market Risk

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis