Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

 

  Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Fiscal Year Ended December 31, 2019

2021

  Transition Report Pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934

For the transition period from ________ to ________.

Commission File Number: 0-15204

 

NATIONAL BANKSHARES, INC.INC.

(Exact name of registrant as specified in its charter)

 

Virginia

(State or other jurisdiction of incorporation or organization)

54-1375874

(I.R.S. Employer Identification No.)

101 Hubbard Street

Blacksburg, Virginia 24062-9002

(540) 951-6300

(Address and telephone number of principal executive offices) (zip code)

(540) 951-6300

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $1.25 per share

NKSH

Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  ☐   No  ☒

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  ☐   No  ☒

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such period that the registrant was required to submit files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company"company” and "emerging“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ☐     Accelerated filer ☒     Non-accelerated filer ☐     Smaller reporting company ☒     Emerging growth company ☐

Large accelerated filer ☐Accelerated filer ☐Non-accelerated filer ☒Smaller reporting company ☒Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

 

The aggregate market value of the voting common stock of the registrant held by non-affiliates of the registrant on June 28, 201930, 2021 (the last business day of the most recently completed second fiscal quarter) was approximately $253,261,996.$216,013,731. As of March 10, 2020,8, 2022, the registrant had 6,489,5746,022,752 shares of voting common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following documents aredocument is incorporated herein by reference into the Part of the Form 10-K indicated.

 

Document

Part of Form 10-K into which incorporated

National Bankshares, Inc. Proxy Statement for the 20202022 Annual Meeting of Stockholders

Part III

Part III

 

 

 

 

NATIONAL BANKSHARES, INC.

Form 10-K

IndexIndex

Part I

 

Page

   

Item 1.

Business

3

   

Item 1A.

Risk Factors

1210

   

Item 1B.

Unresolved Staff Comments

1617

   

Item 2.

Properties

1617

   

Item 3.

Legal Proceedings

1617

   

Item 4.

Mine Safety Disclosures

16

17
   

Part II

  
   

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

1617

   

Item 6.

Selected Financial Data[Reserved]

1817

   

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations

1918

   

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

4639

   

Item 8.

Financial Statements and Supplementary Data

4740

   

Item 9.

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

9481

   

Item 9A.

Controls and Procedures

9481

   

Item 9B.

Other Information

9582

Item 9C.Disclosure Regarding Foreign Jurisdictions that Prevent Inspections82
   

Part III

  
   

Item 10.

Directors, Executive Officers and Corporate Governance

9582

   

Item 11.

Executive Compensation

9682

   

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

9682

   

Item 13.

Certain Relationships and Related Transactions, and Director Independence

9682

   

Item 14.

Principal AccountingAccountant Fees and Services

9682

   

Part IV

  
   

Item 15.

Exhibits and Financial Statement Schedules

9783

   

Item 16.

Form 10-K Summary

9884

   

Signatures

 

9985

 

2

 

Part I

$ in thousands, except per share datadata.

 

Item 1 1. Business. Business

 

History and Business

National Bankshares, Inc. (the “Company” or “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. National Bankshares, Inc. common stock is listed on the Nasdaq Capital Market and is traded under the symbol “NKSH.”  It conducts most of its operations through its wholly-owned community bank subsidiary, the National Bank of Blacksburg (the “Bank” or “NBB”). It also owns National Bankshares Financial Services, Inc. (“NBFS”), which does business as National Bankshares Insurance Services and National Bankshares Investment Services. References in this report to “we,” “us,” or “our” refer to NBI unless the context indicates that the reference is to NBB.

 

The National Bank of Blacksburg

The National Bank of Blacksburg, which does business as National Bank, was originally chartered in 1891 as the Bank of Blacksburg. Its state charter was converted to a national charter in 1922 and it became the National Bank of Blacksburg.  In 2004, NBB purchased Community National Bank of Pulaski, Virginia. In May, 2006, Bank of Tazewell County, a Virginia bank which since 1996 was a wholly-owned subsidiary of NBI, was merged with and into NBB.

NBB is community-oriented and offers a full range of retail and commercial banking services to individuals, businesses, non-profits and local governments from its headquarters in Blacksburg, Virginia, and its twenty-four23 branch offices throughout southwest Virginia and one loan production office in Roanoke, Virginia. NBB hasoffers telephone, mobile and internet banking and it operates twenty-four22 automated teller machines (“ATMs”) in its service area.

The Bank’s primary source of revenue stems from lending activities.  The Bank focuses lending on small and mid-sized businesses and individuals. Loan types include commercial and agricultural, commercial real estate, construction for commercial and residential properties, residential real estate, home equity and various consumer loan products. The Bank believes its prudent lending policies align its underwriting and portfolio management with its risk tolerance and income strategies. Underwriting and documentation requirements are tailored to the unique characteristics and inherent risks of each loan category.

The Bank’s loan policy is updated and approved by the Board of Directors annually and disseminated to lending and loan portfolio management personnel to ensure consistent lending practices. The policy communicates the Company’s risk tolerance by prescribing underwriting guidelines and procedures, including approval limits and hierarchy, documentation standards, requirements for collateral and loan-to-value limits, debt coverage, overall creditworthiness and guarantor support.

Of primary consideration is the repayment ability of the borrowers and (if secured) the collateral value in relation to the principal balance.  Collateral lowers risk and may be used as a secondary source of repayment. The credit decision must be supported by documentation appropriate to the type of loan, including current financial information, income verification or cash flow analysis, tax returns, credit reports, collateral information, guarantor verification, title reports, appraisals (where appropriate) and other documents.  A discussion of underwriting policies and procedures specific to the major loan products follows.

Commercial Loans.  Commercial and agricultural loans primarily finance equipment acquisition, expansion, working capital, and other general business purposes.  Because these loans have a higher degree of risk, the Bank generally obtains collateral such as inventory, accounts receivables or equipment and personal guarantees from the borrowing entity’s principal owners.  The Bank’s policy limits lending up to 60% of the appraised value for inventory, up to 90% of the lower of cost of market value of equipment and up to 70% for accounts receivables less than 90 days old.  Credit decisions are based upon an assessment of the financial capacity of the applicant, including the primary borrower’s ability to repay within proposed terms, a risk assessment, financial strength of guarantors and adequacy of collateral. Credit agency reports of individual owners’ credit history supplement the analysis.

Commercial Real Estate Loans. Commercial mortgages and construction loans are offered to investors, developers and builders primarily within the Bank’s market area in southwest Virginia. These loans generally are secured by first mortgages on real estate. The loan amount is generally limited to 80% of the collateral value and is individually determined based on the property type, quality, location and financial strength of any guarantors. Commercial properties financed include retail centers, office space, hotels and motels, apartments, and industrial properties.

Underwriting decisions are based upon an analysis of the economic viability of the collateral and creditworthiness of the borrower. The Bank obtains appraisals from qualified certified independent appraisers to establish the value of collateral properties. The property’s projected net cash flows compared to the debt service requirement (often referred to as the “debt service coverage ratio”) is required to be 115% or greater and is computed after deduction for a vacancy factor and property expenses, as appropriate. Borrower cash flow may be supplemented by a personal guarantee from the principal(s) of the borrower and guarantees from other parties. The Bank requires title insurance, fire, extended coverage casualty insurance and flood insurance, if appropriate, in order to protect the security interest in the underlying property. In addition, the Bank may employ stress testing techniques on higher balance loans to determine repayment ability in a changing rate environment before granting loan approval.

Public Sector and Industrial Development Loans. The Bank provides both long and short term loans to municipalities and other governmental entities within its geographical footprint. Borrowers include general taxing authorities such as a city or county, 

industrial/economic development authorities or utility authorities. Repayment sources are derived from taxation, such as property taxes and sales taxes, or revenue from the project financed with the loan. The Company’s underwriting considers local economic and population trends, reserves and liabilities, including pension liabilities.

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Construction Loans. Construction loans are underwritten against projected cash flows from rental income, business and/or personal income from an owner-occupant or the sale of the property to an end-user. Associated risks may be mitigated by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements.

Consumer Real Estate Loans.  The Bank offers a variety of first mortgage and junior lien loans secured by primary residences to individuals within our markets.  Credit decisions are primarily based on loan-to-value (“LTV”) ratios, debt-to-income (“DTI”) ratios, liquidity and net worth.  Income and financial information is obtained from personal tax returns, personal financial statements and employment documentation.  A maximum LTV ratio of 80% is generally required, although higher levels are permitted.  The DTI ratio is limited to 43% of gross income.

Consumer real estate mortgages may have fixed interest rates for the entire term of the loan or variable interest rates subject to change after the first, third, or fifth year.  Variable rates are based on the weekly average yield of United States Treasury Securities and are underwritten at fully-indexed rates. We do not offer certain high risk loan products such as interest-only consumer mortgage loans, hybrid loans, payment option adjustable rate mortgages (“ARMs”), reverse mortgage loans, loans with initial teaser rates or any product with negative amortization. Hybrid loans are loans that start out as a fixed rate mortgage, but after a set number of years they automatically adjust to an ARM. Payment option ARMs usually have adjustable rates, for which borrowers choose their monthly payment of either a full payment, interest only, or a minimum payment which may be lower than the payment required to reduce the balance of the loan in accordance with the originally underwritten amortization.

Home equity loans are secured primarily by second mortgages on residential property. The underwriting policy for home equity loans generally permits aggregate (the total of all liens secured by the collateral property) borrowing availability up to 80% of the appraised value of the collateral. We offer both fixed rate and variable rate home equity loans, with variable rate loans underwritten at fully-indexed rates. Decisions are primarily based on LTV ratios, DTI ratios, liquidity and credit history. We do not offer home equity loan products with reduced documentation.

Consumer Loans. Consumer loans include loans secured by automobiles, loans to consumers secured by other non-real estate collateral and loans to consumers that are unsecured. Automobile loans include loans secured by new or used automobiles. We originate automobile loans on a direct basis.  During 2018 and years prior, automobile loans were also originated on an indirect basis through selected dealerships.  This program was discontinued in 2019. We require borrowers to maintain collision insurance on automobiles securing consumer loans. Our procedures for underwriting consumer loans include an assessment of an applicant’s overall financial capacity, including credit history and the ability to meet existing obligations and payments on the proposed loan. An applicant’s creditworthiness is the primary consideration, and if the loan is secured by an automobile or other collateral, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount.

Other Products and ServicesDeposit products offered by the Bank include interest-bearing and non-interest bearing demand deposit accounts, money market deposit accounts, savings accounts, certificates of deposit, health savings accounts and individual retirement accounts. Deposit accounts are offered to both individuals and commercial businesses. Business and consumer debit and credit cards are available. NBB offers other miscellaneous services normally provided by commercial banks, such as letters of credit, night depository, safe deposit boxes, utility payment services and automatic funds transfer. NBB conducts a general trust business that has wealth management, trust and estate services for individual and business customers.

The COVID-19 pandemic continues to present significant challenges and uncertainty.  In May of 2021, the Bank reopened branch lobbies after serving customers through drive-through and online channels for over a year.  Federal aid has benefitted the Bank’s depositors and has increased deposit balances, while programs benefitting borrowers provided the Bank with increased loan income. The Company continues to carefully monitor COVID-19 pandemic related developments.

At December 31, 2019,2021, NBB had total assets of $1,318,594$1,699,084 and total deposits of $1,119,961.$1,497,336. NBB’s net income for 20192021 was $18,011,$20,708, which produced a return on average assets of 1.43%1.29% and a return on average equity of 9.82%11.35%. Refer to Note 11 of the Notes to Consolidated Financial Statements for NBB’s risk-based capital ratios.

 

National Bankshares Financial Services, Inc.

In 2001, National Bankshares Financial Services, Inc. was formed in Virginia as a wholly-owned subsidiary of NBI. NBFS offers non-deposit investment products and insurance products for sale to the public. NBFS works cooperatively with Infinex Investments, Inc. to provide investments and with Bankers Insurance, LLC for insurance products. NBFS does not significantly contribute to NBI’s net income.

 

4

Operating Revenue

The following table displays components that contributed 15% or more of the Company’s total operating revenue for the years ended December 31, 2019, 2018 and 2017.revenue.

 


Period


Class of Service

Percentage of
Total Revenues

December 31, 2019

Interest and Fees on Loans

62.79

%

Interest on Investments

18.09

%

Noninterest Income

16.30

%

December 31, 2018

Interest and Fees on Loans

61.49

%

Interest on Investments

22.02

%

Noninterest Income

15.17

%

December 31, 2017

Interest and Fees on Loans

61.22

%

Interest on Investments

21.55

%

Noninterest Income

15.62

%

  

Percentage of Total Operating Revenue For the Year Ended December 31,

 

Revenue Component

 

2021

 

2020

 

Interest and Fees on Loans

 

65.38

%

66.45

%

Interest on Investments

 

18.52

%

17.73

%

Noninterest Income

 

15.78

%

15.29

%

 

Market Area

The Company serves customers through its offices in southwest Virginia, including the counties of Montgomery, Giles, Tazewell, Washington, Wythe, Roanoke and Pulaski, as well as the cities of Galax, Radford and Roanoke.  The Company’s market area in southwestalso includes neighboring counties and cities, including the Virginia is made upcounties of Carroll, Grayson, Smyth, Botetourt, Craig, Russell and Bland, and cities of Salem and Bristol, the southernmost tip of West Virginia including the counties of Montgomery, Roanoke, Giles, Pulaski, Tazewell, Wythe, SmythMercer, Monroe and Washington. It includesMcDowell, the independent citiesNorth Carolina counties of Roanoke, RadfordSurry and Galax,Alleghany and the portionsTennessee city of CarrollBristol and Grayson Counties that are adjacent to Galax. The Company also serves those portionscounties of Mercer CountyWashington and McDowell County, West Virginia that are contiguous with Tazewell County, Virginia and portionsSullivan.

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Although largely rural, the market area is home to two major state-supported universities, Virginia Polytechnic Institute and State University (“Virginia Tech”) and Radford University, two smaller colleges and to threefour community colleges. Virginia Tech, located in Blacksburg, Virginia, is the area’s largest employer and is Virginia’s second largest university. A second state supported university, Radford University, is located nearby. In recent years, Virginia Tech’s Corporate Research Center has brought a number of technology-related companies to Montgomery County.

In addition to education, the market area has a diverse economic base with manufacturing, agriculture, tourism, healthcare, retail and service industries. Large manufacturing facilities in the region include Celanese Acetate, the largest employer in Giles County, and Volvo Heavy Trucks, the largest company in Pulaski County. Both of these firmscompanies have experienced cycles of hiring and layoffs within the past several years. Tazewell County is largely dependent on the coal mining industry and on agriculture for its economic base. Coal production is a cyclical industry that has declined significantly in recent years and suffered from increased regulations. Montgomery County, Bluefield in Tazewell County and Abingdon in Washington County are regional retail centers and have facilities to provide basic health care for the region.

NBI’s market area offers the advantages of a good quality of life, scenic beauty, moderate climate and historical and cultural attractions. The region has had some recent success attracting retirees, particularly from the Northeast and urban northern Virginia.

Because NBI’s market area is economically diverse and includes large public employers, it has historically avoided the most extreme effects of past economic downturns. If the economy wavers or experiences recession, it is likely thatFuture economic challenges may impact unemployment will rise and that other economic indicators willthat could negatively impactaffect the Company'sCompany’s market.

 

Competition

The banking and financial services industry is highly competitive. The competitive business environment is a result of changes in regulation, changes in technology and product delivery systems and competition from other financial institutions as well as non-traditional financial services. NBB competes for loans and deposits with other commercial banks, credit unions, securities and brokerage companies, mortgage companies, insurance companies, retailers, automobile companies and other nonbank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader array of financial services than NBB. In order to compete, NBB relies upon a deep knowledge of its markets, a service-based business philosophy, personal relationships with customers, specialized services tailored to meet customers’ needs and the convenience of office locations. In addition, the Bank is generally competitive with other financial institutions in its market area with respect to interest rates paid on deposit accounts, interest rates charged on loans and other service charges on loans and deposit accounts.

 

5

Cybersecurity

As a financial institution, NBI is subject to cybersecurity risks and has suffered two cybersecurity incidents.  To manage and mitigate cybersecurity risk, the Company limits certain transactions and interactions with customers.  The Company does not offer online account openings or loan originations, limits the dollar amount of online banking transfers to other banks, does not permit customers to submit address changes or wire requests through online banking, requires a special vetting process for commercial customers who wish to originate ACH transfers, and limits certain functionalities of mobile banking.  The Company also requires assurances from key vendors regarding their cybersecurity.  While these measures reduce the likelihood and scope of the risk of further cybersecurity breaches, in light of the evolving sophistication of system intruders, the risk of such breaches continues to exist.  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.

Organization and Employment

NBI, NBB and NBFS are organized in a holding company/subsidiary structure. At December 31, 2019,2021, NBB had 235218 full time equivalent employees and NBFS had 3 full time equivalent employees. NBB performs services and charges commensurate fees to NBI and NBFS.

 

Regulation, Supervision and Government Policy

NBI and NBB are subject to state and federal banking laws and regulations that provide for general regulatory oversight of all aspects of their operations. As a result of substantial regulatory burdens on banking, financial institutions like NBI and NBB are at a disadvantage to other competitors who are not as highly regulated, and NBI and NBB’s costs of doing business are accordingly higher. Legislative efforts to prevent a repeat of the 2008 financial crisis culminated in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“the “Dodd-Frank Act”). This legislation, together with existing and planned regulations, dramatically increased the regulatory burden on commercial banks. The burden falls disproportionately on community banks like NBB, which must devote a higher proportion of their human and other resources to compliance than do their larger competitors. The financial crisis also heightened the examination focus by banking regulators, particularly on Bank Secrecy Act, real estate-related assets and commercial loans. However, with the passage of the Economic Growth, Regulatory  Reform and Consumer Protection Act (“EGRRCPA”) in 2018, a number of regulatory requirements for smaller financial institutions like the Company were reduced or eliminated (see below). The following is a brief summary of certain laws, rules and regulations that affect NBI and NBB.

 

National Bankshares, Inc.

NBI is a bank holding company qualified as a financial holding company under the federal Bank Holding Company Act of 1956, as amended (“BHCA”), which is administered by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As such, NBI is subject to the supervision, examination, and reporting requirements of the BHCA and the regulations of the Federal Reserve. NBI is required to furnish to the Federal Reserve an annual report of its operations at the end of each fiscal year and such additional information as the Federal Reserve may require pursuant to the BHCA. The Federal Reserve is authorized to examine NBI and its subsidiaries. With some limited exceptions, the BHCA requires a bank holding company to obtain prior approval from the Federal Reserve before acquiring or merging with a bank or before acquiring more than 5% of the voting shares of a bank unless it already controls a majority of shares.

 

The Bank Holding Company Act. Under the BHCA, a bank holding company is generally prohibited from engaging in nonbanking activities unless the Federal Reserve has found those activities to be incidental to banking. Amendments to the BHCA that were included in the Gramm-Leach-Bliley Act of 1999 (see below) permitted any bank holding company with bank subsidiaries that are well-capitalized, well-managed and which have a satisfactory or better rating under the Community Reinvestment Act (see below) to file an election with the Federal Reserve to become a financial holding company. A financial holding company may engage in any activity that is (i) financial in nature (ii) incidental to a financial activity or (iii) complementary to a financial activity. Financial activities include insurance underwriting, insurance agency activities, securities dealing and underwriting and providing financial, investment or economic advising services. NBI is a financial holding company that currently engages in insurance agency activities and provides financial, investment or economic advising services.

 

The Virginia Banking Act. The Virginia Banking Act requires all Virginia bank holding companies to register with the Virginia State Corporation Commission (the “Commission”). NBI is required to report to the Commission with respect to its financial condition, operations and management. The Commission may also make examinations of any bank holding company and its subsidiaries and must approve the acquisition by a Virginia bank holding company of ownership or control of more than 5% of the voting shares of any Virginia bank or bank holding company.

4

 

The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (“GLBA”) permits significant combinations among different sectors of the financial services industry, allows for expansion of financial service activities by bank holding companies and offers financial privacy protections to consumers. GLBA preempts most state laws that prohibit financial holding companies from engaging in insurance activities. GLBA permits affiliations between banks and securities firms in the same holding company structure, and it permits financial holding companies to directly engage in a broad range of securities and merchant banking activities.

6

 

The Sarbanes-Oxley Act. The Sarbanes-Oxley Act (“SOX”) protects investors by improving the accuracy and reliability of corporate disclosures. It impacts all companies with securities registered under the Securities Exchange Act of 1934, including NBI. SOX creates increased responsibility for chief executive officers and chief financial officers with respect to the content of filings with the Securities and Exchange Commission. Section 404 of SOX and related Securities and Exchange Commission rules focused increased scrutiny by internal and external auditors on NBI’s systems of internal controls over financial reporting, which is designed to ensure that those internal controls are effective in both design and operation. SOX sets out enhanced requirements for audit committees, including independence and expertise, and it includes stronger requirements for auditor independence and limits the types of non-audit services that auditors can provide. Finally, SOX contains additional and increased civil and criminal penalties for violations of securities laws.

 

Capital and Related Requirements. In August, 2018, the Federal Reserve updated the Small Bank Holding Company Policy Statement (the “Statement”), in compliance with the EGRRCPA.Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”).  The Statement, among other things, exempts qualified bank holding companies that fall below a certain asset thresholdhave consolidated total assets of less than $3 billion from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements.  The interim final rule expands the exemption to bank holding companies with consolidated total assets of less than $3 billion. Prior to August 2018, the statement exempted bank holding companies with consolidated total assets of less than $1 billion. As a result of the interim final rule, the Company qualifies as of August, 2018 as a small bank holding company and is no longer subject to regulatory capital requirements on a consolidated basis.

The Bank continues to be subject to various capital requirements administered by banking agencies as described below. Failure to meet minimum capital requirements can trigger certain mandatory and discretionary actions by regulators that could have a direct material effect on the Company’s consolidated financial statements.

 

Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act was signed into law on July 21, 2010. Its wide ranging provisions affect all federal financial regulatory agencies and nearly every aspect of the American financial services industry. The Dodd-Frank Act created an independent Consumer Financial Protection Bureau (the “CFPB”) which has the ability to write rules for consumer protections governing all financial institutions. All consumer protection responsibility formerly handled by other banking regulators was consolidated in the CFPB. It oversees the enforcement of all federal laws intended to ensure fair access to credit. For smaller financial institutions such as NBI and NBB, the CFPB coordinates its examination activities through their primary regulators.

The Dodd-Frank Act contains provisions designed to reform mortgage lending, which includes the requirement of additional disclosures for consumer mortgages, and the CFPB implemented many mortgage lending regulations to carry out its mandate. Additionally, in response to the Dodd-Frank Act, the Federal Reserve issued rules in 2011 which had the effect of limiting the fees charged to merchants by credit card companies for debit card transactions. The Dodd-Frank Act also contains provisions that affect corporate governance and executive compensation.

The Dodd-Frank Act provisions are extensive and have required the Company and the Bank to deploy resources to comply with them. Several federal agencies, including the Federal Reserve, the CFPB and the Securities and Exchange Commission, have been in the process of issuing final regulations implementing major portions of the legislation, and this process will be affected by the EGRRCPA, which rolls back many provisions of the Dodd-Frank Act (see below).

 

Source of Strength. Federal Reserve policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources and capital to support NBB, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

 

The Economic Growth, Regulatory Reform and Consumer Protection Act of 2018.In May 2018 the EGRRCPA amended provisions of the Dodd-Frank Act and other statutes administered by banking regulators. Among these amendments are provisions to tailor applicability of certain of the enhanced prudential standards for Systemically Important Financial Institutions (“SIFI’s”) and to increase the $50 billion asset threshold in two stages to $250 billion to which these enhanced standards apply. The EGRRCPA exempts insured depository institutions (and their parent companies) with less than $10 billion in consolidated assets and that meet certain tests from the Volker Rule (which prohibits banks from conducting certain investment activities with their own accounts). As discussed above,below, pursuant to EGRRCPA, regulators finalized a new CBLRan optional, simplified measure of capital adequacy, which is commonly known as the “community bank leverage ratio” (“CBLR”) framework, for qualifying financial institutions with less than $10 billion in consolidated assets. If the financial institution maintains its tangible equity above the CBLR, it will be deemed in compliance with the various regulatory capital requirements currently in effect. The EGRRCPA also increased the asset threshold from $1 billion to $3 billion for financial institutions to qualify for an 18 month on site examination schedule. The EGRRCPA changes numerous other regulatory requirements based on the size and complexity of financial institutions, particularly benefiting smaller institutions like the Company.

 

75

 

The National Bank of Blacksburg

NBB is a national banking association incorporated under the laws of the United States, and the bank is subject to regulation and examination by the Office of the Comptroller of the Currency (the “OCC”). NBB’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the limits of applicable law. The OCC, as the primary regulator, and the FDIC regulate and monitor all areas of NBB’s operation. These areas include adequacy of capitalization and loss reserves, loans, deposits, business practices related to the charging and payment of interest, investments, borrowings, payment of dividends, security devices and procedures, establishment of branches, corporate reorganizations and maintenance of books and records. NBB is required to maintain certain capital ratios. It must also prepare quarterly reports on its financial condition for the OCC and conduct an annual audit of its financial affairs. The OCC requires NBB to adopt internal control structures and procedures designed to safeguard assets and monitor and reduce risk exposure. While appropriate for the safety and soundness of banks, these requirements add to overhead expense for NBB and other banks.

 

The Community Reinvestment Act. NBB is subject to the provisions of the Community Reinvestment Act (“CRA”), which imposes an affirmative obligation on financial institutions to meet the credit needs of the communities they serve, including low and moderate income neighborhoods. The OCC monitors NBB’s compliance with the CRA and assigns public ratings based upon the bank’s performance in meeting stated assessment goals. Unsatisfactory CRA ratings can result in restrictions on bank operations or expansion. NBB received a “satisfactory” rating in its last CRA examination by the OCC.

In December 2019, the FDIC and the OCC jointly proposed rules that would significantly change existing CRA regulations. The proposed rules are intended to increase bank activity in low and moderate income communities where there is significant need for credit, more responsible lending, greater access to banking services, and improvements to critical infrastructure. The proposals change four key areas: (i) clarifying what activities qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and objective method for measuring CRA performance; and (iv) revising CRA-related data collection, record keeping, and reporting.  The Bank is evaluating what impact this proposed rule, if implemented, may have on its operations.

Privacy Legislation. Several recent laws, including the Right to Financial Privacy Act and the GBLA, and related regulations issued by the federal bank regulatory agencies, also provide new protections against the transfer and use of customer information by financial institutions. A financial institution must provide to its customers information regarding its policies and procedures with respect to the handling of customers’ personal information. Each institution must conduct an internal risk assessment of its ability to protect customer information. These privacy provisions generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated parties without prior notice and approval from the customer.

The USA Patriot Act. The USA Patriot Act (“Patriot Act”) facilitates the sharing of information among government entities and financial institutions to combat terrorism and money laundering. The Patriot Act imposes an obligation on NBB to establish and maintain anti-money laundering policies and procedures, including a customer identification program. The Bank must screen all customers against government lists of known or suspected terrorists. The Patriot Act, particularly as it relates to money laundering, is a significant focus of regulators and there is substantial regulatory oversight to insure compliance.

 

Consumer Laws and Regulations. There are a number of laws and regulations that regulate banks’ consumer loan and deposit transactions. Among these are the Truth in Lending Act, the Truth in Savings Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Fair Credit Reporting Act, the Electronic Funds Transfer Act, the Fair Debt Collections Practices Act, the Home Mortgage Disclosure Act, the Service Members Civil Relief Act, laws governing flood insurance, federal and state laws prohibiting unfair and deceptive business practices, foreclosure laws and various regulations that implement some or all of the foregoing. NBB is required to comply with these laws and regulations in its dealings with customers. In addition, the CFPB has adopted and may continue to refine rules regulating consumer mortgage lending pursuant to the Dodd-Frank Act. There are numerous disclosure and other compliance requirements associated with the consumer laws and regulations. The EGRRCPA modified a number of these requirements, including, for qualifying institutions with less than $10 billion in assets, a safe harbor for compliance with the “ability to pay” requirements for consumer mortgage loans.

 

Deposit Insurance. NBB has deposits that are insured by the FDIC. The FDIC maintains a Deposit Insurance Fund (“DIF”) that is funded by risk-based insurance premium assessments on insured depository institutions. Assessments are determined based upon several factors, including the level of regulatory capital and the results of regulatory examinations. The FDIC may adjust assessments if the insured institution’s risk profile changes or if the size of the DIF declines in relation to the total amount of insured deposits. Beginning April 1, 2011, anAn institution’s assessment base becameis consolidated total assets less its average tangible equity as defined by the FDIC. The FDIC has authority to impose (and has imposed during the recent financial crisis) special measures to boost the deposit insurance fund such as prepayments of assessments and additional special assessments.

After giving primary regulators an opportunity to first take action, the FDIC may initiate an enforcement action against any depository institution it determines is engaging in unsafe or unsound actions or which is in an unsound condition, and the FDIC may terminate that institution’s deposit insurance. NBB has no knowledge of any matter that would threaten its FDIC insurance coverage.

                  

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Capital Requirements. NBB is subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act (the “Basel III Capital Rules”) as applied by the OCC. The Basel III Capital Rules require NBB to comply with minimum capital ratios plus a “capital conservation buffer” designed to absorb losses during periods of economic stress. The implementation period for the capital conservation buffer began in 2016 and it was fully phased in on January 1, 2019.  The following table presents the required minimum ratios along with the required minimum ratios including the capital conservation buffer:

 

Regulatory Capital Ratios

 

Minimum Ratio

 

Minimum Ratio With Capital Conservation Buffer

  

Minimum Ratio

 

Minimum Ratio With

Capital Conservation

Buffer

 

Common Equity Tier 1 Capital to Risk Weighted Assets

 

4.50

%

 

7.00

%

  

4.50

%

 

7.00

%

 

Tier 1 Capital to Risk Weighted Assets

 

6.00

%

 

8.50

%

  

6.00

%

 

8.50

%

 

Total Capital to Risk Weighted Assets

 

8.00

%

 

10.50

%

  

8.00

%

 

10.50

%

 

Leverage Ratio

 

4.00

%

 

4.00

%

  

4.00

%

 

4.00

%

 

 

Risk-weighted assets are assets on the balance sheet as well as certain off-balance sheet items, such as standby letters of credit, to which weights between 0% and 1250% are applied, according to the risk of the asset type. Common Equity Tier 1 Capital (“CET1”) is capital according to the balance sheet, adjusted for goodwill and intangible assets and other prescribed adjustments. At NBB’s election, CET1 is also adjusted to exclude accumulated other comprehensive income. Tier 1 Capital is CET1 adjusted for additional capital deductions. Total Capital is Tier 1 Capital increased for the allowance for loan losses and adjusted for other items. The Leverage Ratio is the ratio of Tier 1 Capital to total average assets, less goodwill and intangibles and certain deferred tax assets. As of December 31, 2019,2021, NBB’s capital ratios exceeded the above minimum ratios including the capital conservation buffer.

NBB is also subject to the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, of 1950,as amended, which were revised, effective as of January 1, 2015, to incorporateincorporates a CET1 ratio and to increaseincreases certain other capital ratios. To be classified as well capitalized under the revised regulations, NBB must have the following minimum capital ratios: (i) a CET1 ratio of at least 6.5%; (ii) a Tier 1 Capital to Risk Weighted Assets ratio of at least 8.0%; (iii) a Total Capital to Risk Weighted Assets ratio of at least 10.0%; and (iv) a Leverage Ratio of at least 5.0%. NBB exceeded the thresholds to be considered well capitalized as of December 31, 2019.2021.

Pursuant to the EGRRCPA, regulators have provided for an optional, simplified measure of capital adequacy, which is commonly known as the “community bank leverage ratio”CBLR framework, (“CBLR”), for qualifying community banking organizations.organizations with consolidated assets of less than $10 billion. Banks that qualify, including NBB, may opt in to the CBLR framework beginning January 1, 2020 or any time thereafter.framework. The CBLR framework eliminates the requirement to comply with capital ratios disclosed above and, instead, requires the disclosure of a single leverage ratio, with a minimum requirement of 9%. The Company and the Bank are evaluating whether to opthas not opted in to the CBLR framework.framework at this time.

In December 2017, the Basel Committee on Banking Supervision published standards that it described as the finalization of the Basel III post-crisis regulatory reforms (the standards are commonly referred to as “Basel IV”). Among other things, these standards revise the standardized approach for credit risk (including by recalibrating risk weights and introducing new capital requirements for certain “unconditionally cancellable commitments,” such as unused credit card lines of credit) and provide a new standardized approach for operational risk capital. Under the proposed framework, these standards will generally be effective on January 1, 2022, with an aggregate output floor phasing-in through January 1, 2027. Under the current capital rules, operational risk capital requirements and a capital floor apply only to “advanced approaches” institutions, and not to the Company or the Bank. The impact of Basel IV on the Company and the Bank will depend on the manner in which it is implemented by the federal bank regulatory agencies.

 

Limits on Dividend Payments. A significant portion of NBI’s income is derived from dividends paid by NBB. As a national bank, NBB may not pay dividends from its capital, and it may not pay dividends if the bank would become undercapitalized, as defined by regulation, after paying the dividend. Without prior OCC approval, NBB’s dividend payments in any calendar year are restricted to the bank’s retained net income for that year, as that term is defined by the laws and regulations, combined with retained net income from the preceding two years, less any required transfer to surplus.

The OCC and FDIC have authority to limit dividends paid by NBB if the payments are determined to be an unsafe and unsound banking practice. Any payment of dividends that depletes the bank’s capital base could be deemed to be an unsafe and unsound banking practice.

 

Branching. As a national bank, NBB is required to comply with the state branch banking laws of Virginia, the state in which the main office of the bank is located. NBB must also have the prior approval of the OCC to establish a branch or acquire an existing banking operation. Under Virginia law, NBB may open branch offices or acquire existing banks or bank branches anywhere in the state. Virginia law also permits banks domiciled in the state to establish a branch or to acquire an existing bank or branch in another state. The Dodd-Frank Act permits the OCC to approve applications by national banks like NBB to establish de novo branches in any state in which a bank located in that state is permitted to establish a branch.

 

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Ability-to-RepayMortgage Banking Regulation. NBB is subject to rules and Qualified Mortgage Rule. Pursuantregulations that, among other things, establish standards for mortgage loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, in some cases restrict certain loan features and fix maximum interest rates and fees, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the Dodd-Frank Act,reasonable value of the CFPB amendedservices rendered and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution and income level. NBB is also subject to rules and regulations that require the collection and reporting of significant amounts of information with respect to mortgage loans and borrowers.  NBB’s mortgage origination activities are subject to the Federal Reserve’s Regulation Z, as implemented bywhich implements the Truth in Lending Act, requiring mortgage lendersAct. Certain provisions of Regulation Z require creditors to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider the following eight underwriting factors when making the credit decision: (i) current or reasonably expected income or assets; (ii) current employment status; (iii) the monthly payment on the covered transaction; (iv) the monthly payment on any simultaneous loan; (v) the monthly payment for mortgage-related obligations; (vi) current debt obligations, alimony,

Anti-Money Laundering Laws and child support; (vii) the monthly debt-to-income ratio or residual income; and (viii) credit history. Alternatively, the mortgage lender can originate “qualified mortgages,” which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a “qualified mortgage” is a mortgage loan without negative amortization, interest-only payments, balloon payments or terms exceeding 30 years. In addition, to be a qualified mortgage the points and fees paid by a consumer cannot exceed 3% of the total loan amount. Qualified mortgages that are “higher-priced” (e.g. subprime loans) create a rebuttable presumption of compliance with the ability-to-repay rules, while qualified mortgages that are not “higher-priced” (e.g. prime loans) are given a safe harbor of compliance. Regulations. The Company is predominantly an originatorsubject to several federal laws that are designed to combat money laundering, terrorist financing, and transactions with persons, companies or foreign governments designated by U.S. authorities (“AML laws”). This category of compliant qualified mortgages.laws includes the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the USA PATRIOT Act of 2001, and the Anti-Money Laundering Act of 2020.

The AML laws and their implementing regulations require insured depository institutions, broker-dealers, and certain other financial institutions to have policies, procedures, and controls to detect, prevent, and report money laundering and terrorist financing. The AML laws and their regulations also provide for information sharing, subject to conditions, between federal law enforcement agencies and financial institutions, as well as among financial institutions, for counter-terrorism purposes. Federal banking regulators are required, when reviewing bank holding company acquisition and bank merger applications, to take into account the effectiveness of the anti-money laundering activities of the applicants. To comply with these obligations, the Company has implemented appropriate internal practices, procedures, and controls.

 

Office of Foreign Assets Control. The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) is responsible for administering and enforcing economic and trade sanctions against specified foreign parties, including countries and regimes, foreign individuals and other foreign organizations and entities. OFAC publishes lists of prohibited parties that are regularly consulted by the Company in the conduct of its business in order to assure compliance. The Company is responsible for, among other things, blocking accounts of, and transactions with, prohibited parties identified by OFAC, avoiding unlicensed trade and financial transactions with such parties and reporting blocked transactions after their occurrence. Failure to comply with OFAC requirements could have serious legal, financial and reputational consequences for the Company.

 

Incentive Compensation. In June 2010, the federal bank regulatory agencies issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of financial institutions do not undermine the safety and soundness of such institutions by encouraging excessive risk-taking. The Interagency Guidance on Sound Incentive Compensation Policies, which covers all employees that have the ability to materially affect the risk profile of a financial institutions, either individually or as part of a group, is based upon the key principles that a financial institution’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the institution’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the financial institution’s board of directors.

Section 956 of the Dodd-Frank Act requires the federal banking agencies and the Securities and Exchange Commission to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities that encourage inappropriate risk-taking by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. The federal banking agencies issued such proposed rules in March 2011 and issued a revised proposed rule in June 2016 implementing the requirements and prohibitions set forth in Section 956. The revised proposed rule would apply to all banks, among other institutions, with at least $1 billion in average total consolidated assets for which it would go beyond the existing Interagency Guidance on Sound Incentive Compensation Policies to (i) prohibit certain types and features of incentive-based compensation arrangements for senior executive officers, (ii) require incentive-based compensation arrangements to adhere to certain basic principles to avoid a presumption of encouraging inappropriate risk, (iii) require appropriate board or committee oversight, (iv) establish minimum recordkeeping, and (v) mandate disclosures to the appropriate federal banking agency.

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of financial institutions, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each financial institution based on the scope and complexity of the institution’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the institution’s supervisory ratings, which can affect the institution’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a financial institution if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the institution’s safety and soundness and the financial institution is not taking prompt and effective measures to correct the deficiencies. As of December 31, 2019,2021, the Company had not been made aware of any instances of non-compliance with the final guidance.

8

 

Cybersecurity. In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If the Company fails to observe the regulatory guidance, it could be subject to various regulatory sanctions, including financial penalties.

10

its customer base, in the ordinary course of business, (ii) business line(s), including associated operations, services, functions, and support, that upon failure would result in a material loss of revenue, profit, or franchise value, or (iii) operations, including associated services, functions and support, as applicable, the failure or discontinuance of which would pose a threat to the financial stability of the United States.

The Company’s systems and those of its customers and third-party service providers are under constant threat. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by the Company and its customers.

 

Coronavirus Aid, Relief, and Economic Security Act and Consolidated Appropriations Act (the "CARES Act"). In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020 and the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law on December 27, 2020.  Among other things, the CARES Act and CAA include provisions impacting financial institutions, such as temporarily modifying the CBLR framework, as well as the following:

Temporary Troubled Debt Restructurings Relief. The CARES Act allowed banks to elect to suspend requirements under U.S. generally accepted accounting principles (“GAAP”) for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would otherwise be categorized as a troubled debt restructuring (“TDR”), including impairment for accounting purposes, until the earlier of 60 days after the termination date of the national emergency or December 31, 2020.  Federal banking agencies were required to defer to the determination of the banks making such suspension.  The CAA extended this temporary relief until the earlier of 60 days after the termination date of the national emergency or January 1, 2022.

Small Business Administration Paycheck Protection Program. The CARES Act created, and the CAA extended, the Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”).  Under the PPP, money was authorized for small business loans to pay payroll and group health costs, salaries and commissions, mortgage and rent payments, utilities, and interest on other debt.  The loans were provided through participating financial institutions, such as the Bank, that processed loan applications and service the loans.

Monetary Policy

The monetary and interest rate policies of the Federal Reserve, as well as general economic conditions, affect the business and earnings of NBI. NBB and other banks are particularly sensitive to interest rate fluctuations. The spread between the interest paid on deposits and that which is charged on loans is the most important component of the bank’s earnings. In addition, interest earned on investments held by NBI and NBB has a significant effect on earnings. U.S. fiscal policy, including deficits requiring increased governmental borrowing also can affect interest rates. As conditions change in the national and international economy and in the money markets, the Federal Reserve’s actions, particularly with regard to interest rates, and the effects of fiscal policies can impact loan demand, deposit levels and earnings at NBB. It is not possible to accurately predict the effects on NBI of economic and interest rate changes.

 

Other Legislative and Regulatory Concerns

Federal and state laws and regulations are regularly proposed that could affect the regulation of financial institutions. New, revised or rescinded regulations could add to the regulatory burden on banks and other financial service providers and increase the costs of compliance, or they could change the products that can be offered and the manner in which financial institutions do business. We cannot foresee how regulation of financial institutions may change in the future and how those changes might affect NBI.

 

Company Website

NBI maintains a website at www.nationalbankshares.com.www.nationalbankshares.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are made available on its website as soon as is practical after the material is electronically filed with the Securities and Exchange Commission.Commission (“SEC”). The Company’s proxy materials for the 20202022 annual meeting of stockholders are also posted on a separate website at www.investorvote.com/NKSH. Access through the Company’s websites to the Company’s filings is free of charge. The Securities and Exchange CommissionSEC maintains an internet site (http://www.sec.gov) that contains reports, proxy, and information statements, and other information the Company files electronically with the SEC.

9

 

Executive Officers of the Company

The following is a list of names and ages of all executive officers of the Company; their terms of office as officers; the positions and offices within the Company held by each officer; and each person’s principal occupation or employment during the past five years.

 

Name

Age

Offices and Positions Held

Year Elected an Officer/Director

F. Brad Denardo

67

National Bankshares, Inc.: Chairman, President and Chief Executive Officer (“CEO”), May 2019 to Present; President and CEO, September 2017 – May 2019; Executive Vice President, April 2008 – August 2017.

The National Bank of Blacksburg: Chairman, September 2017 to Present; President & CEO, July 2014 to Present; Executive Vice President/Chief Operating Officer, October 2002 – July 2014.

National Bankshares Financial Services, Inc.: Chairman, President and CEO of National Bankshares Financial Services, Inc., September 2017 to Present; Treasurer, June 2011 to Present.

1989

David K. Skeens

53

National Bankshares, Inc.: Treasurer and Chief Financial Officer (“CFO”), January 2009 to Present.

The National Bank of Blacksburg: Senior Vice President/Operations & Risk Management & CFO, January 2009 to Present; Senior Vice President/Operations & Risk Management, February 2008 – January 2009; Vice President/Operations & Risk Management, April 2004- February 2008.

2009

Lara E. Ramsey

51

National Bankshares, Inc.: Corporate Secretary, June 2016 to Present.

National Bankshares, Inc.: Senior Vice President/Administration, June 2011 to Present.

National Bankshares, Inc.: Vice President/Human Resources, January 2001 – June 2011.

2016

Paul M. Mylum

53

The National Bank of Blacksburg: Executive Vice President, November 2019 to Present.

The National Bank of Blacksburg: Senior Vice President/Chief Lending Officer, August 2016 – November 2019.
The National Bank of Blacksburg: Senior Vice President/Loans, August 2012—August 2016.

2012

Rebecca M. Melton

49

The National Bank of Blacksburg: Senior Vice President/Chief Credit Officer, November 2018 to Present. 

Skyline National Bank: Chief Risk Officer, July 2016 – November 2018.
Skyline National Bank: Chief Credit Officer, June 2011 – July 2016.

2018

 

11

Name

Age

Offices and Positions Held

Year Elected an Officer/Director

F. Brad Denardo

69

National Bankshares, Inc.: Chairman, President and Chief Executive Officer (“CEO”), May 2019 to Present; President and CEO, September 2017 – May 2019; Executive Vice President, April 2008 – August 2017.

The National Bank of Blacksburg: Chairman, September 2017 to Present; President & CEO, July 2014 to Present; Executive Vice President/Chief Operating Officer, October 2002 – July 2014.

National Bankshares Financial Services, Inc.: Chairman, President and CEO of National Bankshares Financial Services, Inc., September 2017 to Present; Treasurer, June 2011 to Present.

1989

David K. Skeens

55

National Bankshares, Inc.: Treasurer and Chief Financial Officer (“CFO”), January 2009 to Present.

The National Bank of Blacksburg: Senior Vice President/Operations & Risk Management & CFO, January 2009 to Present; Senior Vice President/Operations & Risk Management, February 2008 – January 2009; Vice President/Operations & Risk Management, April 2004 - February 2008.

2009

Lara E. Ramsey

53

National Bankshares, Inc.: Corporate Secretary, June 2016 to Present.

The National Bank of Blacksburg: Senior Vice President/Administration, January 2018 to Present.

National Bankshares, Inc.: Senior Vice President/Administration, June 2011 – December 2017.

National Bankshares, Inc.: Vice President/Human Resources, January 2001 – June 2011.

2016

Paul M. Mylum

55

The National Bank of Blacksburg: Executive Vice President/Chief Lending Officer, November 2019 to Present.

The National Bank of Blacksburg: Senior Vice President/Chief Lending Officer, August 2016 – November 2019.

The National Bank of Blacksburg: Senior Vice President/Loans, August 2012 – August 2016.

2012

 

Item 1A. Risk Factors

 

If economic trends reverse or recession returns, our credit risk will increase and there could be greater loan losses.

A reversal in economic trends or return to a recession is likely to result in a higher rate of business closures and increased job losses in the region in which we do business. In addition, reduced state funding for the public colleges and universities that are large employers in our market area could have an adverse effect on employment levels and on the area’s economy. These factors would increase the likelihood that more of our customers would become delinquent or default on their loans. A higher level of loan defaults could result in higher loan losses, which could adversely affect our result of operations and financial condition.

A reversal in economic trends, return to recession, or change in interest rates could increase the risk of losses in our investment portfolio.

The Company holds both corporate and municipal bonds in its investment portfolio. A reversal in economic trends or return to recession could increase the actual or perceived risk of default by both corporate and government issuers and, in either case, could adversely affect the value of these investments. In addition, the value of these investments could be adversely affected by a change in interest rates and related factors, including the pricing of securities.

A decline in the condition of the local real estate market could negatively affect our business.

Substantially all of the Company’s real property collateral is located in its market area. If there is a decline in real estate values, especially in the Company’s market area, the collateral for loans would deteriorate and provide significantly less security to the Company.  In the event the Company forecloses on a loan that is collateralized with property having reduced market value, the Company may suffer a recovery loss.

CREDIT RISK

Focus on lending to small to mid-sized community-based businesses may increase our credit risk.

Most of the Company’s commercial business and commercial real estate loans are made to small business or middle market customers. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities and have a heightened vulnerability to economic conditions. If general economic conditions in the market areas in which the Company operates negatively impact this important customer sector, the Company’s results of operations and financial condition may be adversely affected.  Moreover, a portion of these loans have been made by the Company in recent years and the borrowers may not have experienced a complete business or economic cycle since becoming borrowers of the Bank. The deterioration of the borrowers’ businesses may hinder their ability to repay their loans with the Company, which could have a material adverse effect on the Company’s financial condition and results of operations.

 

When market interest rates change, our net interest income can be negatively affected in the short term.

The direction and speed

10

 

The allowance for loan losses may not be adequate to cover actual losses.

In accordance with accounting principles generally accepted in the United States,GAAP, an allowance for loan losses is maintained to provide for probable loan losses. The allowance for loan losses may not be adequate to cover actual credit losses, and future provisions for credit losses could materially and adversely affect operating results.  The allowance for loan losses is based on prior experience as well as an evaluation of the risks in the current portfolio. The amount of future losses is susceptible to changes in economic, operating, and other outside forces and conditions, including changes in interest rates, all of which are beyond the Company’s control; and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review the Company’s loans and allowance for loan losses. The Company also outsources an independent loan review. While management believes that the allowance for loan losses is adequate to cover current probable losses, it cannot make assurances that it will not further increase the allowance for loan losses or that regulators will not require it to increase this allowance. Either of these occurrencesoccurrence could adversely affect earnings.

The allowance for loan losses requires management to make significant estimates that affect the consolidated financial statements. Due to the inherent nature of this estimate, management cannot provide assurance that it will not significantly increase the allowance for loan losses, which could materially and adversely affect earnings.

 

A decline in the condition of the local real estate market could negatively affect our business.

The Company offers a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, residential mortgages, home equity loans and lines of credit, consumer and other loans. Many of these loans are secured by real estate (both residential and commercial). As of December 31, 2021, 82.6% of all loans were secured by mortgages on real property. Substantially all of the Company’s real property collateral is located in its market area. If there is a decline in real estate values, especially in the Company’s market area, the collateral for loans would deteriorate and provide significantly less security to the Company. In the event the Company forecloses on a loan that is collateralized with property having reduced market value, the Company may suffer a recovery loss.

The Bank has a moderate concentration of credit exposure in commercial real estate, and loans with this type of collateral are viewed as having more risk of default.

As of December 31, 2021, the Bank had approximately $405,722 in loans secured by commercial real estate, representing approximately 51.5% of total loans outstanding at that date. The real estate consists primarily of multi-family housing, non-owner-operated properties and other commercial properties. These types of loans are generally viewed as having more risk of default than residential real estate loans. They are also typically larger than residential real estate loans and consumer loans and depend on cash flows from the owner’s business or the property to service the debt. It may be more difficult for commercial real estate borrowers to repay their loans in a timely manner, as commercial real estate borrowers’ abilities to repay their loans frequently depends on the successful rental of their properties. Cash flows may be affected significantly by general economic conditions, and a downturn in the local economy or in occupancy rates in the local economy where the property is located could increase the likelihood of default. Because the Bank’s loan portfolio contains a number of commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in the percentage of non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on the Company’s financial condition.

Nonperforming assets take significant time to resolve and adversely affect the Company’sCompanys results of operations and financial condition.

The Company’s nonperforming assets adversely affect its net income in various ways. The Company expects to continue to incur additional losses relating to volatility in nonperforming loans. The Company does not record interest income on nonaccrual loans, which adversely affects its income and increases credit administration costs. When the Company receives collateral through foreclosures and similar proceedings, it is required to mark the related asset to the then fair market value of the collateral less estimated selling costs, which may, and often does, result in a loss. An increase in the level of nonperforming assets also increases the Company’s risk profile and may impact the capital levels regulators believe are appropriate in light of such risks. The Company utilizes various techniques such as workouts and restructurings to manage problem assets. Increases in or negative adjustments in the value of these problem assets, the underlying collateral, or in the borrowers’ performance or financial condition, could adversely affect the Company’s business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and staff, which can be detrimental to the performance of their other responsibilities, including generation of new loans. There can be no assurance that the Company will avoid further increases in nonperforming loans in the future.

 

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The Company relies upon independent appraisals to determine the value of the real estate which secures a significant portion of its loans, and the values indicated by such appraisals may not be realizable if the Company is forced to foreclose upon such loans.

A significant portion of the Company’s loan portfolio consists of loans secured by real estate. The Company relies upon independent appraisers to estimate the value of such real estate. Appraisals are only estimates of value and the independent appraisers may make mistakes of fact or judgment which adversely affect the reliability of their appraisals. In addition, events occurring after the initial appraisal may cause the value of the real estate to increase or decrease.  As a result of any of these factors, the real estate securing some of the Company’s loans may be more or less valuable than anticipated at the time the loans were made. If a default occurs on a loan secured by real estate that is less valuable than originally estimated, the Company may not be able to recover the outstanding balance of the loan and will suffer a loss.

 

Our loan portfolios credit risk and the risk of loan losses may increase if economic conditions worsen due to the ongoing COVID-19 pandemic.

If the COVID-19 pandemic depresses business activity, it is likely to result in a higher rate of business closures and increased job losses in the region in which we do business. If, in response to the COVID-19 pandemic, public colleges and universities in our market area experience reduced enrollment or in-person learning, or reduced attendance at sporting events, employment levels in our area may also be adversely affected. These factors would increase the likelihood that more of our customers would become delinquent or default on their loans. A higher level of loan defaults could result in higher loan losses, which could adversely affect our result of operations and financial condition.

The risk of loss in our investment portfolio may increase if economic conditions worsen due to the ongoing COVID-19 pandemic or if interest rates change rapidly.

The Company holds both corporate and municipal bonds in its investment portfolio. An economic downturn due to the COVID-19 pandemic could increase the actual or perceived risk of default by both corporate and government issuers and, in either case, could adversely affect the value of these investments. In addition, the value of these investments could be adversely affected by a change in interest rates and related factors, including the pricing of securities.

The ongoing COVID-19 pandemic may adversely affect the Companys current or future impaired loans.

The impact of the COVID-19 pandemic continues to present uncertainty and may lead to additional loans designated as impaired in future quarters.  Cash flow assumptions associated with impaired loans measured under the cash flow method may be impacted if borrowers are further distressed by the economic impacts of the COVID-19 pandemic, resulting in lower measurements and higher funding requirements for the allowance for loan losses.  Real estate activity in the Company’s market over the most recent 12 months has been robust.  However, if the COVID-19 pandemic begins to negatively impact the real estate markets in which the Company’s collateral resides, the fair value of impaired loans measured using the collateral method could decline and may result in charge-offs.

The expiration of federal government aid related to the COVID-19 pandemic to assist borrowers may increase credit risk.

Federal aid from the CARES Act, the CAA and other regulations assisted borrowers during 2020 and 2021 for COVID-19 pandemic-related hardship.  With the expiration of the aid, borrowers may face increased difficulty in servicing debt, which could result in loan losses and adversely affect the Company’s financial condition and results of operation.

MARKET RISK

If competition increases, our business could suffer.suffer, which could result in loan losses and adversely affect the Companys financial condition and results of operations.

The financial services industry is highly competitive, with a number of commercial banks, credit unions, insurance companies, stockbrokers, financial technology companies and other nonbank financial service providers seeking to do business with our customers. If there is additional competition from new business or if our existing competitors focus more attention on our market, we could lose customers and our business could suffer.

 

Additional laws and regulations, or revisions and rescission of existing laws and regulations, could lead to a significant increase in our regulatory burden.

Both federal and state governments could enact new laws and regulations affecting financial institutions that would further increase our regulatory burden and could negatively affect our profits. Likewise, revisions or rescission of existing laws and regulations already implemented may result in additional compliance costs, at least in the short term or, if done imprudently, could ultimately create economic risks negatively affecting our revenues.

 Intense oversight by regulators could result in stricter requirements and higher overhead costs.

Regulators for the Company and the Bank are tasked with ensuring compliance with applicable laws and regulations.  Laws and regulations are subject to a degree of interpretation.  If financial industry regulators take more extreme interpretations, the Company’s earnings could be adversely impacted.

Political, economic and social risks in the U.S. and the rest of the world could negatively affect the financial markets.

Political, economic and social risks in the U.S. and the rest of the world could affect financial markets and affect fiscal policy which could negatively affect our investment portfolio and earnings.

Our information systems may experience an interruption or security breach.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions of our internet banking, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if it does occur, that it will be adequately addressed.

In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees, in systems and on networks. The secure processing, maintenance and use of this information is critical to the Company’s operations and business strategy. The Company has invested in industry-accepted technologies, and annually reviews its processes and practices that are designed to protect its networks, computers and data from damage or unauthorized access. Despite these security measures, the Company’s computer systems experienced two cyber-intrusions, one in May 2016 and one in January 2017 in which certain customer information was compromised, but which did not cause interruption to the Company’s normal operations.  The Company has implemented additional security measures since the breaches. The Company’s computer systems and infrastructure may in the future be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. The occurrence of any failure, interruption or security breach of our communications and information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability.

Cyber-attacks may disarm and/or bypass system safeguards and allow unauthorized access and misappropriation of financial data and assets.

As a financial institution, we are vulnerable to and the target of cyber-attacks that attempt to access our digital technology systems, disarm and/or bypass system safeguards, access customer data and ultimately increase the risk of economic and reputational loss.

The Company experienced two cyber-intrusions, one in May 2016 and one in January 2017 in which certain customer information was compromised. The Company has strengthened its multi-faceted approach to reduce the exposure of our systems to cyber-intrusions, strengthen our defenses against hackers and protect customer accounts and information relevant to customer accounts from unauthorized access.  These tools include digital technology safeguards, internal policies and procedures, and employee training.

The Company believes its cybersecurity risk management program reasonably addresses the risk from cybersecurity attacks.  However, it is not possible to fully eliminate exposure. We may experience human error or have unknown susceptibilities that allow our systems to become victim to a highly-sophisticated cyber-attack.  If hackers gain entry to our systems, they may disable other safeguards that limit loss, including limits on the number, amount and frequency of automated teller machine (“ATM”) withdrawals, as well as other loss-prevention or detection measures.

Cybersecurity attacks are probable and may result in additional costs.

The Company has experienced many attempted cybersecurity attacks, of which two resulted in a breach.  The Company estimates that the probability of future attempted cyber-attacks is high.  To reduce the risk of loss from cyber-attacks and to remediate vulnerabilities discovered through the breach investigations, the Company has incurred costs related to forensic investigations, legal and advisory expenses, insurance premiums, system monitoring and testing, and installing new technological infrastructure and defenses.  The Company has implemented every recommendation from the forensic investigations.  If the Company experiences another cyber-breach, these costs will increase and the Company will also likely incur additional litigation, reputational harm and regulatory costs.

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Insurance may not cover losses from cybersecurity attacks.

The Company has invested in insurance related to cybersecurity. Insurance policies are necessary to protect the Company from major losses but may be written in such a way as to limit the protection from certain risks, including cyber risks for which the availability of insurance coverage is currently limited. If the insurance carrier denies coverage of losses the Company may litigate, resulting in additional legal expense. Because of policy technicalities, litigation may not result in a favorable outcome for the Company.

The Company relies on other companies to provide key components of the Company’s business infrastructure.

Third parties provide key components of the Company’s business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections and network access. While the Company has selected these third party vendors carefully, it does not control their actions. Any problem caused by these third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, failures of a vendor to provide services for any reason or poor performance of services, could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business. Financial or operational difficulties of a third party vendor could also hurt the Company’s operations if those difficulties interface with the vendor’s ability to serve the Company.  Replacing these third party vendors could also create significant delay and expense and damage the Company’s ability to service its customers, resulting in a loss of customer goodwill. Accordingly, use of such third parties creates an unavoidable inherent risk to the Company’s business operations.

Consumers may increasingly decide not to use the Bank to completeprocess their financial transactions, which would have a material adverse impact on the Company’sCompanys financial condition and operations.

Technology and other changes are allowing parties to complete financial transactions through alternative methods that historically have involved banks. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts, mutual funds or general-purpose reloadable prepaid cards. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost of deposits as a source of funds could have a material adverse effect on the Company’s financial condition and results of operations.

 

ChangesThe expected replacement or discontinuation of the London Interbank Offered Rate (LIBOR) as a benchmark interest rate and a transition to an alternative reference interest rate could present operational problems and result in fundingmarket disruption.

The administrator of LIBOR has announced its intention to extend the publication of most tenors of LIBOR for higher education could materially affect our business.

Two major employersU.S. dollars through June 30, 2023 and ceased publishing other LIBOR tenors on December 31, 2021.  Management cannot predict whether or when LIBOR will actually cease to be available, whether the Secured Overnight Funding Rate (“SOFR”), will become the market benchmark in its place or what impact such a transition may have on the Company’s market area are Virginia Tech and Radford University, both state-supported institutions. If federal or state support for public colleges and universities wanes, our business, may be adversely affected from declines in university programs, capital projects, employment, enrollment and other related factors.

The Company is dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect the Company’s operations and prospects.

The Company currently depends on the services of a number of key management personnel. The loss of key personnel could materially and adversely affect the results of operations and financial condition. The Company’s success also depends in part on the ability to attract and retain additional qualified management personnel. Competition for such personnel is strong and the Company may not be successful in attracting or retaining the personnel it requires.

Changes in accounting standards could impact reported earnings.

The authorities who promulgate accounting standards, including the Financial Accounting Standards Board, SEC, and other regulatory authorities, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes are difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases,

The Federal Reserve, based on the Company couldrecommendations of the Federal Reserve Bank of New York’s Alternative Reference Rate Committee, has begun publishing SOFR, which is intended to replace LIBOR, and has encouraged banks to transition away from LIBOR as soon as practicable. Although SOFR appears to be requiredthe preferred replacement rate for LIBOR, it is unclear if other benchmarks may emerge or if other rates will be adopted outside of the United States. The replacement of LIBOR also may result in economic mismatches between different categories of instruments that now consistently rely on the LIBOR benchmark. Markets are slowly developing in response to applythese new rates, and questions around liquidity in these rates and how to appropriately adjust these rates to eliminate any economic value transfer at the time of transition remain a new or revised standard retroactively, resulting in the restatement of financial statements for prior periods. Such changes could also require the Company to incur additional personnel or technology costs. Notably, guidance issued in June 2016 requires a change in the calculation of credit reserves from using an incurred loss model to using the current expected credit losses model (“CECL”). During 2019, the standard’s effective date was delayed for the Company and other qualifying institutions until January 1, 2023. significant concern.

The Company formedhas a management committeesmall number of loans, purchased through participation with larger banks, with attributes that are either directly or indirectly dependent on LIBOR. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. The transition from LIBOR could create additional cost and risk, with potential to prepare foradversely impact the new standard. The committee implemented data collection measures, researched forecasting resources, studied applicable loss calculationsCompany’s financial condition and has begun running preliminary CECL models concurrent with the incurred loss model. The committee will analyze the CECL disclosuresresults of companies who adopt the standard effective January 1, 2020 for consideration in further refining its CECL calculations. To implement the standard, the Company will incur costs related to data collection and documentation, technology, training and increased audit expenses to validate the model. Implementation could significantly impact our required credit reserves. Other impacts to capital levels, profit and loss and various financial metrics will also result.operations.

 

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INTEREST RATE RISK

When market interest rates change, our net interest income can be negatively affected in the short term.

The Company is subject to claimsdirection and litigation pertaining to fiduciary responsibility.

From time to time, customers make claimsspeed of interest rate changes affect our net interest margin and take legal action pertaining tonet interest income. In the performance of the Company’s fiduciary responsibilities. Whether customer claims and legal action related to the performance of the Company’s fiduciary responsibilities are founded or unfounded,short term, rising interest rates may negatively affect our net interest income if such claims and legal actions are not resolved in a manner favorable to the Company, theyour interest-bearing liabilities (generally deposits) reprice sooner than our interest-earning assets (generally loans). Falling interest rates may result in significant financial liability and/or adverselynegatively affect the market perception of the Company and its products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.our net interest income if our interest-earning assets reprice sooner than our interest-bearing liabilities.

 

LIQUIDITY RISK

The Company’s ability to pay dividends depends upon the results of operations of its subsidiaries.Company

The Company is a financial holding company and a bank holding company that conducts substantially all of its operations through NBB. As a result, the Company’s ability to make dividend payments on its common stock depends primarily on certain federal regulatory considerations and the receipt of dividends and other distributions from NBB. There are various regulatory restrictions on the ability of NBB to pay dividends or make other payments to the Company. Although the Company has historically paid a cash dividend to the holders of its common stock, holders of the common stock are not entitled to receive dividends, and regulatory or economic factors may cause the Company’s Board of Directors to consider, among other things, the reduction of dividends paid on the Company’s common stock.

While the Company’s common stock is currently traded on the Nasdaq Capital Market, it has less liquidity than stocks for larger companies quoted on a national securities exchange.

The trading volume in the Company’s common stock on the Nasdaq Capital Market has been relatively low when compared with larger companies listed on the Nasdaq Capital Market or other stock exchanges. There is no assurance that a more active and liquid trading market for the common stock will exist in the future. Consequently, stockholders may not be able to sell a substantial number of shares for the same price at which stockholders could sell a smaller number of shares. In addition, the Company cannot predict the effect, if any, that future sales of its common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of the common stock. Sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, could cause the price of the Company’s common stock to decline, or reduce the Company’s ability to raise capital through future sales of common stock.

The Company’ss liquidity needs could adversely affect results of operations and financial condition.

The Company’s primary sources of funds are deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including, but not limited to, changes in economic conditions, reductions in real estate values or markets, availability of, and/or access to, sources of refinancing, business closings or lay-offs, and natural disasters. Additionally, deposit levels may be affected by a number of factors, including, but not limited to, rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to customers on alternative investments and general economic conditions. Accordingly, the Company may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal Home Loan Bank of Atlanta (“FHLB”) advances, sales of securities and loans, federal funds lines of credit from correspondent banks and borrowings from the Federal Reserve Discount Window, as well as additional out-of-market time deposits and brokered deposits. While the Company believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if the Company continues to grow and experiences increasing loan demand. The Company may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

 

CYBERSECURITY RISK

Our information systems may experience an interruption or security breach.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions of our internet banking, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if it does occur, that it will be adequately addressed.

In the ordinary course of business, the Company collects and stores sensitive data, including proprietary business information and personally identifiable information of its customers and employees, in systems and on networks. The secure processing, maintenance and use of this information is critical to the Company’s operations and business strategy. The Company has invested in industry-accepted technologies, and annually reviews its processes and practices that are designed to protect its networks, computers and data from damage or unauthorized access. Despite these security measures, the Company’s computer systems experienced two cyber-intrusions, one in May 2016 and one in January 2017 in which certain customer information was compromised, but which did not cause interruption to the Company’s normal operations.  The Company has implemented additional security measures since the breaches.

The Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. A breach of any kind could compromise systems and the information stored there could be accessed, damaged or disclosed. The occurrence of any failure, interruption or security breach of our communications and information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability.

Cybersecurity attacks may disarm and/or bypass system safeguards that are used by us and our vendors and service providers, and allow unauthorized access and misappropriation of financial data and assets.

As a financial institution, we are vulnerable to and are the target of cybersecurity attacks that attempt to access our digital technology systems, disarm and/or bypass system safeguards, access customer data and ultimately increase the risk of economic and reputational loss.

The Company experienced two cyber-intrusions, one in May 2016 and one in January 2017 in which certain customer information was compromised. The Company has strengthened its multi-faceted approach to reduce the exposure of our systems to cyber-intrusions, strengthen our defenses against hackers and protect customer accounts and information relevant to customer accounts from unauthorized access.  These tools include digital technology safeguards, internal policies and procedures, and employee training.

The Company believes its cybersecurity risk management program reasonably addresses the risk from cybersecurity attacks.  However, it is not possible to fully eliminate exposure. We may experience human error or have unknown susceptibilities that allow our systems to become victim to a highly-sophisticated cyber-attack.  If hackers gain entry to our systems, they may disable other safeguards that limit loss, including limits on the number, amount and frequency of ATM withdrawals, as well as other loss-prevention or detection measures.

We also face risks related to cybersecurity attacks and security breaches in connection with the use, transmission and storage of sensitive information regarding us and our customers by various vendors and service providers. Some of these vendors and service providers have been the target of cybersecurity attacks or suffered security breaches, and because they use systems that we do not control or secure, future cyber-attacks or security breaches affecting any of these vendors and service providers could impact us through no fault of our own. In some cases, we may have exposure and suffer losses relating to these companies. Although we assess the security of our higher risk vendors and service providers, we cannot be sure that the information security protocols of all companies we do business with are sufficient to withstand cyber-attacks or other security breaches.

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Cybersecurity attacks are probable and may result in additional costs.

The Company has experienced many attempted cybersecurity attacks, of which two resulted in a breach.  The Company estimates that the probability of future attempted cyber-attacks is high.  To reduce the risk of loss from cyber-attacks, the Company has incurred costs related to advisory expenses, insurance premiums, system monitoring and testing, and installing new technological infrastructure and defenses.  If the Company experiences a cyber-breach, these costs will increase and the Company will also likely incur additional litigation, reputational harm and regulatory costs.

Insurance may not cover losses from cybersecurity attacks.

The Company has invested in insurance related to cybersecurity.  Insurance policies are necessary to protect the Company from major losses but may be written in such a way as to limit the protection from certain risks, including cyber risks.  If the insurance carrier denies coverage of losses, the Company may litigate.  Because of policy technicalities, litigation may not result in a favorable outcome for the Company.  Litigation will result in additional legal expense.

OPERATIONAL RISK

The Company is dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect the Companys operations and prospects.

The Company currently depends on the services of a number of key management personnel. The loss of key personnel could materially and adversely affect the results of operations and financial condition. The Company’s success also depends in part on the ability to attract and retain additional qualified management personnel. Competition for such personnel is strong and the Company may not be successful in attracting or retaining the personnel it requires.

The Company relies on other companies to provide key components of the Companys business infrastructure.

Third parties provide key components of the Company’s business operations such as data processing, recording and monitoring transactions, online banking interfaces and services, internet connections and network access. While the Company has selected these third party vendors carefully, it does not control their actions. Any problem caused by these third parties, including those resulting from disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, failures of a vendor to provide services for any reason or poor performance of services, could adversely affect the Company’s ability to deliver products and services to its customers and otherwise conduct its business. Financial or operational difficulties of a third party vendor could also hurt the Company’s operations if those difficulties interface with the vendor’s ability to serve the Company.  Replacing these third party vendors could also create significant delay and expense and damage the Company’s ability to service its customers, resulting in a loss of customer goodwill. Accordingly, use of such third parties creates an unavoidable inherent risk to the Company’s business operations.

The Companys ability to operate profitably may be dependent on its ability to integrate or introduce various technologies into its operations.

The market for financial services, including banking and consumer finance services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation, online banking and tele-banking. The Company’s ability to compete successfully in its market may depend on the extent to which it is able to exploit such technological changes. If the Company is not able to afford such technologies, properly or timely anticipate or implement such technologies, or effectively train its staff to use such technologies, its business, financial condition or results of operations could be adversely affected.

COMPLIANCE AND REGULATORY RISK

Additional laws and regulations, or revisions and rescission of existing laws and regulations, could lead to a significant increase in our regulatory burden.

Both federal and state governments could enact new laws and regulations affecting financial institutions that would further increase our regulatory burden and could negatively affect our profits. Likewise, revisions or rescission of existing laws and regulations already implemented may result in additional compliance costs, at least in the short term or, if done imprudently, could ultimately create economic risks negatively affecting our revenues.

Intense oversight by regulators could result in stricter requirements and higher overhead costs.

Regulators for the Company and the Bank are tasked with ensuring compliance with applicable laws and regulations. Laws and regulations are subject to a degree of interpretation. If financial industry regulators take more extreme interpretations, the Company’s earnings could be adversely impacted.

Regulatory capital standards may have an adverse effect on the Companys profitability, lending, and ability to pay dividends on the Companys securities.

The Company is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that the Company and the Bank must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. If the Company fails to meet these minimum capital guidelines and/or other regulatory requirements, its financial condition would be materially and adversely affected. The Basel III Capital Rules require bank holding companies and their subsidiaries to maintain significantly more capital as a result of higher required capital levels and more demanding regulatory capital risk weightings and calculations. While the Company is exempt from these capital requirements under the Statement, the Bank is not exempt and must comply. The Bank must also comply with the capital requirements set forth in the “prompt corrective action” regulations pursuant to Section 38 of the Federal Deposit Insurance Act, as amended. Satisfying capital requirements may require the Company to limit its banking operations, retain net income or reduce dividends to improve regulatory capital levels, which could negatively affect its business, financial condition and results of operations.

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Changes in accounting standards could impact reported earnings.

The authorities who promulgate accounting standards, including the Financial Accounting Standards Board (“FASB”), SEC, and other regulatory authorities, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes are difficult to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of consolidated financial statements for prior periods. Such changes could also require the Company to incur additional personnel or technology costs. Notably, guidance issued in June 2016 requires a change in the calculation of credit reserves from using an incurred loss model to using the current expected credit losses model (“CECL”). During 2019, the standard’s effective date was delayed for the Company and other qualifying institutions until January 1, 2023. The Company formed a management committee to prepare for the new standard. The committee implemented data collection measures, researched forecasting resources, studied applicable loss calculations and has begun running preliminary CECL models concurrent with the incurred loss model. To implement the standard, the Company will incur costs related to documentation, technology, training and increased audit expenses to validate the model. Implementation could significantly impact our required credit reserves. Other impacts to capital levels, profit and loss and various financial metrics will also result.

The Companys ability to pay dividends depends upon the results of operations of its subsidiaries.

The Company is a financial holding company and a bank holding company that conducts substantially all of its operations through NBB. As a result, the Company’s ability to make dividend payments on its common stock depends primarily on certain federal regulatory considerations and the receipt of dividends and other distributions from NBB. There are various regulatory restrictions on the ability of NBB to pay dividends or make other payments to the Company. Although the Company has historically paid a cash dividend to the holders of its common stock, holders of the common stock are not entitled to receive dividends, and regulatory or economic factors may cause the Company’s Board of Directors to consider, among other things, the reduction of dividends paid on the Company’s common stock.

Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact the Companys business.

The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. Federal and state legislatures and regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. The federal banking agencies, including the OCC, have emphasized that climate-related risks are faced by banking organizations of all types and sizes and are in the process of enhancing supervisory expectations regarding banks’ risk management practices. In December 2021, the OCC published proposed principles for climate risk management by banking organizations with more than $100 billion in assets. The OCC also has appointed its first ever Climate Change Risk Officer and established an internal climate risk implementation committee in order to assist with these initiatives and to support the agency’s efforts to enhance its supervision of climate change risk management.  Similar and even more expansive initiatives are expected, including potentially increasing supervisory expectations with respect to banks’ risk management practices, accounting for the effects of climate change in stress testing scenarios and systemic risk assessments, revising expectations for credit portfolio concentrations based on climate-related factors and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change.  To the extent that these initiatives lead to the promulgation of new regulations or supervisory guidance applicable to the Company, the Company would likely experience increased compliance costs and other compliance-related risks.

LEGAL RISK

The Company is subject to claims and litigation pertaining to fiduciary responsibility.

From time to time, customers make claims and take legal action pertaining to the performance of the Company’s fiduciary responsibilities. Whether customer claims and legal action related to the performance of the Company’s fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability and/or adversely affect the market perception of the Company and its products and services, as well as impact customer demand for those products and services. Any financial liability or reputation damage could have a material adverse effect on the Company’s business, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations.

GENERAL RISK

Changes in funding for local universities could materially affect our business.

Two major employers in the Company’s market area are Virginia Tech and Radford University, both state-supported institutions. If federal or state support for public colleges and universities wanes, our business may be adversely affected from declines in university programs, capital projects, employment, enrollment, sporting and cultural events, and other related factors.

If the economy suffers a recession, our credit risk will increase and there could be greater loan losses.

If the economy suffers a recession, it is likely to result in a higher rate of business closures and increased job losses in the region in which we do business. These factors would increase the likelihood that more of our customers would become delinquent or default on their loans. A higher level of loan defaults could result in higher loan losses, which could adversely affect our result of operations and financial condition.

Political, economic and social risks in the U.S. and the rest of the world could negatively affect the financial markets.

Political, economic and social risks in the U.S. and the rest of the world could affect financial markets and affect fiscal policy which could negatively affect our investment portfolio and earnings.

While the Companys common stock is currently traded on the Nasdaq Capital Market, it has less liquidity than stocks for larger companies quoted on a national securities exchange.

The trading volume in the Company’s common stock on the Nasdaq Capital Market has been relatively low when compared with larger companies listed on the Nasdaq Capital Market or other stock exchanges. There is no assurance that a more active and liquid trading market for the common stock will exist in the future. Consequently, stockholders may not be able to sell a substantial number of shares for the same price at which stockholders could sell a smaller number of shares. In addition, the Company cannot predict the effect, if any, that future sales of its common stock in the market, or the availability of shares of common stock for sale in the market, will have on the market price of the common stock. Sales of substantial amounts of common stock in the market, or the potential for large amounts of sales in the market, could cause the price of the Company’s common stock to decline, or reduce the Company’s ability to raise capital through future sales of common stock.

Natural disasters, acts of war or terrorism, the impact of public health epidemicsissues and other adverse external events could detrimentally affect our financial condition and results of operations. 

Natural disasters, acts of war or terrorism, the impact of public health issues and other adverse external events could have a significant negative impact on our ability to conduct business or upon third parties who perform operational services for us or our customers.  Such events also could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue or cause us to incur additional expenses.

The recent coronavirus outbreak could negatively impact the ability of our employees and customers to engage in banking and other financial transactions in the geographic areas in which the Company operates. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to a coronavirus outbreak in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. In the event of a natural disaster, acts of war or terrorism, the spreadimpact of the coronavirus to our market areaspublic health issues or other adverse external events, our business, services, asset quality, financial condition and results of operations could be adversely affected.

15

 

The effects of widespread public health emergencies may negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations.

Widespread health emergencies, such as the recent coronavirus outbreak,current COVID-19 pandemic, can disrupt our operations through their impact on our employees, customers and their businesses, and the communities in which we operate. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result in a decline in local loan demand, loan originations and deposit availability and negatively impact the implementation of our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results of operations.

 

The ongoing COVID-19 pandemic may adversely affect the Companys business, financial condition and operations; the extent of such impacts are highly uncertain and difficult to predict.

Global health and economic concerns relating to the COVID-19 pandemic has had a material adverse impact on the macroeconomic environment and significantly increased economic uncertainty.

The COVID-19 outbreak has adversely impacted and is likely to continue to adversely impact the Company’s workforce and operations and the operations of the Company’s customers and business partners. In particular, the Company may experience adverse effects due to operational factors impacting the Company or its customers or business partners, including but not limited to:

decreased demand for the Company’s products and services due to economic uncertainty, volatile market conditions and temporary business closures;

credit losses resulting from financial stress experienced by the Company’s borrowers, especially those operating in industries most hard hit by government measures to contain the spread of the virus;

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

the allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods or after the cessation of government aid, which will adversely affect the Company’s net income;

operational failures, disruptions or inefficiencies due to changes in the Company’s normal business practices necessitated by its internal measures to protect the Company’s employees and government-mandated measures intended to slow the spread of the virus;

possible business disruptions experienced by vendors and business partners in carrying out work that supports the Company’s operations;

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of the cash dividend paid to the Company’s shareholders;

any financial liability, credit losses, litigation costs or reputational damage resulting from the Company’s origination of loans under the SBA’s PPP; and

heightened levels of cyber and payment fraud, as cyber criminals try to take advantage of the disruption and increased online activity brought about by the COVID-19 pandemic.

The extent to which the COVID-19 pandemic impacts the Company’s business, liquidity, financial condition and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. In addition, the rapidly changing and unprecedented nature of COVID-19 heightens the inherent uncertainty of forecasting future economic conditions and their impact on the Company’s loan portfolio, thereby increasing the risk that the assumptions, judgments and estimates used to determine the allowance for loan losses and other estimates are incorrect. Further, the Company’s program providing loan payment extensions and interest only periods could delay or make it difficult to identify the extent of asset quality deterioration during the period of relief. As a result of these and other conditions, the ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change, and the Company cannot predict the full extent of the impacts on its business or operations, or the local and national economy as a whole. To the extent any of the foregoing risks or other factors that develop as a result of COVID-19 materialize, it could exacerbate the risk factors above, or otherwise materially and adversely affect the Company’s business, liquidity, financial condition and results of operations.

 

15
16

 

Item 1B. Unresolved Staff Comments

 

There are no unresolved staff comments.

 

Item 2. 2. Properties

 

NBB owns and has a branch bank in NBI’s headquarters building located at 101 Hubbard Street, Blacksburg, Virginia. NBB’s main office is at 100 South Main Street, Blacksburg, Virginia. NBB owns an additional seventeeneighteen branch offices and a private office location for support functions and it leases sixfour branch locations and a loan production office. We believe that existing facilities are adequate for current needs and to meet anticipated growth.

 

Item 3. 3. Legal Proceedings

 

NBI, NBB, and NBFS are not currently involved in any material pending legal proceedings. There are no legal proceedings against the Company related to cybersecurity.

 

Item 4. 4. Mine Safety Disclosures

 

Not applicable.

Part II

 

Part II

Item 5. Market for Registrants Common Equity,, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Common Stock Information and Dividends

National Bankshares, Inc.’sNBI’s common stock is traded on the Nasdaq Capital Market under the symbol “NKSH.” As of December 31, 2019,2021, there were 611560 record stockholders of NBI common stock.

NBI’s primary source of funds for dividend payments is dividends from its bank subsidiary, NBB. Bank dividend payments are restricted by regulators, as more fully disclosed in “Regulation, Supervision and Government Policy” contained in Part I, Item 1, “Business” and Note 10 of Notes to Consolidated Financial Statements contained in Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.

On May 15, 2019,12, 2021, NBI’s Board of Directors approved the repurchase of up to 1,000,000 shares of the Company’s common stock. The authorization extends from June 1, 20192021 to May 31, 2020.2022. During 2019,2021, the Company repurchased 452,400368,083 shares, of which 87,400 shares were repurchased under a prior repurchase authorizationplan in effect from June 1, 2020 to May 31, 2021 and 16,000106,121 shares were repurchased under the repurchase program authorized in May 2019.plan that became effective June 1, 2021. The Company may yet repurchase 984,000893,879 shares under the program.

Purchases of Equity Securities by the Issuer

Share repurchase activity during the fourth quarter of 2019 was as follows:

Period

Total

Number of

Shares

Purchased(1)

Average Price

Paid

Per Share

Total Number of

Shares Purchased as

Part of Publicly

Announced Program(1)

Number of

Shares that May Yet

Be Purchased

Under the Program(1)

October 1, 2019 – October 31, 2019

---------984,000

November 1, 2019 – November 30, 2019

---------984,000

December 1, 2019 – December 31, 2019

---------984,000

Total during fourth quarter 2019

---------

(1) In May 2018, the Company announced the Board of Directors had authorized a 100,000 share repurchase program. In November 2018, the Company announced that the Board of Directors increased its authorization to repurchase up to 250,000 shares. In February 2019, the Company announced that the Board of Directors increased its authorization to repurchase up to 1,000,000 shares, with an expiration date of May 31, 2019. In May 2019, the Company renewed authorization to repurchase up to 1,000,000 shares, with an expiration date of May 31, 2020. The Company’s share repurchase program does not obligate it to acquire any specific number of shares or any shares at all.

During the year ended December 31, 2019,2020, the Company repurchased 468,400 shares.57,554 shares under prior repurchase authorizations.

Purchases of Equity Securities by the Issuer

Share repurchase activity during the fourth quarter of 2021 was as follows:

Period

 

Total

Number of

Shares

Purchased(1)

  

Average Price

Paid

Per Share

  

Total Number of

Shares Purchased as

Part of Publicly

Announced Program

  

Number of

Shares that May Yet

Be Purchased

Under the Program

 

October 1, 2021 – October 31, 2021

  1,400  $37.08   1,400   925,500 

November 1, 2021 – November 30, 2021

  31,621   38.51   31,621   893,879 

Total during fourth quarter 2021

  33,021  $38.45   33,021     

Item 6. [Reserved]

 

16

Stock Performance Graph

The following graph compares the yearly percentage change in the cumulative total of stockholder return on NBI common stock with the cumulative return on the Nasdaq Composite Index, and the Nasdaq Bank Index for the five-year period commencing on December 31, 2014. These comparisons assume the investment of $100 in National Bankshares, Inc. common stock in each of the indices on December 31, 2014, and the reinvestment of dividends.

  

2014

 

2015

 

2016

 

2017

 

2018

 

2019

NATIONAL BANKSHARES, INC.

  100   121   153   165   136   173 

NASDAQ COMPOSITE INDEX

  100   107   117   151   147   201 

NASDAQ BANK INDEX

  100   108   150   158   133   167 

17

 

Item 6. Selected Financial Data 7. Management

National Bankshares, Inc. and Subsidiaries

Selected Consolidated Financial Data

$ in thousands, except per share data

 

Year ended December 31,

  

2019

 

2018

 

2017

 

2016

 

2015

Selected Income Statement Data:

                    

Interest income

 $45,147  $43,224  $41,260  $40,930  $42,914 

Interest expense

  7,380   5,047   4,125   4,166   4,183 

Net interest income

  37,767   38,177   37,135   36,764   38,731 

Provision for (recovery of) loan losses

  126   (81

)

  157   1,650   2,009 

Noninterest income

  8,790   7,729   7,636   7,115   6,764 

Noninterest expense

  25,754   27,276   24,229   23,335   22,913 

Income taxes

  3,211   2,560   6,293   3,952   4,740 

Net income

  17,466   16,151   14,092   14,942   15,833 
                     

Per Share Data:

                    

Basic net income

  2.65   2.32   2.03   2.15   2.28 

Diluted net income

  2.65   2.32   2.03   2.15   2.28 

Cash dividends declared

  1.39   1.21   1.17   1.16   1.14 

Book value

  28.31   27.34   26.57   25.62   24.74 
                     

Selected Balance Sheet Data at End of Year:

                    

Loans, net of unearned income and deferred fees and costs, and the allowance for loan losses

  726,588   702,409   660,144   639,452   610,711 

Total securities

  436,483   426,230   459,751   440,409   389,288 

Total assets

  1,321,837   1,256,032   1,256,757   1,233,942   1,203,519 

Total deposits

  1,119,753   1,051,942   1,059,734   1,043,442   1,018,859 

Stockholders’ equity

  183,726   190,238   184,896   178,263   172,114 
                     

Selected Balance Sheet Daily Averages:

                    

Loans, net of unearned income and deferred fees and costs, and the allowance for loan losses

  711,851   675,647   644,998   613,366   611,554 

Total securities

  394,356   455,810   442,101   420,915   379,805 

Total assets

  1,255,934   1,251,843   1,235,754   1,206,745   1,155,594 

Total deposits

  1,062,683   1,045,798   1,038,586   1,013,787   976,597 

Stockholders’ equity

  176,906   186,637   184,539   180,047   171,732 
                     

Selected Ratios:

                    

Return on average assets

  1.39

%

  1.29

%

  1.14

%

  1.24

%

  1.37

%

Return on average equity

  9.87

%

  8.65

%

  7.64

%

  8.30

%

  9.22

%

Dividend payout ratio

  51.71

%

  52.13

%

  57.77

%

  54.02

%

  50.09

%

Average equity to average assets

  14.09

%

  14.91

%

  14.93

%

  14.92

%

  14.86

%

Efficiency ratio(1)

  54.44

%

  53.20

%

  50.41

%

  49.32

%

  49.41

%

(1)

The efficiency ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with U.S. generally accepted accounting principles (GAAP) and should not be viewed as a substitute for GAAP. See “Non-GAAP Financial Measures” included in Item 7 of this Form 10-K.

18

Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsOperations

$ in thousands, except per share datadata.

 

The purpose of this discussion and analysis is to provide information about the results of operations, financial condition, liquidity and capital resources of of the Company. The discussion should be read in conjunction with the material presented in Item 8, “Financial Statements and Supplementary Data,” of this Form 10-K.

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

 

Cautionary Statement Regarding Forward-Looking Statements

We make forward-looking statements in this Form 10-K that are subject to significant risks and uncertainties.  These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals, and are based upon our management’s views and assumptions as of the date of this report.  The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements.

These forward-looking statements are based upon or are affected by factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. These factors include, but are not limited to, effects of or changes in:

interest rates,

 

interest rates,general and local economic conditions,

 

general and local economic conditions,the legislative/regulatory climate,

the legislative/regulatory climate,

 

monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury, the Office of the Comptroller of the Currency,OCC, the Federal Reserve, the Consumer Financial Protection BureauCFPB 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 impactlevel of any policies or programs implemented pursuant to financial reform legislation,unemployment in the Company’s market,

 

unanticipated increases in the levelquality or composition of unemployment in the Company’s market,loan and/or investment portfolios,

 

the quality or composition of thedemand for loan and/or investment portfolios,products,

deposit flows,

competition,

 

demand for loan products,financial services in the Company’s market,

deposit flows,

competition,

demand for financial services in the Company’s market,

 

the real estate market in the Company’s market,

 

laws, regulations and policies impacting financial institutions,

 

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

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

 

the Company’s technology initiatives,

steps the Company takes in response to the COVID-19 pandemic, the severity and duration of the COVID-19 pandemic, the uncertainty regarding new variants of COVID-19 that have emerged, the speed and efficacy of vaccine and treatment developments, the impact of loosening or tightening of government restrictions, the pace of recovery when the COVID-19 pandemic subsides and the heightened impact it has on many of the risks described herein,

performance by the Company’s counterparties or vendors,

 

applicable accounting principles, policies and guidelines, and

 

business disruptionsdisruption and/or impact due to the coronavirus or similar pandemic diseases.

These risks and uncertainties should be considered in evaluating the forward-looking statements contained in this report. We caution readers not to place undue reliance on those statements, which speak only as of the date of this report. This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A. of this Form 10-K.

 

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 or wire requests 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.

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 $357 for 2021 and $379 for 2020. These costs are included in various categories of noninterest expense.

 

1918

 

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.

Response to COVID-19 Pandemic

The COVID-19 pandemic has affected the global economy since the first quarter of 2020. The Company has complied with national, state and local guidelines to help reduce the spread of the virus, including implementing social distancing measures for employees and customers. The Company’s business relies on positive relationships with customers. At this time, we feel our customer relationships remain strong and our team remains ready to provide banking services. All forms of customer service are now available without restriction.

The Company has a robust business continuity plan, and partners with vendors whom we believe also have robust business continuity plans. In implementing its business continuity plan to address the COVID-19 pandemic, the Company has not incurred material expenditures and does not anticipate material expenditures. Further, all critical functions are cross-trained as part of our business continuity preparedness. Controls over cash and physical assets have remained in place and internal controls over financial reporting and disclosure have been maintained.

Non-GAAP Financial Measures

The Company prepares financial information in accordance with accounting principles generally accepted in the United States (“GAAP”),GAAP, with the exception of certain financial measures which are computed under a basis other than GAAP (“non-GAAP”). These measures include the efficiency ratio, the net interest margin and the noninterest margin. Management believes such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP.

Net Interest Margin

The efficiency ratio is computed by dividing noninterest expense, excluding certain items management deems unusual or non-recurring, byCompany uses the sum of net interest incomemargin to measure profit on interest generating activities, as a tax-equivalent basis and noninterest income, excluding certain items management deems unusual or non-recurring. The tax rate used to calculate fully taxable equivalent basis is 21% in 2019 and 2018 and 35% in 2017.  This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. The componentspercentage of the efficiency ratio calculation are summarized in the following table.

$ in thousands

 

Year ended December 31,

  

2019

 

2018

 

2017

Noninterest expense

 $25,754  $27,276  $24,229 

Less: write-down of insurance receivable

  ---   (2,010

)

  --- 

Noninterest expense for ratio calculation

 $25,754  $25,266  $24,229 
             

Taxable-equivalent net interest income

 $39,056  $39,764  $40,432 

Noninterest income

  8,790   7,729   7,636 

Less: recovery of insurance receivable

  (538

)

  ---   --- 
Less: realized securities gains  (566)  (17)  (14)

Total income for ratio calculation

 $46,742  $47,476  $48,054 
             

Efficiency ratio

  55.10

%

  53.22

%

  50.42

%

total interest-earning assets. The net interest margin is calculated by dividing taxable equivalent net interest income by total average earninginterest-earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for 2019 and 2018 is 21% and for 2017 is 35%. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below.

 

$ in thousands

 

Year ended December 31,

 

Year ended December 31,

 
 

2019

 

2018

 

2017

 

2021

 

2020

 

GAAP measures:

             

Interest and fees on loans

 $33,869  $31,333  $29,932  $34,923  $34,523 

Interest on interest-bearing deposits

  1,523   672   791   170  276 

Interest and dividends on securities - taxable

  6,725   6,856   5,711   7,960  7,383 

Interest on securities - nontaxable

  3,030   4,363   4,826   1,934  1,826 

Total interest income

 $45,147  $43,224  $41,260  $44,987  $44,008 
             

Interest on deposits

 $7,380  $4,883  $4,125  $3,098  $5,837 

Interest on borrowings

  ---   164   --- 

Total interest expense

 $7,380  $5,047  $4,125 
                

Net interest income

 $37,767  $38,177  $37,135  $41,889  $38,171 
             

Non-GAAP measures:

             

Tax benefit on nontaxable loan income

 $465  $406  $661  $318  $444 

Tax benefit on nontaxable securities income

  824   1,181   2,636   643  564 

Total tax benefit on nontaxable interest income

 $1,289  $1,587  $3,297  $961  $1,008 

Total tax-equivalent net interest income

 $39,056  $39,764  $40,432  $42,850  $39,179 

 

20
19

 

Efficiency Ratio

The noninterest marginefficiency ratio is calculatedcomputed by dividing noninterest expense (excludingby the write-downsum of insurance receivable) lessnet interest income on a tax-equivalent basis and noninterest income, (excluding realized securities gain/loss, net) by average year-to-date assets.excluding certain items management deems unusual or non-recurring. The reconciliationtax rate used to calculate the fully taxable equivalent basis is 21%. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. The components of adjusted noninterest income and adjusted noninterest expense, whichthe efficiency ratio calculation are not measurements under GAAP, is reflectedsummarized in the table below.following table.

 

$ in thousands

 

Year ended December 31,

  

2019

 

2018

 

2017

Noninterest expense under GAAP

 $25,754  $27,276  $24,229 

Less: write-down of insurance receivable

  ---   (2,010

)

  --- 

Noninterest expense for ratio calculation, non-GAAP

 $25,754  $25,266  $24,229 
             

Noninterest income under GAAP

 $8,790  $7,729  $7,636 

Less: recovery of insurance receivable

  (538

)

  ---   --- 

Less: realized securities gains, net

  (566

)

  (17

)

  (14

)

Noninterest income for ratio calculation, non-GAAP

 $7,686  $7,712  $7,622 
             

Net noninterest expense, non-GAAP

 $18,068  $17,554  $16,607 
             

Average assets

 $1,255,934  $1,251,843  $1,235,755 
             

Noninterest margin

  1.44

%

  1.40

%

  1.34

%

$ in thousands

 

Year ended December 31,

 
  

2021

  

2020

 

Noninterest expense

 $26,080  $24,970 
         

Taxable-equivalent net interest income

 $42,850  $39,179 

Noninterest income

  8,426   7,944 

Less: partnership income (1)

  (467

)

  (332

)

Less: realized securities gains

  (6

)

  (108

)

Total income for ratio calculation

 $50,803  $46,683 
         

Efficiency ratio

  51.34

%

  53.49

%

(1)

During the first quarter of each year, the Company adjusts its basis in partnership interests. During 2021 and 2020, the adjustment resulted in recognition of a gain.  During 2021, the Company also received a one-time payout from a partnership interest. The gains and one-time payout are reflected in other income.

 

Critical Accounting Policies

 

General

The Company’s consolidated financial statements are prepared in accordance with GAAP. The financial information contained within our statements is, to a significant extent, financial information 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.

Presented below is a discussion of accounting policies that are the most important to the portrayal and understanding of the Company’s financial condition and results of operations. Please refer to Note 1 of Notes to Consolidated Financial Statements for additional information on the Company’s accounting policies. Critical accounting policies 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 evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed.

 

Allowance for Loan Losses

The allowance for loan losses is an estimate of probable losses inherent in our loan portfolio. The allowance is funded by the provision for loan losses, reduced by charge-offs of loans and increased by recoveries of previously charged-off loans. The determination ofCompany evaluates the allowance is based on two accounting principles, Accounting Standards Codification (“ASC”) Topic 450-20 (Contingencies) which requireseach quarter through a methodology that losses be accrued when occurrence is probable and the amount of the loss is reasonably estimable, and ASC Topic 310-10 (Receivables) which requires accrual ofestimates losses on impaired loans if the recorded investment exceeds fair value.

Probable losses are accrued through two calculations, individual evaluation of impaired loans and collective evaluationevaluates the effect of numerous factors on the remaindercredit risk of the portfolio. groups of homogeneous loans (collectively-evaluated loans).

Impaired loans are larger non-homogeneous loans for which there is a probability that collection will not occur according to the loan terms, as well as loans whose terms have been modified in a troubled debt restructuring (“TDRs”). Impaired loans that are not TDRs with an estimated impairment loss are placed on nonaccrual status. TDRs with an impairment loss may accrue interest if they have demonstrated six months of timely payment performance.

Impaired loans

Impaired loans are identified through the Company’s credit risk rating process. Estimated lossGenerally, impaired loans have risk ratings that indicate higher risk, such as “classified” or “special mention.” Nonaccrual loan relationships that meet the Company’s balance threshold of $250 are designated impaired. Other loan relationships that meet the Company’s balance threshold of $250 and for an impairedwhich a credit review identified a weakness that indicates principal and interest will not be collected according to the loan terms. All TDRs, regardless of size or past due status are designated impaired.

Troubled debt restructurings

Loan modifications are reviewed to determine whether, at the time of the modification, the borrower is experiencing financial difficulty and whether the amountCompany provided a concession that it would not otherwise consider. With the exception of recorded investmentborrowers affected by COVID-19 in 2020 or 2021 who fell under the provisions of the CARES Act and CAA, modified loans that exceedsmeet this criteria are designated TDRs.

20

Individual evaluation

At the loan’s fair value. Fair value of an impaired loan is measured by one of three methods:reporting date, the fair value of collateral (“collateral method”),each impaired loan is estimated using either the present value of future cash flows (“cash flow method”),method or observable market price. The Company applies the collateral method.

Cash flow method to collateral-dependent loans, loans for which foreclosure is imminent and to loans for which the fair value of collateral is a more reliable estimate of fair value.

The cash flow method is applied to loans that are not collateral dependent and for which cash flows may be estimated. The cash flow method measures fair value using assumptions specific to each loan, including expected amount and timing of cash flows and discount rate. For TDR loans, the discount rate is the rate immediately prior to the modification that resulted in a TDR. If an impaired loan evaluated under the cash flow method becomes 90 days or more past due, it is examined to determine whether the late payment indicates collateral dependency or cash flows below those that were used in the fair value measurement.

 

21

Collateral method

The Company bases collateral method fair valuationis applied to impaired loans that are collateral-dependent, for which foreclosure is imminent or for which non-collateral repayment sources are determined not to be available or reliable. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Fair value is based upon the “as-is” value of independent appraisals or evaluations. Valuations for impaired

Impaired loans secured by residential 1-4 family properties with outstanding principal balances greater than $250 are based onvalued using an appraisal. Appraisals are also used to value impaired loans secured by commercial real estate with outstanding principal balances greater than $500. Collateral-method impairedImpaired loans secured by residential 1-4 family property with outstanding principal balances of $250 or less, or secured by commercial real estate with outstanding principal balances of $500 or less, are valued using an internal evaluation.a real estate evaluation prepared by a third party.

Appraisals and internal valuations provide an estimate of market value. Appraisals must conform to the Uniform Standards of Professional Appraisal Practice and are prepared by an independent third-party appraiser who is certified and licensed and who is approved by the Company. Appraisals may incorporate market analysis, comparable sales analysis, cash flow analysis and market data pertinent to the property to determine market value.

Internal evaluationsEvaluations are prepared by third party providers and reviewed by employees of the Company who are independent of the loan origination, operation, management and collection functions. Evaluations provide a property’s market value based on the property’s current physical condition and characteristics and the economic market conditions that affect the collateral’s market value. Evaluations incorporate multipleMultiple sources of data contribute to arrive at a property’sthe estimate of market value, including physical inspection, independent third-party automated tools, comparable sales analysis and local market information.

Updated appraisals or evaluations are ordered when thea loan becomes impaired if the appraisal or evaluation on file is more than twenty-four24 months old. Appraisals and evaluations are reviewed for propriety and reasonableness and may be discounted if the Company determines that the value exceeds reasonable levels. If an updated appraisal or evaluation has been ordered but has not been received by a reporting date, the fair value may be based on the most recent available appraisal or evaluation, discounted for age.

The appraisal or evaluation value for a collateral-dependent loan for whichis reduced by selling costs if recovery is expected solely from the sale of collateralcollateral.

Nonaccrual status of impaired loans

Nonaccrual status is reduced by estimated selling costs. Estimated losses on collateral-dependent loans, as well as any other impairment loss considered uncollectible, are charged against the allowance for loan losses. Impairment losses that are not considered uncollectible or forapplied to impaired loans that are not TDRs and for which fair value measurement indicates an impairment loss. Nonaccrual status is applied to TDRs that allow the borrower to discontinue payments of principal or interest for more than 90 days, unless the modification provides reasonable assurance of repayment performance and collateral dependent are accrued in the allowance.value supports regular underwriting requirements. TDRs that maintain current status for at least a six-month period, including history prior to restructuring, may accrue interest. Impaired loans with partial charge-offs are maintained as impaired until the remaining balance is satisfied. Smaller homogeneous impaired loans that are not troubled debt restructurings and are not part of a larger impaired relationship are collectively evaluated.

TDRs are impaired loans and are measured for impairment under the same valuation methods as other impaired loans. TDRs are maintained in nonaccrual status until the loan has demonstrated reasonable assurance of repayment with at least six months of consecutive timely payment performance. TDRs may be removed from TDR status, and therefore from individual evaluation, if the restructuring agreement specifies a contractual interest rate that is a market interest rate at the time of restructuring and the loan is in compliance with its modified terms one year after the restructure was completed.

 

Collectively-evaluatedCollectively evaluated loans

Non-impaired loans and smaller homogeneous impaired loans that are not TDRs and not part of a larger impaired relationship are grouped by portfolio segments. Portfolio segments are further divided into smaller loan classes. Loans within a segment or class have similar risk characteristics.

Probable Credit loss on collectively-evaluated loans is determinedestimated by applying to current class balances the class historical net charge-off rates as well as additionaland percentages for trendsqualitative factors that affect credit risk.

Qualitative factors include changes in national and current levelslocal economic and business conditions, the nature and volume of quantitativeclasses within the portfolio, loan quality, loan officers’ experience, lending policies and the Company’s loan review system. The qualitative factors. factor allocations are determined for pass-rated loans.  To reflect the increased risk of criticized assets, qualitative factor allocations are multiplied by 150% for special mention loans, and multiplied by 200% for classified loans.

Loss rates

Loss rates are calculated for and applied to individual classes by averaging loss rates over the most recent eight quarters. The loss rate calculation for each class includes losses and recoveries on all loans within the class, including TDRs and other impaired loans. The look-back period of eight quarters is applied consistently among all classes.

Two loss rates for each class are calculated: total net charge-offs for the class as a percentage of average class loan balance (“class loss rate”), and total net charge-offs for the class as a percentage of average classified loans in the class (“classified loss rate”). Classified loans are those with risk ratings that indicate credit quality is “substandard”, “doubtful” or “loss”. Net charge-offs in both calculations include charge-offs and recoveries offor all loans within the class, including classified and non-classified loans, as well as those associated with impaired and TDR loans. Class historical loss rates are applied to collectively-evaluated non-classifiedcollectively evaluated pass-rated loan balances and special mention rated loan balances, and classified historical loss rates are applied to collectively-evaluatedcollectively evaluated classified loan balances.

21

Qualitative factor allocations

The analysis of certain factors are evaluated andresults in standard allocations are applied to each class. Qualitativeall classes. These factors include delinquency rates, loan quality and concentrations,the risk from changes in lending policies, loan officers’ experience, changes in lending policiesloan review, and changeseconomic factors including local unemployment levels, local bankruptcy rates, interest rate environment, and competition/legal/regulatory environments. Standard allocations for residential vacancy rates and housing inventory are applied to the following classes: all classes within the consumer real estate segment, residential construction, investor-owned residential real estate, multifamily loans, other commercial real estate and state and political subdivision loans.

Qualitative factors incorporate economic data targeted to the Company’s market. If market–specific information is not available on a timely basis, regional or national information that historically shows a high degree of correlation to market data may be used.

Also applied to all segments and classes is an economic factor implemented to address COVID-19 uncertainty: national unemployment filings. Due to continuous developments related to the COVID-19 pandemic, current data is valuable in assessing risk. Local unemployment data lags the reporting date but historical analysis determined that local unemployment filings were closely correlated to national unemployment filings.

Factors analyzed for each class, with resultant allocations based upon the level of risk assessed for each class, include levels of past due loans, levels of nonaccrual loans, current class balance as a percentage of total loans, loans that received COVID-related modifications that are still in the modification period, and the percentage of high risk loans within the class. High risk loans include junior liens, interest only and high loan review process. Economic factors such as unemployment rates, bankruptcy rates and others are evaluated, with standard allocations applied consistently to relevant classes.

The Company accrues additional allocations for criticizedvalue loans. High risk loans within each class are analyzed and forallocated additional reserves based on current trends.

Nonaccrual status

The Company reviews loans designated high risk. Criticizedwith certain risk indicators to determine whether the loans include classifiedshould be placed on nonaccrual status, including loans as well asthat exceed 90 days past due, loans rated “special mention”. Loans rated special mention indicate weakened credit quality but to a lesser degree than classified, loans. High risk loans are defined as junior lien mortgages, loans with high loan-to-value ratios and loans with a non-COVID 19 related modification that provides relief from payments of interest or principle for more than 90 days.

Loans in nonaccrual are reviewed on an individual loan basis to determine whether they may return to accrual status. To return to accrual status, the Company’s analysis must determine that future payments are reasonably assured. To satisfy this criteria, the Company’s evaluation must determine that the underlying cause of the original delinquency or weakness that indicated nonaccrual status has been resolved, such as receipt of new guarantees, increased cash flows that cover the debt service or other resolution. Nonaccrual loans that demonstrate reasonable assurance of future payments and that have made at least six consecutive payments in accordance with repayment terms that require interest only payments. Both criticizedand timeframes may be returned to accrual status.

Sales, purchases and reclassification of loans and high risk

The Company finances consumer real estate mortgages under “best efforts” contracts with mortgage purchasers. The mortgages are designated as held for sale upon initiation. There have been no major reclassifications from portfolio loans to held for sale. Mortgages held for sale are not included in the calculation of the allowance for loan losses.

Occasionally, the Company purchases or sells participations in loans. All participation loans purchased met the Company’s normal underwriting standards at the time the participation was entered. Participation loans are included in the base risk analysis for each class and are allocated additional reserves.appropriate portfolio balances to which the allowance methodology is applied.

 

Unallocated surplus

In addition to funding the allowance for loan losses based upon data analysis, the Company has the option to fund an unallocated surplus in excess to the calculated requirement, based upon management judgement.  The Company’s policy permits an unallocated surplus of between 0% and 5% of the calculated requirement.  At December 31, 2021, management provided an unallocated surplus of 4.9% to reflect the uncertainty presented by the ongoing COVID-19 pandemic.

Estimation of the allowance for loan losses

The estimation of the allowance involves analysis of internal and external variables, methodologies, assumptions and ourmanagement’s judgment and experience. Key judgments used in determining the allowance for loan losses include internal risk rating determinations, market and collateral values, discount rates, loss rates, and our viewmanagement’s assessment of current economic conditions. These judgments are inherently subjective and our actual losses could be greater or less than the estimate. Future estimates of the allowance could increase or decrease based on changes in the financial condition of individual borrowers, concentrations of various types of loans, economic conditions or the markets in which collateral may be sold. The estimate of the allowance accrual determines the amount of provision expense and directly affects our financial results.

22

The estimate of the allowance for December 31, 20192021 considered market conditions as of December 31, 2021 where possible, and the most recent available information when data was not available as of December 31, 2021, portfolio conditions during 2019 as well asand levels of delinquencies at December 31, 2021, and net charge-offs in the eight quarters prior to the quarter ended December 31, 2019. If the economy experiences a downturn, the ultimate amount of loss could vary from that estimate.2021. For additional discussion of the allowance, see Note 5 of the Notes to Consolidated Financial Statements and the consolidated financial statements andsubsections “Asset Quality,” and “Provision and Allowance for Loan Losses.”Losses” below.

 

22

 Goodwill

Goodwill

Goodwill is subject to at least an annual assessment for impairment by applying a fair value based test. The Company performscontracts with a third party valuation expert to perform impairment testing in the fourth quarter of each year. The Company’s most recent impairment test was performed using data from September 30, 2019.2021. Accounting guidance provides the option of performing preliminary assessment of qualitative factors before performing more substantialto determine whether impairment testing for impairment.is necessary. The Company opted not to perform the preliminary assessment. The Company’s goodwill impairment analysis considered three valuation techniques appropriate to the measurement. The first technique uses the Company’s market capitalization as an estimate of fair value; the second technique estimates fair value using current market pricing multiples for companies comparable to the Company; while the third technique uses current market pricing multiples for change-of-control transactions involving companies comparable to the Company. Each measure indicated that the Company’s fair value exceeded its book value, validating that goodwill isThe analysis did not impaired.result in an impairment assessment.

Certain key judgments were used in the valuation measurement. Goodwill is held by the Company’s bank subsidiary. The bank subsidiary is 100% owned by the Company, and no market capitalization is available. Because most of the Company’s assets are comprised of the subsidiary bank’sbank subsidiary’s equity, the Company’s market capitalization was used to estimate the Bank’s market capitalization. Other judgments include the assumption that the companies and transactions used as comparables for the second and third technique were appropriate to the estimate of the Company’s fair value, and that the comparable multiples are appropriate indicators of fair value, and compliant with accounting guidance.

 

Other Real Estate Owned (“OREO”)

Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at fair value of the property, less estimated disposal costs, if any. Any excess of cost over the fair value less costs to sell at the time of acquisition is charged to the allowance for loan losses. The fair value is reviewed periodically by management and any write-downs are charged against current earnings. Accounting policy and treatment is consistent with accounting for impaired loans described above.

Pension Plan

The Company’s actuary determines plan obligations and annual pension expense using a number of key assumptions. Key assumptions may include the discount rate, the estimated return on plan assets and the anticipated rate of compensation increases. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may impact pension assets, liabilities or expense.

 

Other Than Temporary Impairment ("OTTI")Performance Summary

The COVID-19 pandemic continued to impact the Company in 2021, although in somewhat different respects than the impact in 2020. During 2020, the Company worked with borrowers impacted by the COVID-19 pandemic to provide payment relief, which reduced interest income on certain loans within the portfolio. Adverse economic indicators escalated credit risk, increasing provision for loan loss expense. Positive effects of Securities 

Impairmentthe COVID-19 pandemic resulted from the low interest rate environment, which fueled refinance activity and gains from the sale of securities occurs whenmortgages. The Company also participated in the fair value of a security is less than its amortized cost.  For debt securities, impairment is considered other-than-temporarySBA’s PPP loan program and recognized in its entirety in net income if either (i)increased fee income.

During 2021, the Company intendsrecognized additional fee income from PPP loans. Pandemic-related modifications slowed significantly and there are currently no loans under modified terms related to sell the security or (ii) it is more likely than not thatCOVID-19 pandemic. Economic indicators improved markedly and the Company will be requiredwas able to sell the security before recovery of its amortized cost basis.  If, however, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery, the Company must determine what portionrecover some of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security.  If there is no credit loss, there is no OTTI.  If there is a credit loss, OTTI exists, and the credit loss must beprovision expense recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income (loss).  The Company regularly reviews each investment security for OTTI based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the Company’s best estimate of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery.2020.

Overview

National Bankshares, Inc. is a financial holding company incorporated under the laws of Virginia. Located in southwest Virginia, NBI has two wholly-owned subsidiaries, the National Bank of Blacksburg and National Bankshares Financial Services, Inc. NBB, which does business as National Bank from twenty-five office locations and one loan production office, is a community bank. 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. 

National Bankshares, Inc. common stock is listed on the Nasdaq Capital Market and is traded under the symbol “NKSH.” National Bankshares, Inc. has been included in the Russell Investments Russell 3000 and Russell 2000 Indexes since June 29, 2009.

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Performance Summary

The following table presents NBI’s key performance ratios for the years ending December 31, 2019 and December 31, 2018:

  

Year Ended December 31,

  

2019

 

2018

Return on average assets

  1.39

%

  1.29

%

Return on average equity

  9.87

%

  8.65

%

Basic net earnings per common share

 $2.65  $2.32 

Fully diluted net earnings per common share

 $2.65  $2.32 

Net interest margin (1)

  3.29

%

  3.36

%

Noninterest margin (2)

  1.44

%

  1.40

%

(1)

Net Interest Margin – Non-GAAP measure of year-to-date tax equivalent net interest income divided by year-to-date average interest-earning assets.  Please see “Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to GAAP.

(2)

Noninterest Margin – Non-GAAP measure of noninterest expense (excluding the insurance receivable write-down, provision for bad debts and income taxes) less noninterest income (excluding securities gains and losses) divided by average year-to-date assets.  Please see “Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to GAAP.

The keyKey performance ratios provide a summary of the Company’s results and allow comparison with results from prior years and with current peer results.years. The return on average assetsfollowing table presents NBI’s key performance ratios for the year ended December 31, 2019 was 1.39%, an increase from 1.29% for the year ended December 31, 2018. The return on average equity increased from 8.65% for the year ended December 31, 2018 to 9.87% for the year ended December 31, 2019.years indicated:

The net interest margin decreased from 3.36% for the year ended December 31, 2018 to 3.29% for the year ended December 31, 2019. The Federal Reserve interest rates were higher for most

  

Year Ended December 31,

 
  

2021

  

2020

 

Return on average assets

  1.26

%

  1.15

%

Return on average equity(1)

  10.59

%

  8.21

%

Basic net earnings per common share

 $3.28  $2.48 

Fully diluted net earnings per common share

 $3.28  $2.48 

Net interest margin (2)

  2.81

%

  2.98

%

Efficiency ratio (3)

  51.34

%

  53.49

%

(1)

During the year ended December 31, 2021, the Company repurchased 368,083 shares under its publicly announced stock repurchase plan. The repurchased shares reduced shareholders equity by $13,354 during 2021. During the year ended December 31, 2020, the Company repurchased 57,554 shares under its publicly announced stock repurchase plan. The repurchased shares reduced shareholders equity by $1,722 during 2020.

(2)

The net interest margin is a non-GAAP financial measure. Tax advantaged portions of net interest income are adjusted to their fully-taxable equivalent basis. Net interest income on a fully-taxable equivalent basis is divided by average earning assets. Please see “Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to GAAP.

(3)

The efficiency ratio is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. Such information is not prepared in accordance with GAAP and should not be viewed as a substitute for GAAP. See “Non-GAAP Financial Measures” above.

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The noninterest margin increased from 1.40% to 1.44% over the same period, while      basic net earnings per common share increased from $2.32 for the year ended December 31, 2018 to $2.65 for the year ended December 31, 2019.

 

Growth

NBI’s key growth indicators are shown in the following table:

$ in thousands

 

12/31/2019

 

12/31/2018

 

12/31/2021

 

12/31/2020

 

Change

 

Securities

 $436,483  $426,230 

Securities and restricted stock

 $686,925  $548,021  25.35

%

Loans, net of unearned income and deferred fees and costs, and the allowance for loan losses

  726,588   702,409   795,574  760,318  4.64

%

Deposits

  1,119,753   1,051,942   1,494,587  1,297,143  15.22

%

Total assets

  1,321,837   1,256,032   1,702,175  1,519,673  12.01

%

 

Securities and restricted stock, loans and total assets increased when amounts at December 31, 20192021 are compared with amounts at December 31, 2018.2020. Customer deposits increased $67,811$197,444 or 6.45%15.22% from December 31, 2018,2020, with the most substantial increase in interest-bearing deposits, as well as increases mainly from interest-bearing demandin noninterest-bearing deposits and certificates of deposit.savings deposits. Time deposits declined. The liquidity provided by the increase of deposits supported growth in loans of $24,179$35,256 or 3.44%4.64% and growth in securities and restricted stock of $10,253$138,904 or 2.41%25.35%.

 

24

Asset Quality

Key indicators of NBI’s asset quality are presented in the following table:

$ in thousands

 

12/31/2019

 

12/31/2018

 

12/31/2021

  

12/31/2020

 

Nonperforming loans(1)

 $3,375  $3,420  $2,873  $3,685 

Loans past due 90 days or more and accruing

  231   35   90  17 

Other real estate owned

  1,612   2,052   957  1,553 

Allowance for loan losses to loans(2)

  0.94

%

  1.04

%

  0.96

%

 1.10

%

Net charge-off ratio

  0.09

%

  0.07

%

  0.05

%

 0.05

%

 

 

(1)

Nonperforming loans includeare nonaccrual loans plus restructured loansand TDRs in nonaccrual status. Accruing restructured loansTDRs are not included.

 

(2)

Loans are net of unearned income and deferred fees and costs.

 

The Company monitors asset quality indicators in managing credit risk and in determining the allowance and provision for loan losses. AtAs of December 31, 2019,2021, nonperforming loans were $3,375 or 0.46% of loans net of unearned income and deferred fees and costs. This compares to $3,420 or 0.48%other real estate improved when compared with levels at December 31, 2018. Loans2020, while accruing loans past due 90 days or more and still accruing at year-end 2019 totaled $231, an increase from $35 at December 31, 2018.increased slightly. The net charge-off ratio increasedremained steady from 0.07% for the year ended December 31, 20182020 to 0.09% for the year ended December 31, 2019, while OREO decreased $440 for the same period.2021.

The Company’s risk analysis determined an allowance for loan losses of $6,863$7,674 at December 31, 2019,2021, resulting in a recovery of previous provision for the yearexpense of $126.$398. This compares with an allowance for loan losses of $7,390$8,481 as of December 31, 2018,2020, and a recoveryprovision of $81$1,991 for the year ended December 31, 2018.2020. The ratio of the allowance for loan losses to loans decreased to 0.94%0.96% at December 31, 2019,2021, from 1.04%1.10% at December 31, 2018.2020. The methodology for determining the allowance for loan losses relies on historical charge-off trends, modified by loan portfolio trends in nonperforming loans and economic indicators.

More information about the level and calculation methodology of the allowance for loan losses is provided in the sections “Provision and Allowance for Loan Losses”, “Balance Sheet – Loans – Risk Elements,”Elements” and “Balance Sheet – Loans – Modifications and Troubled Debt Restructurings,”Restructurings” below as well as Notes 1 and 5 of the Notes to Consolidated Financial Statements.

Sufficient resources have been dedicated to working out problem assets, and exposure to loss is somewhat mitigated because most of the nonperforming loans are collateralized. More information about nonaccrual and past due loans is provided in the section “Balance Sheet – Loans – Risk Elements” below and Note 5 of the Notes to Consolidated Financial Statements. The Company continues to carefully monitor risk levels within the loan portfolio and expects that any further increase in the allowance for loan losses would be the resultevolving impact of the refinement of loss estimates and would not dramatically affect net income.COVID-19 pandemic.

 

Net Interest Income

Net interest income was $37,767 for the year ended December 31, 2019, $38,177 for the year ended December 31, 2018 and $37,135 for the year ended December 31, 2017. The net interest margin was 3.29% for 2019, 3.36% for 2018 and 3.45% for 2017.  Total interest income was $45,147 for the year ended December 31, 2019, $43,224 for the year ended December 31, 2018 and $41,260 for the year ended December 31, 2017. Interest expense was $7,380 for the year ended December 31, 2019, $5,047 for the year ended December 31, 2018 and $4,125 for the year ended December 31, 2017.

The amount of net interest income earned is affected by various factors, including changes in market interest rates due to the Federal Reserve‘s monetary policy, U.S. fiscal policy, competitive pressure, the level and composition of the interest-earning assets and the composition of interest-bearing liabilities.

The Federal Reserve increased its target federal funds rate by 25 basis points in March, June, September and December, 2018 and then decreased the rate by 25 basis points in July, September, and October 2019, ending the year at a target of 1.75%.  Changes in the Federal Reserve’s target interest rate immediately impact the yield on the Company’s interest-bearing deposits in other banks, and have a slightly delayed impact on other interest-earning assets. The Federal Reserve’s target interest rate also impacts the Company’s cost of interest-bearing liabilities.

The primary source of funds used to support the Company’s interest-earning assets is deposits. Deposits are obtained in the Company’s market through traditional marketing techniques. The cost of deposits is dependent on interest rate levels and competitive factors.  Increases in the Federal Reserve’s target interest rate may increase competitive pressure to raise deposit offering rates, while decreases in the Federal Reserve’s target interest rate allow reduced deposit offering rates.  Time deposits provide a measure of stability in the cost of funds, but partially delay the Company’s ability to respond to downward rate movements. The Company also has access to other funding sources, including the FHLB. 

Interest expense in 2019 was influenced by increased deposit offering rates in the latter part of 2018 that carried in to 2019 and were required to remain competitive in what was a rising interest rate environment.  Interest expense in 2018 included the cost of short-term borrowings to meet loan demand while anticipating maturity of securities and an increase in deposits that is typical during the fourth quarter. Please refer to the section titled “Analysis of Changes In Interest Income and Interest Expense” for further information related to rate and volume changes.

25

The net interest margin is a non-GAAP measure that incorporates the effect of tax-advantaged instruments, including qualifying investments and loans to municipalities.  For purposes of the net interest margin, interest income on tax-advantaged instruments is grossed up to reflect the value of lower tax expense.  The Tax Act became effective January 1, 2018 and decreased the Company’s tax rate from a marginal 35% in 2017 to a flat 21% in 2018 and 2019.  This decreased the value of tax-advantaged instruments when 2019 and 2018 are compared with 2017.

Management has the ability to respond over time to interest rate movements, statutory tax rate changes and other influencing factors to reduce volatility in the net interest margin. However, the frequency and/or magnitude of changes in market interest rates and legislative changes are difficult to predict and may have a greater impact on net interest income than adjustments by management.

Analysis of Net Interest Earnings

The following table shows the major categories of interest-earning assets and interest-bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net yield on average interest-earning assets for the years indicated.

  

December 31, 2019

 

December 31, 2018

 

December 31, 2017

$ in thousands

 


Average
Balance

 

Interest

 

Average
Yield/
Rate

 

Average
Balance

 

Interest

 

Average
Yield/
Rate

 

Average
Balance

 

Interest

 

Average
Yield/
Rate

Interest-earning assets:

                                    

Loans, net of unearned income and deferred fees and costs (1)(2)(3)(4)

 $719,916  $34,334   4.77

%

 $683,624  $31,739   4.64

%

 $653,756  $30,593   4.68

%

Taxable securities(5)

  304,292   6,725   2.21

%

  340,594   6,856   2.01

%

  313,255   5,711   1.82

%

Nontaxable securities (1)(5)

  89,631   3,854   4.30

%

  123,668   5,544   4.48

%

  131,762   7,462   5.66

%

Interest-bearing deposits

  74,527   1,523   2.04

%

  36,562   672   1.84

%

  71,603   791   1.10

%

Total interest-earning assets

 $1,188,366  $46,436   3.91

%

 $1,184,448  $44,811   3.78

%

 $1,170,376  $44,557   3.81

%

Interest-bearing liabilities:

                                    

Interest-bearing demand deposits

 $601,884  $5,126   0.85

%

 $606,766  $4,121   0.68

%

 $598,661  $3,344   0.56

%

Savings deposits

  142,985   449   0.31

%

  140,918   236   0.17

%

  140,997   244   0.17

%

Time deposits

  116,844   1,805   1.54

%

  105,674   526   0.50

%

  120,220   537   0.45

%

Borrowings

  ---   ---   ---   7,192   164   2.28

%

  ---   ---   --- 

Total interest-bearing liabilities

 $861,713  $7,380   0.86

%

 $860,550  $5,047   0.59

%

 $859,878  $4,125   0.48

%

Net interest income(1) and interest rate spread

     $39,056   3.05

%

     $39,764   3.19

%

     $40,432   3.33

%

Net yield on average interest-earning assets

          3.29

%

          3.36

%

          3.45

%

(1)

Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a Federal income tax rate of 21% in 2018 and 2019 and 35% in 2017.

(2)

Loan fees included in total interest income are $99 in 2019, $115 in 2018 and $303 in 2017.

(3)

Nonaccrual loans are included in average balances for yield computations.

(4)Includes loans held for sale.

(5)

Daily averages are shown at amortized cost.

26

The following table reconciles net interest income on a fully-taxable equivalent basis to net interest income on a GAAP basis for the years indicated.

$ in thousands

 

December 31,

  

2019

 

2018

 

2017

Net interest income, GAAP

 $37,767  $38,177  $37,135 

Taxable equivalent adjustment

  1,289   1,587   3,297 

Net interest income, fully taxable equivalent

 $39,056  $39,764  $40,432 

Analysis of Changes in Interest Income and Interest Expense

The Company’s primary source of revenue is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and other funds. The Company’s netinterest-bearing liabilities. Net interest income is affected by changes invarious factors, including the amountFederal Reserve’s monetary policy, U.S. fiscal policy, competitive pressure, the level and mixcomposition of the interest-earning assets and the composition of interest-bearing liabilitiesliabilities. Changes in the Federal Reserve’s target interest rate immediately affect the yield on the Company’s interest-bearing deposits in other banks, and affect other interest-earning assets within a short time. The primary source of funds used to support the Company’s interest-earning assets is deposits. When the interest rate environment changes, the Company can immediately change rates on interest-bearing deposits and change offering rates on new time deposits. Existing time deposits commit the Company to the contractual rate for the length of the term. Time deposits provide a measure of stability in the cost of funds, but partially delay the Company’s ability to respond to downward rate movements.

24

The net interest margin for the year ended December 31, 2021 declined when compared with the year ended December 31, 2020. The Federal Reserve cut rates in March 2020 in an effort to counter the COVID-19 pandemic’s economic impact and maintained low interest rates throughout 2021. The low rates spurred high levels of loan refinance activity. Calls on securities surged and reinvestment opportunities for matured and called securities as well as investing excess liquidity from customer deposits resulted in lower yields for taxable and nontaxable securities. Further, uncertainty surrounding the length of time that customer deposits, bolstered by federal stimulus aid, will remain with the Bank resulted in a higher balance in interest-bearing deposits, which provides the lowest yielding investment opportunity. In response, the Company reduced offering rates on deposits in 2020 and 2021.

         Fees and interest income from PPP loans helped increase the net interest margin in 2021 and 2020. During 2020 and 2021, the Company generated 1,259 PPP loans with original principal balances totaling $83,023. The loans bear a contractual interest rate of 1%, supplemented by an origination fee which is accreted over the life of the loan. When loans are forgiven or paid off prior to maturity, the Company recognizes the outstanding origination fee at the date of forgiveness or payoff. PPP loans contributed interest and fee income of $2,711 for the year ended December 31, 2021 and $1,753 for the year ended December 31, 2020. As of December 31, 2021, gross PPP loans totaling $1,094 with net deferred fees of $42 remain on the balance sheet.

The frequency and/or magnitude of future changes in yields earnedmarket interest rates and legislative changes are difficult to predict and may have a greater short-term impact on interest-earningnet interest income than adjustments by management. Please refer to the section titled “Analysis of Changes In Interest Income and Interest Expense” for further information related to rate and volume changes.

Analysis of Net Interest Earnings

The following table shows the major categories of interest‑earning assets and ratesinterest‑bearing liabilities, the interest earned or paid, the average yield or rate on interest-bearing liabilities. the daily average balance outstanding, net interest income and net yield on average interest‑earning assets for the years indicated.

  

December 31, 2021

  

December 31, 2020

 

$ in thousands

 

Average
Balance

  

Interest

  

Average
Yield/
Rate

  

Average
Balance

  

Interest

  

Average
Yield/
Rate

 

Interest-earning assets:

                        

Loans (1)(2)(3)(4)

 $787,754  $35,241   4.47

%

 $769,819  $34,967   4.54

%

Taxable securities(5)(6)

  524,818   7,960   1.52

%

  401,952   7,383   1.84

%

Nontaxable securities (2)(5)

  80,059   2,577   3.22

%

  62,874   2,390   3.80

%

Interest-bearing deposits

  133,020   170   0.13

%

  81,639   276   0.34

%

Total interest-earning assets

 $1,525,651  $45,948   3.01

%

 $1,316,284  $45,016   3.42

%

Interest-bearing liabilities:

                        

Interest-bearing demand deposits

 $811,661  $2,657   0.33

%

 $669,383  $3,759   0.56

%

Savings deposits

  190,997   174   0.09

%

  158,334   414   0.26

%

Time deposits

  86,089   267   0.31

%

  112,463   1,664   1.48

%

Total interest-bearing liabilities

 $1,088,747  $3,098   0.28

%

 $940,180  $5,837   0.62

%

Net interest income(2) and interest rate spread

     $42,850   2.73

%

     $39,179   2.80

%

Net yield on average interest‑earning assets

          2.81

%

          2.98

%

(1)

Loans are net of unearned income and deferred fees and costs. Loans include loans held in portfolio and loans held for sale.

(2)

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

(3)

Net loan fees included in interest income in 2021 are $2,558, of which $2,444 was related to PPP loans. Net loan fees included in interest income in 2020 are $1,441, of which $1,366 was related to PPP loans.

(4)

Nonaccrual loans are included in average balances for yield computations.

(5)

Daily averages are shown at amortized cost.

(6)

Includes restricted stock.

The following table reconciles net interest income on a fully-taxable equivalent basis to net interest income on a GAAP basis for the years indicated.

$ in thousands

 

December 31,

 
  

2021

  

2020

 

Net interest income, GAAP

 $41,889  $38,171 

Taxable equivalent adjustment

  961   1,008 

Net interest income, fully taxable equivalent

 $42,850  $39,179 

25

Analysis of Changes in Interest Income and Interest Expense

The following table sets forth, for the years indicated, a summary of the changes in interest income and interest expense resulting from changes in average asset and liability balances (volume) and changes in average interest rates (rate).

 

$ in thousands

 

2019 Over 2018

 

2018 Over 2017

 

2021 Over 2020

 
 

Changes Due To

     

Changes Due To

     

Changes Due To

    
 

Rates(2)

 

Volume(2)

 

Net Dollar
Change

 

Rates(2)

 

Volume(2)

  

Net Dollar

Change

 

Rates(2)

 

Volume(2)

 

Net Dollar Change

 

Interest income: (1)

                         

Loans

 $880  $1,715  $2,595  $(243

)

 $1,389  $1,146  $(533

)

 $807  $274 

Taxable securities

  638   (769

)

  (131

)

  623   522   1,145   (1,430

)

  2,007   577 

Nontaxable securities

  (218

)

  (1,472

)

  (1,690

)

  (1,482

)

  (436

)

  (1,918

)

  (402

)

  589   187 

Interest-bearing deposits

  83   768   851   377   (496

)

  (119

)

  (226

)

  120   (106

)

Increase (decrease) in income on interest-earning assets

 $1,383  $242  $1,625  $(725

)

 $979  $254  $(2,591

)

 $3,523  $932 

Interest expense:

                         

Interest-bearing demand deposits

 $1,038  $(33

)

 $1,005  $731  $46  $777  $(1,789

)

 $687  $(1,102

)

Savings deposits

  210   3   213   (8

)

  ---   (8

)

  (312

)

  72   (240

)

Time deposits

  1,217   62   1,279   58   (69

)

  (11

)

  (1,077

)

  (320

)

  (1,397

)

Short-term borrowings

  ---

 

  (164

)

  (164

)

  ---   164   164 

Increase (decrease) in expense of interest-bearing liabilities

 $2,465  $(132

)

 $2,333  $781  $141  $922  $(3,178

)

 $439  $(2,739

)

Increase (decrease) in net interest income

 $(1,082

)

 $374  $(708

)

 $(1,506

)

 $838  $(668

)

Increase in net interest income

 $587  $3,084  $3,671 

 

 

(1)

Taxable equivalent basis using a Federal income tax rate of 21% in 2018 and 2019 and 35% in 2017..

 

(2)

Variances caused by the change in rate timesmultiplied by the change in volume have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each.

 

NetThe low interest rate environment reduced interest income on a taxable-equivalent basis decreased $708 when 2019the year ended December 31, 2021 is compared with 2018. Totalthe year ended December 31, 2020. However, greater volume more than offset the impact of rates, resulting in a net increase in interest income on a taxable equivalent basis increased $1,625 while totalincome.

The Company’s reduced deposit offering rates saved $3,178 in interest expense, slightly offset by increased by $2,333.expense for higher volume when the year ended December 31, 2021 is compared with the year ended December 31, 2020.

Interest Rate changes decreasedSensitivity

Interest rate risk is the risk to earnings or capital arising from movements in market interest rates. When interest-earning assets and interest-bearing liabilities reprice at different times or in different degrees or when call options are exercised, in response to change in market interest rates, future net interest income by $1,000, partially offset by $292 from increased volume.

Compared with 2018,is impacted. When interest-earning assets mature or re-price more quickly than interest-bearing liabilities, the interest rate environment in 2019 was elevated by Federal Reserve interest rate increases throughout 2018, partially offset by Federal Reserve rate decreases in the latter half of 2019.  The higher rate environment provided an increase of $83 in interest income on interest-bearing deposits, $638 on taxable securities and $880 (taxable equivalent) on loans when 2019balance sheet is compared with 2018.  Non-taxable securities generated lower taxable equivalent returns of $218 due to the loss of higher-yielding securities from sales, calls and maturities during 2019.  The Federal Reserve’s rate policies also gave rise to competitive pressures to boost customer deposit offering rates, resulting in an additional $2,465 in interest expense.

The average balance of loans grew $36,292 and the average balance of interest-bearing deposits grew $37,965 when 2019 is compared with 2018, providing additional interest income of $2,483.  The average balance of securities declined $70,339 when 2019 is compared with 2018, reducing interest income by $2,241.  During 2019, the Company implemented a plan to restructure its securities portfolio to manage interest rate risk.  Timing differences in sales and purchase activity increased the average balance of interest-bearing deposits.

27

The average balance of savings and time deposits grew by $13,237 when 2019 is compared with 2018, increasing interest expense by $65, partially offset by reduced expense of $33 associated with a lower average balance of interest-bearing demand deposits.

When 2018 is compared with 2017,considered “asset sensitive”. An asset sensitive position will produce relatively more net interest income on a taxable-equivalent basis decreased $668. Totalwhen interest income on a taxable equivalent basis increased $254 while total interest expense increased by $922. A decline in the yield of interest-earning assetsrates rise and an increase in the yield on interest-bearing liabilities decreasedless net interest income by $1,506, offset by increases due to volume of $838.

The Federal Reserve increasedwhen rates by 25 basis pointsdecline. Conversely, when interest-bearing liabilities mature or re-price more quickly than interest-earning assets in December 2017 and four times in 2018. The rate increases had a direct and immediate effect ongiven period, the Company’s interest-bearing deposits. Interest income on interest-bearing deposits increased $377 due to rates, but declined by $496 due to reduced volume, for abalance sheet is considered “liability sensitive”. A liability sensitive position will produce relatively more net decrease of $119 when 2018 is compared with 2017. Taxable securities also benefitted from the increased interest rate environment, as matured and called securities were invested at higher rates. Interest income on taxable securities increased $1,145 when 2018 is compared with 2017, the result of an increase of $522 due to volume along with an increase of $623 due to rates.

Taxable equivalent interest income on loans increased $1,146 when 2018interest rates fall and 2017 are compared, due to robust growth in the loan portfolio. The average balance of loans increased from $653,756 in 2017 to $683,624 in 2018, increasingless net interest income by $1,389. The increase due to volume was offset slightly by a decrease of $243 due to yield. Taxable equivalent yields on tax-advantaged loans were negatively impacted by a decrease in the Company’s statutory tax rate from 35% in 2017 to 21% in 2018. If the 35% rate were applicable during 2018, yields would have shown anwhen rates increase.

Taxable-equivalent interest on non-taxable securities declined $1,482 due to rates and $436 due to volume. The lower yields available upon reinvestment of called and matured securities negatively impacted income from securities during 2018.

Interest on time deposits declined $11 from 2017 to 2018, with a increase of $58 due to rates offset by a decline of $69 due to decreased volume.

See “Net Interest Income” for additional information related to interest income and expense.

Interest Rate Sensitivity

The Company considers interest rate risk to be a significant risk and has systemsmanages its exposure through policies approved by its Asset Liability Committee ("ALCO") and Board of Directors. ALCO reviews periodic reports of the Company's interest rate risk position, including results of simulation analysis. Simulation analysis applies interest rate shocks, hypothetical immediate shifts in placeinterest rates, to measure the exposure ofCompany’s financial instruments and determines the impact to projected one-year net interest income and fair market values to movement in interest rates. Among the tools available to management is interest rate sensitivity analysis, which provides information related to repricing opportunities. Interest rate shock simulations indicate potential economic loss due to future interest rate changes. Shock analysis is a test that measures the effect of a hypothetical, immediate and parallel shift in interest rates. other key measures.

The following table shows the results of a rate shock and the effectsshocks on the return on average assets and the return on average equityone-year projected atnet interest income as of December 31, 20192021 and 2018.2020. For purposes of this analysis, noninterest income and expenses are assumed to be flat.

 

Rate Shift (bp)

Return on Average Assets

 

Return on Average Equity

 

Change in Projected Net Interest Income

 

2019

  

2018

  

2019

  

2018

   

2021

 

2020

 
300 1.40

%

  1.38

%

  10.12

%

 8.84

%

   2.5

%

 8.0

%

200 1.40

%

  1.39

%

  10.14

%

 8.92

%

   2.9

%

 3.6

%

100 1.39

%

  1.40

%

  10.07

%

 8.95

%

   2.5

%

 0.5

%

(-)100 1.22

%

  1.32

%

  8.85

%

 8.46

%

   0.0

%

 1.5

%

(-)200 1.13

%

  1.16

%

  8.20

%

 7.47

%

(-)300 1.15

%

  1.12

%

  8.34

%

 7.32

%

 

Simulation analysis is another tool available toResults of the simulation for net interest income at December 31, 2021 and December 31, 2020 indicate the Company to testis in an asset and liability management strategies under rising and falling rate conditions.sensitive position. As a part of the simulation process, certain estimates and assumptions must be made. These include, but are not limited to, asset growth, the mix of assets and liabilities, the interest rate environment and local and national economic conditions. Asset growth and the mix of assets can, to a degree, be influenced by management. Other areas, such as the interest rate environment and economic factors, cannot be controlled. In addition, competitive pressures can make it difficult to price deposits and loans in a manner that optimally minimizes interest rate risk. Therefore, actualActual results may vary materiallywill differ from any particular forecast or shock analysis. This shortcoming is offset somewhat bysimulated results due to the periodic reforecastingtiming, magnitude, and frequency of the balance sheet to reflect current trendsinterest rate changes; changes in market conditions and economic conditions. Shock analysis must also be updated periodically as a part of the assetcustomer behavior; and liabilitychanges in management process.strategies.

 

2826

 

While the asset/liability management program is designed to protect the Company over the long term, it does not provide near-term protection from interest rate shocks, as interest rate sensitive assets and liabilities do not by their nature move up or down in tandem in response to changes in the overall rate environment. The Company’s profitability in the near term may be temporarily negatively affected in a period of rapidly rising or rapidly falling rates, because it takes some time for the Company’s portfolio to reflect changes to offering rates in response to a new interest rate environment.

Noninterest Income

The following table presents the Company’s noninterest income for the years indicated.

 

$ in thousands

 

Year Ended

 

Year Ended December 31,

 

Change

 
 

December 31, 2019

 

December 31, 2018

 

December 31, 2017

 

2021

 

2020

 

Dollar

 

Percent

 

Service charges on deposits

 $2,453  $2,678  $2,776  $2,045  $1,966  $79   4.02

%

Other service charges and fees

  198   132   205   179  162   17   10.49

%

Credit card fees

  1,398   1,431   1,205 

Credit card fees, net

  1,869  1,400   469   33.50

%

Trust fees

  1,622   1,565   1,530   1,792  1,662   130   7.82

%

Bank-owned life insurance income

  910   901   758   910  877   33   3.76

%

Gain on sale of mortgage loans

  364  676   (312

)

  (46.15

)%

Other income

  1,643   1,005   1,148   1,261  1,093   168   15.37

%

Realized securities gains

  566   17   14 

Realized securities gains, net

  6   108   (102

)

  (94.44

)%

Total noninterest income

 $8,790  $7,729  $7,636  $8,426  $7,944  $482   6.07

%

 

An enhanced fee schedule implemented in the latter half of 2020 benefitted income from service charges on deposits in 2021. Service charges on deposit accounts totaled $2,453include account maintenance fees, fees for the year ended December 31, 2019. This is a decrease of $225, or 8.40%, from $2,678 for the year ended December 31, 2018. Service charges on deposit accounts increased $98, or 3.53%, from 2017 to 2018. This income category is affected by the number of deposit accounts, the level of service chargesnonsufficient funds, ATM and the number of checking account overdrafts. The decreases in 2019 and 2018 were driven by a decrease in fees from a lower volume of customer non-sufficient funds and overdraft activity.

wire transfer fees. Other service charges and fees include charges for official checks, income from the sale of checks to customers, safe deposit box rent, fees from letters of credit and income from commissions on the sale of credit life, accident and health insurance. These

Increased transactions improved credit card fees were $198 forwhen the year ended December 31, 2019, an increase of $66, or 50.00%, from $132 for 2018. The increase stemmed from higher check charges and service charges on letters of credit. The total for2021 is compared with the year ended December 31, 2018 was $73 below the $205 posted for the year ended December 31, 2017, due to lower service charges on letters of credit and check charges. 

Credit card fees for the year ended December 31, 2019, were $33 below the $1,431 reported for the year ended December 31, 2018. From 2017 to 2018, credit card fees increased $226, or 18.76%.2020. Credit card fees are presented net of certain processing expenses and are dependent on the volume of transactions.

Trust fees at $1,622 increased by $57 or 3.64% when the years ended December 31, 2019 and 2018 are compared. For the year ended December 31, 2018, trust fees were $1,565, an increase of $35, or 2.29%, from 2017.2021 is compared with the year ended December 31, 2020. Trust fees are generated from a number of different types of accounts, including estates, personal trusts, employee benefit trusts, investment management accounts, attorney-in-fact accounts and guardianships. Trust income varies depending on the number and type of accounts under management and financial market conditions.

The mix of account types affected the level of trust feesCompany purchased an additional $5,000 in 2018 and 2019.

Noninterest income from bank-owned life insurance (“BOLI”) during 2021, contributing to increased from $901 forincome compared with 2020.

A robust housing market during 2020 and the Federal Reserve’s rate cuts in March 2020 spurred a high level of consumer real estate purchase activity and refinance activity, increasing the sale of mortgage loans. During the year ended December 31, 20182021, activity returned to $910 for 2019. Income from BOLI was affected bymore conventional levels, decreasing the performancegain on sale of the variable rate policies, which has not varied significantly.  BOLI income formortgage loans when the year ended December 31, 2017 was $758. The Company purchased an additional $10 million in BOLI in June 2017. 2021 is compared with the year ended December 31, 2020.

Other income isbenefitted in 2021 from increased commissions on sales of securities and insurance, compared with the year ended December 31, 2020. Other income from smaller balance accounts that cannot be classifiedincludes dividends and increases in another category. Some examples include gains on mortgage loans sold,the Company’s equity-method investments, net gains from the sale of fixed assets, and revenue from investment and insurance sales. When 2019 is compared to 2018, other income was $1,643, an increase of $638, or 63.48%. This was largely the result of a recovery from an insurance receivable. Other income for 2018 was $1,005, a decrease of $143, or 12.46%, when compared with $1,148 for the year ended December 31, 2017. In December 2017, the Company realized a gain on the sale of its Marion branch office of $134.

During 2019,2021, securities gains resulted solely from the call of securities. During 2020, the Company realized net securities gains of $566, including net gains of $438$43 on the sale of securities and $128$65 on calls of securities. The salessale of securities werewas pursuant to a restructuring plan to manage interest rate risk.  During 2018, the $17 realized securities gain stemmed from the call of one security with a gain of $1 and the sale of another security for a gain of $16.  During 2017, the Company sold a small investment in community bank stock that resulted in a gain of $4 while all other net realized gains resulted from calls of securities.

 

29
27

 

Noninterest Expense

The following table presents the Company’s noninterest expense for the years indicated.

 

$ in thousands

 

Year Ended

 

Year Ended December 31,

 

Change

 
 

December 31, 2019

 

December 31, 2018

 

December 31, 2017

 

2021

 

2020

 

Dollar

 

Percent

 

Salaries and employee benefits

 $15,298  $14,506  $13,670  $15,747  $14,674  $1,073   7.31

%

Occupancy, furniture and fixtures

  1,866   1,845   1,820   1,842  1,795   47   2.62

%

Data processing and ATM

  3,171   2,784   2,280   3,039  3,088   (49

)

  (1.59

)%

FDIC assessment

  167   359   364   422  198   224   113.13

%

Intangibles amortization

  ---   50   68 

Net costs of other real estate owned

  47   553   205   51  39   12   30.77

%

Franchise taxes

  1,333   1,278   1,315   1,425  1,340   85   6.34

%

Write-down of insurance receivable

  ---   2,010   --- 

Other operating expenses

  3,872   3,891   4,507   3,554  3,836   (282

)

  (7.35

)%

Total noninterest expense

 $25,754  $27,276  $24,229  $26,080  $24,970  $1,110   4.45

%

 

Salaries and employee benefits expense, which includes salaries, payroll taxes, health insurance, contributions to the employee stock ownership plan and employee 401(k), pension expense, incentives and salary continuation.  When 2019continuation increased when 2021 is compared with 2018, salary2020, due to normal compensation and employee benefits expensestaffing decisions as well as increased $792, or 5.46%, from $14,506 forpension cost.

When the year ended December 31, 2018 to $15,298 for 2019.  The increase was the result of normal staffing and compensation decisions.

Salary and benefits expense increased $836, or 6.12%, from $13,670 for2021 is compared with the year ended December 31, 2017 to $14,506 for 2018. When compared to 2017, the expense in 2018 was increased by health insurance reserve requirements, higher contribution for the employee stock ownership plan and greater pension expense. In 2017, health insurance expense was reduced by a one-time $175 refund, while in 2018 the expense increased $240 for reserve requirements based on claims history.  The contribution to the employee stock ownership plan is determined by management based on overall Company performance, while the pension expense is determined by the Company’s actuarial calculations.

Occupancy,2020, occupancy, furniture and fixtures expense was $1,866 for the year ended December 31, 2019, an increase of $21, or 1.14%, from the prior year. When 2018 is compared with 2017, the expense increased $25 or 1.37%.

Dataslightly, while data processing and ATM expense was $3,171 in 2019, $2,784 in 2018 and $2,280 in 2017. The increase of $387 or 13.90% from 2018 to 2019 and $504 or 22.11% from 2017 to 2018 was due to increased maintenance expense associated with infrastructure upgrades. The Company is committed to maintaining up-to-date technology in a cost-effective manner.decreased slightly.

When the years ended December 31, 2019 and December 31, 2018 are compared, the FDIC assessment expense decreased $192 or 53.48%. The total expense for 2019 was $167, which compares with $359 for 2018.increased from 2020 to 2021. The FDIC assessment is accrued based on a method provided by the FDIC. During the third quarter of 2019, the FDIC notified the Bank that it was eligible to use small bank assessment credits. The credits were applied toreduced expense for the Bank’s September 30, 2019 and December 31, 2019 assessments. If the FDIC’s Deposit Insurance Fund Reserve Ratio maintains a certain ratio, the Bank may be able to use additional credits for future assessments. Thefirst half of 2020, after which FDIC assessment expense for the year ended December 31, 2018 decreased $5 from $364 for 2017. 

Core deposit intangibles are the result of prior merger and acquisition activity and are amortized over a period of years. Amortization of the Company’s intangible assets was completed in 2018. This accounted for the decline in intangibles amortization expense of $50 when 2019 and 2018 are compared.  The expense for intangibles amortization decreased $18 from 2017returned to 2018, due to certain core deposit intangibles becoming fully amortized.normal levels.

Net costs of OREO decreased from $553 forother real estate owned ("OREO") increased slightly when the periodyears ended December 31, 2018 to $47 for the year ended December 31, 2019. From 2017 to 2018, net costs of OREO increased $348 from $205.2021 and 2020 are compared. This expense category varies with the number of foreclosed properties owned by NBB and with the expensecosts associated with each. It includes write-downs on OREO plus other costs associated with carrying these properties, as well as net gains or losses on the sale of other real estate. There were no write-downs on OREOwrite downs during 2021 and one write-down in 2019. This compares with $476 in 2018 and $113 in 2017. Other real estate is initially accounted for at fair value less estimated costs to sell using current valuations, which include appraisals, real estate evaluations and realtor market opinions. If new valuation information indicates a decline from the initial basis, the Company records a write-down.2020 totaling $9. Other costs for these properties in 20192021 were $42,$25, compared with $64$51 in 2018 and $80 in 2017.2020. The Company recorded a loss of $5$26 on the sale of OREO in 2019, a loss of $13 for 20182021 and a lossgain of $12 for 2017. The Company’s market area shows positive economic signs, and$21 on the national economy appears to show mixed economic signals.  There may be additional foreclosuressale of OREO in the future.2020. The Company currently has loans of $509$62 in process of foreclosure.

Franchise tax expense increased when the years ended December 31, 2021 and 2020 are compared. Franchise taxes are levied by the states in which NBB operates and are based upon NBB’s total equity at the prior year-end, adjusted for real estate taxes and certain other items.  Franchise taxes were $1,333 for the period ended December 31, 2019 and $1,278 for 2018, an increase of $55 or 4.30%. Franchise tax expense decreased $37 in 2018 from $1,315 in 2017.

The write-down of insurance receivables totaled $2,010 for the year ended December 31, 2018. The write-down is associated with the two cybersecurity breaches. Please see additional information under the heading “Cybersecurity Risks and Incidents”.

30

The category of other operating expenses includes noninterest expense items such as professional services, stationery and supplies, telephone costs and charitable donations. ForOther operating expenses decreased when the yearyears ended December 31, 2019, other operating expenses were $3,872. This compares with $3,891 for 20182021 and $4,507 for 2017. The $616 decrease from 2017 to 2018 was2020 are compared, primarily due to a loss of $189 resulting from a wire fraud in 2017 and a decrease in expenses associated with consulting services related to the cybersecurity breaches and the non-servicing component ofdecreased non-service pension expense.cost.

 

Cybersecurity Risks and Incidents

The Company treats cybersecurity risk seriously. 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 costs of these measures were $365 for the twelve months ended December 31, 2019, $345 for the twelve months ended December 31, 2018 and $277 for the twelve months ended December 31, 2017. These costs are included in various categories of noninterest expense.

The Company experienced two intrusions to its digital systems, one in May 2016 and one in January 2017. Hackers and related organized criminal groups obtained unauthorized access to certain customer accounts. The attacks disabled certain systems protections, including limits on the number, amount, and frequency of ATM withdrawals. The attacks resulted in the theft of funds disbursed through ATMs. In the May 2016 attack, hackers accessed customer funds and in the January 2017 intrusion, the hackers artificially inflated account balances and did not access customer funds. The Company notified all affected customers, and restored all funds so that no customer experienced a loss. The Company retained a nationally recognized firm to investigate and remediate the May 2016 intrusion and a separate nationally recognized firm to investigate and remediate the January 2017 intrusion. The Company adopted and implemented all of the recommendations provided through the investigations.

The financial impact of the attacks include the amount of the theft, as well as costs of investigation and remediation. The theft of funds totaled $570 in the May 2016 attack and $1,838 in the January 2017 attack. The Company recognized an estimated loss of $347 in 2016, and $2,010 in 2018, with a remaining insurance receivable of $50 at December 31, 2018. Costs for investigation, remediation, and legal consultation totaled $157 in 2019, $224 in 2018 and $407 in 2017. The Company’s litigation against the insurance carrier was settled during the first quarter of 2019, subject to a non-disclosure agreement. There has been no litigation against the Company to date associated with the breaches.

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. 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. The Company maintains insurance which provides a degree of coverage depending on the nature and circumstances of any cyber penetration but cannot be relied upon to reimburse fully the Company for all losses that may arise. The Company has adopted new protections and invested additional resources to increase its security.

Income Taxes

Income tax expense for 20192021 was $3,211$4,251 compared to $2,560$3,077 in 2018 and $6,293 in 2017. During 2019 and 2018, the2020. The Company’s statutory tax rate was 21%; during 2017, the Company’s marginal tax rate was 35%.  The decrease in the tax rate was due to the enactment on December 22, 2017 of the Tax Act, which became effective January 1, 2018. 

for such years. The Company’s effective tax rates for 2019, 20182021 and 20172020 were 15.53%, 13.68%17.26% and 30.87%16.06%, respectively. The expected income tax expense based on the Company’s statutory tax rate differs from the actual income tax expense due to tax exempt income on municipal securities and loans, and in 2017, the re-valuation of deferred tax assets from 35% to 21%. GAAP requires deferred tax assets to be valued at the tax rate at which the Company expects to realize them.  As a result of the change in the Company’s tax rate, the Company recognized a revaluation adjustment of $1,560 in 2017, with a corresponding charge to income tax expense.loans. See Note 9 of the Notes to Consolidated Financial Statements for information relating to income taxes.

 

Effects of Inflation

The Company’s consolidated statements of income generally reflect the effects of inflation. Since interest rates, loan demand and deposit levels are related to inflation, the resulting changes are included in net income. The most significant item which does not reflect the effects of inflation is depreciation expense. Historical dollar values used to determine depreciation expense do not reflect the effects of inflation on the market value of depreciable assets after their acquisition.

 

31

Provision and Allowance for Loan Losses

The Company’s risk analysis at December 31, 20192021 determined an allowance for loan losses of $6,863$7,674 or 0.94%0.96% of loans net of unearned income and deferred fees and costs, a decrease from $7,390 or 1.04%costs. The allowance at December 31, 2018.2020 was $8,481 or 1.10% of loans net of unearned income and deferred fees and costs. The determination of the appropriate level for the allowance for loan losses resulted in a provisionrecovery of $126$398 for the twelve months ended December 31, 2019,2021, compared with a recoveryprovision of $1,991 for the twelve month period ended December 31, 2018 of $81.2020. To determine the appropriate level of the allowance for loan losses, the Company considers credit risk for certain loans designated as impaired and for non-impaired (“collectively evaluatedevaluated”) loans.

28

Individually Evaluated Impaired Loans

Individually evaluated impaired loans at December 30, 2021 were $5,878 gross and $5,880 net of unearned income and deferred fees and costs. There were no specific allocations to the allowance for loan losses as of December 31, 2021. At December 31, 2020, individually evaluated impaired loans totaled $5,289 on a$4,903 gross basis and $4,905 net of unearned income and deferred fees and costs, with specific allocations to the allowance for loan losses totaling $110 at December 31, 2019.  Individually evaluated impaired loans at December 31, 2018 were $6,820 on a gross basis as well as net of unearned income and deferred fees and costs, with specific allocations to the allowance for loan losses of $139.$75. The specific allocation is determined based on criteria particular to each impaired loan.

Collectively Evaluated Loans

Collectively evaluated loans totaled $728,738 on a$797,851 gross basis and $728,162$797,368 net of unearned income and deferred fees and costs, with an allowance of $6,753$7,674 or 0.93%0.96% of collectively-evaluated loans net of unearned income and deferred fees and costs at December 31, 2019.2021. At December 31, 2018,2020, collectively evaluated loans totaled $703,577 on a$765,124 gross basis and $702,979$763,894 net of unearned income and deferred fees and costs, with an allowance of $7,251$8,406 or 1.03%1.10%.

ForCollectively evaluated loans are divided into classes based upon risk characteristics. In order to calculate the allowance for collectively evaluated loans, the Company applies to each loan class a historical net charge-off rate for the class, adjusted for qualitative factors that influence credit risk. Qualitative factors evaluated for impact to credit risk include economic measures, asset quality indicators, loan characteristics, and changes to internal BankCompany policies and changes in management.

Net charge-off rates for each class are averaged over eight quarters (two years) to determine the historical net charge off rate applied to each class of collectively evaluated loans. Net charge-offs for the twelve months ended December 31, 2019 were $653 or 0.09% of average loans, an increase from $454 or 0.07% for the twelve months ended December 31, 2018. The eight-quarter average historical loss rate applied to the calculation was 0.08% for the period ended December 31, 2019 and 0.07% for the period ended December 31, 2018. Charge-Offs

Increases in the net charge-off rate increase the required allowance for collectively evaluatedcollectively-evaluated loans, while decreases in the net charge-off rate decrease the required allowance for collectively evaluatedcollectively-evaluated loans. On a portfolio level, net charge-offs were $409 for the twelve months ended December 31, 2021, or 0.05% of average loans. Net charge-offs for the twelve months ended December 31, 2020 were $373 or 0.05% of average loans. The 8-quarter average historical loss rate was 0.05% as of December 31, 2021 and 0.07% as of December 31, 2020.

Economic Factors

Economic factors influence credit risk and impact the allowance for loan loss. The Company considers economic indicators within its market area, including: unemployment, business and personal bankruptcy filings, business bankruptcy filings, the interest rate environment, residential vacancy rates, housing inventory for sale,rate and the competitive environment. Lowerinventory of new and existing homes.

The Company sources economic data pertinent to its market from the most recently available publications. Most economic indicators lag the report date by one to three months. In periods of low volatility, lagging indicators are accepted as reasonably representative of current conditions. The COVID-19 pandemic introduced significant uncertainty and beginning in 2020, the Company implemented a qualitative factor for national unemployment lowers credit riskfilings to capture current economic data. Unemployment filings for the Company’s market area are not available on a timely basis, however national data is available on a timely basis and historical analysis shows a strong correlation between national and local unemployment filings.

National unemployment claims escalated sharply beginning in the latter half of March 2020 and the Company reacted by substantially increasing the allowance for loan losses, while higherlosses. During 2021, national unemployment increasesclaims decreased considerably and average weekly claims over the last six weeks of the year were similar to pre-pandemic levels, allowing the Company to reduce the allocation for this factor.

The Company continues to monitor the most recently available economic indicators for its market and their effect on credit risk. As of December 30, 2021, the unemployment rate for the Company’s market area was measured as of November 30, 2021 and decreased from the measurement available at December 31, 2020, decreasing the allocation to the allowance for loan losses.

Business and personal bankruptcy filing data was available as of September 2021. Higher bankruptcy filings indicate heightened credit risk and increase the allowance for loan losses, while lower bankruptcy filings have a beneficial impact on credit risk. The interest rate environment impacts variable rate loans.  As interest rates increase,Compared with data available at December 31, 2020, business bankruptcies were at a similar level and received the payment on variable rate loans increases, which may increase credit risk.  However the effect of gradual, measured interest rate changes does not affect credit risk as much assame allocation and personal bankruptcies were slightly lower and resulted in a volatile interest rate environment.  slightly lower allocation.

Residential vacancy rates and housing inventory for sale impact the Company’s residential construction customers and the consumer real estate market. Higher levels increase credit risk. Higher competition for loans increases credit risk, while lower competition decreases credit risk.

Within the Company’s market area, the number of personal bankruptcies increased from levelsThe residential vacancy rate at December 31, 2018, indicating increased credit risk.  The competitive, legal2021 was measured as of the third quarter of 2021 and regulatory environments andwhile still lower than normal levels, worsened slightly from the inventory of new and existing homes remained at similar levels todata incorporated into the December 31, 2018.  Business bankruptcies, interest rates, residential vacancy rates2020 calculation, resulting in a higher allocation. Housing inventory data was available as of December 31, 2021. Levels are historically low and the unemployment rate decreased when compared with levelsare lower than those at December 31, 2018.  The Company assessed the decreases as positive indicators for credit risk, and reduced the risk allocation.2020.

The Company considers other factors that impact credit risk, including the risk from changes in the legal and regulatory environments, changes to lending policies and loan review, and changes in management’s experience.  The legal and regulatory environment, lending policies, and management’s experience remained at similar levels to December 31, 2018.  Slight changes to the loan review system to align with regulatory guidance resulted in a slight increase in the allocation.

Asset Quality Indicators

Asset quality indicators, affectincluding past due levels, nonaccrual levels and internal risk ratings, are evaluated at the class level. Loans past due and loans designated nonaccrual indicate heightened credit risk. Increases in past due and nonaccrual loans increase the required level of the allowance for loan losses and decreases in past due and nonaccrual loans reduce the required level of the allowance for loan losses.

Accruing loans past due 30-89 days were 0.15%0.12% of total loans net of unearned income and deferred fees and costs at December 31, 2019,2021, a decrease from 0.23%0.19% at December 31, 2018.2020. Accruing loans past due 90 days or more were 0.03%0.01% of total loans, net of unearned income and deferred fees and costs at December 31, 2019, and2021 compared to 0.00% at December 31, 2018.2020. Nonaccrual loans at December 31, 201930, 2021 were 0.46%0.36% of total loans net of unearned income and deferred fees and costs, a decrease fromlower than 0.48% at December 31, 2018. Decreases in past due2020.

29

Loans rated special mention and nonaccrualclassified (together, “criticized assets”) indicate heightened credit risk. Higher levels of criticized assets increase the required level of the allowance for collectively-evaluated loans, while lower levels of criticized assets reduce the required level of the allowance for collectively-evaluated loans. Collectively evaluated loans rated special mention were $3,728 at December 31, 2021, lower than $8,035 at December 31, 2020. Collectively evaluated loans rated classified were $1,064 at December 31, 2021 and $473 at December 31, 2020.

Other Factors

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 losses, while increasesreview, changes in past duemanagement, high risk loans, as well as a factor to measure the risk from loans that received a COVID-19 modification and nonaccrual loansthen received a subsequent COVID-19 modification.

The interest rate environment impacts variable rate loans. If interest rates increase, the requiredpayment on variable rate loans increases, which may increase credit risk. The interest rate environment is at a low level as of December 31, 2021, unchanged from the level at December 31, 2020. The low level of interest rates indicates no additional credit risk.

The competitive, legal and regulatory environments were evaluated for changes that would impact credit risk. Higher competition for loans increases credit risk, while lower competition decreases credit risk. Competition remained at similar levels to those at December 31, 2020. The legal and regulatory environments remain in a similar posture to that at December 31, 2020.

Lending policies, loan review procedures and management’s experience influence credit risk. Since December 31, 2020, there have been no changes that affect credit risk to the Company’s lending policies or loan review procedures. During the fourth quarter, the Company’s Chief Credit Officer resigned. The Company allocated to the allowance for loan losses.losses to reflect the increased risk that results from a change in management.

Levels of high risk loans are considered in the determination of the level of the allowance for loan loss. High risk loans are defined by the Company as loans secured by junior liens, interest-only loans and loans with a high loan-to-value ratio. 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 $28,386$23,101 or 18.07%20.41% from the level at December 31, 2018,2020, resulting in a decreased allocation.

Loans rated “special mention” and “classified” (together, “criticized assets”) indicate heightened credit risk. Higher levels of criticized assets increaseAt December 31, 2020, the required level ofCompany allocated to the allowance for collectively evaluated loans, while lower levels of criticized assets reduce the required level of the allowance for collectively evaluated loans. Loans rated special mention receive a 50% greater allocation for qualitative risk factors, and loans rated classified receive a 100% greater allocation for qualitative risk factors. A classified loss rate is also applied to classified loans, calculated as net charge offs divided by classified loans.  During the third quarter of 2019, the Bank slightly revised the loan risk rating system to align with regulatory guidance.  After the revision, the “special mention” rating is no longer applied to consumer loans.  The allowance for loan losses includes a two basis point adjustment to account for certain COVID-19 related modifications. As of December 31, 2021, there were no loans with COVID-19 related modifications still in the change. Collectively evaluated loans rated “special mention” were $135modification period, and no allocation was taken.

Unallocated Surplus

The unallocated surplus at December 30, 2021 is $361 or 4.94% in excess of the calculated requirement. The unallocated surplus at December 31, 2019 and $1,455 at December 31, 2018. Collectively evaluated loans rated classified were $961 at December 31, 2019 and $735 at December 31, 2018.2020 was $396 or 4.89% in excess of the calculated requirement. The surplus provides some mitigation of the uncertainty surrounding the impact of COVID-19.

 

32

Conclusion

The calculation of the appropriate level for the allowance for loan losses incorporates analysis of multiple factors and requires management’s prudent and informed judgment. The ratio of the allowance for loan losses to total loans, net of unearned income and deferred fees and costs at December 31, 2019 was 0.94%, a decrease from 1.04% at December 31, 2018. The ratio of the allowance for collectively evaluated loan losses to collectively evaluated loans, net of unearned income and deferred fees and costs was 0.93%, compared with 1.03% at December 31, 2018. Improvementsmost recently available data showed improvements that decreased the required level of the allowance for loan losses at December 31, 2021 from December 31, 2018 included loans past due 30-89 days, loans rated special mention and classified,2020 including loans considered high risk, the interest rate environment, business bankruptcies, residential vacancy rate,and personal bankruptcy filings, the unemployment rate, criticized loans and nonaccrual loans.certain loans with COVID-19 related modifications. Other indicators, slightly offset the improvements, including a slight worsening in personal bankruptcy andaccruing loans past due 90 days.days or more and residential vacancy, showed worsening from levels at December 31, 2020 and increased the required level of the allowance for loan losses.

To reflect the impact of the COVID-19 pandemic, the Company added a qualitative factor for national unemployment filings beginning with the first quarter of 2020. During 2020, national unemployment filings increased dramatically from pre-pandemic levels and was the source of most of the provision taken for 2020. During 2021, unemployment filings declined substantially, which was a key factor in reducing the required level of the allowance for loan losses and resulted in a recovery for the year ended December 31, 2021.

The Company augmented the calculated requirement with an unallocated surplus of 4.94% to mitigate some of the uncertainty caused by the lingering pandemic. Based on analysis of historical indicators, asset quality and economic factors, management believes the level of allowance for loan losses is reasonable for the credit risk in the loan portfolio.portfolio as of December 31, 2021.

Quarterly Results of Operations

The following is a summaryPlease refer to Note 5of Notes to Consolidated Financial Statements for further information on collectively evaluated loans, individually evaluated impaired loans and the unallocated portion of the unaudited quarterly results of operationsallowance for the years ended December 31, 2019, 2018 and 2017:loan losses.

$ in thousands, except per share data

 

2019

  

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

Income Statement Data:

                

Interest income

 $11,138  $11,293  $11,288  $11,428 

Interest expense

  1,793   1,914   1,865   1,808 

Net interest income

  9,345   9,379   9,423   9,620 

Provision for (recovery of) loan losses

  200   55   95   (224

)

Noninterest income

  2,489   1,856   2,098   2,347 

Noninterest expense

  6,465   6,453   6,386   6,450 

Income taxes

  726   733   788   964 

Net income

 $4,443  $3,994  $4,252  $4,777 

Per Share Data:

                

Basic net income per common share

 $0.65  $0.61  $0.65  $0.74 

Fully diluted net income per common share

  0.65   0.61   0.65   0.74 

Cash dividends per common share

  ---   0.67   ---   0.72 

Book value per common share

  27.86   28.26   28.97   28.31 

$ in thousands, except per share data

 

2018

  

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

Income Statement Data:

                

Interest income

 $10,484  $10,726  $10,945  $11,069 

Interest expense

  1,081   1,145   1,245   1,576 

Net interest income

  9,403   9,581   9,700   9,493 

Provision for (recovery of) loan losses

  (472

)

  342   223   (174

)

Noninterest income

  2,023   1,868   1,914   1,924 

Noninterest expense

  8,164   6,424   6,463   6,225 

Income taxes

  438   642   677   803 

Net income

 $3,296  $4,041  $4,251  $4,563 

Per Share Data:

                

Basic net income per common share

 $0.47  $0.58  $0.61  $0.66 

Fully diluted net income per common share

  0.47   0.58   0.61   0.66 

Cash dividends per common share

  ---   0.58   ---   0.63 

Book value per common share

  26.67   26.71   27.04   27.34 

 

33
30

 

$ in thousands, except per share data

 

2017

  

First
Quarter

 

Second
Quarter

 

Third
Quarter

 

Fourth
Quarter

Income Statement Data:

                

Interest income

 $10,238  $10,295  $10,301  $10,426 

Interest expense

  1,028   1,048   1,021   1,028 

Net interest income

  9,210   9,247   9,280   9,398 

Provision for (recovery of) loan losses

  59   464   201   (567

)

Noninterest income

  1,850   1,731   1,884   2,171 

Noninterest expense

  6,283   5,974   6,031   5,941 

Income taxes

  1,069   970   1,147   3,107 

Net income

 $3,649  $3,570  $3,785  $3,088 

Per Share Data:

                

Basic net income per common share

 $0.52  $0.51  $0.54  $0.46 

Fully diluted net income per common share

  0.52   0.51   0.54   0.46 

Cash dividends per common share

  ---   0.56   ---   0.61 

Book value per common share

  26.30   26.49   26.97   26.57 

Balance Sheet

On December 31, 2019, the Company had total assets of $1,321,837, an increase of $65,805 or 5.24%, over total assets of $1,256,032 on December 31, 2018. Total assets at December 31, 20182021 were down by $725,$1,702,175, an increase of $182,502 or 0.06%12.01%, from $1,256,757$1,519,673 at December 31, 2017.2020. Growth in assets was fueled by growth in customer deposits, which increased $197,444 or 15.22% from $1,297,143 at December 31, 2020 to $1,494,587 at December 31, 2021.

 

Loans

The Company’s loan categorization reflects its approach to loan portfolio management and includes six groups. Real estate construction loans include construction loans for residential and commercial properties, as well as land.  Consumer real estate loans include conventional and junior lien mortgages, equity lines and investor-owned residential real estate. Commercial real estate loans are comprised of owner-occupied and leased nonfarm, nonresidential properties, multi-family residence loans and farmland. Commercial non-real estate loans include agricultural loans, operating capital lines and loans secured by capital assets.assets, as well as PPP loans.  At December 31, 2021, PPP loans were $1,094 with deferred fees of $42.  At December 31, 2020, PPP loans were $36,903 with net deferred fees of $911. Public sector and industrial development authority (“IDA”) loans are extended to municipalities.  Consumer non-real estate loans include automobile loans, personal loans, credit cards and consumer overdrafts.

 

A.

Types of Loans

$ in thousands

 

December 31,

  

2019

 

2018

 

2017

 

2016

 

2015

Real estate construction

 $42,303  $37,845  $34,694  $36,345  $48,251 

Consumer real estate

  181,472   175,456   166,965   157,718   143,504 

Commercial real estate

  365,373   353,546   340,414   336,457   309,378 

Commercial non-real estate

  46,576   46,535   40,518   39,204   37,571 

Public sector and IDA

  63,764   60,777   51,443   45,474   51,335 

Consumer non-real estate

  34,539   36,238   34,648   33,528   29,845 

Total loans

 $734,027  $710,397  $668,682  $648,546  $619,884 

Less unearned income and deferred fees

  (576

)

  (598

)

  (613

)

  (794

)

  (876

)

Total loans, net of unearned income and deferred fees and costs

 $733,451  $709,799  $668,069  $647,752  $619,008 

Less allowance for loans losses

  (6,863

)

  (7,390

)

  (7,925

)

  (8,300

)

  (8,297

)

Total loans, net

 $726,588  $702,409  $660,144  $639,452  $610,711 

34

B.

Maturities and Interest Rate Sensitivities

A.    Maturities and Interest Rate Sensitivities

The following table presents maturities and interest rate sensitivities for commercial non real estate, commercial real estate and real estate construction loans.

$ in thousands

 

December 31, 2019

  

< 1 Year

 

1 – 5 Years

 

After 5 Years

 

Total

Commercial non real estate

 $30,742  $15,171  $663  $46,576 

Commercial real estate

  71,810   241,968   51,595   365,373 

Real estate construction

  13,994   10,879   17,430   42,303 

Total

  116,546   268,018   69,688   454,252 

Less loans with predetermined interest rates

  (12,471

)

  (29,300

)

  (8,505

)

  (50,276

)

Loans with adjustable rates

 $104,075  $238,718  $61,183  $403,976 

Risk Elements Loans are presented on a gross basis.

 

The following table presents aggregate amounts for nonaccrual loans, restructured loans in nonaccrual, other real estate owned net, and accruing loans which are contractually past due ninety days or more as to interest or principal payments, and accruing restructured loans.

$ in thousands

December 31, 2021

 
 

< 1 Year

 

1  5 Years

 

6-15 Years

 

>15 Years

 

Total

 

Real estate construction

$

9,190

 

$

14,428

 

$

9,877

 

$

15,346

 

$

48,841

 

Consumer real estate

 

6,581

  

9,325

  

51,212

  

141,859

  

208,977

 

Commercial real estate

 

4,115

  

12,591

  

70,498

  

318,518

  

405,722

 

Commercial non-real estate

 

17,290

  

31,318

  

4,688

  

6,968

  

60,264

 

Public sector and IDA

 

3

  

1,158

  

32,438

  

14,300

  

47,899

 

Consumer non-real estate loans

 

9,663

  

21,567

  

706

  

90

  

32,026

 

 Total

$

46,842

 

$

90,387

 

$

169,419

 

$

497,081

 

$

803,729

 

Less loans with predetermined interest rates

 

(21,165

)

 

(80,678

)

 

(28,771

)

 

(23,374

)

 

(153,988

)

Loans with adjustable rates

$

25,677

 

$

9,709

 

$

140,648

 

$

473,707

 

$

649,741

 

 

$ in thousands

 

December 31,

  

2019

 

2018

 

2017

 

2016

 

2015

Nonaccrual loans

                    

Real estate construction

 $---  $---  $---  $---  $--- 

Consumer real estate

  24   119   6   256   14 

Commercial real estate

  ---   192   ---   698   1,146 

Commercial non real estate

  136   ---   ---   217   883 

Public sector and IDA

  ---   ---   ---   ---   --- 

Consumer non real estate

  4   ---   ---   ---   --- 

Total nonaccrual loans

 $164  $311  $6  $1,168  $2,043 

Restructured loans (TDR Loans) in nonaccrual

                    

Real estate construction

 $---  $---  $---  $270  $718 

Consumer real estate

  262   610   145   ---   --- 

Commercial real estate

  2,949   2,494   2,602   4,390   3,921 

Commercial non real estate

  ---   5   15   24   --- 

Public sector and IDA

  ---   ---   ---   ---   --- 

Consumer non real estate

  ---   ---   1   3   --- 

Total restructured loans in nonaccrual

 $3,211  $3,109  $2,763  $4,687  $4,639 

Total nonperforming loans

 $3,375  $3,420  $2,769  $5,855  $6,682 

Other real estate owned, net

  1,612   2,052   2,817   3,156   4,165 

Total nonperforming assets

 $4,987  $5,472  $5,586  $9,011  $10,847 

Accruing loans past due 90 days or more

                    

Real estate construction

 $---  $---  $---  $---  $--- 

Consumer real estate

  188   ---   11   42   145 

Commercial real estate

  ---   ---   ---   ---   --- 

Commercial non real estate

  17   2   ---   ---   --- 

Public sector and IDA

  ---   ---   ---   ---   --- 

Consumer non real estate

  26   33   40   21   11 

Total accruing loans past due 90 days or more

 $231  $35  $51  $63  $156 
                  (continued) 

 

3531

 

Accruing restructured loans

                    

Real estate construction

 $---  $---  $---  $---  $--- 

Consumer real estate

  426   417   947   877   962 

Commercial real estate

  382   1,112   2,948   2,892   7,645 

Commercial non real estate

  916   1,010   1,214   ---   207 

Public sector and IDA

  ---   ---   ---   ---   --- 

Consumer non real estate

  5   13   25   ---   --- 

Total accruing restructured loans

 $1,729  $2,552  $5,134  $3,769  $8,814 

Loan loss and other indicators related to asset quality are presented in the Loan Loss Data table.

Loan Loss Data Table

$ in thousands

 

2019

 

2018

 

2017

Provision for (recovery of) loan losses

 $126  $(81

)

 $157 

Net charge-offs to average net loans

  0.09

%

  0.07

%

  0.08

%

Allowance for loan losses to loans, net of unearned income and deferred fees

  0.94

%

  1.04

%

  1.19

%

Allowance for loan losses to nonperforming loans

  203.35

%

  216.08

%

  286.20

%

Allowance for loan losses to nonperforming assets

  137.62

%

  135.05

%

  141.87

%

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

  0.68

%

  0.77

%

  0.83

%

Nonaccrual loans

 $164  $311  $6 

Restructured loans in nonaccrual status

  3,211   3,109   2,763 

Other real estate owned, net

  1,612   2,052   2,817 

Total nonperforming assets

 $4,987  $5,472  $5,586 

Accruing loans past due 90 days or more

 $231  $35  $51 

Nonperforming loans include nonaccrual loans and TDRs in nonaccrual status, but do not include accruing loans 90 days or more past due or accruing restructured loans. TDRs are discussed in detail under the section titled “C.B. Modifications and Troubled Debt Restructurings” below. Impaired loans, or loans for which management does not expect to collect at the original loan terms, but which may or may not be nonperforming, are presented in Note 5 of Notes to Consolidated Financial Statements.

Total impaired loans at December 31, 2019 were $5,289, of which $3,211 were in nonaccrual status. Impaired loans at December 31, 2018 and 2017 were $6,820 and $11,924, of which $3,420 and $2,763 were in nonaccrual status, respectively.

The ratio of the allowance for loan losses to total nonperforming loans decreased from 216.08% in 2018 to 203.35% in 2019. The Company believes the allowance for loan losses is adequate for the credit risk inherent in the loan portfolio.Restructurings

 

C.

Modifications and Troubled Debt Restructurings

Modifications

In the ordinary course of business the Company modifies loan terms on a case-by-case basis, including both consumer and commercial loans, for a variety of reasons. Modifications to consumer loans generally involve short-term deferrals to accommodate specific,may include rate reductions, payment extensions of varying lengths of time, a change in amortization term or method or other arrangements. Payment extensions allow borrowers temporary circumstances.payment relief and result in extending the original contractual maturity by the number of months for which the extension was granted. The Company may grant payment extensions to borrowers who have demonstrated a willingness and ability to repay their loan but who are experiencing consequences of a specific unforeseen temporary hardship.

An extension defers monthly payments and requires a balloon payment at the original contractual maturity. If the temporary event is not expected to impact a borrower’s ability to repay the debt, and if the Company expects to collect all amounts due including interest accrued at the contractual interest rate for the extension period of delay at contractual maturity, the modification is not designated a TDR.

Modifications to consumer loans generally involve short-term payment extensions to accommodate specific, temporary circumstances. Modifications to commercial loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants. In the original underwriting, loan terms are established that represent the then-current and projected financial condition of the borrower. If the modified terms are consistent with competitive market conditions and representative of terms the borrower could otherwise obtain in the open market, the modified loan is not categorized as a TDR.

The Company codes modifications to assist in identifying TDRs. When the COVID-19 pandemic began, the Company added coding to identify modifications to borrowers experiencing COVID-19 related hardship.

Modifications Made for Competitive Purposes

During the year ended December 31, 2021, the Company provided 875 modifications for competitive reasons to loans totaling $112,718. The modifications were not TDRs and were not related to COVID-19. For the twelve months ended December 31, 2020, the Company provided non-TDR modifications for competitive reasons to 1,047 loans totaling $152,681.

Modifications Related to COVID-19

The COVID-19 pandemic negatively impacted a significant number of the Company’s borrowers, and may adversely impact some borrowers in the future. Since the COVID-19 pandemic began in March 2020, the Company provided modifications related to COVID-19 financial difficulty, including payment extensions and interest only periods. The CARES Act, the CAA and regulatory guidance specify criteria that, if met, permit an election not to designate the loans as TDRs. The TDRs designated during the year ended December 31, 2021 resulted from COVID-19 related modifications that did not meet the legal and regulatory criteria to avoid designation as TDR. All of the Company’s other COVID-19 related modifications met the criteria and were not designated TDR. The Company followed its normal risk rating and nonaccrual designation procedures and did not automatically downgrade or designate as nonaccrual if the loan was modified for COVID-19 related difficulty.

 

3632

 

The Company codesfollowing tables provide information regarding COVID-19 related modifications to assist in identifying TDRs. The majority of modifications were granted for competitive reasonsthe years ended December 31, 2021 and did not constitute TDRs. A description of modifications that did not result in TDRs follows:December 31, 2020.

 

Modifications Made During the 12 Months Ended December 31, 2019

to Borrowers Not Experiencing Financial Difficulty

Modification

 

Number of Loans Modified

  

Total Amount Modified

Rate reductions for competitive purposes

 10  $21,717 

Payment extensions for less than 3 months

 72   1,302 

Maturity date extensions of more than 3 months and up to 6 months

 143   20,287 

Maturity date extensions of more than 6 months and up to 12 months

 234   14,475 

Maturity date extensions of more than 12 months

 74   8,811 

Advances on non-revolving loans or recapitalization

 4   1,019 

Change in amortization term or method

 11   4,374 

Change or release of collateral

 26   532 

Renewal of expired Home Equity Line of Credit loans to additional 10 years

 34   1,330 

Renewal of single-payment notes

 124   3,254 

Total modifications that do not constitute TDRs

 732  $77,101 
  

Twelve Months Ended December 31,

 
  

2021

  

2020

 

Modifications To Borrowers Impacted by the

COVID-19 Pandemic

 

Number

  

Amount

(in thousands)

  

Number

  

Amount

(in thousands)

 

Payment extensions(2)

  37  $16,426   350  $121,676 

Interest-only period for amortizing loans(2)

  8   22,135   31   59,982 

Maturity date extension

  -   -   2   729 

Rate reductions(1)

  -   -   5   442 

Total

  45  $38,561   388  $182,829 

 

(1)

Rate reductions were granted to qualifying loans and are permanent for the remaining term of the loan. Rate reductions were provided to alleviate COVID-19 hardship and also to remain competitive in the current low interest rate environment.

(2)

Payment extensions and interest-only periods granted to amortizing loans have a set expiration date.

A loan that received multiple modifications as part of one request, for instance, a rate reduction and a payment extension, is presented only under one modification category. A loan that was modified pursuant to a first request and then was modified subsequently pursuant to a separate request is included for each of the requests. For example, a loan that received a payment extension under a first request and a rate reduction under a second request is counted in the rate reduction category and again in the payment extension category.

All COVID-19 related modifications for payment extensions and interest-only periods have returned to contractual terms as of December 31, 2021.

 

Modifications Made During the 12 Months Ended December 31, 2018

to Borrowers Not Experiencing Financial Difficulty

Modification

 

Number of Loans Modified

  

Total Amount Modified

Rate reductions for competitive purposes

 18  $8,384 

Payment extensions for less than 3 months

 61   646 

Maturity date extensions of more than 3 months and up to 6 months

 134   22,663 

Maturity date extensions of more than 6 months and up to 12 months

 308   11,777 

Maturity date extensions of more than 12 months

 17   2,304 

Advances on non-revolving loans or recapitalization

 8   2,076 

Change in amortization term or method

 11   1,542 

Change or release of collateral

 43   783 

Renewal of expired Home Equity Line of Credit loans to additional 10 years

 20   300 

Renewal of single-payment notes

 138   2,862 

Total modifications that do not constitute TDRs

 758  $53,337 

37

Modifications Made During the 12 Months Ended December 31, 2017

to Borrowers Not Experiencing Financial Difficulty

Modification

 

Number of Loans Modified

  

Total Amount Modified

Rate reductions for competitive purposes

 29  $11,783 

Payment extensions for less than 3 months

 126   2,693 

Maturity date extensions of more than 3 months and up to 6 months

 182   29,253 

Maturity date extensions of more than 6 months and up to 12 months

 316   14,675 

Maturity date extensions of more than 12 months

 7   3,474 

Advances on non-revolving loans or recapitalization

 12   4,603 

Change in amortization term or method

 42   4,884 

Renewal of expired Home Equity Line of Credit loans to additional 10 years

 19   448 

Renewal of single-payment notes

 240   5,044 

Total modifications that do not constitute TDRs

 973  $76,857 

Modifications in which the borrower is experiencing financial difficulty and for which the Company makes a concession to the original contractual loan terms are designated TDRs. Modifications of loan terms to borrowers experiencing financial difficulty are made in an attempt to protect as much of the Company’s investment in the loan as possible. The determination of whether a modification should be accounted for as a TDR requires significant judgment after consideration of all facts and circumstances surrounding the transaction.

Assuming all other TDR criteria are met, the Company considers one or a combination of the following concessions to the loan terms to indicate TDR status: a reduction of the stated interest rate, an extension of the maturity date at an interest rate lower than the current market rate for a new loan with a similar term and similar risk, or forgiveness of principal or accrued interest.

The Company has restructured loan terms for certain qualified financially distressed borrowers who have agreed to work in good faith and have demonstrated the ability to make the restructured payments in order to avoid a foreclosure. TDR loans are individually evaluated for impairment for purposes of determining the allowance for loan losses. TDR loans with at least six months of timely repayment history may accrue interest.  TDR loans that do not have six months of timely repayment performance are maintained on nonaccrual until the borrower demonstrates sustained repayment history under the restructured terms and continued repayment is not in doubt.  TDR loans may be removed from TDR status, and placed in the appropriate collectively evaluated pool, if the restructuring agreement specified a market interest rate at the time of restructuring and the loan is in compliance with modified terms for a period of at least one year after the restructuring was executed.TDRs

The Company’s TDRs, amounted to $4,940 as of December 31, 2019 and $5,661 as of December 31, 2018. Accruing TDR loans amounted to $1,729 at December 31, 2019 compared to $2,552 at December 31, 2018.by delinquency status, are presented below:

Restructuring generally results in loans with lower payments or an extended maturity beyond that originally required, and are expected to have a lower risk of loss due to nonperformance than loans classified as nonperforming. In 2019, the Company modified one loan in a TDR that, directly prior to restructuring, totaled $100, and currently has a balance of $100 at December 31, 2019.  Of the Company’s TDRs at December 31, 2019, seven loans, all part of one relationship defaulted within 12 months of being modified.  The Company defines default as a delay in one payment of more than 90 days or foreclosure after the date of restructuring.

$ in thousands

 

TDR Delinquency Status as of December 31, 2021

 
      

Accruing

     
  

Total TDR

Loans

  

Current

  

30-89 Days

Past Due

  

90+ Days

Past Due

  

Nonaccrual

 

Consumer real estate

 $191  $191  $-  $-  $- 

Commercial real estate

  5,386   2,814   -   -   2,572 

Commercial non-real estate

  301   -   -   -   301 

Total TDR Loans

 $5,878  $3,005  $-  $-  $2,873 

$ in thousands

 

TDR Delinquency Status as of December 31, 2020

 
      

Accruing

     
  

Total TDR

Loans

  

Current

  

30-89 Days

Past Due

  

90+ Days

Past Due

  

Nonaccrual

 

Consumer real estate

 $194  $194  $-  $-  $- 

Commercial real estate

  3,202   -   363   -   2,839 

Commercial non-real estate

  851   188   663   -   - 

Consumer non-real estate

  2   1   -   1   - 

Total TDR Loans

 $4,249  $383  $1,026  $1  $2,839 

In 2018, the Company modified loans in a TDR that, directly prior to restructuring, totaled $4,213 and that had total principal balances of $3,800 as of December 31, 2018. None of the Company’s restructured loans defaulted during the twelve months ended December 31, 2018.    Please refer to Note 5 of Notes to Consolidated Financial Statements for information on the effect of default on the allowance for loan losses.

 

38
33

The following tables present the delinquency status of TDR loans.

$ in thousands

 

TDR Delinquency Status as of December 31, 2019

      

Accruing

    
  

Total TDR

Loans

 

Current

 

30-89 Days

Past Due

 

90+ Days

Past Due

 

Nonaccrual

Real estate construction

 $---  $---  $---  $---  $--- 

Consumer real estate

  688   426   ---   ---   262 

Commercial real estate

  3,331   382   ---   ---   2,949 

Commercial non real estate

  916   916   ---   ---   --- 

Public sector and IDA

  ---   ---   ---   ---   --- 

Consumer non real estate

  5   2   3   ---   --- 

Total TDR Loans

 $4,940  $1,726  $3  $---  $3,211 

$ in thousands

 

TDR Delinquency Status as of December 31, 2018

      

Accruing

    
  

Total TDR

Loans

 

Current

 

30-89 Days

Past Due

 

90+ Days

Past Due

 

Nonaccrual

Real estate construction

 $---  $---  $---  $---  $--- 

Consumer real estate

  1,027   417   ---   ---   610 

Commercial real estate

  3,606   1,112   ---   ---   2,494 

Commercial non real estate

  1,015   1,010   ---   ---   5 

Public sector and IDA

  ---   ---   ---   ---   --- 

Consumer non real estate

  13   9   4   ---   --- 

Total TDR Loans

 $5,661  $2,548  $4  $---  $3,109 

$ in thousands

 

TDR Delinquency Status as of December 31, 2017

      

Accruing

    
  

Total TDR

Loans

 

Current

 

30-89 Days

Past Due

 

90+ Days

Past Due

 

Nonaccrual

Real estate construction

 $---  $---  $---  $---  $--- 

Consumer real estate

  1,092   773   174   ---   145 

Commercial real estate

  5,550   2,948   ---   ---   2,602 

Commercial non real estate

  1,229   1,214   ---   ---   15 

Public sector and IDA

  ---   ---   ---   ---   --- 

Consumer non real estate

  26   25   ---   ---   1 

Total TDR Loans

 $7,897  $4,960  $174  $---  $2,763 

39

Summary of Loan Loss Experience

 

A.   Loan Loss Data 

Analysis of the Allowance for Loan Losses

The following table showsprovides information about the allowance for loan losses, nonperforming assets and accruing loans past due 90 days or more:

  

December 31,

 

$ in thousands

 

2021

 

2020

 

Allowance for loan losses

 

$

7,674

 

$

8,481

 

Total loans, net of unearned income and deferred fees

  

803,248

  

768,799

 

Allowance for loan losses to loans, net of unearned income and deferred fees

  

0.96

%

 

1.10

%

        

Nonaccrual loans

 

$

-

 

$

846

 

TDR loans in nonaccrual status

  

2,873

  

2,839

 

Total nonperforming loans

 

$

2,873

 

$

3,685

 

Other real estate owned, net

  

957

  

1,553

 

Total nonperforming assets

 

$

3,830

 

$

5,238

 

Nonperforming loans to total loans, net of unearned income and deferred fees and costs

  

0.36

%

 

0.48

%

Allowance for loan losses to nonperforming loans

  

267.11

%

 

230.15

%

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

  

0.48

%

 

0.68

%

Allowance for loan losses to nonperforming assets

  

200.37

%

 

161.91

%

        

Accruing loans past due 90 days or more

 

$

90

 

$

17

 

Management analyzes many factors to determine the appropriate level for the allowance for loan losses and resultant provision expense, including the historical loss rate, the quality of the loan portfolio as determined by management, diversification as to type of loans in the portfolio, internal policies and economic factors. The allowance for loan losses at December 31, 2020 reflected stressed economic data and a high level of uncertainty associated with the COVID-19 pandemic.  The percentage of the allowance for loan losses to total loans decreased from December 31, 2020 to December 31, 2021.  Improved economic conditions at December 31, 2021, as well as lower loss rates, decreases in the amount of loans considered high risk, criticized loans and certain loans with COVID-19 related modifications, led to the reduction of the percentage of the allowance for loan losses to loans.  Nonperforming loans and other real estate owned (“OREO”), together nonperforming assets, improved from December 31, 2020 to December 31, 2021, while accruing loans past due 90 days or more worsened slightly.  More information about the level and calculation methodology of the allowance for loan losses is provided in the sections “Provision and Allowance for Loan Losses” as well as Notes 1 and 5 of Notes to Consolidated Financial Statements.

B.  Analysis of Net Charge-Offs

The following tables show net charge-offs, average loan balancesbalance and the percentage of charge-offs to average loan balance for each of the Company’s loan segments at the end of each period; changes in the allowance for loan losses arising fromperiod.  Average loans charged offare presented net of unearned income and recoveries on loans previously charged off by loan category; and additions to the allowance which have been charged to operating expense:net deferred fees.

 

$ in thousands

 

December 31,

  

2019

 

2018

 

2017

 

2016

 

2015

Average loans, net of unearned income and deferred fees and costs

 $719,179  $683,310  $653,364  $621,654  $619,745 

Allowance for loan losses at beginning of year

  7,390   7,925   8,300   8,297   8,263 

Charge-offs:

                    

Real estate construction

  ---   ---   ---   29   --- 

Consumer real estate

  192   38   146   133   205 

Commercial real estate

  150   ---   139   488   1,114 

Commercial non real estate

  47   107   82   883   490 

Public Sector and IDA

  ---   ---   ---   ---   --- 

Consumer non real estate

  531   544   452   273   311 

Total loans charged off

  920   689   819   1,806   2,120 

Recoveries:

                    

Real estate construction

  ---   ---   ---   ---   --- 

Consumer real estate

  ---   3   1   2   2 

Commercial real estate

  49   49   131   83   49 

Commercial non real estate

  1   22   23   10   1 

Public Sector and IDA

  ---   ---   ---   ---   --- 

Consumer non real estate

  217   161   132   64   93 

Total recoveries

  267   235   287   159   145 

Net loans charged off

  653   454   532   1,647   1,975 

Provision for (recovery of) loan losses

  126   (81

)

  157   1,650   2,009 

Allowance for loan losses at end of year

 $6,863  $7,390  $7,925  $8,300  $8,297 

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

  0.09

%

  0.07

%

  0.08

%

  0.26

%

  0.32

%

$ in thousands

December 31, 2021

 
 

Net Charge-Offs (Recoveries)

 

Average Loans

 

Percentage of Net Charge-Offs (Recoveries) to Average Loans

 

Real estate construction

$

-

  

$

45,463

  

-

 

%

Consumer real estate

 

 (7

)

  

193,159

  

-

 

%

Commercial real estate

 

(159

)

  

402,146

  

(0.04

)

%

Commercial non-real estate

 

493

   

68,917

  

0.72

 

%

Public Sector  and IDA

 

-

   

45,829

  

-

 

%

Consumer non-real estate

 

82

   

31,589

  

0.26

 

%

Total

$

409

  

$

787,103

  

0.05

 

%

$ in thousands

December 31, 2020

 
 

Net Charge-Offs (Recoveries)

 

Average Loans

 

Percentage of Net Charge-Offs (Recoveries) to Average Loans

 

Real estate construction

$

-

  

$

37,258

  

-

 

%

Consumer real estate

 

 67

   

179,378

  

0.04

 

%

Commercial real estate

 

(130

)

  

378,896

  

(0.03

)

%

Commercial non-real estate

 

363

   

81,776

  

0.44

 

%

Public Sector  and IDA

 

-

   

57,760

  

-

 

%

Consumer non-real estate

 

73

   

33,325

  

0.22

 

%

Total

$

373

  

$

768,393

  

0.05

 

%

 

The Company charges off commercial real estate loans at the time that a loss is confirmed. When delinquency status or other information indicates that the borrower will not repay the loan, the Company considers collateral value based upon a current appraisal or internal evaluation. Any loan amount in excess of collateral value is charged off and the collateral is taken into OREO.

Management analyzes many factors to determine the appropriate level for the allowance for loan losses and resultant provision expense, including the historical loss rate, the quality of the loan portfolio as determined by management, diversification as to type of loans in the portfolio, internal policies and economic factors. Management considers net charge-offs over the most recent eight quarters to determine the historical loss rate to be applied to the calculation. The historical loss rate contributes significantly to the required level for the allowance for loan losses.

 

40
34

 

B.

C.Allocation of the Allowance for Loan Losses

Allocation of the Allowance for Loan Losses

The allowance for loan losses has been allocated according to the amount deemed necessary to provide for anticipated losses within the categories of loans for the years indicated as follows:indicated.  Loans are presented net of unearned income and net deferred fees.

 

$ in thousands

 

December 31,

  

2019

 

2018

 

2017

 

2016

 

2015

  

Allowance
Amount

 

Percent of
Loans in

Each
Category to
Total
Loans(1)

 

Allowance
Amount

 

Percent of
Loans in
Each
Category to
Total
Loans(1)

 

Allowance
Amount

 

Percent of
Loans in
Each
Category to
Total

Loans(1)

 

Allowance
Amount

 

Percent of
Loans in
Each
Category to
Total
Loans(1)

 

Allowance
Amount

 

Percent of
Loans in
Each
Category to
Total

Loans(1)

Real estate construction

 $400  5.76

%

 $398  5.33

%

 $337  5.19

%

 $438  5.60

%

 $576  7.78

%

Consumer real estate

  1,895  24.72

%

  2,049  24.70

%

  2,027  24.97

%

  1,830  24.32

%

  1,866  23.15

%

Commercial real estate

  2,559  49.77

%

  2,798  49.77

%

  3,044  50.91

%

  3,738  51.88

%

  4,109  49.92

%

Commercial non real estate

  555  6.35

%

  602  6.55

%

  1,072  6.06

%

  1,063  6.02

%

  655  6.06

%

Public sector and IDA

  478  8.69

%

  583  8.55

%

  419  7.69

%

  330  7.01

%

  436  8.28

%

Consumer non real estate

  650  4.71

%

  750  5.10

%

  707  5.18

%

  644  5.17

%

  627  4.81

%

Unallocated

  326      210      319      257      28    
  $6,863  100.00

%

 $7,390  100.00

%

 $7,925  100.00

%

 $8,300  100.00

%

 $8,297  100.00

%

(1)

Loans are presented on a gross basis.

$ in thousands

 

December 31, 2021

 

December 31, 2020

 
  

Allowance Amount

 

Percent of Loans to Total Loans

 

Percent of Allowance to Loans

 

Allowance Amount

 

Percent of Loans to Total Loans

 

Percent of Allowance to
Loans

 

Real estate construction

 

$

422

 

6.07

%

 

0.87

%

 

$

503

 

5.50

%

1.19

%

 

Consumer real estate    

  

1,930

 

26.02

%

 

0.92

%

  

2,165

 

23.64

%

1.19

%

 

Commercial real estate

  

3,121

 

50.49

%

 

0.77

%

  

3,853

 

51.12

%

0.98

%

 

Commercial non-real estate

  

1,099

 

7.50

%

 

1.82

%

  

670

 

10.14

%

0.86

%

 

Public sector and IDA     

  

297

 

5.97

%

 

0.62

%

  

339

 

5.33

%

0.83

%

 

Consumer non-real estate     

  

444

 

3.95

%

 

1.40

%

  

555

 

4.27

%

1.69

%

 

Unallocated     

  

361

 

-

  

-

   

396

 

-

 

-

  
  

$

7,674

 

100.00

%

 

0.96

%

 

$

8,481

 

100.00

%

1.10

%

 

 

An analysis of the allowance for loan losses by impairment basis follows:follows.  Loans are presented on a gross basis.

 

$ in thousands

 

December 31,

  

2019

 

2018

 

2017

Impaired loans(1)

 $5,289  $6,820  $11,924 

Allowance related to impaired loans(1)

  110   139   177 

Allowance to impaired loans(1)

  2.08

%

  2.04

%

  1.48

%

             

Non-impaired loans(1)

  728,738   703,577   656,758 

Allowance related to non-impaired loans(1)

  6,753   7,251   7,748 

Allowance to non-impaired loans(1)

  0.93

%

  1.03

%

  1.18

%

             

Total gross loans

  734,027   710,397   668,682 

Less: unearned income and deferred fees and costs

  (576

)

  (598

)

  (613

)

Loans, net of unearned income and deferred fees and costs

  733,451   709,799   668,069 

Allowance for loan losses, total

  6,863   7,390   7,925 

Allowance as a percentage of loans, net of unearned income and deferred fees and costs

  0.94

%

  1.04

%

  1.19

%

(1)

Loans are presented on a gross basis.

41

$ in thousands

 

December 31,

  

2021

 

2020

 

Impaired loans

 

$

5,878

 

$

4,903

 

Allowance related to impaired loans

  

-

  

75

 

Allowance to impaired loans

  

-

  

1.53

%

        

Non-impaired loans

  

797,851

  

765,124

 

Allowance related to non-impaired loans

  

7,674

  

8,406

 

Allowance to non-impaired loans

  

0.95

%

 

1.10

%

        

Total gross loans

  

803,729

  

770,027

 

Less: unearned income and deferred fees and costs

  

(481

)

 

(1,228

)

Loans, net of unearned income and deferred fees and costs

  

803,248

  

768,799

 

Allowance for loan losses, total

  

7,674

  

8,481

 

Allowance as a percentage of loans, net of unearned income and deferred fees and costs

  

0.96

%

 

1.10

%

 

Individually-evaluated impaired loans are valued using the fair value of the underlying collateral or the present value of cash flows for each loan. Valuation procedures for impaired loans resulted in a required reserve for impaired loans of $110 at December 31, 2019, $139 at December 31, 2018 and $177 at December 31, 2017. The amount of the individual impaired loan balance that exceeds the fair value is accrued in the allowance for loan losses.

Management’s analysis of the loan portfolio and pertinent economic conditions resulted in a determination of the allowance for loan losses for collectively evaluated loans of $6,753 or 0.93% of such loans at December 31, 2019, $7,251 or 1.03% at December 31, 2018, and $7,748 or 1.18% at December 31, 2017. The allowance for collectively evaluated loans is determined by applying historical charge-off percentages, as well as additional accruals for internal and external credit risk factors to groups of collectively evaluated loans. The Company applies the average of the most recent eight quarters of net charge-offs to calculate historical net charge-offs for the allowance. The ratio decreased from 2018 to 2019 due to improvements in economic and credit risk factors. The ratio decreased from 2017 to 2018 due to a decreased charge-off ratio, down from 0.08% for the twelve months ended December 31, 2017 to 0.07% for the year ended December 31, 2018. Also contributing to the reduced allowance requirement were improved asset quality indicators, and favorable economic indicators.

The unallocated portion of the reserve was $326 at December 31, 2019, $210 at December 31, 2018 and $319 at December 31, 2017. The unallocated portion of the reserve is the amount that exceeds the calculated requirement for the allowance for loan losses. The Company’s policy permits an unallocated reserve of up to 5% in excess of the required level for the allowance for loan losses.

The total calculated allowance for loan losses of $6,863 at December 31, 2019, $7,390 as of December 31, 2018 and $7,925 as of December 31, 2017 indicated a provision of $126 for the twelve months ended December 31, 2019 and indicated a recovery of $81 for the twelve months ended December 31, 2018 and a provision of $157 for the twelve months ended December 31, 2017. Please refer to the discussion under “Provision and Allowance for Loan Losses” for additional information on the determination of the allowance for loan loss.

 

35

Securities

The fair value of securities available for sale was $435,263,$686,080, an increase of $10,253$139,338 or 2.41%25.49% from December 31, 2018.

2020. The securities portfolio is subject to the volatility and risk in the financial markets. The risk in financial markets affects the Company in the same way that it affects other institutional and individual investors. The Company’s investment portfolio includes corporate bonds. If because of economic hardship, the corporate issuers were to default, there could be a delay in the payment of interest, or there could be a loss of principal and accrued interest. To date, there have been no defaults in any of the corporate bonds held in the portfolio. The Company’s investment portfolio also contains a large percentage of municipal bonds. If economic forces reduce the ability of states and municipalities to make scheduled principal and interest payments on their outstanding indebtedness, or if their income from taxes and other sources declines significantly, states and municipalities could default on their bond obligations. There have been no defaults among the municipal bonds in the Company’s investment portfolio. The fair value of our bond portfolio is affected by interest rates.  The fair value of available for sale securities is reflected on the Company's balance sheet, while held to maturity securities are reported at amortized cost.sheet.

In making investment decisions, management follows internal policy guidelines that help to limit risk by specifying parameters for both security quality and industry and geographic concentrations. Management regularly monitors the quality of the investment portfolio and tracks changes in financial markets. The value of individual securities will be written down if a decline in fair value is considered to be other than temporary, given the totality of the circumstances.

Additional information about securities available for sale and securities held to maturity can be found in Note 3 of the Notes to Consolidated Financial Statements.

 

42

Maturities and Associated Yields

 

The following table presents the maturities for debt securities available for sale and held to maturity at their carrying values as of December 31, 20192021 and weighted average yield for each range of maturities.  Weights are based upon the value of each security.

 

$ in thousands

 

Maturities and Yields

 

Maturities and Yields

 
 

December 31, 2019

 

December 31, 2021

 
 

< 1 Year

 

1-5 Years

 

5-10 Years

 

> 10 Years

 

None

 

Total

 

< 1 Year

 

1-5 Years

 

5-10 Years

 

> 10 Years

 

None

 

Total

 

Available for Sale:

                                    

U.S. government agencies

 $43,988  $991  $41,019  $35,125  $---  $121,123  $-  $16,942  $218,768  $42,309  $-  $278,019 
  1.62

%

  2.41

%

  2.57

%

  3.01

%

  ---   2.35

%

Weighted average yield  -   1.23

%

  1.62

%

  1.99

%

  -   1.65

%

Mortgage-backed securities

 $114  $85  $83,841  $137,743  $---  $221,783  $15  $2,888  $78,413  $124,858  $-  $206,174 
  0.00

%

  5.60

%

  2.23

%

  2.31

%

  ---   2.28

%

Weighted average yield  -   0.61

%

  1.47

%

  0.77

%

  -   1.03

%

States and political subdivision – nontaxable (1)

 $9,195  $5,429  $19,400  $54,215  $---  $88,239  $2,525  $4,221  $15,141  $176,785  $-  $198,672 
  5.01

%

  4.46

%

  4.27

%

  3.27

%

  ---   3.74

%

Weighted average yield  4.10

%

  4.57

%

  2.89

%

  2.46

%

  -   2.56

%

Corporate

 $2,005  $---  $---  $2,113  $---  $4,118  $-  $-  $966  $2,249  $-  $3,215 
  2.44   ---   ---   4.00

%

  ---   3.22

%

Weighted average yield  -   -   1.61

%

  4.00

%

  -   3.20

%

Total

 $55,302  $6,505  $144,260  $229,196  $---  $435,263  $2,540  $24,051  $313,288  $346,201  $-  $686,080 
  2.21

%

  4.16

%

  2.60

%

  2.66

%

  ---   2.60

%

                        

Restricted stock:

                        

Restricted stock

 $---  $---  $---  $---  $1,220  $1,220 
  ---   ---   ---   ---   7.05

%

  7.05

%

Weighted average yield  4.08

%

  1.74

%

  1.64

%

  1.80

%

  -   1.73

%

 

(1)

(1) Rates shown represent weighted average yield on a fully taxable basis.

 

The majority of mortgage-backed securities and collateralized mortgage obligations held at December 31, 20192021 were backed by U.S. government agencies. Certain holdings are required to be periodically subjected to the Federal Financial Institution Examination Council’s (FFIEC) high risk mortgage security test. These tests address possible fluctuations in the average life and variances caused by the change in rate times the change in volume that have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each. Except for U.S. government agency securities, the Company has no securities with any issuer that exceeds 10% of stockholders’ equity.

 

36

Deposits

 

TotalThe following table presents deposit categories:

  

December 31, 2021

  

December 31, 2020

  

Percent Change

 

Noninterest-bearing demand deposits

 $317,430  $276,793   14.68

%

Interest-bearing demand deposits

  890,124   763,293   16.62

%

Saving deposits

  208,065   167,475   24.24

%

Time deposits

  78,968   89,582   (11.85

)%

Total deposits

 $1,494,587  $1,297,143   15.22

%

Deposits, including noninterest-bearing demand deposits, interest-bearing deposits and interest-bearing time deposits are obtained in the Company’s markets through traditional marketing techniques. The Company’s deposits do not include any brokered deposits. Time deposits decreased due to decreased offering rates. All other categories of deposits increased, due in large part to government stimulus funds received by $67,811 or 6.45%, from $1,051,942 at December 31, 2018 to $1,119,753 at December 31, 2019. While all deposit categories increased, the two greatest impacts came from growth of $26,955 in interest-bearing demand depositsmunicipal depositors and growth of $26,229 in time deposits. During the fourth quarter of 2018, the Company raised its deposit offering rates in order to remain competitive during a rising rate environment. When December 31, 2018 is compared with December 31, 2017, total deposits decreased $7,792, or 0.74%, from $1,059,734 at December 31, 2017, primarily due to a decline in time deposits.other depositors.

 

A

A.  Average Amounts of Deposits and Average Rates Paid.

Average Amounts of Deposits and Average Rates Paid

Average amounts and average rates paid on deposit categories are presented below:

 

$ in thousands

 

Year Ended December 31,

  

2019

 

2018

 

2017

  


Average
Amounts

 

Average
Rates
Paid

 

Average
Amounts

 

Average
Rates
Paid

 

Average
Amounts

 

Average
Rates
Paid

Noninterest-bearing demand deposits

 $200,970   ---  $192,440   ---  $178,708   --- 

Interest-bearing demand deposits

  601,884   0.85

%

  606,766   0.68

%

  598,661   0.56

%

Savings deposits

  142,985   0.31

%

  140,918   0.17

%

  140,997   0.17

%

Time deposits

  116,844   1.54

%

  105,674   0.50

%

  120,220   0.45

%

Average total deposits

 $1,062,683   0.69

%

 $1,045,798   0.47

%

 $1,038,586   0.40

%

43

B.

Time Deposits of $250 or More

$ in thousands

 

Year Ended December 31,

 
  

2021

  

2020

  
  

Average
Amounts

  

Average
Rates
Paid

  

Average
Amounts

  

Average
Rates
Paid

  

Noninterest-bearing demand deposits

 $316,976   -  $248,392   -  

Interest-bearing demand deposits

  811,661   0.33

%

  669,383   0.56

%

 

Savings deposits

  190,997   0.09

%

  158,334   0.26

%

 

Time deposits

  86,089   0.31

%

  112,463   1.48

%

 

Average total deposits

 $1,405,723   0.28

%

 $1,188,572   0.49

%

 

 

B.Uninsured Deposits

FDIC insurance covers deposits of up to $250 per depositor.  As of December 31, 2021, $599,948 of the Bank's deposits were uninsured.  The following table sets forth time certificates of deposit and other time deposits of $250 or more:that exceed $250.

 

$ in thousands

 

December 31, 2019

 

December 31, 2021

 
 

3 Months or Less

 

Over 3 Months

Through 6 Months

 

Over 6 Months

Through 12 Months

 

Over 12 Months

 

Total

 

3 Months or

Less

 

Over 3 Months

Through 6 Months

 

Over 6 Months

Through 12 Months

 

Over 12

Months

 

Total

 

Total time deposits of $250 or more

 $2,763  $8,215  $11,182  $252  $22,412  $454  $3,797  $6,971  $3,378  $14,600 

 

Derivatives and Market Risk Exposures

The Company engages in derivative financial instruments associated with its secondary market operation.  The derivatives are valued within other assets and other liabilities.  Please refer to Note 1 of Notes to Consolidated Financial Statements for information on derivative valuation.  The Company is not a party to derivative financial instrumentsderivatives with off-balance sheet risks such as futures, forwards, swaps, and options.

The Company is a party to financial instruments with off-balance sheet risks such as commitments to extend credit, standby letters of credit, and recourse obligations in the normal course of business to meet the financing needs of its customers. See Note 13 of Notes to Consolidated Financial Statements for additional information relating to financial instruments with off-balance sheet risk. Management does not plan any future involvement in high risk derivative products.

The Company has investments in mortgage-backed securities, principally through the Government National Mortgage Association (“GNMA”) and Federal National Mortgage Association, (“FNMA”), with a fair value of approximately $221,783.$206,174. See Note 3 of Notes to Consolidated Financial Statements for additional information relating to securities.

The Company’s securities and loans are subject to credit and interest rate risk, and its deposits are subject to interest rate risk. Management considers credit risk when a loan is granted and monitors credit risk after the loan is granted. The Company maintains an allowance for loan losses to absorb losses in the collection of its loans. See Note 5 of Notes to Consolidated Financial Statements for information relating to the allowance for loan losses. See Note 14 of Notes to Consolidated Financial Statements for information relating to concentrations of credit risk. The Company has an asset/liability program to manage its interest rate risk. This program provides management with information related to the rate sensitivity

37

The effects of changing interest rates are primarily managed through adjustments to the loan portfolio and deposit base, to the extent competitive factors allow. The investment portfolio is generally longer term. Adjustments for asset and liability management are made when securities are called or mature and funds are subsequently reinvested. Securities may be sold for reasons related to credit quality, orto maintain compliance with regulatory limitations and in limited circumstances, securities available for sale have been disposedor for interest rate risk management. No trading activity for this purpose is planned in the foreseeable future, though it does remain an option.future.

While the asset/See Interest Rate Sensitivity for further details on asset liability planning program is designed to protect the Company over the long term, it does not provide near-term protection from interest rate shocks, as interest rate sensitive assetsmanagement and liabilities do not by their nature move up or down in tandem in response to changes in the overall rate environment. The Company’s profitability in the near term may be temporarily negatively affected in a period of rapidly rising or rapidly falling rates, because it takes some time for the Company to change its rates to adjust to a new interest rate environment. See Note 15 of Notes to Consolidated Financial Statements for information relating to fair value of financial instruments and comments concerning interest rate sensitivity.instruments.

 

Liquidity

Liquidity measures the Company’s ability to meet its financial commitments at a reasonable cost. Demands on the Company’s liquidity include funding additional loan demand and accepting withdrawals of existing deposits. The Company has diverse liquidity sources, including customer and purchased deposits, customer repayments of loan principal and interest, sales, calls and maturities of securities, Federal Reserve discount window borrowing, short-term borrowing, and FHLB advances. At December 31, 2019,2021, the Bank did not have purchased deposits, discount window borrowings, short-term borrowings, or FHLB advances.  To assure that short-term borrowing is readily available, the Company tests accessibility annually.

The Company considers its security portfolio for typical liquidity needs, within accounting, legal and strategic parameters.  Prior to the second quarter of 2018, the securities portfolio was segregated into available for sale and held to maturity. During the second quarter of 2018, the Company re-classified all its held to maturity securities to available for sale. Portions of the securities portfolio are pledged to meet state requirements for public funds deposits. Discount window borrowings also require pledged securities. Increased/decreased liquidity from public funds deposits or discount window borrowings results in increased/decreased liquidity from pledging requirements. The Company monitors public funds pledging requirements and unpledged available for sale securities accessible for liquidity needs.

Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve discount window. At December 31, 2019,2021, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve discount window.

44

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. At December 31, 2019,2021, the Company’s liquidity is sufficient to meet projected trends in these areas.

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. At December 31, 2019,2021, 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 own policy range of 65% to 75%. At December 31, 2019,2021, the loan to deposit ratio was 65.50%53.74%. The investment strategy takes into consideration the term of the investment, and securities in the available for sale portfolio are laddered based upon projected funding needs.

In the normal course of business, we enter into certain contractual obligations, including obligations to make future payments on lease arrangements, contractual commitments with depositors, and service contracts. The table below presents our significant contractual obligations as of December 31, 2019,2021, except for pension and other postretirement benefit plans, which are included in Note 8 "Employee Benefit Plans,"of Notes to the Consolidated Financial Statements in this Form 10-K.

 

$ in thousands

 

Payments Due by Period

 

Payments Due by Period

 
 

Total

 

Less Than

1 Year

 

1-3 Years

 

4-5 Years

 

More Than

5 Years

 

Total

 

Less Than

1 Year

 

1-3 Years

 

4-5 Years

 

More Than

5 Years

 

Time deposits

 $128,028  $116,969  $8,384  $2,606  $69  

$

78,968

$

64,113

$

6,462

$

8,224

$

169

 

Purchase obligations (1)

  10,975   4,520   3,747   2,708   ---   

12,549

 

4,393

 

5,830

 

2,326

 

-

 

Operating leases

  2,580   354   694   684   848   

1,726

 

293

 

584

 

455

 

394

 

Total

 $141,583  $121,843  $12,825  $5,998  $917  

$

93,243

$

68,799

$

12,876

$

11,005

$

563

 

 

 

(1)

Includes contracts with a minimum annual payment of $100.

 

As of December 31, 2019,2021, the Company was not aware of any other known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of December 31, 2019,2021, the Company has no material commitments for long-termlong term debt or for capital expenditures.

 

Recent Accounting Pronouncements

See Note 1 of Notes to Consolidated Financial Statements for information relating to recent accounting pronouncements.

 

38

Capital Resources

Total stockholders’ equity at December 31, 20192021 was $183,726,$191,751, a decrease of $6,512,$8,856, or 3.42%4.41%, from the $190,238$200,607 at December 31, 2018.2020. The largest component of 2019 stockholders’ equity, was retained earnings, of $184,120, which included net income of $17,466, offset bydecreased from $189,547 at December 31, 2020 to $188,229 at December 31, 2020, due to dividends of $9,032$8,806 and repurchase of shares of $17,939. Total stockholders’ equity increased$12,894, offset by $5,342 or 2.89%, from $184,896 on December 31, 2017 to $190,238 on December 31, 2018.net income of $20,382.

In August 2018,The Company qualifies as a small bank holding company under the Federal Reserve updated theReserve’s Small Bank Holding Company Policy Statement, in compliance with EGRRCPA.  The statement, among other things, exemptedwhich exempts bank holding companies that fall below a certain asset thresholdwith less than $3 billion in assets from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements. The interim final rule expanded the exemption to bank holding companies with consolidated total assets of less than $3 billion. Prior to August 2018, the statement exempted bank holding companies with consolidated total assets of less than $1 billion. As a result of the interim final rule, the Company qualified as of August 2018 as a small bank holding company andNBB is no longer subject to regulatory capital requirements on a consolidated basis.

45

The Bank continues to be subject to various capital requirements administered by banking agencies.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 at December 31, 2021 and December 31, 2020. Risk based capital ratios for the Bank are shown in the following tables.

 

  

Ratios at

December 31, 2019

 

Regulatory Capital

Minimum Ratios

 

Regulatory Capital Minimum

Ratios with Capital Conservation Buffer

Common Equity Tier I Capital Ratio

  22.283

%

  4.500

%

  7.000

%

Tier I Capital Ratio

  22.283

%

  6.000

%

  8.500

%

Total Capital Ratio

  23.128

%

  8.000

%

  10.500

%

Leverage Ratio

  14.175

%

  4.000

%

  4.000

%

  

Ratios at

December 31, 2018

 

Regulatory Capital

Minimum Ratios

 

Regulatory Capital Minimum

Ratios with Capital Conservation Buffer

Common Equity Tier I Capital Ratio

  23.856

%

  4.500

%

  6.375

%

Tier I Capital Ratio

  23.856

%

  6.000

%

  7.875

%

Total Capital Ratio

  24.764

%

  8.000

%

  9.875

%

Leverage Ratio

  15.788

%

  4.000

%

  4.000

%

Risk-based capital ratios are calculated in compliance with FDIC rules based on Basel III Capital Requirements. The Bank’s ratios are well above the required minimums at December 31, 2019 and December 31, 2018.

Banks are subject to an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments. The implementation period for the capital conservation buffer began in 2016 and was fully phased in January 1, 2019, with .625% added each year and a final buffer of 2.5% in excess of regulatory capital minimum ratios.

  

Ratios at

December 31, 2021

  

Ratios at

December 31, 2020

  

Regulatory Capital

Minimum Ratios

  

Regulatory Capital Minimum

Ratios with Capital

Conservation Buffer

 

Total Capital Ratio

  19.495

%

  19.943

%

  8.000

%

  10.500

%

Tier I Capital Ratio

  18.715

%

  19.028

%

  6.000

%

  8.500

%

Common Equity Tier I Capital Ratio

  18.715

%

  19.028

%

  4.500

%

  7.000

%

Leverage Ratio

  11.164

%

  12.105

%

  4.000

%

  4.000

%

 

Off-Balance Sheet Arrangements

The Company’s off-balance sheet arrangements at December 31, 20192021 are detailed in the table below.

 

$ in thousands

 

Payments Due by Period

 

Payments Due by Period

 
 

Total

 

Less Than 1 Year

 

1-3 Years

 

4-5 Years

 

More Than 5 Years

 

Total

 

Less Than 1 Year

 

1-3 Years

 

4-5 Years

 

More Than 5 Years

 

Commitments to extend credit

 $158,859  $158,859  $---  $---  $---  $181,395  $181,395  $-  $-  $- 

Standby letters of credit

  15,212   15,212   ---   ---   ---   13,984   13,984   -   -   - 

Mortgage loans with potential recourse

  20,496   20,496   ---   ---   ---   18,287   18,287   -   -   - 

Operating leases

  2,580   354   694   684   848   1,726   293   584   455   394 

Total

 $197,147  $194,921  $694  $684  $848  $215,392  $213,959  $584  $455  $394 

 

In the normal course of business the Company’s banking affiliate extends lines of credit to its customers. Amounts drawn upon these lines vary at any given time depending on the business needs of the customers.

Standby letters of credit are also issued to the Bank’s customers. There are two types of standby letters of credit. The first is a guarantee of payment to facilitate customer purchases. The second type is a performance letter of credit that guarantees a payment if the customer fails to perform a specific obligation. Revenue from these letters was approximately $71$42 in 2019.2021.

While it would be possible for customers to fully draw on approved lines of credit and for beneficiaries to call all letters of credit, historically this has not occurred. In the event of a sudden and substantial draw on these lines, the Company has its own lines of credit from which it can draw funds. A sale of loans or investments would also be an option to meet liquidity demands.

The Company sells mortgages on the secondary market subject to recourse agreements. The mortgages originated must meet strict underwriting and documentation requirements for the sale to be completed. The Company estimates a potential loss reserve for recourse provisions. The amount is not material as of December 31, 2019.2021. To date, no recourse provisions have been invoked.

Operating leases are for buildings used in the Company’s day-to-day operations.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

Information about market risk is set forth above in the “Interest Rate Sensitivity” and “Derivatives and Market Risk Exposure” sections, of the Management’sItem 7, “Management’s Discussion and Analysis.Analysis of Financial Condition and Results of Operations,” of this Form 10-K.

 

46
39

 

Item 8. 8. Financial Statements and Supplementary Data

 

Consolidated Balance Sheets

 

December 31,

$ in thousands, except share and per share data

 

2019

 

2018

Assets

        

Cash and due from banks

 $10,290  $12,882 

Interest-bearing deposits

  76,881   43,491 

Securities available for sale, at fair value

  435,263   425,010 

Restricted stock

  1,220   1,220 

Mortgage loans held for sale

  905   72 

Loans:

        

Real estate construction loans

  42,303   37,845 

Consumer real estate loans

  181,472   175,456 

Commercial real estate loans

  365,373   353,546 

Commercial non real estate loans

  46,576   46,535 

Public sector and IDA loans

  63,764   60,777 

Consumer non real estate loans

  34,539   36,238 

Total loans

  734,027   710,397 

Less unearned income and deferred fees and costs

  (576

)

  (598

)

Loans, net of unearned income and deferred fees and costs

  733,451   709,799 

Less allowance for loan losses

  (6,863

)

  (7,390

)

Loans, net

  726,588   702,409 

Premises and equipment, net

  8,919   8,646 

Accrued interest receivable

  4,285   5,160 

Other real estate owned, net

  1,612   2,052 

Goodwill

  5,848   5,848 

Bank-owned life insurance (BOLI)

  35,567   34,657 

Other assets

  14,459   14,585 

Total assets

 $1,321,837  $1,256,032 

Liabilities and Stockholders’ Equity

        

Noninterest-bearing demand deposits

 $201,866  $195,441 

Interest-bearing demand deposits

  643,482   616,527 

Savings deposits

  146,377   138,175 

Time deposits

  128,028   101,799 

Total deposits

  1,119,753   1,051,942 

Accrued interest payable

  144   89 

Other liabilities

  18,214   13,763 

Total liabilities

  1,138,111   1,065,794 

Commitments and contingencies

        

Stockholders’ equity:

        

Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding

  ---   --- 

Common stock, $1.25 par value. Authorized 10,000,000 shares; issued and outstanding, 6,489,574 shares in 2019 and 6,957,974 in 2018

  8,112   8,698 

Retained earnings

  184,120   193,625 

Accumulated other comprehensive loss, net

  (8,506

)

  (12,085

)

Total stockholders’ equity

  183,726   190,238 

Total liabilities and stockholders’ equity

 $1,321,837  $1,256,032 

Consolidated Balance Sheets

 

 

December 31,

 

$ in thousands, except per share data

 

2021

  

2020

 

Assets

        

Cash and due from banks

 $8,768  $13,147 

Interest-bearing deposits

  130,021   120,725 

Securities available for sale, at fair value

  686,080   546,742 

Restricted stock

  845   1,279 

Mortgage loans held for sale

  615   866 

Loans:

        

Real estate construction loans

  48,841   42,266 

Consumer real estate loans

  208,977   181,782 

Commercial real estate loans

  405,722   393,115 

Commercial non-real estate loans

  60,264   78,771 

Public sector and IDA loans

  47,899   40,983 

Consumer non-real estate loans

  32,026   33,110 

Total loans

  803,729   770,027 

Less unearned income and deferred fees and costs

  (481

)

  (1,228

)

Loans, net of unearned income and deferred fees and costs

  803,248   768,799 

Less allowance for loan losses

  (7,674

)

  (8,481

)

Loans, net

  795,574   760,318 

Premises and equipment, net

  9,722   10,035 

Accrued interest receivable

  5,104   5,028 

Other real estate owned, net

  957   1,553 

Goodwill

  5,848   5,848 

Bank-owned life insurance (BOLI)

  42,354   36,444 

Other assets

  16,287   17,688 

Total assets

 $1,702,175  $1,519,673 

Liabilities and Stockholders Equity

        

Noninterest-bearing demand deposits

 $317,430  $276,793 

Interest-bearing demand deposits

  890,124   763,293 

Savings deposits

  208,065   167,475 

Time deposits

  78,968   89,582 

Total deposits

  1,494,587   1,297,143 

Accrued interest payable

  48   56 

Other liabilities

  15,789   21,867 

Total liabilities

  1,510,424   1,319,066 

Commitments and contingencies

          

Stockholders’ equity:

        

Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding

  0   0 

Common stock, $1.25 par value. Authorized 10,000,000 shares; issued and outstanding, 6,063,937 shares at December 31, 2021 and 6,432,020 at December 31, 2020

  7,580   8,040 

Retained earnings

  188,229   189,547 

Accumulated other comprehensive (loss) income, net

  (4,058

)

  3,020 

Total stockholders’ equity

  191,751   200,607 

Total liabilities and stockholders’ equity

 $1,702,175  $1,519,673 

 

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

 

47
40

 

Consolidated Statements of Income

 

Consolidated Statements of Income

 

Years ended December 31,

 

Years ended December 31,

 

$ in thousands, except per share data

 

2019

 

2018

 

2017

 

2021

 

2020

 

Interest Income

                

Interest and fees on loans

 $33,869  $31,333  $29,932  $34,923  $34,523 

Interest on interest-bearing deposits

  1,523   672   791   170  276 

Interest and dividends on securities – taxable

  6,725   6,856   5,711   7,960  7,383 

Interest on securities – nontaxable

  3,030   4,363   4,826   1,934  1,826 

Total interest income

  45,147   43,224   41,260   44,987  44,008 
             

Interest Expense

                

Interest on deposits

  7,380   4,883   4,125   3,098  5,837 

Interest on borrowings

  ---   164   --- 

Total interest expense

  7,380   5,047   4,125 

Net interest income

  37,767   38,177   37,135   41,889  38,171 

Provision for (recovery of) loan losses

  126   (81

)

  157   (398

)

 1,991 

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

  37,641   38,258   36,978   42,287  36,180 
             

Noninterest Income

                

Service charges on deposit accounts

  2,453   2,678   2,776   2,045  1,966 

Other service charges and fees

  198   132   205   179  162 

Credit and debit card fees

  1,398   1,431   1,205 

Credit and debit card fees, net

  1,869  1,400 

Trust income

  1,622   1,565   1,530   1,792  1,662 

BOLI income

  910   901   758   910  877 

Gain on sale of mortgage loans

  364  676 

Other income

  1,643   1,005   1,148   1,261  1,093 

Realized securities gains, net

  566   17   14   6  108 

Total noninterest income

  8,790   7,729   7,636   8,426  7,944 
             

Noninterest Expense

                

Salaries and employee benefits

  15,298   14,506   13,670   15,747  14,674 

Occupancy, furniture and fixtures

  1,866   1,845   1,820   1,842  1,795 

Data processing and ATM

  3,171   2,784   2,280   3,039  3,088 

FDIC assessment

  167   359   364   422  198 

Intangible assets amortization

  ---   50   68 

Net costs of other real estate owned

  47   553   205   51  39 

Franchise taxes

  1,333   1,278   1,315   1,425  1,340 

Write-down of insurance receivable

  ---   2,010   --- 

Other operating expenses

  3,872   3,891   4,507   3,554  3,836 

Total noninterest expense

  25,754   27,276   24,229   26,080  24,970 

Income before income taxes

  20,677   18,711   20,385   24,633  19,154 

Income tax expense

  3,211   2,560   6,293   4,251  3,077 

Net income

 $17,466  $16,151  $14,092  $20,382  $16,077 

Basic net income per common share

 $2.65  $2.32  $2.03 

Fully diluted net income per common share

 $2.65  $2.32  $2.03 

Basic and fully diluted net income per common share

 $3.28  $2.48 

 

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

 

48
41

 

Consolidated Statements of Comprehensive Income

 

Consolidated Statements of Comprehensive Income 

Years ended December 31,

$ in thousands, except per share data

 

2019

2018

2017

Net Income

 $17,466  $16,151  $14,092 
             

Other Comprehensive Income (Loss), Net of Tax

            

Unrealized holding gain (loss) on available for sale securities net of tax of $1,486 in 2019, ($595) in 2018 and $296 in 2017

  5,595   (2,246

)

  546 

Reclassification adjustment for gain included in net income, net of tax of ($119) in 2019, ($4) in 2018 and ($4) in 2017

  (447

)

  (13

)

  (6

)

Transfer from held to maturity to available for sale securities, net of tax of $237 in 2018

  ---   891   --- 

Net pension gain (loss) arising during the period, net of tax of ($394) in 2019, ($249) in 2018 and $115 in 2017

  (1,482

)

  (936

)

  213 

Less amortization of prior service cost included in net periodic pension cost, net of tax of ($23) in 2019, ($24) in 2018 and ($38) in 2017

  (87

)

  (86

)

  (71

)

Other comprehensive income (loss), net of tax of $950 in 2019, ($635) in 2018 and $369 in 2017

  3,579   (2,390

)

  682 

Total Comprehensive Income

 $21,045  $13,761  $14,774 

 

 

Years ended December 31,

 

$ in thousands

 

2021

  

2020

 

Net Income

 $20,382  $16,077 
         

Other Comprehensive (Loss) Income, Net of Tax

        

Unrealized holding (loss) gain on available for sale securities net of tax of ($2,740) in 2021 and $3,502 in 2020

  (10,308

)

  13,176 

Reclassification adjustment for gain included in net income, net of tax of ($1) in 2021 and ($23) in 2020

  (5

)

  (85

)

Net pension gain (loss) arising during the period, net of tax of $862 in 2021 and ($393) in 2020

  3,244   (1,478

)

Less amortization of prior service cost included in net periodic pension cost, net of tax of ($2) in 2021 and ($23) in 2020

  (9

)

  (87

)

Other comprehensive (loss) income, net of tax of ($1,881) in 2021 and $3,063 in 2020

  (7,078

)

  11,526 

Total Comprehensive Income

 $13,304  $27,603 

 

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

 

Consolidated Statements of Changes in Stockholders’Stockholders Equity

 

$ in thousands, except per share data

 

Common Stock

 

Retained Earnings

 

Accumulated Other

Comprehensive (Loss)

 

Total

Balance at December 31, 2016

 $8,698  $178,224  $(8,659

)

 $178,263 

Net income

  ---   14,092   ---   14,092 

Other comprehensive income, net of tax of $369

  ---   ---   682   682 

Cash dividend ($1.17 per share)

  ---   (8,141

)

  ---   (8,141

)

Reclassification of stranded tax effects from change in tax rate

  ---   1,718   (1,718

)

  --- 

Balance at December 31, 2017

 $8,698  $185,893  $(9,695

)

 $184,896 

Net income

  ---   16,151   ---   16,151 

Other comprehensive loss, net of tax of ($635)

  ---   ---   (2,390

)

  (2,390

)

Cash dividend ($1.21 per share)

  ---   (8,419

)

  ---   (8,419

)

Balance at December 31, 2018

 $8,698  $193,625  $(12,085

)

 $190,238 

Net income

  ---   17,466   ---   17,466 

Other comprehensive income, net of tax of $950

  ---   ---   3,579   3,579 

Cash dividend ($1.39 per share)

  ---   (9,032

)

  ---   (9,032

)

Stock repurchase (468,400 shares)

  (586

)

  (17,939

)

      (18,525

)

Balance at December 31, 2019

 $8,112  $184,120  $(8,506

)

 $183,726 

$ in thousands, except per share data

 

Common Stock

  

Retained Earnings

  

Accumulated Other

Comprehensive

Income (Loss)

  

Total

 

Balance at December 31, 2019

 $8,112  $184,120  $(8,506

)

 $183,726 

Net income

  0   16,077   0   16,077 

Other comprehensive income, net of tax of $3,063

  0   0   11,526   11,526 

Cash dividend ($1.39 per share)

  0   (9,000

)

  0   (9,000

)

Stock repurchase (57,554 shares)

  (72

)

  (1,650

)

  0   (1,722

)

Balance at December 31, 2020

 $8,040  $189,547  $3,020  $200,607 

Net income

  0   20,382   0   20,382 

Other comprehensive loss, net of tax of ($1,881)

  0   0   (7,078

)

  (7,078

)

Cash dividend ($1.44 per share)

  0   (8,806

)

  0   (8,806

)

Stock repurchase (368,083 shares)

  (460

)

  (12,894

)

  0   (13,354

)

Balance at December 31, 2021

 $7,580  $188,229  $(4,058

)

 $191,751 

 

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

 

49

Consolidated Statements of Cash Flows 

Years ended December 31,

$ in thousands

 

2019

 

2018

 

2017

Cash Flows from Operating Activities

            

Net income

 $17,466  $16,151  $14,092 

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

            

Provision for (recovery of) loan losses

  126   (81

)

  157 

Deferred income tax expense (benefit)

  529   (382

)

  1,790 

Re-valuation of deferred tax assets

  ---   ---   1,560 

Depreciation of premises and equipment

  739   766   805 

Amortization of intangibles

  ---   50   68 

Amortization of premiums and accretion of discounts, net

  212   58   58 

Loss (gain) on disposal of fixed assets

  5   ---   (134

)

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

  (566

)

  (17

)

  (10

)

Gain on calls of securities held to maturity, net

  ---   ---   (4

)

Loss and write-down on other real estate owned

  5   489   125 

Loss (gain) on sale of repossessed assets

  4   8   (1

)

Income on investment in BOLI

  (910

)

  (901

)

  (758

)

Gain on sale of mortgage loans held for sale

  (297

)

  (199

)

  (211

)

Origination of mortgage loans held for sale

  (21,032

)

  (12,626

)

  (13,912

)

Sale of mortgage loans held for sale

  20,496   13,013   14,341 

Contribution to defined benefit plan

  ---   ---   (4,507

)

Net change in:

            

Accrued interest receivable

  875   137   (37

)

Other assets

  (1,340

)

  2,899   (2,537

)

Accrued interest payable

  55   27   7 

Other liabilities

  2,465   404   101 

Net cash provided by operating activities

  18,832   19,796   10,993 
             

Cash Flows from Investing Activities

            

Net change in interest-bearing deposits

  (33,390

)

  7,742   29,035 

Proceeds from repayments of mortgage-backed securities

  1,089   224   298 

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

  348,032   50,438   13,812 

Proceeds from calls and maturities of securities held to maturity

  ---   6,430   8,975 

Purchases of securities available for sale

  (352,505

)

  (25,323

)

  (40,290

)

Purchases of securities held to maturity

  ---   ---   (1,319

)

Net change in restricted stock

  ---   (20

)

  (30

)

Purchase of BOLI

  ---   ---   (10,000

)

Purchases of loan participations

  (673

)

  (7,853

)

  (7,395

)

Collections of loan participations

  4,262   970   2,113 

Loan originations and principal collections, net

  (28,388

)

  (35,591

)

  (15,981

)

Proceeds from disposal of other real estate owned

  591   276   311 

Proceeds from disposal of repossessed assets

  53   34   31 

Recoveries on loans charged off

  267   235   287 

Additions to premises and equipment

  (1,032

)

  (1,191

)

  (261

)

Proceeds from sale of premises and equipment

  16   ---   222 

Net cash used in investing activities

  (61,678

)

  (3,629

)

  (20,192

)

          (continued)

50
42

 

Cash Flows from Financing Activities

            

Net change in time deposits

  26,229   (13,085

)

  (15,730

)

Net change in other deposits

  41,582   5,293   32,022 

Cash dividends paid

  (9,032

)

  (8,419

)

  (8,141

)

Shares repurchased

  (18,525

)

  ---   --- 

Net cash provided by (used in) financing activities

  40,254   (16,211

)

  8,151 
             

Net change in cash and due from banks

  (2,592

)

  (44

)

  (1,048

)

Cash and due from banks at beginning of year

  12,882   12,926   13,974 

Cash and due from banks at end of year

 $10,290  $12,882  $12,926 
             

Supplemental Disclosures of Cash Flow Information

            

Interest paid on deposits and borrowed funds

 $7,325  $5,020  $4,118 

Income taxes paid

  2,544   1,778   4,092 
             

Supplemental Disclosures of Noncash Activities

            

Loans charged against the allowance for loan losses

 $920  $689  $819 

Loans transferred to other real estate owned

  156   ---   97 

Unrealized gain (loss) on securities available for sale

  6,515   (2,858

)

  832 

Unrealized net gain on securities transferred from HTM to AFS

  ---   1,128   --- 

Fair value of securities transferred from held-to-maturity to available-for-sale

  ---   119,790   --- 

Minimum pension liability adjustment

  (1,986

)

  (1,295

)

  219 

Increase in the lease right-of-use asset upon adoption of ASU 2016-02

  684   ---   --- 

Increase in the lease liability upon adoption of ASU 2016-02

  684   ---   --- 

Consolidated Statements of Cash Flows

  

 

Years ended December 31,

 

 

$ in thousands

 

2021

  

2020

 

Cash Flows from Operating Activities

        

Net income

 $20,382  $16,077 

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

        

(Recovery of) provision for loan losses

  (398

)

  1,991 

Deferred income tax expense

  152   282 

Depreciation of premises and equipment

  636   708 

Amortization of premiums and accretion of discounts, net

  1,688   1,455 

Gain on disposal of fixed assets

  0   (2

)

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

  (6

)

  (108

)

Loss (gain) and write-down on other real estate owned

  25   (13

)

Loss on sale of repossessed assets

  0   1 

Income on investment in BOLI

  (910

)

  (877

)

Gain on sale of mortgage loans held for sale

  (364

)

  (676

)

Origination of mortgage loans held for sale

  (17,672

)

  (39,647

)

Sale of mortgage loans held for sale

  18,287   40,362 

Contribution to defined benefit plan

  0   (5,000

)

Net change in:

        

Accrued interest receivable

  (76

)

  (743

)

Other assets

  1,661   (132

)

Accrued interest payable

  (8

)

  (88

)

Other liabilities

  (515

)

  203 

Net cash provided by operating activities

  22,882   13,793 
         

Cash Flows from Investing Activities

        

Net change in interest-bearing deposits

  (9,296

)

  (43,844

)

Proceeds from repayments of mortgage-backed securities

  44,881   18,068 

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

  20,377   126,840 

Purchases of securities available for sale

  (219,331

)

  (241,164

)

Net change in restricted stock

  434   (59

)

Purchases of loan participations

  (25,167

)

  (11,404

)

Collections of loan participations

  15,191   207 

Loan originations and principal collections, net

  (25,289

)

  (24,875

)

Proceeds from disposal of other real estate owned

  621   72 

Proceeds from disposal of repossessed assets

  11   30 

Recoveries on loans charged off

  346   347 

Purchase of BOLI

  (5,000

)

  0 

Additions to premises and equipment

  (323

)

  (1,824

)

Proceeds from sale of premises and equipment

  0   2 

Net cash used in investing activities

  (202,545

)

  (177,604

)

(continued)

43

Cash Flows from Financing Activities

        

Net change in time deposits

  (10,614

)

  (38,446

)

Net change in other deposits

  208,058   215,836 

Cash dividends paid

  (8,806

)

  (9,000

)

Shares repurchased

  (13,354

)

  (1,722

)

Net cash provided by financing activities

  175,284   166,668 
         

Net change in cash and due from banks

  (4,379

)

  2,857 

Cash and due from banks at beginning of year

  13,147   10,290 

Cash and due from banks at end of year

 $8,768  $13,147 
         

Supplemental Disclosures of Cash Flow Information

        

Interest paid on deposits and borrowed funds

 $3,106  $5,925 

Income taxes paid

  3,180   3,860 
         

Supplemental Disclosures of Noncash Activities

        

Loans charged against the allowance for loan losses

 $755  $720 

Loans transferred to other real estate owned

  50   0 

Loans transferred to repossessed assets

  11   4 

Unrealized (loss) gain on securities available for sale

  (13,054

)

  16,570 

Minimum pension liability adjustment

  4,095   (1,981

)

Lease liabilities arising from obtaining right-of-use assets during the period

  0   24 

 

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

 

51
44

 

Notes to Consolidated Financial Statements

$ in thousands, except per share datadata.

 

 

Note 1:Summary of Significant Accounting Policies

The consolidated financial statements include the accounts of National Bankshares, Inc. and its wholly-owned subsidiaries, the National Bank of Blacksburg, and National Bankshares Financial Services, Inc. All intercompany balances and transactions have been eliminated in consolidation.

The accounting and reporting policies of the Company conform to GAAP and to general practices within the banking industry. The following is a summary of significant accounting policies.

Subsequent events have been considered through the date of this Form 10-K.10-K. The following summarizes significant accounting policies.

 

Cash and Cash Equivalents

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

 

Interest-Bearing Deposits

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

 

Securities

Certain debt securities that management has the positive intent and ability to hold to maturity may be classified as “held to maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held to maturity or trading, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive (loss) income. The Company uses the interest method to recognize purchase premiums and discounts in interest income over the term of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

During 2018, the Company’s held to maturity securities were re-designated as available for sale.  At the time of the transfer, the re-designated securities had a fair value of $119,790 and an unrealized net gain of $1,128.  The unrealized gain/loss on the re-designated securities is included in accumulated other comprehensive income, net of deferred tax. 

The Company follows the accounting guidance related to recognition and presentation of OTTI.other–than-temporary impairment (“OTTI”). The guidance specifies that if (a) an entity does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that the entity will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired,OTTI, unless there is a credit loss. When criteria (a) and (b) are met, the entity will recognize the credit component of an OTTI of a debt security in earnings and the remaining portion in other comprehensive (loss) income. For held to maturity debt securities, the amount of an OTTI recorded in other comprehensive income for the noncredit portion of a previous OTTI is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security.

Equity securities with readily-determinable fair values are measured at fair value using the “exit price notion”. Changes in fair value are recognized in net income. Equity securities without readily-determinable fair values are recorded as other assets at cost less impairment, if any, and adjusted for changes resulting from observable price changes in orderly transactions for identical or similar investment of the same issuer.

 

Loans Held for Sale

Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value on an individual loan basis. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The Company releases mortgage servicing rights when loans are sold on the secondary market.

 

Loans

The Company, through its banking subsidiary, provides mortgage, commercial, and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans, particularly commercial mortgages. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Company’s market area.

The Company’s loans are grouped into six segments: real estate construction, consumer real estate, commercial real estate, commercial non-real estate, public sector and IDA, and consumer non-real estate. Each segment is subject to certain risks that influence pricing, loan structures, approval requirements, reserves, and ongoing credit management. 

Real estate construction loans are subject to general risks from changing commercial building and housing market trends and economic conditions that may impact demand for completed properties and the costs of completion.  Completed properties that do not sell or become leased within originally expected timeframes may impact the borrower’s ability to service the debt.  These risks are measured by market-area unemployment rates, bankruptcy rates, housing and commercial building market trends, and interest rates. Risks specific to the borrower are also evaluated, including previous repayment history, debt service ability, and current and projected loan-to value ratios for the collateral.

52

The credit quality of consumer real estate is subject to risks associated with the borrower’s repayment ability and collateral value, measured generally by analyzing local unemployment and bankruptcy trends, and local housing market trends and interest rates. Risks specific to a borrower are determined by previous repayment history, loan-to-value ratios and debt-to-income ratios.

The commercial real estate segment includes loans secured by multifamily residential real estate, commercial real estate occupied by the owner/borrower, and commercial real estate leased to non-owners. Loans in the commercial real estate segment are impacted by economic risks from changing commercial real estate markets, rental markets for multi-family housing and commercial buildings, business bankruptcy rates, local unemployment rates and interest rate trends that would impact the businesses housed by the commercial real estate.

Commercial non-real estate loans are secured by collateral other than real estate, or are unsecured. Credit risk for commercial non-real estate loans is subject to economic conditions, generally monitored by local business bankruptcy trends, interest rates, borrower repayment ability and collateral value (if secured).

Public sector and IDA loans are extended to municipalities and related entities. Credit risk is based upon the entity’s ability to repay through either a direct obligation or assignment of specific revenues from an enterprise or other economic activity, and interest rate trends.

Consumer non-real estate includes credit cards, automobile and other consumer loans. Credit cards and certain other consumer loans are unsecured, while collateral is obtained for automobile loans and other consumer loans. Credit risk stems primarily from the borrower’s ability to repay.  If the loan is secured, the company analyzes loan-to-value ratios. All consumer non-real estate loans are analyzed for debt-to-income ratios and previous credit history, as well as for general risks for the portfolio, including local unemployment rates, personal bankruptcy rates and interest rates.

Risks from delinquency trends and characteristics such as second-lien position and interest-only status, as well as historical charge-off rates, are analyzed for all segments.

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, any purchase premium or discount, unearned income and deferred fees or costs. Interest income is accrued on the unpaid principal balance. Unearned income on dealer-originated loans and loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Purchase premium or discount is recognized as an adjustment of the related loan yield using the interest method.

The Bank’s loan policy is updated and approved by the Board of Directors annually and disseminated to lending and loan portfolio management personnel to ensure consistent lending practices. The policy communicates the Company’s risk tolerance by prescribing underwriting guidelines and procedures, including approval limits and hierarchy, documentation standards, requirements for collateral and loan-to-value limits, debt coverage, overall creditworthiness and guarantor support. Of primary consideration is the repayment ability of the borrowers and (if secured) the collateral value in relation to the principal balance. Collateral lowers risk and may be used as a secondary source of repayment. The credit decision must be supported by documentation appropriate to the type of loan, including current financial information, income verification or cash flow analysis, tax returns, credit reports, collateral information, guarantor verification, title reports, appraisals (where appropriate) and other documents.

The Company’s loans are grouped into six segments: real estate construction, consumer real estate, commercial real estate, commercial non-real estate, public sector and IDA, and consumer non-real estate. Each segment is subject to certain risks that influence pricing, loan structures, approval requirements, reserves, and ongoing credit management.

45

Real Estate Construction Loans. Real estate construction loans are subject to general risks from changing commercial building and housing market trends and economic conditions that may impact demand for completed properties and the costs of completion. Completed properties that do not sell or become leased within originally expected timeframes may impact the borrower’s ability to service the debt. Construction loans are underwritten against projected cash flows from rental income, business and/or personal income from an owner-occupant or the sale of the property to an end-user. Associated risks may be mitigated by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements. Risks specific to the borrower are also evaluated, including previous repayment history, debt service ability, and current and projected loan-to value ratios for the collateral.

Consumer Real Estate Loans. The Bank offers a variety of first mortgage and junior lien loans secured by primary residences within our markets. The credit quality of consumer real estate is subject to risks associated with the borrower’s repayment ability and collateral value. Credit decisions are primarily based on loan-to-value (“LTV”) ratios, debt-to-income (“DTI”) ratios, liquidity and net worth. Income and financial information is obtained from personal tax returns, personal financial statements and employment documentation. A maximum LTV ratio of 80% is generally required. The DTI ratio is limited to 43% of gross income.

Consumer real estate mortgages may have fixed interest rates for the entire term of the loan or variable interest rates subject to change after the first, third, or fifth year. Variable rates are based on the weekly average yield of United States Treasury Securities and are underwritten at fully-indexed rates.         

Home equity loans are secured primarily by second mortgages on residential property. The underwriting policy for home equity loans generally permits aggregate (the total of all liens secured by the collateral property) borrowing availability up to 80% of the appraised value of the collateral. We offer both fixed rate and variable rate home equity loans, with variable rate loans underwritten at fully-indexed rates. Decisions are primarily based on LTV ratios, DTI ratios, liquidity and credit history. We do not offer home equity loan products with reduced documentation.

We do not offer certain high risk loan products such as interest-only consumer mortgage loans, hybrid loans, payment option adjustable rate mortgages (“ARMs”), reverse mortgage loans, loans with initial teaser rates or any product with negative amortization. Hybrid loans are loans that start out as a fixed rate mortgage, but after a set number of years they automatically adjust to an ARM. Payment option ARMs usually have adjustable rates, for which borrowers choose their monthly payment of either a full payment, interest only, or a minimum payment which may be lower than the payment required to reduce the balance of the loan in accordance with the originally underwritten amortization.

Commercial Real Estate Loans. Commercial real estate loans generally are secured by first mortgages on real estate, including multifamily residential real estate, commercial real estate occupied by the owner/borrower, and commercial real estate leased to non-owners. Properties financed include retail centers, office space, hotels and motels, apartments, and industrial properties. Loans in the commercial real estate segment are impacted by economic risks from changing commercial real estate markets, rental markets for multi-family housing and commercial buildings, and economic factors that would impact the businesses housed by the commercial real estate. Underwriting decisions are based upon an analysis of the economic viability of the collateral and creditworthiness of the borrower. The Bank obtains appraisals from qualified certified independent appraisers to establish the value of collateral properties. The loan amount is generally limited to 80% of the lower of cost or appraised value and is individually determined based on the property type, quality, location and financial strength of any guarantors. The property’s projected net cash flows compared to the debt service (often referred to as the “debt service coverage ratio”) is required to be 115% or greater and is computed after deduction for a vacancy factor and property expenses, as appropriate. Borrower cash flow may be supplemented by a personal guarantee from the principal(s) of the borrower and guarantees from other parties. The Bank may employ stress testing techniques on higher balance loans to determine repayment ability in a changing rate environment before granting loan approval. The Bank requires title insurance, fire, extended coverage casualty insurance and flood insurance, if appropriate, in order to protect the security interest in the underlying property.

Commercial Non-Real Estate Loans. Commercial non-real estate loans are secured by collateral other than real estate, or are unsecured. Credit risk for commercial non-real estate loans is subject to economic conditions, borrower repayment ability and collateral value (if secured). Commercial and agricultural loans primarily finance equipment acquisition, expansion, working capital, and other general business purposes. Because these loans have a higher degree of risk, the Bank generally obtains collateral such as inventory, accounts receivables or equipment and personal guarantees from the borrowing entity’s principal owners. The Bank’s policy limits lending up to 60% of the appraised value for inventory, up to 90% of the lower of cost of market value of equipment and up to 70% for accounts receivables less than 90 days old. Credit decisions are based upon an assessment of the financial capacity of the applicant, including the primary borrower’s ability to repay within proposed terms, a risk assessment, financial strength of guarantors and adequacy of collateral. Credit agency reports of individual owners’ credit history supplement the analysis.

Included within this category are SBA PPP loans. The Bank provided qualifying customers with small business loans to pay payroll and other qualifying expenses. The vast majority of the Bank’s PPP loans have been repaid.

Public Sector and IDA Loans. Public sector and IDA loans are extended to municipalities and related entities within the Bank’s geographical footprint. Borrowers include general taxing authorities such as a city or county, industrial/economic development authorities or utility authorities. Credit risk stems from the entity’s ability to repay through either a direct obligation or assignment of specific revenues from an enterprise or other economic activity. Repayment sources are derived from taxation, such as property taxes and sales taxes, or revenue from the project financed with the loan. The Company’s underwriting considers economic and population trends of the municipality and the municipality’s reserves, pension liabilities and other liabilities.

46

Consumer Non-Real Estate Loans. Consumer non-real estate includes credit cards, automobile and other consumer loans. Credit cards and certain other consumer loans are unsecured, while collateral is obtained for automobile loans and other consumer loans. Credit risk stems primarily from the borrower’s ability to repay. Our procedures for underwriting consumer loans include an assessment of an applicant’s overall financial capacity, including credit history and the ability to meet existing obligations and payments on the proposed loan. If the loan is secured by an automobile or other collateral, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount. We require borrowers to maintain collision insurance on automobiles securing consumer loans.

Past Due Status and Nonaccrual Designation

A loan is considered past due when a payment of principal and/or interest is due but not paid. Credit card payments not received within 30 days after the statement date, real estate loan payments not received within the payment cycle and all other non-real estate secured loans for which payment is not made within the required payment cycle are considered 30 days past due. Management closely monitors past due loans in timeframes of 30-89 days past due and 90 or more days past due.

The Company considers multiple factors when determining whether to discontinue accrual of interest on individual loans. Generally loans are placed in nonaccrual status when collection of interest and/or full principal is considered doubtful. Interest accrual is discontinued at the time a commercial real estate loan or commercial non-real estate loan is 90 days delinquent unless the credit is well secured and in the process of collection. Loans within all loan classes that are not restructured but that are impaired and have an associated impairment loss are placed on nonaccrual.  Restructured loans within all classes that allow the borrower to discontinue payments of principal orAccrued interest for more than 90 days are placed on nonaccrual unless the modification provides reasonable assurance of repayment performance and collateral value supports regular underwriting requirements. Restructured loans within all classes that maintain current status for at least a six-month period, including history prior to restructuring, may be returned to accrual status. 

All interest accrued but not collected for loans of all classes that are placed on nonaccrual or for loans charged off is reversed against interest income.income when a loan is placed in nonaccrual status. Any interest payments received onduring a loan’s nonaccrual loans of all classesperiod are credited to the principal balance of the loan. Loans of all classes

Nonaccrual loans that have are not been restructured and that have been designated nonaccrual TDR are returned to accrual status when all the principal and interest amounts contractually due are current;current and future payments are reasonably assured; and forassured. Nonaccrual TDR loans that financed the sale of OREO property, loan-to-value thresholds are met. Loans that have been restructured that have been designated nonaccrual may return to accrual status after six months of timely repayment performance.  The Company reviews nonaccrual loans on an individual loan basis to determine whether future payments are reasonably assured.  In order for this criteria to be satisfied, the Company’s evaluation must determine that the underlying cause of the original delinquency or weakness that indicated nonaccrual status has been resolved, such as receipt of new guarantees, increased cash flows that cover the debt service or other resolution.

A loan is considered past due when a payment of principal and/or interest is due but not paid.  Credit card payments not received within 30 days after the statement date, real estate loan payments not received within the payment cycle and all other non-real estate secured loans for which payment is not made within the required payment cycle are considered 30 days past due.  Management closely monitors past due loans in timeframes of 30-89 days past due and 90 or more days past due.

Allowance for Loan Losses

The allowance for loan losses represents management’sis an estimate of probable losses inherent in the Company’s loan portfolio. AThe allowance is funded by the provision for estimated losses is charged to earnings to establish and maintain the allowance for loan losses, at a level reflectivereduced by charge-offs of loans and increased by recoveries of previously charged-off loans. The determination of the estimated credit risk. When management determinesallowance is based on two accounting principles, Accounting Standards Codification ("ASC") Topic 450-20 (Contingencies) which requires that a loan balance or portionlosses be accrued when occurrence is probable and the amount of a loan balance is not collectible, the loss is charged against the allowance. Subsequent recoveries, if any, are credited to the allowance.

Management evaluates the allowance each quarter through a methodology that estimatesreasonably estimable, and ASC Topic 310-10 (Receivables) which requires accrual of losses on individual impaired loans and evaluatesif the effect of numerous factors on the credit risk of groups of homogeneous loans.recorded investment exceeds fair value.

Specific allowances are established for individually-evaluated impaired

Impaired loans based on the excess of the loan balance relative to the fair value of the loan.

Impaired loans are designated as such when current information indicateslarger non-homogeneous loans for which there is a probability that it is probable that the Company will be unable to collectcollection of principal or interest when duewill not occur according to the contractual terms of the loan agreement. Loan relationships exceeding $250 in nonaccrual status or that are significantly past due, or for which a credit review identified weaknesses that indicate principal and interest will not be collected according to the loan terms,agreement, as well as TDRs,loans whose terms have been modified in a TDR. Impaired loans are designated impaired. This policy is applicableindividually evaluated to all loan classes.

53

the invested amount or the fair value. Fair value of impaired loans is estimated in one of three ways: (1)(1) the estimated fair value (less selling costs) of the underlying collateral, (2)(2) the present value of the loan’s expected future cash flows, or (3)(3) the loan’s observable market value.

The amount ofestimated fair value is compared with the loan’s recorded investment (unpaid principal net of any interest payments made by the borrower during the nonaccrual period and net of any partial charge-offs, accrued interest and deferred fees and costs) in a non-collateral dependent impaired loan. Any amount of recorded investment that exceeds theestimated fair value on collateral-dependent loans, as well as any other impairment loss considered uncollectible, is charged against the allowance for loan losses. Fair value shortfalls that are not considered uncollectible for loans that are not collateral-dependent are accrued as estimated loss in the allowance.allowance as specific reserves. Impaired loans for which collection of interest or principal is in doubt are placed in nonaccrual status. For collateral-dependent impaired loans, the amount of recorded investment that exceeds theIf fair value of an impaired loan is charged off.higher than the book value, no specific reserve is recorded, and the loan remains impaired as long as analysis indicates that collection of the loan will not occur according to the contractual terms of the loan agreement.

Collectively-evaluated loans

General allowances are established for collectively evaluated loans. Collectively evaluated loans are grouped into classes based on similar characteristics. Factors considered in determining general allowances include net charge-off trends,historical loss rates, internal risk ratings, delinquency and nonperforming rates, product mix, underwriting practices,changes in loan policies and procedures, changes in loan review systems, changes in economic conditions, changes in management experience, industry trends, interest rate trends and economic trends.changes in the competitive, legal and regulatory environment.

Charge-off policy

The Company’s charge-off policy meets or is more stringent than the minimum standards required by regulators. When available information confirms that a specific loan or a portion thereof, within any loan class, is uncollectible the amount is charged off against the allowance for loan losses. Additionally, losses on consumer real estate and consumer non-real estate loans are typically charged off no later than when the loans are 120-180 days past due, and losses on loans secured by residential real estate or by commercial real estate are charged off by the time the loans reach 180 days past due, in compliance with regulatory guidelines. Accordingly, secured loans may be charged down to the estimated value of the collateral, with previously accrued unpaid interest reversed. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects.

 

47

Troubled Debt Restructurings Credit quality indicators

In situations where,Credit quality indicators, which the Company terms risk grades, are assigned through the Company’s credit review function for larger loans and selective review of loans that fall below credit review thresholds. Credit quality is rated based on the loan’s payment history, the borrower’s current financial situation and value of the underlying collateral.

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

TDRs

When the Company grants a concession to a borrower for economic or legal reasons related to a borrower’s financial condition, management grants a concession to the borrower that it would not otherwise consider, the related loan is classified a TDR. TheseWhen the Company grants a subsequent modification to a loan that had previously been modified terms but not designated TDR, it considers whether the totality of the accommodations amount to a concession that, along with the evaluation of borrower financial difficulty, indicate TDR status. Concessions may include reduction of the interest rate, extension of the maturity date at an interest rate lower than the current market rate for a new loan with similar risk, forgiveness of principal or accrued interest or other actions intended to minimize the economic loss. TDR loans are individually measured for impairment. TDRs may be removed from TDR status, and therefore from individual evaluation, if the restructuring agreement specifies a contractual interest rate that is a market interest rate at the time of restructuring and the loan is in compliance with its modified terms one year after the restructure was completed.

 

Rate Lock Commitments

The Company enters into commitments to originate mortgage loans in which the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 30 to 60 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, by committing to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Company is not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity.

The market value of rate lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments and best effort contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the changes in the value of the underlying assets while taking into consideration the probability that the rate lock commitments will close. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss occurs on the rate lock commitments.

 

Premises and Equipment

Land is carried at cost. Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is charged to expense over the estimated useful lives of the assets on the straight-line basis. Depreciable lives include 40 years for premises, 3-10 years for furniture and equipment, and 3 years for computer software. Costs of maintenance and repairs are charged to expense as incurred and improvements are capitalized.

 

Other Real Estate Owned

Real estate acquired through or in lieu of foreclosure is held for sale and is initially recorded at fair value less estimated costs to sell at the date of foreclosure, establishing the cost basis of the asset. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other operating expenses.

 

Goodwill

The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. Goodwill is subject to at least an annual assessment for impairment by applying a fair value based test. The Company performs its annual analysis as of September 30 of each fiscal year. Accounting guidance permits preliminary assessmentThe impairment test for 2021 incorporated data as of qualitative factors to determine whether more substantial impairment testing is required. The Company chose to bypass the preliminary assessment and utilized a two-step process for impairment testing of goodwill. The first step tests for impairment, while the second step, if necessary, measures the impairment.

54

September 30, 2021.

The Company’s goodwill impairment analysis considered three valuation techniques appropriate to the measurement. The first technique uses the Company’s market capitalization as an estimate of fair value, the second technique estimates fair value using current market pricing multiples for companies comparable to NBI, while the third technique uses current market pricing multiples for change-of-control transactions involving companies comparable to NBI. Certain key judgments were used in the valuation measurement. Goodwill is held by the Company’s bank subsidiary. The bank subsidiary is 100% owned by the Company, and no market capitalization is available. Because most of the Company’s assets are comprised of the subsidiary bank’sbank subsidiary’s equity, the Company’s market capitalization was used to estimate the Bank’s market capitalization. Other judgments include the assumption that the companies and transactions used as comparables for the second and third technique techniques were appropriate to the estimate of the Company’s fair value, and that the comparable multiples are appropriate indicators of fair value, and compliant with accounting guidance.

Each Based upon data at September 30, 2021, each measure indicated that the Company’s fair value exceeded its book value. No indicatorsvalue and 0 impairment was indicated.

48

The Company’s intangible assets became fully amortized during 2018.  Acquired intangible assets (such as core deposit intangibles) are recognized separately from goodwill if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over its useful life. The Company amortized on a straight-line basis intangible assets arising from branch purchase transactions over their useful lives, determined by the Company to be 10 to 12 years. Prior to becoming fully amortized, core deposit intangibles were subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used. The impairment testing showed that the expected cash flows of the intangible assets exceeded the carrying value.

Pension Plan

The Company recognizes the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognizes changes in that funded status in the year in which the changes occur through other comprehensive (loss) income. The funded status of a benefit plan is measured as the difference between plan assets at fair value and the projected benefit obligation.

 

Income Taxes

Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the asset and liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-notmore-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-notmore-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted in December, 2017 with an effective date of January 1, 2018.  Among other things, the Tax Act lowered the federal corporate income tax rate to 21% from the maximum rate prior to the passage of the Tax Act of 35%.  The change to the tax rate necessitated a re-measurement of deferred tax assets and deferred tax liabilities, including those accounted for in accumulated other comprehensive income, as of the date of enactment.  The re-measurement in 2017 resulted in a $1,560 reduction in the value of the Company’s net deferred tax asset and a corresponding incremental income tax expense of $1,560.

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”).  The Company early adopted this new standard for 2017.  In compliance with ASU 2018-01, the Company reclassified from AOCI to retained earnings stranded tax effects of $1,718.  The stranded tax effects were a result of recognizing in tax expense the re-measurement impact of items that are included in AOCI.

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

 

Trust Assets and Income

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

 

55

Earnings Per Common Share

Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. During 2021 and 2020, there were 0 potential common shares outstanding.

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

 

  

2019

 

2018

 

2017

Average number of common shares outstanding

  6,580,659   6,957,974   6,957,974 
  

2021

  

2020

 

Average number of common shares outstanding

  6,209,929   6,483,230 

 

As of December 31, 2019 and December 31, 2018, there were no potential common shares outstanding.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business are recorded as liabilities when the likelihood of loss is probable and reasonably estimated. Management does not believe there are such matters that will have a material effect on the consolidated financial statements.

 

Advertising

The Company charges advertising costs to expenses as incurred. In 2019,Advertising expenses were $112 for the Company expensed $120, year ended December 31, 2021 and expensed $106 and $148 in 2018 and 2017, respectively.$99 for the year ended December 31, 2020.

 

Revenue Recognition

The Company accounts for revenue associated with financial instruments, including loans and securities via the accrual method. The Company recognizes noninterest income when it satisfies commitments to customers. Please refer to Note 18: Revenue Recognition.

 

49

Use of Estimates

In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of other real estate owned, other-than-temporary impairments of securities, evaluation of impairment of goodwill, and pension obligations.

Changing economic conditions, adverse economic prospects for borrowers, as well as regulatory agency action as a result of examination, could cause NBB

Reclassifications

Certain amounts reported in prior years have been reclassified to recognize additionsconform to the allowance for loan losses and may also affectcurrent year’s presentation. These reclassifications had no effect on the valuationCompany’s net income of real estate acquired in connection with foreclosures or in satisfaction of loans.stockholders' equity.

 

Accounting Standards Adopted in 2019

ASU No. 2016-02, “Leases (Topic 842)”

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, the standard requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. For financial reporting purposes, the standard provides for a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach.

Subsequent to the issuance of ASU 2016-02, the FASB issued targeted updates to clarify specific implementation issues including ASU No. 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842,” ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” ASU No. 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” and ASU No. 2019-01 “Leases (Topic 842): Codification Improvements.” One of the amendments in ASU 2018-11 provides an additional (and optional) transition method. If elected, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with previous GAAP (Topic 840, Leases).

Upon adoption on January 1, 2019, the Company elected the prospective application approach provided by ASU 2018-11. There was no cumulative effect adjustment at adoption. The Company also elected certain practical expedients within the standard and did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases and did not reassess any initial direct costs for existing leases. The Company evaluated its existing leases as of January 1, 2019 and recognized a right-of-use asset and lease liability for leases with a remaining term greater than 12 months. The Company also recognized a right-of-use asset and lease liability for leases that commenced after January 1, 2019.

56

ASU No. 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities”

In March 2017, the FASB issued ASU 2017‐08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310‐20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Premiums on qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The ASU provided for adoption on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company adopted the ASU on January 1, 2019. Adoption did not have a material impact and no cumulative effect adjustment was recorded.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU Accounting Standards Update (“ASU”) No. 2016-13,2016-13, “Financial Instruments – Credit Losses (Topic 326)326): Measurement of Credit Losses on Financial Instruments.”  The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available for saleavailable-for-sale debt securities and purchased financial assets with credit deterioration. For public business entities that meetThe FASB has issued multiple updates to ASU 2016-13 as codified in Topic 326, including ASUs 2019-04,2019-05,2019-10,2019-11,2020-02, and 2020-03.  These ASUs have provided for various minor technical corrections and improvements to the definition of a U.S. Securities and Exchange Commission (SEC) filer, excluding smallercodification as well as other transition matters.  Smaller reporting companies who file with the standard is effective for fiscal years beginning after December 15, 2019, including interim periods in those fiscal years.  AllSEC and all other entities will bewho do not file with the SEC are required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022.  The Company is currently assessing the impact that ASU 2016-132016-13 will have on its consolidated financial statements.  ManagementThe Company is working to ensure readiness and compliance with the standard andstandard.  The Company has implemented coding of the loan portfolio to enable appropriate segregation andengaged with a vendor, validated data, integrity, analyzed correlations for forecasting, determinedselected methodologies and selected a vendor to provide a platform.begun running parallel models.  Management has prepared multiple concurrent models using the CECL methodology and will continue to refine assumptions that impact the calculation prior to the effective date.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119.  SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.”  It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

In January 2017, March 2020, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and Other (Topic 350): Simplifyingexceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the Testglobal market-wide reference rate transition period. The guidance is effective for Goodwill Impairment.” The amendmentsall entities as of March 12, 2020 through December 31, 2022. Subsequently, in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.

In August 2018, 2021, the FASB issued ASU 2018-13, “Fair Value MeasurementNo.2021-01 “Reference Rate Reform (Topic 820)848): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements.

In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.Scope.” This ASU clarifies that certain optional expedients and improves areasexceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance relatedto derivative instruments affected by the discounting transition. An entity may elect to apply ASU No.2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the recently issued standards on credit losses,date that financial statements are available to be issued. An entity may elect to apply ASU No.2021-01 to eligible hedging and recognition and measurement including improvements resulting from various Transition Resource Group (TRG) Meetings. The effective date of eachrelationships existing as of the amendments depends onbeginning of the adoption dateinterim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of ASU 2016-1, ASU 2016-03, and ASU 2017-12.the interim period that includes March 12, 2020.  The Company has a small number of participation loans that reference LIBOR.  The Company is currently assessingworking with the impact that ASU 2019-04 will have on its consolidated financial statements.

In May 2019, the FASB issued ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.” The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an optionprimary banks to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. The effective date and transition methodology for the amendments in ASU 2019-05 are the same as in ASU 2016-13. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements.determine appropriate actions. 

 

5750

Recently Adopted Accounting Developments

In NovemberDecember 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” This ASU addresses issues raised by stakeholders during the implementation of ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets). In response to this question, the ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The ASU includes effective dates and transition requirements that vary depending on whether or not an entity has already adopted ASU 2016-13. The Company is currently assessing the impact that ASU 2019-11 will have on its consolidated financial statements.

In December 2019 the FASB issued ASU 2019-12,-12, “Income Taxes (Topic 740)740) – Simplifying the Accounting for Income Taxes.”  The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects.  For public business entities, the amendments areASU 2019-12 was effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Earlythe Company on January 1, 2021. The adoption is permitted. The Company is currently assessingof ASU 2019-12 did not have a material impact on the impact that ASU 2019-12 will have on itsCompany’s consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01,2020-01, “Investments – Equity Securities (Topic 321)321), Investments – Equity Method and Joint Ventures (Topic 323)323), and Derivatives and Hedging (Topic 815)815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.”  The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions.  ASU 2016-012020-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.  Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting.  For public business entities, the amendments in the ASU are2020-01 was effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. Thethe Company does not expect theon January 1, 2021.  The adoption of ASU 2020-01 to2020-01 did not have a material impact on itsthe Company’s consolidated financial statements.

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119.  SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.”  It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.

In August 2018, October 2020, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes2020-08, “Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable fees and Other Costs.” This ASU clarifies that an entity should reevaluate whether a callable debt security is within the Disclosure Requirementsscope of ASC paragraph 310-20-35-33 for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligationeach reporting period. ASU 2020-08 was effective for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company does not expect theon January 1, 2021. The adoption of ASU 2018-14 to2020-08 did not have a material impact on itsthe Company’s consolidated financial statements.

In December 2020, the CAA was passed.  Under Section 541 of the CAA, Congress extended or modified many of the relief programs first created by the CARES Act, including the PPP loan program and treatment of certain loan modifications related to the COVID-19 pandemic.     The Company modified loans in accordance with the CAA and the CARES Act. The Company modified loans in accordance with the CAA and the CARES Act.

In August 2021, the FASB issued ASU 2021-06, “'Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946): Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No.33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No.33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No.33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants”. The ASU was effective upon addition to the FASB Codification. The adoption of ASU 2021-06 did not have a material impact on the Company’s consolidated financial statements.

Risks and Uncertainties

Since the beginning of 2020, the COVID-19 pandemic and efforts to reduce its spread have caused significant disruptions in the U.S. economy and negatively impacted financial activity in the Company’s market. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. Some measures appear to indicate a positive trajectory, however if the pandemic escalates, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent of the impact COVID-19 will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations

During 2020, the COVID-19 pandemic led to declines in two key income categories: interest income and overdraft fee income.  Interest income was impacted by certain modification requests that reversed accrued interest when granted, and by a decreased interest rate environment. During 2021, the number of modification requests that reduce interest income vastly decreased, though loan refinance and securities call activity spurred by the low interest rates continue to impact interest income, with reinvestment opportunities at lower rates.  If the COVID-19 pandemic’s evolution brings new or worsened economic impacts, these income categories and others may be negatively affected. 

Low interest rates since the beginning of the pandemic, financial aid to consumers provided by the CARES Act and the CAA, increased demand and supply chain bottlenecks have resulted in historically high levels of inflation. Potential future increases in interest rates to address inflation may adversely affect net interest income if liabilities reprice more quickly than assets. If future interest rate movements reduce economic activity more substantially than desired, the Company’s market area could experience a decline that would reduce lending activity and fee income. At this time, the Company is unable to project the materiality of such an impact.

51

Capital and Liquidity

While the Company believes that it has sufficient capital to withstand a potential second economic recession if the pandemic resurges or if potential interest rate movements reduce economic activity more substantially than desired, its reported and regulatory capital ratios could be adversely impacted if credit losses increase.

The Company maintains access to multiple sources of liquidity. Wholesale funding markets are currently available to the Company. If the uncertainty caused by the COVID-19 pandemic results in volatile or elevated funding costs for an extended period of time and if it becomes necessary for the Company to access wholesale funding, the Company’s net interest margin could be adversely affected. Deposits have increased since the beginning of the pandemic, however, if conditions worsen and cause a large number of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding.

Asset valuation

The pandemic has not affected the Company’s ability, nor is it expected to affect the Company’s ability, to account timely for the assets on its balance sheet. However if the impact of the pandemic worsens, valuation procedures in future periods could be negatively affected. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances, such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.

The Company tests goodwill for impairment annually, usually during the fourth quarter using September 30 information, unless facts and circumstances indicate the need for more frequent impairment testing. If the evolution of the pandemic or other adverse events cause a sustained decline in the Company’s stock price or the occurrence of what management deems to be a triggering event, under certain circumstances prescribed by GAAP, the Company will perform goodwill impairment testing as needed, which may be more frequently than annually. In the event that testing indicates that all or a portion of goodwill is impaired, a non-cash charge for the amount of such impairment would be recorded to earnings.

Lending operations, accommodations to borrowers and credit risk

The Company worked with customers directly affected by COVID-19, providing short-term assistance in accordance with the CARES Act, the CAA and regulatory guidelines. Assistance included providing payment extensions, periods of interest only payments to otherwise amortizing loans, and interest rate reductions. Pandemic-related modification requests have greatly subsided and as of December 31, 2021, there were 0 loans remaining in a temporarily modified state for COVID-19 relief.

If eventual credit losses are identified on loans that received modifications or other loans, accrued interest and fee income would be reversed at the time the loss is identified. If the loans are fully or partially charged off, future requirements for the provision for loan losses expense will increase. At this time, the Company is unable to project the materiality of such an impact, but recognizes economic declines may affect its borrowers’ ability to repay in future periods. The Company is closely monitoring credit quality and developments related to the pandemic.

 

 

Note 2: Restriction on Cash

The Company’s subsidiary bank is a member of the Federal Reserve System. The Federal Reserve does not currently require member banks to hold an average balance in order to purchase services from the Federal Reserve.

 

58

Note 3: Securities

The amortized cost and fair value of debt securities available for sale, with gross unrealized gains and losses, as of the dates indicated, follows:

 

 

December 31, 2019

 

December 31, 2021

 

Available for sale:

 

Amortized

Cost

 

Gross

Unrealized

Gains

 

Gross

Unrealized

Losses

 

Fair Value

 

Amortized

Cost

 

Gross

Unrealized

Gains

 

Gross

Unrealized

Losses

 Fair Value 

U.S. Government agencies and corporations

 $119,903  $1,995  $775  $121,123  $279,934  $2,795  $4,710  $278,019 

States and political subdivisions

  88,092   791   644   88,239   195,365   5,314   2,007   198,672 

Mortgage-backed securities

  223,173   45   1,435   221,783   204,164   2,323   313   206,174 

Corporate debt securities

  3,998   120   ---   4,118   3,004   248   37   3,215 

Total securities available for sale

 $435,166  $2,951  $2,854  $435,263  $682,467  $10,680  $7,067  $686,080 

 

  

December 31, 2018

Available for sale:

 

Amortized

Cost

 

Gross

Unrealized

Gains

 

Gross

Unrealized

Losses

 

Fair Value

U.S. Government agencies and corporations

 $306,264  $449  $6,666  $300,047 

States and political subdivisions

  118,564   1,218   1,166   118,616 

Mortgage-backed securities

  586   42   ---   628 

Corporate debt securities

  6,014   ---   295   5,719 

Total securities available for sale

 $431,428  $1,709  $8,127  $425,010 
52

Prior to the second quarter


 
  

December 31, 2020

 

Available for sale:

 

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair Value

 

U.S. Government agencies and corporations

 $86,859  $4,477  $173  $91,163 

States and political subdivisions

  196,435   7,778   252   203,961 

Mortgage-backed securities

  244,780   4,473   78   249,175 

Corporate debt securities

  2,001   442   -   2,443 

Total securities available for sale

 $530,075  $17,170  $503  $546,742 

 

The amortized cost and fair value of single maturity securities available for sale at December 31, 2019, 2021, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities included in these totals are categorized by final maturity at December 31, 2019.2021.

 

  

December 31, 2019

Available for sale:

 

Amortized

Cost

 

Fair Value

Due in one year or less

 $55,186  $55,302 

Due after one year through five years

  6,342   6,505 

Due after five years through ten years

  145,040   144,260 

Due after ten years

  228,598   229,196 

Total securities available for sale

 $435,166  $435,263 

  

December 31, 2021

 

Available for sale:

 

Amortized Cost

  

Fair Value

 

Due in one year or less

 $2,519  $2,540 

Due after one year through five years

  24,034   24,051 

Due after five years through ten years

  313,966   313,288 

Due after ten years

  341,948   346,201 

Total securities available for sale

 $682,467  $686,080 

 

Information pertaining to securities with gross unrealized losses at December 31, 2019 2021 and 20182020 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

 

December 31, 2019

 

December 31, 2021

 
 

Less Than 12 Months

 

12 Months or More

 

Less Than 12 Months

 

12 Months or More

 
 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

U.S. Government agencies and corporations

 $53,244  $738  $38,962  $37  $201,650  $3,530  $26,792  $1,180 

State and political subdivisions

  35,934   596   591   48   50,659   1,214   20,542   793 

Mortgage-backed securities

  181,279   1,435   ---   ---   13,139   141   4,665   172 

Corporate debt securities

  966   37   0   0 

Total temporarily impaired securities

 $270,457  $2,769  $39,553  $85  $266,414  $4,922  $51,999  $2,145 

 

 

December 31, 2018

 

December 31, 2020

 
 

Less Than 12 Months

 

12 Months or More

 

Less Than 12 Months

 

12 Months or More

 
 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

Fair
Value

 

Unrealized
Loss

 

U.S. Government agencies and corporations

 $17,730  $216  $259,992  $6,450  $28,798  $173  $0  $0 

State and political subdivisions

  16,882   352   20,758   814  32,353  249  635  3 

Corporate debt securities

  4,842   194   876   101 

Mortgage-backed securities

  8,816   76   4,060   2 

Total temporarily impaired securities

 $39,454  $762  $281,626  $7,365  $69,967  $498  $4,695  $5 

 

The Company had 166291 securities with a fair value of $310,010$318,413 that were temporarily impaired at December 31, 2019.  2021.  The total unrealized loss on these securities was $2,854.$7,067. Of the temporarily impaired total, 4048 securities with a fair value of $39,553$51,999 and an unrealized loss of $85$2,145 have been in a continuous loss position for 12 months or more. The Company has determined that these securities are temporarily impaired at December 31, 2019 2021 for the reasons set out below.

U.S. Government agencies. The unrealized Unrealized losses of $37$1,180 on U.S. Government agency securities stemmed from 3928 securities with a fair value of $38,962. The unrealized losses$26,792 were caused by interest rate and market fluctuations. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of the investments. The Company is monitoring bond market trends to develop strategies to address unrealized losses. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company does not consider this investmentsthe securities to be other-than-temporarily impaired.

53

States and political subdivisions. This category exhibits unrealized losses of $48 on 1 security with a fair value of $591. The Company reviewed financial statements and cash flows for the security17 securities with a fair value of $20,542 and unrealized losses of $793 and determined that the unrealized loss is primarily the result of interest rate and market fluctuations and not associated with impaired financial status. The contractual terms of the investment do not permit the issuer to settle the security at a price less than the cost basis of the investment. Because the Company does not intend to sell the investment and it is not likely that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be at maturity, the Company does not consider the investment to be other-than-temporarily impaired.

Mortgage-backed securities. Unrealized losses of $172 on 3 securities with a fair value of $4,665 were caused by interest rate and market fluctuations. Because the Company does not intend to sell the investment and it is not likely that the Company will be required to sell the investment before recovery of its amortized costs basis, which may be at maturity, the Company does not consider this investment to be other-than-temporarily impaired.

Restricted stock.Stock

The Company holdsheld restricted stock of $1,220 as of $845 at December 31, 2019 2021 and as of $1,279 at December 31, 2018. 2020. Restricted stock is reported separately from available-for-sale securities and held-to-maturityavailable for sale securities. As a member of the Federal Reserve and the FHLB, NBB is required to maintain certain minimum investments in the common stock of those entities. Required levels of investment are based upon NBB’s capital and a percentage of qualifying assets. The Company purchases stock from or sells stock back to the correspondents based on their calculations. The stock is held by member institutions only and is not actively traded.

Redemption of FHLB stock is subject to certain limitations and conditions. At its discretion, the FHLB may declare dividends on the stock. In addition to dividends, NBB also benefits from its membership with FHLB through eligibility to borrow from the FHLB, using as collateral NBB’s capital stock investment in the FHLB and qualifying NBB real estate mortgage loans totaling $533,963$603,827 at December 31, 2019. 2021. Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at December 31, 2019, 2021, management did not determine any impairment.

Management regularly monitors the credit quality of the investment portfolio. Changes in ratings are noted and follow-up research on the issuer is undertaken when warranted. Management intends to carefully monitor any changes in bond quality.

 

Pledged Securities

At December 31, 2019 2021 and 2018,2020, securities with a carrying value of $220,299$287,023 and $196,062,$251,048, respectively, were pledged to secure municipal deposits and for other purposes as required or permitted by law.

 

Realized Securities Gains and Losses

During 2019,2021, the Company realized net securities gains of $566,$6, all of which stemmed from calls of securities. During 2020, the Company realized net securities gains of $108, including net gains of $438$43 on the sale of securities and $128$65 on calls of securities. The sales of securities were pursuant to a restructuring plan to manage interest rate risk. During 2018, the $17 realized securities gain stemmed from the call of one security with a gain of $1 and the sale of another security for a gain of $16. During 2017, the Company sold a small investment in community bank stock that resulted in a gain of $4. The investment was classified as available for sale and had a book value of $189. All other net realized gains resulted from calls of securities. Information pertaining to realized gains and losses on sold and called securities follows:

 

  

For the year ended December 31, 2019

  

Proceeds

 

Book Value

 

Gross Gain

 

Gross Loss

 

Net Gain

Available for sale

 $348,032  $347,466  $1,157  $591  $566 
  

For the year ended December 31, 2021

 
  

Proceeds

  

Book Value

  

Gross Gain

  

Gross Loss

  

Net Gain

 

Available for sale

 $20,377  $20,371  $6  $0  $6 

  

For the year ended December 31, 2020

 
  

Proceeds

  

Book Value

  

Gross Gain

  

Gross Loss

  

Net Gain

 

Available for sale

 $126,840  $126,732  $110  $2  $108 

 

  

For the year ended December 31, 2018

  

Proceeds

 

Book Value

 

Gross Gain

 

Gross Loss

 

Net Gain

Available for sale

 $17,287  $17,270  $17  $---  $17 

Held to maturity

  6,430   6,430   ---   ---   --- 

  

For the year ended December 31, 2017

  

Proceeds

 

Book Value

 

Gross Gain

 

Gross Loss

 

Net Gain

Available for sale

 $13,620  $13,614  $10  $---  $10 

Held to maturity

  8,975   8,971   4   ---   4 

Note 4: Related Party Transactions

In the ordinary course of business, the Company, through its banking subsidiary, has granted loans to related parties, including executive officers and directors of NBI and its subsidiaries. Total funded credit extended to related parties amounted to $15,098$14,822 at December 31, 2019 2021 and $18,700$15,403 at December 31, 2018. 2020. During 2019, there was a change in related party relationships that resulted in removal of loans with funded amounts2021, total principal additions totaled $2,570 and principal payments were $3,151. Loans totaling $116 at December 31, 20182020 were removed when a director retired and a review of $3,382.related parties determined a previously reported party did not meet the definition for reporting. During 2018, there was a change in related party relationships that resulted in removal of loans with funded amounts at December 31, 2017 of $782. During 2019,2020, total principal additions were $6,152$10,649 and principal payments were $6,372. $10,248.

The Company held $5,907$14,460 in deposits for related parties as of December 31, 2019 2021 and $6,911$16,140 as of December 31, 2018. 2020.

The Company leases to a director a small office space.  The lease payments totaled $5 in 20192021 and $5 in 2018.2020. The Company has also contracted with a director's firm to prepare architectural plans for a new office in Roanoke, Virginia.  The arrangement is at arms-length and the Company paid the director's firm $113 in 2021 and $66 in 2020.

 

 

Note 5: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans

The allowance for loan losses methodology incorporates individual evaluation of impaired loans and collective evaluation of groups of non-impaired loans. The Company performs ongoing analysis of the loan portfolio to determine credit quality on an individual loan basis and to identify impaired loans. Credit quality is rated based on the loan’s payment history, the borrower’s current financial situation and value of the underlying collateral.

 

Impaired Loans

Loans are designated as impaired when, in the judgment

54

Please refer to Note 1: Summary of Significant Accounting Policies for additional information on evaluation of impaired loans and associated specific reserves, and policies regarding nonaccruals, past due status and charge-offs.

TDRs impact the estimation of the appropriate level of the allowance for loan losses. If the restructuring included forgiveness of a portion of principal or accrued interest, the charge-off is included in the historical charge-off rates applied to the collective evaluation methodology.  Restructured loans are individually evaluated for impairment,

Portfolio Segments and the amount of a TDR’s book value in excess of its fair value is accrued as a specific allocation in the allowance for loan losses. If a TDR loan payment exceeds 90 days past due, it is examined to determine whether the late payment indicates collateral dependency or cash flows below those that were used in the fair value measurement. TDRs, as well as all impaired loans, that are determined to be collateral dependent are charged down to fair value. Deficiencies indicated by impairment measurements for TDRs that are not collateral dependent may be accrued in the allowance for loan losses or charged off if deemed uncollectible.

Collectively-Evaluated LoansClasses

The Company evaluated characteristics in the loan portfolio and determined major segments and smaller classes within each segment. These characteristics include collateral type and intended use, repayment sources, and (if applicable) the borrower’s business model. The methodology for calculating reserves for collectively-evaluatedcollectively evaluated loans is applied at the class level.

Portfolio Segments and Classes

The Company’s segments and classes used in determining the allowance for loan losseswithin each segment are as follows.presented below:

Real Estate Construction

Construction, residential

Construction, other

Consumer Real Estate

Equity lines

Residential closed-end first liens

Residential closed-end junior liens

Investor-owned residential real estate

Commercial Real Estate

Multifamily real estate

Commercial real estate, owner-occupied

Commercial real estate, other

Commercial Non RealNon-Real Estate

Commercial and Industrial

Public Sector and IDA

Public sectorState and IDA

political subdivisions

Consumer Non RealNon-Real Estate

Credit cards

Automobile

Other consumer loans

 

Historical Loss Rates

The Company’s allowance methodologyCollectively-evaluated loans within each class are further stratified by risk rating: pass-rated loans, loans rated special mention, and loans rated classified. Credit risk for collectively-evaluated loans applies historical loss rates by class to current class balances as part of the process of determining required reserves. Class loss rates are calculated as the net charge-offs foris estimated at the class as a percentage of average class balance. The Company averages losslevel, by risk rating, by applying historical net charge-off rates and percentages for the most recent eight quarters to determine the historical loss rate for each class.

Two loss rates for each class are calculated: total net charge-offs for the class as a percentage of average class loan balance (“class loss rate”), and total net charge-offs for the class as a percentage of average classified loans in the class (“classified loss rate”). Classified loans are those with risk ratings of “substandard” or lower. Net charge-offs in both calculations include charge-offs and recoveries of classified and non-classified loans as well as those associated with impaired loans. Class historical loss rates are applied to non-classified loan balances at the reporting date, and classified historical loss rates are applied to classified balances at the reporting date.

Risk Factors

In addition to historical loss rates, riskqualitative factors pertinent tothat influence credit risk for each class are analyzed to estimate reserves for collectively-evaluated loans. Factors include changes in national and local economic and business conditions, the nature and volume of classes within the portfolio, loan quality, loan officers’ experience, lending policies and the Company’s loan review system.

The analysis of certain factors results in standard allocations to all segments and classes. These factors include the risk from changes in lending policies, loan officers’ average years of experience, unemployment levels, bankruptcy rates, interest rate environment, and competition/legal/regulatory environments. Factors analyzed for each class, with resultant allocations based upon the level of risk assessed for each class, include the risk from changes in loan review, levels of past due loans, levels of nonaccrual loans, current class balance as a percentage of total loans, and the percentage of high risk loans within the class. Additionally, factors specific to each segment are analyzed and result in allocations to the segment.risk.  Please refer to Note 1: Summary of Significant Accounting Policies for a discussion of risk factors pertinent to each class.

Real estate construction loans are subject to general risks from changing commercial building and housing market trends and economic conditions that may impact demand for completed properties and the costsclass, information on evaluation of completion. These risks are measured by market-area unemployment rates, bankruptcy rates, building market trends, and interest rates.

The credit quality of consumer real estate is subject to risks associated with the borrower’s repayment ability and collateral value, measured generally by analyzing local unemployment and bankruptcy trends, local housing market trends, and interest rates.

The commercial real estate segment includes loans secured by multifamily residential real estate, commercial real estate occupied by the owner/borrower, and commercial real estate leased to non-owners. Loans in the commercial real estate segment are impacted by economic risks from changing commercial real estate markets, rental markets for multi-family housing and commercial buildings, business bankruptcy rates, local unemployment and interest rate trends that would impact the businesses housed by the commercial real estate.

Commercial non real estate loans are secured by collateral other than real estate, or are unsecured. Credit risk for commercial non real estate loans is subject to economic conditions, generally monitored by local business bankruptcy trends, and interest rates.

Public sector and IDA loans are extended to municipalities and related entities. Credit risk is based upon the entity’s ability to repay and interest rate trends.

Consumer non real estate includes credit cards, automobile and other consumer loans. Credit cards and certain other consumer loans are unsecured, while collateral is obtained for automobileimpaired loans and other consumer loans. Credit risk stems primarily from the borrower’s ability to repay, measured by average unemployment, average personal bankruptcy ratesassociated specific reserves, and interest rates.

Factor allocations applied to each class are increased for loans rated special mentionpolicies regarding nonaccruals, past due status and increased to a greater extent for loans rated classified. The Company allocates additional reserves for “high risk” loans. High risk loans include junior liens, interest only and high loan to value loans.charge-offs.

 

A detailed analysis showing the allowance roll-forward by portfolio segment and related loan balance by segment follows:

 

 

Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2019

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

Real Estate Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non-Real

Estate

 

Public

Sector and

IDA

 

Consumer Non-Real Estate

 

Unallocated

 

Total

 

Real Estate Construction

 

Consumer Real Estate

  Commercial Real Estate  

Commercial Non-Real Estate

 

Public Sector and IDA

 

Consumer Non-Real Estate

  Unallocated  

Total

 

Balance, December 31, 2018

 $398  $2,049  $2,798  $602  $583  $750  $210  $7,390 

Balance, December 31, 2020

 $503  $2,165  $3,853  $670  $339  $555  $396  $8,481 

Charge-offs

  ---   (192

)

  (150

)

  (47

)

  ---   (531

)

  ---   (920

)

  -   (13

)

  0   (526

)

  -   (216

)

  -   (755

)

Recoveries

  ---   ---   49   1   ---   217   ---   267   -   20   159   33   -   134   -   346 

Provision for (recovery of) loan losses

  2   38   (138

)

  (1

)

  (105

)

  214   116   126   (81

)

  (242

)

  (891

)

  922   (42

)

  (29

)

  (35

)

  (398

)

Balance, December 31, 2019

 $400  $1,895  $2,559  $555  $478  $650  $326  $6,863 

Balance, December 31, 2021

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

  

Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2020

 
  

Real Estate Construction

  

Consumer Real Estate

  

Commercial Real Estate

  

Commercial Non-Real Estate

  

Public Sector and IDA

  

Consumer Non-Real Estate

  Unallocated  

Total

 

Balance, December 31, 2019

 $400  $1,895  $2,559  $555  $478  $650  $326  $6,863 

Charge-offs

  -   (85

)

  (15

)

  (372

)

  -   (248

)

  -   (720

)

Recoveries

  -   18   145   9   -   175   -   347 

Provision for (recovery of) loan losses

  103   337   1,164   478   (139

)

  (22

)

  70   1,991 

Balance, December 31, 2020

 $503  $2,165  $3,853  $670  $339  $555  $396  $8,481 

 

  

Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2018

  

Real Estate Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non-Real

Estate

 

Public

Sector and

IDA

 

Consumer Non-Real Estate

 

Unallocated

 

Total

Balance, December 31, 2017

 $337  $2,027  $3,044  $1,072  $419  $707  $319  $7,925 

Charge-offs

  ---   (38

)

  ---   (107

)

  ---   (544

)

  ---   (689

)

Recoveries

  ---   3   49   22   ---   161   ---   235 

Provision for (recovery of) loan losses

  61   57   (295

)

  (385

)

  164   426   (109

)

  (81

)

Balance, December 31, 2018

 $398  $2,049  $2,798  $602  $583  $750  $210  $7,390 

  

Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2017

  

Real Estate Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non-Real

Estate

 

Public

Sector and

IDA

 

Consumer Non-Real Estate

 

Unallocated

 

Total

Balance, December 31, 2016

 $438  $1,830  $3,738  $1,063  $330  $644  $257  $8,300 

Charge-offs

  ---   (146

)

  (139

)

  (82

)

  ---   (452

)

  ---   (819

)

Recoveries

  ---   1   131   23   ---   132   ---   287 

Provision for (recovery of) loan losses

  (101

)

  342   (686

)

  68   89   383   62   157 

Balance, December 31, 2017

 $337  $2,027  $3,044  $1,072  $419  $707  $319  $7,925 

  

Allowance for Loan Losses by Segment and Evaluation Method as of

  

December 31, 2019

  

Real Estate Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non-Real

Estate

 

Public

Sector and

IDA

 

Consumer Non-Real Estate

 

Unallocated

 

Total

Individually evaluated for impairment

 $---  $2  $---  $108  $---  $---  $---  $110 

Collectively evaluated for impairment

  400   1,893   2,559   447   478   650   326   6,753 

Total

 $400  $1,895  $2,559  $555  $478  $650  $326  $6,863 

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

 

  

Loans by Segment and Evaluation Method as of

  

December 31, 2019

  

Real Estate Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non-Real

Estate

 

Public

Sector and

IDA

 

Consumer Non-Real Estate

 

Unallocated

 

Total

Individually evaluated for impairment

 $---  $759  $3,608  $918  $---  $4  $---  $5,289 

Collectively evaluated for impairment

  42,303   180,713   361,765   45,658   63,764   34,535   ---   728,738 

Total

 $42,303  $181,472  $365,373  $46,576  $63,764  $34,539  $---  $734,027 

  

Allowance for Loan Losses by Segment and Evaluation Method as of

  

December 31, 2018

  

Real Estate Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non-Real

Estate

 

Public

Sector and

IDA

 

Consumer Non-Real Estate

 

Unallocated

 

Total

Individually evaluated for impairment

 $---  $4  $---  $135  $---  $---  $---  $139 

Collectively evaluated for impairment

  398   2,045   2,798   467   583   750   210   7,251 

Total

 $398  $2,049  $2,798  $602  $583  $750  $210  $7,390 

 

Loans by Segment and Evaluation Method as of

 

Allowance for Loan Losses by Segment and Evaluation Method as of

 
 

December 31, 2018

 

December 31, 2021

 
 

Real Estate Construction

 

Consumer

Real Estate

 

Commercial

Real Estate

 

Commercial

Non-Real

Estate

 

Public

Sector and

IDA

 

Consumer Non-Real Estate

 

Unallocated

 

Total

 

Real Estate Construction

 

Consumer Real Estate

 

Commercial Real Estate

 

Commercial Non-Real Estate

 

Public Sector and IDA

 

Consumer Non-Real Estate

 

Unallocated

 

Total

 

Individually evaluated for impairment

 $---  $1,452  $4,340  $1,015  $---  $13  $---  $6,820  $-  $0  $-  $0  $-  $-  $-  $0 

Collectively evaluated for impairment

  37,845   174,004   349,206   45,520   60,777   36,225   ---   703,577 

Collectively evaluated loans

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

Total

 $37,845  $175,456  $353,546  $46,535  $60,777  $36,238  $---  $710,397  $422  $1,930  $3,121  $1,099  $297  $444  $361  $7,674 

 

 

  

Loans by Segment and Evaluation Method as of

 
  

December 31, 2021

 
  

Real Estate Construction

  

Consumer Real Estate

  

Commercial Real Estate

  

Commercial Non-Real Estate

  

Public Sector and IDA

  

Consumer Non-Real Estate

  

Unallocated

  

Total

 

Individually evaluated for impairment

 $-  $191  $5,386  $301  $-  $0  $-  $5,878 

Collectively evaluated loans

  48,841   208,786   400,336   59,963   47,899   32,026   0   797,851 

Total

 $48,841  $208,977  $405,722  $60,264  $47,899  $32,026  $0  $803,729 

  

Allowance for Loan Losses by Segment and Evaluation Method as of

 
  

December 31, 2020

 
  

Real Estate Construction

  

Consumer Real Estate

  

Commercial Real Estate

  

Commercial Non-Real Estate

  

Public Sector and IDA

  

Consumer Non-Real Estate

  

Unallocated

  

Total

 

Individually evaluated for impairment

 $-  $2  $-  $73  $-  $-  $-  $75 

Collectively evaluated loans

  503   2,163   3,853   597   339   555   396   8,406 

Total

 $503  $2,165  $3,853  $670  $339  $555  $396  $8,481 

  

Loans by Segment and Evaluation Method as of

 
  

December 31, 2020

 
  

Real Estate Construction

  

Consumer Real Estate

  

Commercial Real Estate

  

Commercial Non-Real Estate

  

Public Sector and IDA

  

Consumer Non-Real Estate

  

Unallocated

  

Total

 

Individually evaluated for impairment

 $0  $194  $3,856  $851  $0  $2  $0  $4,903 

Collectively evaluated loans

  42,266   181,588   389,259   77,920   40,983   33,108   0   765,124 

Total

 $42,266  $181,782  $393,115  $78,771  $40,983  $33,110  $0  $770,027 

56

A summary of ratios for the allowance for loan losses follows:

 

  

December 31,

  

2019

 

2018

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

  0.94

%

  1.04

%

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

  0.09

%

  0.07

%

  

December 31,

 
  

2021

  

2020

 

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

  0.96

%

  1.10

%

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

  0.05

%

  0.05

%

 

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

 

 

December 31,

 

December 31,

 
 

2019

 

2018

 

2021

 

2020

 

Nonperforming assets:

         

Nonaccrual loans

 $164  $311  $0  $846 

Restructured loans in nonaccrual

  3,211   3,109 

TDR loans in nonaccrual

  2,873  2,839 

Total nonperforming loans

  3,375   3,420   2,873  3,685 

Other real estate owned, net

  1,612   2,052   957  1,553 

Total nonperforming assets

 $4,987  $5,472  $3,830  $5,238 

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

  0.68

%

  0.77

%

  0.48

%

 0.68

%

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

  203.35

%

  216.08

%

  267.11

%

 230.15

%

 

(1)(1)

The Company defines nonperforming loans as total nonaccrual and restructuredTDR loans that are nonaccrual. Loans 90 days past due and still accruing and accruing restructuredTDR loans are excluded.

As of December 31, 2021, OREO is comprised of construction properties. There is 0 residential real estate in OREO. As of December 31, 2021, $62 in loans secured by residential real estate are in process of foreclosure.

 

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

 

 

December 31,

 

December 31,

 
 

2019

 

2018

 

2021

 

2020

 

Loans past due 90 days or more and still accruing

 $231  $35  $90  $17 

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

  0.03

%

  0.00

%

  0.01

%

 0.00

%

Accruing restructured loans

 $1,729  $2,552 

Accruing TDR loans

 $3,005  $1,410 

Impaired loans:

         

Impaired loans with no valuation allowance

 $4,174  $5,667  $5,878  $3,858 

Impaired loans with a valuation allowance

  1,115   1,153   0  1,045 

Total impaired loans

 $5,289  $6,820  $5,878  $4,903 

Valuation allowance

 $(110

)

 $(139

)

 $0  $(75

)

Impaired loans, net of allowance

 $5,179  $6,681  $5,878  $4,828 

Average recorded investment in impaired loans(1)

 $5,359  $9,788  $5,901  $5,093 

Income recognized on impaired loans, after designation as impaired

 $171  $250  $137  $54 

Amount of income recognized on a cash basis

 $---  $---  $-  $- 

 

 

(1)(1)

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

 

NoNaN interest income was recognized on nonaccrual loans for the years ended December 31, 2019, 2018 2021 or 2017.2020. Nonaccrual loans that meet the Company’s balance thresholds are designated as impaired.

 

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

 

 

Impaired Loans as of December 31, 2019

 

Impaired Loans as of December 31, 2021

 
 

Principal

Balance

 

(A)

Total

Recorded Investment(1)

 

Recorded Investment(1) in (A)

for Which There is

No Related

Allowance

 

Recorded Investment(1) in

(A) for Which

There is a Related Allowance

 

Related

Allowance

 

Principal Balance

 

(A)

Total

Recorded

Investment(1)

 

Recorded

Investment(1) in (A)

for Which There is

No Related

Allowance

 

Recorded

Investment(1) in

(A) for Which

There is a Related

Allowance

 

Related

Allowance

 

Consumer Real Estate(2)

                                        

Residential equity lines

 $100  $100  $100  $---  $--- 

Residential closed-end first liens

  221   221   221   ---   --- 

Investor-owned residential real estate

  441   438   241   197   2   $191   $191   $191   $0   $0 

Commercial Real Estate(2)

                                        

Multifamily real estate

  278   278   278   ---   --- 

Commercial real estate, owner occupied

  929   895   895   ---   ---   3,256   2,665   2,665   -   - 

Commercial real estate, other

  2,867   2,435   2,435   ---   ---   2,721   2,721   2,721   -   - 

Commercial Non-Real Estate(2)

                                        

Commercial and Industrial

  917   918   ---   918   108   310   301   301   0   0 

Consumer Non-Real Estate(2)

                    

Automobile

  4   4   4   ---   --- 

Total

 $5,757  $5,289  $4,174  $1,115  $110  $6,478  $5,878  $5,878  $0  $0 

  

Impaired Loans as of December 31, 2020

 
  

Principal Balance

  

(A)

Total

Recorded

Investment(1)

  

Recorded

Investment(1) in (A)

for Which There is

No Related

Allowance

  

Recorded

Investment(1) in

(A) for Which

There is a Related

Allowance

  

Related

Allowance

 

Consumer Real Estate(2)

                    

Investor-owned residential real estate

 $194  $194  $0  $194  $2 

Commercial Real Estate(2)

                    

Commercial real estate, owner occupied

  3,752   3,202   3,202   -   - 

Commercial real estate, other

  654   654   654   -   - 

Commercial Non-Real Estate(2)

                    

Commercial and Industrial

  851   851   -   851   73 

Consumer Non-Real Estate(2)

                    

Automobile

  2   2   2   -   - 

Total

 $5,453  $4,903  $3,858  $1,045  $75 

 

 

(1)(1)

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

 (2)

(2)

Only classes with impaired loans are shown.

 

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

  

Impaired Loans as of December 31, 2018

  

Principal

Balance

 

(A)

Total

Recorded Investment(1)

 

Recorded Investment(1) in (A)

for Which There is

No Related

Allowance

 

Recorded Investment(1) in

(A) for Which

There is a Related Allowance

 

Related

Allowance

Consumer Real Estate(2)

                    

Residential closed-end first liens

 $728  $719  $719  $---  $--- 

Residential closed-end junior liens

  144   143   ---   143   4 

Investor-owned residential real estate

  593   590   590   ---   --- 

Commercial Real Estate(2)

                    

Multifamily real estate

  485   483   483   ---   --- 

Commercial real estate, owner occupied

  1,363   1,363   1,363   ---   --- 

Commercial real estate, other

  2,867   2,494   2,494   ---   --- 

Commercial Non-Real Estate(2)

                    

Commercial and Industrial

  1,018   1,015   5   1,010   135 

Consumer Non-Real Estate(2)

                    

Automobile

  13   13   13   ---   --- 

Total

 $7,211  $6,820  $5,667  $1,153  $139 

 

(1)

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

(2)

Only classes with impaired loans are shown.

Impaired Loans

 

For the Year Ended December 31, 2021

 
  

Average Recorded Investment(1)

  

Interest Income Recognized

 

Consumer Real Estate(2)

        

Investor-owned residential real estate

  $192   $13 

Commercial Real Estate(2)

        

Commercial real estate, owner occupied

  2,668   9 

Commercial real estate, other

  2,723   100 

Commercial Non-Real Estate(2)

        

Commercial and Industrial

  317   15 

Consumer Non-Real Estate(2)

        

Automobile

  1   - 

Total

 $5,901  $137 

 

  

Average Investment and Interest Income for

Impaired Loans

For the Year Ended

December 31, 2019

  

Average Recorded

Investment(1)

 

Interest Income

Recognized

Consumer Real Estate(2)

        

Residential equity lines

 $98  $6 

Residential closed-end first liens

  225   11 

Investor-owned residential real estate

  439   17 

Commercial Real Estate(2)

        

Multifamily real estate

  284   12 

Commercial real estate, owner occupied

  913   41 

Commercial real estate, other

  2,435   59 

Commercial Non-Real Estate(2)

        

Commercial and Industrial

  962   25 

Consumer Non-Real Estate(2)

        

Automobile

  3   --- 

Total

 $5,359  $171 
 

Impaired Loans

 

For the Year Ended December 31, 2020

 
  

Average Recorded Investment(1)

  

Interest Income Recognized

 

Consumer Real Estate(2)

        

Investor-owned residential real estate

 $196  $13 

Commercial Real Estate(2)

        

Commercial real estate, owner occupied

  3,217   19 

Commercial real estate, other

  790   0 

Commercial Non-Real Estate(2)

        

Commercial and Industrial

  887   22 

Consumer Non-Real Estate(2)

        

Automobile

  3   - 

Total

 $5,093  $54 

 

(1)

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

(2)

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

(2)Only classes with impaired loans are shown.

Only classes with impaired loans are shown.

  

Average Investment and Interest Income for

Impaired Loans

For the Year Ended

December 31, 2018

  

Average Recorded

Investment(1)

 

Interest Income

Recognized

Consumer Real Estate(2)

        

Residential closed-end first liens

 $1,202  $41 

Residential closed-end junior liens

  159   9 

Investor-owned residential real estate

  808   23 

Commercial Real Estate(2)

        

Multifamily real estate

  491   20 

Commercial real estate, owner occupied

  3,038   75 

Commercial real estate, other

  2,744   54 

Commercial Non-Real Estate(2)

        

Commercial and Industrial

  1,326   27 

Consumer Non-Real Estate(2)

        

Automobile

  20   1 

Total

 $9,788  $250 

(1)

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

(2)

Only classes with impaired loans are shown.

  

Average Investment and Interest Income for

Impaired Loans

For the Year Ended

December 31, 2017

  

Average Recorded

Investment(1)

 

Interest Income

Recognized

Real Estate Construction(2)

        

Construction other

 $3,298  $177 

Consumer Real Estate(2)

        

Residential closed-end first liens

  781   57 

Residential closed-end junior liens

  185   11 

Investor-owned residential real estate

  329   1 

Commercial Real Estate(2)

        

Multifamily real estate

  748   16 

Commercial real estate, owner occupied

  4,047   200 

Commercial real estate, other

  2,638   --- 

Commercial Non-Real Estate(2)

        

Commercial and Industrial

  1,282   64 

Consumer Non-Real Estate(2)

        

Automobile

  36   2 

Total

 $13,344  $528 

(1)

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

(2)

Only classes with impaired loans are shown.

 

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

 

December 31, 2019

               
  

30 – 89

Days Past

Due

 

90 or More

Days Past Due

 

90 or More

Days Past Due

and Still

Accruing

 

Nonaccruals

(Including

Impaired

Nonaccruals)

Real Estate Construction(1)

                

Construction, other

 $19  $---  $---  $--- 

Consumer Real Estate(1)

                

Residential closed-end first liens

  499   210   188   22 

Residential closed-end junior liens

  83   ---   ---   --- 

Investor-owned residential real estate

  ---   264   ---   264 

Commercial Real Estate(1)

                

Multifamily real estate

  94   ---   ---   --- 

Commercial real estate, owner occupied

  ---   287   ---   514 

Commercial real estate, other

  ---   ---   ---   2,435 

Commercial Non-Real Estate(1)

                

Commercial and Industrial

  45   153   17   136 

Consumer Non-Real Estate (1)

                

Credit cards

  4   ---   ---   --- 

Automobile

  256   14   14   4 

Other consumer loans

  70   12   12   --- 

Total

 $1,070  $940  $231  $3,375 

December 31, 2018

               

December 31, 2021

        
 

30 – 89

Days Past

Due

 

90 or More

Days Past Due

 

90 or More

Days Past Due

and Still

Accruing

 

Nonaccruals

(Including

Impaired

Nonaccruals)

 

30 89

Days Past

Due

 

90 or More

Days Past Due

 

90 or More

Days Past Due

and Still

Accruing

 

Nonaccruals

(Including

Impaired

Nonaccruals)

 

Real Estate Construction(1)

        

Construction, other

 $14  $0  $0  $0 

Consumer Real Estate(1)

                        

Equity lines

  50   29   29   0 

Residential closed-end first liens

 $647  $119  $---  $278   715   58   58   0 

Residential closed-end junior liens

  11   ---   ---   --- 

Investor-owned residential real estate

  ---   ---   ---   451 

Commercial Real Estate(1)

                        

Multifamily real estate

  291   192   ---   192 

Commercial real estate, owner occupied

  325   ---   ---   ---   12   266   -   2,572 

Commercial real estate, other

  ---   ---   ---   2,494 

Commercial Non-Real Estate(1)

                        

Commercial and Industrial

  10   2   2   5   13   0   -   301 

Consumer Non-Real Estate (1)

                        

Credit cards

  5   ---   ---   ---   2   2   2   - 

Automobile

  296   29   29   ---   93   0   0   - 

Other consumer loans

  50   4   4   ---   88   1   1   - 

Total

 $1,635  $346  $35  $3,420  $987  $356  $90  $2,873 

 

 

(1)(1)

Only classes with past due or nonaccrual loans are presentedpresented.

 

 

December 31, 2020

                
  

30 89

Days Past

Due

  

90 or More

Days Past Due

  

90 or More

Days Past Due

and Still

Accruing

  

Nonaccruals

(Including

Impaired

Nonaccruals)

 

Consumer Real Estate(1)

                

Residential closed-end first liens

 $365  $62  $-  $62 

Investor-owned residential real estate

  106   -   -   - 

Commercial Real Estate(1)

                

Commercial real estate, owner occupied

  15   571   -   2,941 

Commercial real estate, other

  -   654   -   654 

Commercial Non-Real Estate(1)

                

Commercial and Industrial

  730   27   -   28 

Consumer Non-Real Estate (1)

                

Credit cards

  7   3   3   0 

Automobile

  144   1   1   0 

Other consumer loans

  130   13   13   0 

Total

 $1,497  $1,331  $17  $3,685 

 

(1)

Only classes with past due or nonaccrual loans are presented.

The estimate of credit risk for non-impaired loans is obtained by applying allocations for internal and external factors. The allocations are increased for loans that exhibit greater credit quality risk.

Credit quality indicators, which the Company terms risk grades, are assigned through the Company’s credit review function for larger loans and selective review of loans that fall below credit review thresholds. Loans that do not indicate heightened risk are graded as “pass.” Loans that appear to have elevated credit risk because of frequent or persistent past due status, which is less than 75 days, or that show weakness in the borrower’s financial condition are risk graded “special mention.” During the third quarter of 2019 the Bank slightly revised the loan risk rating system to align with regulatory guidance. After the revision, the “special mention” rating is no longer applied to consumer loans. Loans with frequent or persistent delinquency exceeding 75 days or that have a higher level of weakness in the borrower’s financial condition are graded “classified.” Classified loans have regulatory risk ratings of “substandard” and “doubtful.” Allocations are increased by 50% and by 100% for loans with grades of “special mention” and “classified,” respectively.

Determination of risk grades was completed for the portfolio as of December 31, 2019 2021 and 2018.

2020.The following displays non-impaired gross loans by credit quality indicator as of the dates indicated:

 

December 31, 20192021

  

Pass

 

Special

Mention

(Excluding

Impaired)

 

 

Classified

(Excluding

Impaired)

Real Estate Construction

            

Construction, 1-4 family residential

 $7,590  $---  $--- 

Construction, other

  34,713   ---   --- 

Consumer Real Estate

            

Equity lines

  16,435   ---   --- 

Closed-end first liens

  94,814   ---   517 

Closed-end junior liens

  3,861   ---   --- 

Investor-owned residential real estate

  65,063   ---   23 

Commercial Real Estate

            

Multifamily residential real estate

  87,934   ---   94 

Commercial real estate owner-occupied

  127,937   ---   164 

Commercial real estate, other

  145,636   ---   -- 

Commercial Non-Real Estate

            

Commercial and Industrial

  45,387   135   136 

Public Sector and IDA

            

States and political subdivisions

  63,764   ---   --- 

Consumer Non-Real Estate

            

Credit cards

  5,703   ---   --- 

Automobile

  14,810   ---   19 

Other consumer

  13,995   ---   8 

Total

 $727,642  $135  $961 

Collectively-Evaluated Loans

 

Pass

  

Special

Mention

  

Classified

 

Real Estate Construction

            

Construction, 1-4 family residential

 $10,008  $-  $- 

Construction, other

  38,833   -   - 

Consumer Real Estate

            

Equity lines

  13,588   -   29 

Closed-end first liens

  106,107   0   275 

Closed-end junior liens

  2,715   0   0 

Investor-owned residential real estate

  85,460   0   612 

Commercial Real Estate

            

Multifamily residential real estate

  106,644   0   - 

Commercial real estate owner-occupied

  125,605   0   35 

Commercial real estate, other

  164,324   3,728   - 

Commercial Non-Real Estate

            

Commercial and Industrial

  59,953   -   10 

Public Sector and IDA

            

States and political subdivisions

  47,899   -   - 

Consumer Non-Real Estate

            

Credit cards

  4,531   -   - 

Automobile

  10,990   -   3 

Other consumer

  16,402   -   100 

Total

 $793,059  $3,728  $1,064 

 

December 31, 2020

Collectively-Evaluated Loans

 

Pass

  

Special

Mention

  

Classified

 

Real Estate Construction

            

Construction, 1-4 family residential

 $8,195  $-  $- 

Construction, other

  34,071   -   - 

Consumer Real Estate

            

Equity lines

  13,903   -   - 

Closed-end first liens

  92,241   66   284 

Closed-end junior liens

  3,003   -   - 

Investor-owned residential real estate

  71,450   641   0 

Commercial Real Estate

            

Multifamily residential real estate

  87,455   265   0 

Commercial real estate owner-occupied

  146,900   543   140 

Commercial real estate, other

  147,436   6,520   - 

Commercial Non-Real Estate

            

Commercial and Industrial

  77,892   0   28 

Public Sector and IDA

            

States and political subdivisions

  40,983   -   - 

Consumer Non-Real Estate

            

Credit cards

  4,665   -   - 

Automobile

  12,024   -   6 

Other consumer

  16,398   -   15 

Total

 $756,616  $8,035  $473 

 

December 31, 2018

  

Pass

 

Special

Mention

(Excluding

Impaired)

 

 

Classified

(Excluding

Impaired)

Real Estate Construction

            

Construction, 1-4 family residential

 $9,264  $---  $--- 

Construction, other

  28,560   21   --- 

Consumer Real Estate

            

Equity lines

  16,026   38   --- 

Closed-end first liens

  92,253   994   582 

Closed-end junior liens

  3,954   ---   --- 

Investor-owned residential real estate

  60,157   ---   --- 

Commercial Real Estate

            

Multifamily residential real estate

  98,582   ---   --- 

Commercial real estate owner-occupied

  123,225   211   32 

Commercial real estate, other

  127,156   ---   --- 

Commercial Non-Real Estate

            

Commercial and Industrial

  45,420   54   46 

Public Sector and IDA

            

States and political subdivisions

  60,777   ---   --- 

Consumer Non-Real Estate

            

Credit cards

  5,724   ---   --- 

Automobile

  18,598   133   71 

Other consumer

  11,691   4   4 

Total

 $701,387  $1,455  $735 

Sales, Purchases and Reclassification of Loans

The Company finances mortgages under “best efforts” contracts with mortgage purchasers. The mortgages are designated as held for sale upon initiation. There have been no major reclassifications from portfolio loans to held for sale. Occasionally, the Company purchases or sells participations in loans. All participation loans purchased met the Company’s normal underwriting standards at the time the participation was entered. Participation loans are included in the appropriate portfolio balances to which the allowance methodology is applied.

 

Troubled Debt Restructurings

From time

Total TDRs amounted to time$5,878 at December 31, 2021 and $4,249 at December 31, 2020. All of the Company’s TDR loans are fully funded and no further increase in credit is available.

TDRs Designated During the Reporting Period

The Company modifiesrecognized three new TDRs during 2021. The restructuring of one commercial real estate owner-occupied loan provided cash flow relief to the borrower by shifting the payment structure from interest-only to amortizing and reducing the interest rate. The restructurings of the two other commercial real estate loans provided cash flow relief by re-amortizing the loans over a longer period and reducing the interest rate. No principal or interest was forgiven. The impairment measurement for all three loans at December 31, 2021 was based upon the collateral method and did not result in TDRs. a specific allocation. There were no new TDRs designated in 2020.

61

The following tables present restructuringstable presents TDRs by class that occurred during the yearsyear ended December 31, 2019, 2018 and 2017.2021.

 

Note: Only classes with restructured loans are presented.

  

Restructurings that occurred during the year ended

December 31, 2019

  

Number of

Contracts

 

Pre-

Modification

Outstanding

Recorded

Investment

 

Post-

Modification

Outstanding

Recorded

Investment(1)

Consumer Real Estate

            

Equity lines

  1  $100  $100 

Total

  1  $100  $100 
  

TDRs that occurred during the year ended

December 31, 2021

 
  

Number of

Contracts

  

Pre-

Modification

Outstanding

Recorded

Investment

  

Post-

Modification

Outstanding

Recorded

Investment(1)

 

Commercial Real Estate

            

Commercial real estate owner-occupied

  1  $102  $102 

Commercial real estate, other

  2   2,724   2,724 

Total

  3  $2,826  $2,826 

 

 

(1)(1)

Post-modification outstanding recorded investment considers amounts immediately following the modification. Amounts do not reflect balances at the end of the end of the period.

 

Defaulted TDRs

The Company restructured 1 loan during the twelve month period ended December 31, 2019 to provide relief to the borrower without forgiving principal or interest. The loan covenants require that the balance be paid in fullanalyzed its TDR portfolio for a period of 30 days each year. The Company allowed the borrower to maintain full funding for more than a year, and extended the maturity date. The impairment analysis was based upon the fair value of collateral and did not result in a specific allocation.

  

Restructurings that occurred during the year ended

December 31, 2018

  

Number of

Contracts

 

Pre-

Modification

Outstanding

Recorded

Investment

 

Post-

Modification

Outstanding

Recorded

Investment(1)

Construction Real Estate

            

Construction, other

  2  $2,882  $2,882 

Commercial Real Estate

            

Commercial real estate, owner occupied

  2   715   715 

Consumer Real Estate

            

Closed-end first liens

  1   22   22 

Investor-owned residential real estate

  8   594   594 

Total

  13  $4,213  $4,213 

(1)

Post-modification outstanding recorded investment considers amounts immediately following the modification. Amounts do not reflect balances at the end of the period.

The Company restructured 13 loans during the twelve month period ended December 31, 2018. Each of the construction loans were restructured to extend the maturity and interest only period for each loan. As of December 31, 2018, the loans were converted to permanent financing at market terms and were no longer considered TDR or individually evaluated for impairment.

Two commercial real estate loans were restructured to provide a 12-month interest-only period without reducing the interest rate. The impairment measurements were based upon the present value of cash flows and did not result in a specific allocation for either loan.

The investor owned residential real estate loans were restructured to provide payment relief. Seven loans were restructured from amortizing to interest-only for a period of 12 months. The impairment measurements were based on the fair value of collateral and did not result in specific allocations. The other investor owned residential real estate restructure consolidated debt at a longer term, provided a rate reduction and capitalized interest. The impairment measurement was based upon the present value of cash flows and did not result in a specific allocation. The loan’s nonaccrual status requires that all payments made during the nonaccrual period are credited fully to principal, reducing the book balance below the present value of cash flows.

One residential closed-end first lien loan was restructured to provide payment relief by restructuring from amortizing to interest-only for a period of 12 months. The impairment measurement was based on the fair value of collateral and did not result in a specific allocation.

None of the restructures completed during the twelve months ended December 31, 2018 forgave principal or interest. 

  

Restructurings that occurred during the year ended

December 31, 2017

  

Number of

Contracts

 

Pre-

Modification

Outstanding

Recorded

Investment

 

Post-

Modification

Outstanding

Recorded

Investment(1)

Consumer Real Estate

            

Closed-end first lien

  1  $8  $8 

Commercial Real Estate

            

Commercial real estate, other

  1   132   132 

Commercial Non-Real Estate

            

Commercial and industrial

  4   1,221   1,221 

Consumer Non-Real Estate

            

Automobile

  4   26   26 

Total

  10  $1,387  $1,387 

(1)

Post-modification outstanding recorded investment considers amounts immediately following the modification. Amounts do not reflect balances at the end of the period.

Each of the restructurings completed during the twelve months ended December 31, 2017 provided payment relief to the borrowers. The consumer real estate loan was modified to provide payment relief by extending the term. Impairment measurement was based on the present value of cash flows and did not result in a specific allocation.

The commercial real estate loan restructuring reduced debt service by lowering the interest rate slightly and changing the interest method from variable to fixed. Interest was capitalized and the loan was re-amortized over a longer term. Impairment measurement, based on the present value of cash flows, did not result in a specific allocation. The loan’s nonaccrual status requires that all payments made during the nonaccrual period are credited fully to principal, reducing the book balance below the present value of cash flows.

The four commercial non-real estate loans were restructured to reduce monthly debt service by increasing the amortization period. Three of the commercial non-real estate loans received rate reductions, and on one commercial non-real estate loan, the interest method was changed from variable to fixed. Impairment measurement, based on the present value of cash flows, indicated a specific reserve for two of the commercial non-real estate loans.

The four automobile loans were restructured pursuant to Chapter 13 bankruptcy requirements, reducing the interest rate and re-amortizing over a longer term to provide monthly debt service relief. One automobile loan restructuring included forgiveness of a small amount of principal to comply with the bankruptcy plan. Impairment measurement for all the restructured automobile loans was based on the present value of cash flows method and resulted in small specific allocations for each loan which totaled $1.

Of the Company's TDRs at December 31, 2019, seven consumer real estate loans totaling $263, all part of one relationship, defaulted within 12 months of modification.  The impairment measurement is based upon the fair value of collateral, less estimated cost to sell, and resulted in no allocation.  All of the defaulted loans are in nonaccrual status while the Company is working with the borrowers to recover its investment.  Of the Company’s TDR’s that defaulted in 2018during 2021 and 2017, none2020, and that were modified within 12 months prior to default. The company defines default as Company designates three circumstances that indicate default: one or more payments that occur more than 90 days past the due date, charge-off, or foreclosure.foreclosure after the date of restructuring.

Of the Company’s TDRs at December 31, 2021 and December 31, 2020, none of the defaulted TDRs were modified within 12 months prior to default.

 

73

Note 6: Premises and Equipment

Note 6:

Premises and Equipment

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

 

 

December 31,

 

December 31,

 
 

2019

 

2018

 

2021

 

2020

 

Premises

 $13,331  $13,244  $14,933  $14,809 

Furniture and equipment

  6,300   5,606   6,819  6,620 

Premises and equipment

 $19,631  $18,850  $21,752  $21,429 

Accumulated depreciation

  (10,712

)

  (10,204

)

  (12,030

)

 (11,394

)

Premises and equipment, net

 $8,919  $8,646  $9,722  $10,035 

 

Depreciation expense for the years ended December 2019, 2018 31, 2021 and 20172020 amounted to $739, $766$636 and $805,$708, respectively. In December 2017, the Company sold its Marion branch office and realized a gain on the sale of fixed assets of $134.

 

 

Note 7:

Note 7: Deposits

Deposits

The aggregate amounts of time deposits in denominations of $250$250 or more at December 31, 2019 2021 and 20182020 were $22,412$14,600 and $14,277,$13,177, respectively. At December 31, 2019 2021, the scheduled maturities of time deposits are as follows:

 

2020

  $117,100 

2021

  6,136 

Year of Maturity

 

Time Deposits

 

2022

  2,217  $64,262 

2023

  2,402   5,954 

2024

  173   508 

2025

  3,195 

2026

  5,029 

Thereafter

  ---   20 

Total time deposits

 $128,028  $78,968 

 

At December 31, 2019 2021 and 2018,2020, overdraft demand deposits reclassified to loans totaled $276$170 and $240,$39, respectively.

 

 

Note 8

Note 8: Employee Benefit Plans

401(k) Plan:

Employee Benefit Plans

401(k) Plan

The Company has a Retirement Accumulation Plan qualifying under IRSInternal Revenue Code Section 401(k)401(k), in which NBI, NBB and NBFS are participating employers. Eligible participants may contribute up to 100% of their total annual compensation to the plan, subject to certain limits based on federal tax laws. Employee contributions are matched by the employer based on a percentage of an employee’s total annual compensation contributed to the plan. For the years ended December 31, 2019, 2018 2021 and 2017,2020, the Company contributed $379, $364 and $340, respectively, to the plan.plan $402 and $394 respectively.

 

Employee Stock Ownership Plan

The Company has a non-leveraged Employee Stock Ownership Plan (ESOP)(“ESOP”) which enables employees of NBI and its subsidiaries who have one year of service and who have attained the age of 21 prior to the plan’s January 1 and July 1 enrollment dates to own NBI common stock. Contributions to the ESOP, which are not mandatory, are determined annually by the NBI Board of Directors. Contribution expense amounted to $300, $300 and $200 in$360 for the yearsyear ended December 31, 2019, 2018 2021 and 2017, respectively. $300 for the year ended December 31, 2020. Dividends on ESOP shares are charged to retained earnings. As of December 31, 2019, 2021, the number of shares held by the ESOP was 190,343.184,054. All shares held by the ESOP are treated as outstanding in computing the Company’s basic net income per share. Upon reaching age 55 with 10 years of plan participation, a vested participant has the right to diversify 50% of his or her allocated ESOP shares, and NBI or the ESOP, with the agreement of the trustee, is obligated to purchase those shares. The ESOP contains a put option which allows a withdrawing participant to require the Company or the ESOP, if the plan administrator agrees, to purchase his or her allocated shares if the shares are not readily tradable on an established market at the time of distribution.

 

Salary Continuation Plan

The Company has a non-qualified Salary Continuation Plan for certain key officers. The plan provides the participating officers with supplemental retirement income, payable for the greater of 15 years after retirement or the officer’s lifetime. The expense accrued for the plans in 2019, 2018,2021 and 2017,2020, based on the present value of the retirement benefits, amounted to $270, $255,$296 and $272,$304 respectively. The plan is unfunded. However bank-owned life insurance has been acquired on the life of the key employees in amounts sufficient to discharge the obligations of the agreement.

 

Defined Benefit Plan

The Company’s defined benefit pension plan covers substantially all employees. The plan benefit formula is based upon the length of service of retired employees and a percentage of qualified W-2W-2 compensation during their final years of employment. Information pertaining to activity in the plan during the years indicated, is as follows:

 

 

December 31,

 

December 31,

 

2019

 

2018

 

2017

 

2021

 

2020

 

Change in benefit obligation

                

Projected benefit obligation at beginning of year

 $23,688  $23,492  $21,059  $34,852  $29,641 

Service cost(1)

  801   868   692   1,445  1,080 

Interest cost

  884   802   743   736  820 

Actuarial loss (gain)(2)

  5,162   (423

)

  1,417   (786

)

 4,621 

Benefits paid

  (894

)

  (1,051

)

  (419

)

  (935

)

  (1,310

)

Projected benefit obligation at end of year

 $29,641  $23,688  $23,492  $35,312  $34,852 
             

Change in plan assets

                

Fair value of plan assets at beginning of year

 $21,786  $23,428  $17,038  $32,415  $25,007 

Actual return on plan assets

  4,115   (591

)

  2,302   4,707  3,718 

Employer contribution

  ---   ---   4,507   0  5,000 

Benefits paid

  (894

)

  (1,051

)

  (419

)

  (935

)

 (1,310

)

Fair value of plan assets at end of year

 $25,007  $21,786  $23,428  $36,187  $32,415 
             

Funded status at the end of the year

 $(4,634

)

 $(1,902

)

 $(64

)

 $875  $(2,437

)

            

Amounts recognized in the Consolidated Balance Sheet

            

Deferred tax asset

 $973  $399  $13 

Other liabilities

  (4,634

)

  (1,902

)

  (64

)

Total amounts recognized in the Consolidated Balance Sheet

 $(3,661

)

 $(1,503

)

 $(51

)

            

Amounts recognized in accumulated other comprehensive (loss), net

            

Net loss

 $(10,983

)

 $(9,107

)

 $(7,923

)

Prior service cost

  120   230   340 

Deferred tax asset

  2,281   1,864   1,592 

Amount recognized

 $(8,582

)

 $(7,013

)

 $(5,991

)

          (continued)

(continued)

 

 

Amounts recognized in the Consolidated Balance Sheet

        

Deferred tax (liability) asset

 $(184

)

 $512 

Other assets (liabilities)

  875   (2,437

)

Total amounts recognized in the Consolidated Balance Sheet

 $691  $(1,925

)

         

Amounts recognized in accumulated other comprehensive (loss) income, net

        

Net loss

 $(8,749

)

 $(12,855

)

Prior service cost

  0   11 

Deferred tax asset

  1,837   2,697 

Amount recognized

 $(6,912

)

 $(10,147

)

         

Accrued/Prepaid benefit cost, net

        

Benefit obligation

 $(35,312

)

 $(34,852

)

Fair value of assets

  36,187   32,415 

Unrecognized net actuarial loss

  8,749   12,855 

Unrecognized prior service cost

  0   (11

)

Deferred tax liability

  (2,021

)

  (2,185

)

Prepaid benefit cost included in other assets

 $7,603  $8,222 
         

Components of net periodic benefit cost

        

Service cost

 $1,445  $1,080 

Interest cost

  736   820 

Expected return on plan assets

  (2,220

)

  (1,679

)

Amortization of prior service cost

  (11

)

  (110

)

Recognized net actuarial loss

  833   710 

Net periodic benefit cost

 $783  $821 
         

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

        

Net (gain) loss

 $(4,106

)

 $1,871 

Amortization of prior service cost

  11   110 

Deferred income tax expense (benefit)

  860   (416

)

Total recognized

 $(3,235

)

 $1,565 
         

Total recognized in net periodic benefit cost and other comprehensive (loss) income

 $(3,312

)

 $2,802 
         

Weighted average assumptions at end of the year

        

Discount rate used for net periodic pension cost

  2.25

%

  3.00

%

Discount rate used for disclosure

  2.50

%

  2.25

%

Expected return on plan assets

  7.50

%

  7.50

%

Rate of compensation increase

  3.00

%

  3.00

%

 

Accrued/Prepaid benefit cost, net

            

Benefit obligation

 $(29,641

)

 $(23,688

)

 $(23,492

)

Fair value of assets

  25,007   21,786   23,428 

Unrecognized net actuarial loss

  10,983   9,107   7,923 

Unrecognized prior service cost

  (120

)

  (230

)

  (340

)

Deferred tax liability

  (1,308

)

  (1,465

)

  (1,579

)

Prepaid benefit cost included in other assets

 $4,921  $5,510  $5,940 
             

Components of net periodic benefit cost

            

Service cost

 $801  $868  $692 

Interest cost

  884   802   743 

Expected return on plan assets

  (1,461

)

  (1,601

)

  (1,097

)

Amortization of prior service cost

  (110

)

  (110

)

  (110

)

Recognized net actuarial loss

  632   585   540 

Net periodic benefit cost

 $746  $544  $768 
             

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

            

Net (gain) loss

 $1,876  $1,184  $(328

)

Amortization of prior service cost

  110   110   110 

Deferred income tax expense (benefit)

  (417

)

  (272

)

  46 

Total recognized

 $1,569  $1,022  $(172

)

             

Total recognized in net periodic benefit cost and other comprehensive income (loss)

 $2,732  $1,838  $550 
             

Weighted average assumptions at end of the year

            

Discount rate used for net periodic pension cost

  4.00

%

  3.50

%

  4.00

%

Discount rate used for disclosure

  3.00

%

  4.00

%

  3.50

%

Expected return on plan assets

  7.50

%

  7.50

%

  7.50

%

Rate of compensation increase

  3.00

%

  3.00

%

  3.00

%

(1)

Cost is included in Salaries and Employee Benefits expense.

(2)

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

 

Long Term Rate of Return

The Company, as plan sponsor, selects the expected long-termlong term rate-of-return-on-assets assumption in consultation with its investment advisors and actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience, which may not continue over the measurement period, but higher significance is placed on current forecasts of future long-termlong term economic conditions.

64

Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, and solely for this purpose, the plan is assumed to continue in force and not terminate during the period during which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).

The Company, as plan sponsor, has adopted a Pension Administrative Committee Policy (the Policy)“Policy”) for monitoring the investment management of its qualified plans. The Policy includes a statement of general investment principles and a listing of specific investment guidelines, to which the committee may make documented exceptions. The guidelines state that, unless otherwise indicated, all investments that are permitted under the prudent investor rule shall be permissible investments for the defined benefit pension plan. All plan assets are to be invested in marketable securities. Certain investments are prohibited, including commodities and future contracts, private placements, repurchase agreements, options and derivatives. The Policy establishes quality standards for fixed income investments and mutual funds included in the pension plan trust. The Policy also outlines diversification standards.

The preferred target allocation for the assets of the defined benefit pension plan is 65% in equity securities and 35% in fixed income securities. Equity securities include investments in large-cap and mid-cap companies primarily located in the United States, although a small number of international large-cap companies are included. There are also investments in mutual funds holding the equities of large-cap and mid-cap U.S. companies. Fixed income securities include U.S. government agency securities and corporate bonds from companies representing diversified industries. There are no0 investments in hedge funds, private equity funds or real estate.

The Company’s required minimum pension contribution for 2022 has not yet been determined. Fair value measurements of the pension plan’s assets at December 31, 2019 2021 and December 31, 2018 2020 are as follows:presented below:

 

 

Fair Value Measurements at December 31, 2019

 

Fair Value Measurements at December 31, 2021

 




Asset Category

 

Total

 

Quoted Prices in

Active Markets for Identical Assets

(Level 1)

 

Significant

Observable

Inputs

(Level 2)

 

Significant

Unobservable

Inputs

(Level 3)

 

Total

 

Level 1

 

Level 2

 

Level 3)

 

Cash

 $4,350  $4,350  $---  $---  $1,390  $1,390  $-  $- 

Equity securities:

                 

U. S. companies

  11,098   11,098   ---   ---   19,758   19,758   -   - 

International companies

  2,334   2,334   ---   ---   2,722   2,722   -   - 

Equities mutual funds (1)

  1,343   1,343   ---   ---   5,257   5,257   -   - 

State and political subdivisions

  202   ---   202   ---   57   -   57   - 

Corporate bonds – investment grade (2)

  5,680   ---   5,680   ---   7,003   -   7,003   - 

Total pension plan assets

 $25,007  $19,125  $5,882  $---  $36,187  $29,127  $7,060  $- 

  

Fair Value Measurements at December 31, 2020

 

Asset Category

 

Total

  

Level 1

  

Level 2

  

Level 3

 

Cash

 $4,336  $4,336  $-  $- 

Equity securities:

                

U. S. companies

  15,129   15,129   -   - 

International companies

  2,735   2,735   -   - 

Equities mutual funds (1)

  3,840   3,840   -   - 

State and political subdivisions

  152   -   152   - 

Corporate bonds – investment grade (2)

  6,223   -   6,223   - 

Total pension plan assets

 $32,415  $26,040  $6,375  $- 

 

 

(1)(1)

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

(2)

This category comprises actively managed equity funds invested in large-cap and mid-caprepresents investment grade bonds of U.S. companies.

(2)issuers from diverse industries.

This category represents investment grade bonds of U.S. issuers from diverse industries.

  

Fair Value Measurements at December 31, 2018




Asset Category

 

Total

 

Quoted Prices in

Active Markets for Identical Assets

(Level 1)

 

Significant

Observable

Inputs

(Level 2)

 

Significant

Unobservable

Inputs

(Level 3)

Cash

 $1,917  $1,917  $---  $--- 

Equity securities:

                

U. S. companies

  8,782   8,782   ---   --- 

International companies

  471   471   ---   --- 

Equities mutual funds (1)

  2,174   2,174   ---   --- 

U. S. government agencies and corporations

  50   ---   50   --- 

State and political subdivisions

  202   ---   202   --- 

Corporate bonds – investment grade (2)

  8,190   ---   8,190   --- 

Total pension plan assets

 $21,786  $13,344  $8,442  $--- 

(1)

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

(2)

This category represents investment grade bonds of U.S. issuers from diverse industries.

The Company’s required minimum pension contribution for 2020 has not yet been determined.

 

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

 

2020

  $5,629 

2021

  $809 

2022

  $1,386   $6,049 

2023

  $913   $984 

2024

  $1,644   $1,649 
2025 - 2029  $9,519 

2025

  $830 

2026

  $2,093 
2027 - 2031  $11,352 

 

 

Note 9:

Note 9: Income Taxes

Income Taxes

The Company files United States federal income tax returns, and Virginia, West Virginia and North Carolina state income tax returns. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2016.

2018.Allocation of income tax expense between current and deferred portions is as follows:

 

  

Years ended December 31,

  

2019

 

2018

 

2017

Current

 $2,682  $2,942  $2,943 

Deferred expense (benefit)

  529   (382

)

  1,790 

Deferred tax adjustment for enacted change in tax rate

  ---   ---   1,560 

Total income tax expense

 $3,211  $2,560  $6,293 

Income tax expense for 2017 includes a downward adjustment of net deferred tax assets in the amount of $1,560, recorded as a result of the enactment of the Tax Act on December 22, 2017.  The Company’s marginal tax rate prior to the enactment of the Act is 35%. Effective January 1, 2018, the Company’s tax rate is 21%.

  

Years ended December 31,

 
  

2021

  

2020

 

Current

 $4,099  $2,795 

Deferred expense

  152   282 

Total income tax expense

 $4,251  $3,077 

 

The following is a reconciliation ofreconciles the “expected” income tax expense, computed by applying the U.S. federal income tax rate of 21% to 2018 and 2019 income before tax expense and 35% to 2017 income before income tax expense, with the reported income tax expense:

  

Years ended December 31,

  

2019

2018

 

2017

Computed “expected” income tax expense

 $4,342  $3,929  $7,135 

Tax impact of enacted change in tax rate

  ---   ---   1,560 

Tax-exempt interest income

  (1,019

)

  (1,255

)

  (2,144

)

Nondeductible interest expense

  96   69   89 

Other, net

  (208

)

  (183

)

  (347

)

Reported income tax expense

 $3,211  $2,560  $6,293 

  

Years ended December 31,

 
  

2021

  

2020

 

Computed “expected” income tax expense

 $5,173  $4,021 

Tax-exempt interest income

  (763

)

  (798

)

Nondeductible interest expense

  25   62 

Other, net

  (184

)

  (208

)

Reported income tax expense

 $4,251  $3,077 

 

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

 

 

December 31,

 

December 31,

 
 

2019

 

2018

 

2021

 

2020

 

Deferred tax assets:

             

Allowance for loan losses and unearned fee income

 $1,597  $1,683  $1,774  $1,938 

Valuation allowance on other real estate owned

  186   223   186  188 

Defined benefit plan

  2,281   1,864   1,837  2,697 

Deferred compensation and other liabilities

  848   1,308   899  866 

Net unrealized loss on securities available for sale

  ---   1,348 

Lease accounting

  2   ---   327  423 

SBA fees

  9  191 

Total deferred tax assets

 $4,914  $6,426  $5,032  $6,303 
         

Deferred tax liabilities:

             

Fixed assets

 $(438

)

 $(365

)

 $(415

)

 $(424

)

Goodwill and deposit intangibles

  (1,228

)

  (1,169

)

Goodwill

  (1,228

)

 (1,228

)

Defined benefit plan, prepaid portion

  (1,308

)

  (1,465

)

  (2,021

)

 (2,186

)

Net unrealized gain on securities available for sale

  (20

)

  ---   (759

)

 (3,500

)

Lease accounting

  (321

)

 (419

)

Discount accretion of securities

  (43

)

  (70

)

  (27

)

 (15

)

Total deferred tax liabilities

  (3,037

)

  (3,069

)

  (4,771

)

 (7,772

)

Net deferred tax assets

 $1,877  $3,357 

Net deferred tax assets (liabilities)

 $261

 

 $(1,469

)

 

The Company has determined that a0 valuation allowance for the gross deferred tax assets is notwas necessary at December 31, 2019 2021 and 2018.2020.

 

 

Note 10:10: Restrictions on Dividends

The Company’s principal source of funds for dividend payments is dividends received from its subsidiary bank. For the years ended December 31, 2019, 2018 2021 and 2017,2020, dividends received from the subsidiary bank were $28,556, $9,419$14,508 and $8,141,$22,000, respectively.

66

Substantially all of NBI’s retained earnings are undistributed earnings of its sole banking subsidiary, which are restricted by various regulations administered by federal bank regulatory agencies. Bank regulatory agencies restrict, unless prior approval is obtained, the total dividend payments of a bank in any calendar year to the bank’s retained net income of that year to date, as defined, combined with its retained net income of the preceding two years, less any required transfers to surplus. During 2021 and 2020, the Bank applied to its primary regulator and was approved to dividend to NBI an amount in excess of the regulatory maximum. The purpose in the excess dividend was to provide cash for stock repurchases. At December 31, 2019, NBB’s2021, NBB had 0 retained net income which was free of such restriction, amountedrestriction. The Bank remains in a highly capitalized position and the Company intends to approximately $3,347.request approval for additional dividends in 2022.

 

 

Note 11:11: Minimum Regulatory Capital Requirement

Prior to 2018, the Company was subject to regulatory capital requirements on a consolidated basis.  WhenUnder the Federal Reserve updated theReserve’s Small Bank Holding Company Policy Statement, in compliance with The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 in August of 2018, the Company becameis exempt from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements.

NBB continues to beis subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on NBI’s and NBB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, NBB must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.

The Bank is subject to the rules implementing the Basel III capital framework and certain related provisions of the Dodd-Frank Act (the “Basel III Capital Rules”) as applied by the Office of the Comptroller of the Currency. The Basel III Capital Rules require the Bank to comply with minimum capital ratios plus a “capital conservation buffer” designed to absorb losses during periods of economic stress. The implementation period for the capital conservation buffer began in 2016 and it was fully phased in on January 1, 2019.  The rules set forth minimum amounts and ratios for CET1 capital, Tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).

NBB’s CET1 capital includes common stock and related surplus and retained earnings. The Basel III Capital Rules provide an option to exclude components of accumulated other comprehensive income (loss) from CET1 capital. Once made, the election is final and cannot be changed. NBB elected to exclude components of accumulated other comprehensive income from CET1 capital.

Tier 1 Capital includes CET1 capital and additional Tier 1 capital components. At December 31, 2019 2021 and 2018,2020, NBB did not hold any additional Tier 1 capital beyond CET1 capital.

Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital includes the allowance for loan losses.

NBB’s risk-weighted assets were $816,962$989,503 at December 31, 2019 2021 and $816,660$932,364 as of December 31, 2018.  2020. Management believes, as of December 31, 2019 2021 and 2018,2020, that NBB met all capital adequacy requirements to which it is subject.

As of December 31, 2019, 2021, the most recent notifications from the Office of the Comptroller of the Currency categorized NBB as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, CET1 risk-based and Tier 1 leverage ratios, as set forth in the following tables. There are no conditions or events since these notifications that management believes have changed NBB’s category.

NBB’s capital amounts and ratios as of December 31, 2019 2021 and 20182020 are presented in the following tables.

 

 

Actual

 

Minimum Capital
Requirement(1)

 

Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions

 

Actual

 

Minimum Capital
Requirement(1)

 

Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions

 
 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

December 31, 2019

                        

December 31, 2021

            

Total capital (to risk weighted assets)

 $188,946   23.128

%

 $85,781   10.500

%

 $81,696   10.000

%

 $192,907   19.495

%

 $103,898   10.500

%

 $98,950   10.000

%

Tier 1 capital (to risk weighted assets)

 $182,044   22.283

%

 $69,442   8.500

%

 $65,357   8.000

%

 $185,187   18.715

%

 $84,108   8.500

%

 $79,160   8.000

%

Common Equity Tier 1 capital (to risk weighted assets)

 $182,044   22.283

%

 $57,187   7.000

%

 $53,103   6.500

%

 $185,187   18.715

%

 $69,265   7.000

%

 $64,318   6.500

%

Tier 1 capital (to average assets)

 $182,044   14.175

%

 $51,371   4.000

%

 $64,213   5.000

%

 $185,187   11.165

%

 $66,348   4.000

%

 $82,935   5.000

%

 

 

Actual

 

Minimum Capital
Requirement(1)

 

Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions

 

Actual

 

Minimum Capital
Requirement(1)

 

Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions

 
 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

December 31, 2018

                        

December 31, 2020

            

Total capital (to risk weighted assets)

 $202,238   24.764

%

 $80,645   9.875

%

 $81,666   10.000

%

 $185,937  19.943

%

 $97,898  10.500

%

 $93,236  10.000

%

Tier 1 capital (to risk weighted assets)

 $194,823   23.856

%

 $64,312   7.875

%

 $65,333   8.000

%

 $177,409  19.028

%

 $79,251  8.500

%

 $74,589  8.000

%

Common Equity Tier 1 capital (to risk weighted assets)

 $194,823   23.856

%

 $52,062   6.375

%

 $53,083   6.500

%

 $177,409  19.028

%

 $65,265  7.000

%

 $60,604  6.500

%

Tier 1 capital (to average assets)

 $194,823   15.788

%

 $49,359   4.000

%

 $61,699   5.000

%

 $177,409  12.105

%

 $58,624  4.000

%

 $73,281  5.000

%

 

 

(1)(1)

Except with regard to NBB’s Tier 1 capital to average assets ratio, the minimum capital requirement includes the current phased-in portion of the Basel III Capital Rules,Rules’ capital conservation buffer (2.50% for 2019 and 1.875% in 2018)(2.50%) which is added to the minimum capital requirements for capital adequacy purposes. The capital conservation buffer was phased in through four equal annual installments of .0625% from 2016 to 2019, with full implementation in January 2019. NBB’s capital conservation buffer consists of additional CET1 above regulatory minimum requirement. Failure to maintain the prescribed levels would result in limitations on capital distributions and discretionary bonuses to executives.

 

 

Note 12:12: Condensed Financial Statements of Parent Company

Financial information pertaining only to NBI (Parent), as of the dates indicated, is as follows:

 

Condensed Balance Sheets 

December 31,

 

December 31,

 
 

2019

 

2018

 

2021

 

2020

 

Assets

            

Cash due from subsidiaries

 $57  $44  $2,324  $987 

Interest-bearing deposits

  623   357   0  10,027 

Investments in subsidiaries

  183,056   189,692   189,027  189,667 

Refundable income taxes

  423   396   647  446 

Other assets

  880   841   847  791 

Total assets

 $185,039  $191,330  $192,845  $201,918 
         

Liabilities and Stockholders’ Equity

        

Liabilities and Stockholders Equity

    

Other liabilities

 $1,313  $1,092  $1,094  $1,311 

Stockholders’ equity

  183,726   190,238   191,751  200,607 

Total liabilities and stockholders’ equity

 $185,039  $191,330  $192,845  $201,918 

 

Condensed Statements of Income 

Years Ended December 31,

 

Years ended December 31,

 
 

2019

 

2018

 

2017

 

2021

 

2020

 

Income

                

Dividends from subsidiaries

 $28,556  $9,419  $8,141  $14,508  $22,000 

Interest on securities – taxable

  ---   ---   --- 

Realized securities gains, net

  ---   ---   4 

Other income

  18   10   1,018   1  4 

Total income

  28,574   9,429   9,163   14,509  22,004 

Expenses

                

Other expenses

  1,025   1,244   1,986   1,135  1,179 

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

  27,549   8,185   7,177   13,374  20,825 

Applicable income tax benefit

  266   308   383   293  301 

Income before equity in undistributed net income of subsidiaries

  27,815   8,493   7,560   13,667  21,126 

Equity (deficit) in undistributed net income of subsidiaries

  (10,349

)

  7,658   6,532   6,715  (5,049

)

Net income

 $17,466  $16,151  $14,092  $20,382  $16,077 

 

Condensed Statements of Cash Flows

 

Years ended December 31,

 
  

2021

  

2020

 

Cash Flows from Operating Expenses

        

Net income

 $20,382  $16,077 

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

        

Deficit (equity) in undistributed net income of subsidiaries

  (6,715

)

  5,049 

Net change in refundable income taxes due from subsidiaries

  (201

)

  (23

)

Net change in other assets

  221   (45

)

Net change in other liabilities

  (217

)

  (2

)

Net cash provided by operating activities

  13,470   21,056 
         

Cash Flows from Investing Activities

        

Net change in interest-bearing deposits

  10,027   (9,404

)

Net cash provided by (used in) investing activities

  10,027   (9,404

)

(continued)

Cash Flows from Financing Activities

        

Cash dividends paid

  (8,806

)

  (9,000

)

Repurchase of shares

  (13,354

)

  (1,722

)

Net cash used in financing activities

  (22,160

)

  (10,722

)

Net change in cash

  1,337   930 

Cash due from subsidiaries at beginning of year

  987   57 

Cash due from subsidiaries at end of year

 $2,324  $987 

 

Condensed Statements of Cash Flows 

Years ended December 31,

  

2019

 

2018

 

2017

Cash Flows from Operating Expenses

            

Net income

 $17,466  $16,151  $14,092 

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

            

Deficit (equity) in undistributed net income of subsidiaries

  10,349   (7,658

)

  (6,532

)

Gain on sale of securities

  ---   ---   (4

)

Net change in refundable income taxes due from subsidiaries

  (27

)

  (228

)

  (146

)

Net change in other assets

  (173

)

  (109

)

  (156

)

Net change in other liabilities

  221   115   (40

)

Net cash provided by operating activities

  27,836   8,271   7,214 
             

Cash Flows from Investing Activities

            

Net change in interest-bearing deposits

  (266

)

  146   807 

Maturities, sales and calls of securities available for sale

  ---   ---   192 

Capital distribution to subsidiary

  ---   ---   (100

)

Net cash (used in) provided by investing activities

  (266

)

  146   899 
             

Cash Flows from Financing Activities

            

Cash dividends paid

  (9,032

)

  (8,419

)

  (8,141

)

Repurchase of shares

  (18,525

)

        

Net cash used in financing activities

  (27,557

)

  (8,419

)

  (8,141

)

Net change in cash

  13   (2

)

  (28

)

Cash due from subsidiaries at beginning of year

  44   46   74 

Cash due from subsidiaries at end of year

 $57  $44  $46 

Note 13:13: Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and interest rate locks. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may require collateral or other security to support the following financial instruments with credit risk.

At December 31, 2019 2021 and 2018,2020, financial instruments outstanding whose contract amounts represent credit risk were:

 

 

December 31,

 

December 31,

 
 

2019

 

2018

 

2021

 

2020

 

Financial instruments whose contract amounts represent credit risk:

         

Commitments to extend credit

 $158,859  $145,635  $181,395  $178,341 

Standby letters of credit

  15,212   16,092   13,984  13,474 

Mortgage loans sold with potential recourse

  20,496   13,013   18,287  40,362 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit. Some of these commitments are uncollateralized and do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

The Company originates mortgage loans for sale to secondary market investors subject to contractually specified and limited recourse provisions. In 2019,2021, the Company originated $21,032$17,672 and sold $20,496$18,287 of mortgage loans to investors, compared to $12,626with $39,647 originated and $13,013 of mortgage loans$40,362 sold in 2018.2020. Every contract with each investor contains certain recourse language. In general, the Company may be required to repurchase a previously sold mortgage loan if there is major noncompliance with defined loan origination or documentation standards, including fraud, negligence or material misstatement in the loan documents. Repurchase may also be required if necessary governmental loan guarantees are canceled or never issued, or if an investor is forced to buy back a loan after it has been resold as a part of a loan pool. In addition, the Company may have an obligation to repurchase a loan if the mortgagor defaults early in the loan term. This potential default period is approximately twelve12 months after sale of a loan to the investor.

At December 31, 2019, 2021, the Company haddid not have any locked-rate commitments to originate mortgage loans amounting to approximately $817 and loansloans.  Loans held for sale of $905.at December 31, 2021 were $615. Risks arise from the possible inability of counterparties to meet the terms of their contracts. The Company does not expect any counterparty to fail to meet its obligations.

The Company maintains cash accounts in other commercial banks. The Company had $14$28 in deposits with correspondent institutions at December 31, 2019 2021 that was were not insured by the Federal Deposit Insurance Corporation.FDIC.

69

 

 

Note 14:14: Concentrations of Credit Risk

The Company does a general banking business, serving the commercial and personal banking needs of its customers. NBB’s primary service area is defined as the counties of Montgomery, Giles, Carroll, Grayson, Pulaski, Tazewell, Smyth, Wythe, Roanoke and Washington and the cities of Galax, Radford and Roanoke in southwest Virginia, and Mercer, Monroe and McDowell counties in West Virginia. For loan purposes, the Company’s market also includes the Virginia cities of Salem and Bristol and counties of Botetourt and Craig, the southernmost tip of West Virginia adjacent to the counties of Giles, Buchanan, Russell and Bland, the North Carolina counties of Surry and Alleghany, and the Tennessee city of Bristol and counties of Washington and Sullivan. Substantially all of NBB’s loans are made in its primary service area. Additionally, the Company occasionally participates in loans in nearby higher growth metropolitan areas. Loans outside of the primary service area are a small percentage of the loan portfolio, are appropriately underwritten and are not considered out of market exceptions. The ultimate collectability of NBB’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, is influenced by the economic conditions of the market area. The Company’s operating results are therefore closely correlated with the economic trends within this area.

Commercial real estate as of December 31, 2019 2021 and 20182020 represented approximately 50% and 51%, respectively, of the loan portfolio, at $365,373$405,722 and $353,546,$393,115, respectively. Included in commercial real estate are loans for college housing and professional office buildings that comprised $181,705$201,858 and $184,203$189,421 as of December 31, 2019 2021 and 2018,2020, respectively, corresponding to approximately 25% of the loan portfolio at December 31, 2019 2021 and 26% of the loan portfolio at December 31, 2018. 2020. Loans secured by residential real estate were $181,472,$208,977, or approximately 25%26% of the portfolio, and $175,456,$181,782, or 25%24% of the portfolio at December 31, 2019 2021 and 2018,2020, respectively.

The Company has established operating policies relating to the credit process and collateral in loan originations. Loans to purchase real and personal property are generally collateralized by the related property and with loan amounts established based on certain percentage limitations of the property’s total stated or appraised value. Credit approval is primarily a function of cash flow, collateral and the evaluation of the creditworthiness of the individual borrower or project based on available financial information. Management considers the concentration of credit risk to be minimal.

 

 

Note 15:15: Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of the observable inputs and minimize the use of the unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

 

 

Level 1

Valuation is based on quoted prices in active markets for identical assets and liabilities.

 

Level 2

Valuation is based on observable inputs includingincluding:

         quoted prices in active markets for similar assets and liabilities,

         quoted prices for identical or similar assets and liabilities in less active markets,

●         inputs other than quoted prices that are observable, and

         model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

 

Level 3

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

 

Fair value is best determined based uponby quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

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

 

Financial Instruments Measured At Fair Value on a Recurring Basis

Securities AvailableAvailable for SaleSale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1)1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2)2). The carrying value of restricted Federal Reserve Bank of Richmond and FHLBFederal Home Loan Bank of Atlanta stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.tables.

 

70

The following tables present the balances of financial assets measured at fair value on a recurring basis as of December 31, 2019 2021 and 2018:2020:

 

     

Fair Value Measurements at December 31, 2019 Using

December 31, 2021

     

Fair Value Measurement Using

 

Description

 

Balance as of
December 31,
2019

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable

Inputs
(Level 3)

 

Balance

 

Level 1

 

Level 2

 

Level 3

 

U.S. Government agencies and corporations

 $121,123  $---  $121,123  $---  $278,019  $-  $278,019  $- 

States and political subdivisions

  88,239   ---   88,239   ---   198,672   -   198,672   - 

Mortgage-backed securities

  221,783   ---   221,783   ---   206,174   -   206,174   - 

Corporate debt securities

  4,118   ---   4,118   ---   3,215   -   3,215   - 

Total securities available for sale

 $435,263  $---  $435,263  $---  $686,080  $-  $686,080  $- 

December 31, 2020

     

Fair Value Measurement Using

 

Description

 

Balance

  

Level 1

  

Level 2

  

Level 3

 

U.S. Government agencies and corporations

 $91,163  $-  $91,163  $- 

States and political subdivisions

  203,961   -   203,961   - 

Mortgage-backed securities

  249,175   -   249,175   - 

Corporate debt securities

  2,443   -   2,443   - 

Total securities available for sale

 $546,742  $-  $546,742  $- 

The Company’s securities portfolio is valued using Level 2 inputs. The Company relies on an independent third party vendor to provide market valuations. The inputs used to determine value include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications. The third party vendor also monitors market indicators, industry activity and economic events as part of the valuation process. Central to the final valuation is the assumption that the indicators used are representative of the fair value of securities held within the Company’s portfolio. Level 2 inputs are subject to a certain degree of uncertainty and changes in these assumptions or methodologies in the future, if any, may impact securities fair value, deferred tax assets or liabilities, or expense.

Interest Rate Loan Contracts and Forward Contracts

The Company originates consumer real estate loans which it intends to sell to a correspondent lender. Interest rate loan contracts and forward contracts result from originating loans held for sale and are derivatives reported at fair value. The Company enters interest rate lock commitments with customers who apply for a loan which the Company intends to sell to a correspondent lender. The interest rate loan contract ends when the loan closes or the customer withdraws their application. Fair value of the interest rate loan contract is based upon the correspondent lender’s pricing quotes at the report date. Fair value is adjusted for the estimated probability of the loan closing with the borrower.

At the time the Company enters into an interest rate loan contract with a customer, it also enters into a best efforts forward sales commitment with the correspondent lender. If the loan has been closed and funded, the best efforts commitment converts to a mandatory forward sales commitment. Fair value is based on the gain or loss that would occur if the Company were to pair-off the transaction with the investor at the measurement date. This is a Level 3 input. The Company has elected to measure and report best efforts commitments at fair value.

Interest rate loan contracts and forward contracts are valued based on quotes from the correspondent lender at the reporting date. Pricing changes daily and if a loan has not been sold to the correspondent by the next reporting date, the fair value may be different from that reported currently. Changes in fair value measurement impacts net income.

The Company did not have any interest rate loan contracts or forward contracts at December 31, 2021. The following tables present information on interest rate loan contracts and forward contracts at December 31, 2020:

December 31, 2020

     

Fair Value Measurements Using

 

Description

 

Balance

  

Level 1

  

Level 2

  

Level 3

 

Interest rate loan contracts

 $1  $-  $-  $1 

Forward contracts

 $(11

)

 $-  $-  $(11

)

 

      

Fair Value Measurements at December 31, 2018 Using

Description

 

Balance as of
December 31,
2018

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable

Inputs
(Level 3)

U.S. Government agencies and corporations

 $300,047  $---  $300,047  $--- 

States and political subdivisions

  118,616   ---   118,616   --- 

Mortgage-backed securities

  628   ---   628   --- 

Corporate debt securities

  5,719   ---   5,719   --- 

Total securities available for sale

 $425,010  $---  $425,010  $--- 
71

December 31, 2020

Valuation Technique

Unobservable Input

Range

(Weighted Average)

Interest rate loan contracts

Market approach

Pull-through rate

87.02%(1)

Forward contracts

Market approach

Pull-through rate

87.02%(1)

Interest rate loan contracts

Market approach

Current reference price

101.91%-103.02% (102.55%)(2)

Forward contracts

Market approach

Current reference price

101.91%-103.19% (102.67%)(2)

 

(1)

All contracts are valued using the same pull-through rate.

(2)

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

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

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

         

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

 

Loans HeldHeld for SaleSale

Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of one-to-fourone-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2)2). As such, the Company records any fair value adjustments on a nonrecurring basis. NoNaN nonrecurring fair value adjustments were recorded on loans held for sale during the years ended December 31, 2019 2021 and 2018.2020.

 

Impaired Loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. TDRs are impaired loans. Impaired loans are measured at fair value on a nonrecurring basis. If an individually-evaluatedindividually evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

The fair value of an impaired loan and measurementmay be measured using one of associated loss is based on onethree methods. Each method falls within a different level of three methods: the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral.hierarchy. The observable market price of a loan is categorized as a Level 1 input. The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a TDR.

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

Loans valued using the collateral method may be in the form ofsecured by real estate or business assets including equipment, inventory, and accounts receivable. MostReal estate collateral secures most loans and valuation is real estate. The Company bases collateral method fair valuationbased upon the “as-is” value of independent appraisals or evaluations. Valuations for impairedAppraisals are used to value loans secured by residential 1-41-4 family properties with outstanding principal balances greater than $250 are based on an appraisal. Appraisals are also used to value impaired loans secured by$250 and commercial real estate loans with outstanding principal balances greater than $500.  Collateral-method impaired$500. Appraisals or real estate evaluations prepared by a third party may be used to value loans secured by residential 1-4 family property with outstanding principal balances below these thresholds.

Appraisals of $250 or less or secured by commercial real estate with outstanding principal balances of $500 or less, are valued using an internal evaluation.

The value of real estate collateral is determined by a current (less than 24 months of age) appraisal or internal evaluation utilizing an income or market valuation approach.  Appraisalsage, conducted by an independent, licensed appraiser outside of the Companyappraisers using observable market data is categorized asanalyzed through an income or sales valuation approach result in Level 2.2 categorization. If a current appraisal cannot be obtained prior to a reporting date and an existing appraisal is discounted to obtain an estimated value, or if declines in value are identified after the date of the appraisal, or if an appraisal is discounted for estimated selling costs, or if the appraisal uses unobservable market data, the valuation of real estate collateral is categorized as Level 3. Valuations derived from internalbased on evaluations are categorized as Level 3. The value of business equipment is based upon an outside appraisal (Level 2)2) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3)3) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3)3). If a current appraisal uses unobservable data as part of the assessment, the value of the collateral is classified as Level 3.

As of At December 31, 2019 and December 31, 2018,2021, measurement of the fair value measurements forCompany’s impaired loans withdid not result in any specific allocations were primarily based upon the present value of expected future cash flows.

allocations. The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis as of the dates indicated.December 31, 2020.

 

December 31, 2020

     

Carrying value

 

Description

 

Balance

  

Level 1

  

Level 2

  

Level 3

 

Impaired loans net of valuation allowance

 $970   0   0  $970 

       

Carrying value

Date

Description

 

Balance

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable

Inputs
(Level 3)

 

Assets:

                

December 31, 2019

Impaired loans net of valuation allowance

 $1,005  $---  $---  $1,005 

December 31, 2018

Impaired loans net of valuation allowance

  1,014   ---   ---   1,014 
72

 

The following table presents information about Level 3 Fair Value Measurements for impaired loans as of the dates indicated.December 31, 2020.

 

Impaired Loans

Valuation Technique

Unobservable Input

 

Range

(Weighted Average)

December 31, 2019

Present value of cash flows

Discount rate

 5.50%-6.50%(5.77%) 

December 31, 2018

Present value of cash flows

Discount rate

 5.50%-7.25% (6.05%) 

Valuation Technique

 

Unobservable Input

 

Range

(Weighted Average(1))

 

Present value of cash flows

 

Discount rate

  5.50%-6.50%(5.78%) 

(1)

Unobservable inputs were weighted by the relative fair value of the impaired loans.

 

As of December 31, 2020, fair value measurements for impaired loans with specific allocations were based upon the present value of expected future cash flows. The loans are TDRs and the discount rate is the contractual rate that was in effect prior to modification to TDR status. Inherent in the measurement of impaired loans using the present value of cash flows method are judgements and assumptions, including the appropriateness of the discount rate and the projections of cash flows. Cash flows in the future may differ from those used in the measurement. Future changes in cash flow assumptions, a change in the measurement basis from the present value of cash flows to the collateral method, or if the loans are fully or partially charged off may result in greater losses than estimated at the reporting dates. An increase in the impairment measurement or a charge-off would increase the provision for loan losses.

Other Real Estate Owned

Certain assets such as OREO are measured at fair value less cost to sell. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.

The following table summarizes the Company’s OREO that were measured at fair value on a nonrecurring basis as of the dates indicated.

 

       

Carrying Value

Date

Description

 

Balance

 

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable

Inputs
(Level 3)

 

Assets:

                

December 31, 2019

Other real estate owned net of valuation allowance

 $1,612  $---  $---  $1,612 

December 31, 2018

Other real estate owned net of valuation allowance

  2,052   ---   ---   2,052 
       

Carrying Value

 

Date

Description

 

Balance

  

Level 1

  

Level 2

  

Level 3

 

December 31, 2021

OREO net of valuation allowance

 $957  $-  $-  $957 

December 31, 2020

OREO net of valuation allowance

  1,553   -   -   1,553 

 

The following table presents information about OREO and Level 3 Fair Value Measurements as of the dates indicated.

 

 

Valuation Technique

 

Unobservable Input

 

Range

(Weighted Average)

     December 31, 
     

2019

2018

Other real estate owned

Discounted appraised value

 

Selling cost

 0.00%(1)-6.00%(0.68%)0.00%(1)-6.00%(0.12%)

Other real estate owned

Discounted appraised value

 

Discount for lack of marketability and age of appraisal

 0.00%-45.17%(1.28%)0.00%-50.05%(1.45%)

Date

 

Valuation Technique

 

Unobservable Input

 

Range

(Weighted Average(1))

 

December 31, 2021

 

Discounted appraised value

 

Selling cost

  6.20%(3)
          

December 31, 2020

 

Discounted appraised value

 

Selling cost

  4.00%9.23%(4.54%)(2)

December 31, 2020

 

Discounted appraised value

 

Discount for lack of marketability and age of appraisal

  0.00%7.66%(0.62%)(1)

 

 

(1)(1)

Discounts were weighted by the relative appraised value of the OREO properties.

(2)

The Company markets OREO both independently and with local realtors. Properties marketed by realtors areappraised value is discounted by selling costs if the OREO property is listed with a realtor and if appraised value exceeds the list price, less estimated selling costs. Properties thatSelling costs do not discount appraised value if the Company markets the OREO property independently are not discounted byor if the OREO property is listed with a realtor and the list price less estimated selling costs.costs exceeds appraised value.

(3)

As of December 31, 2021, the Company held one OREO property

 

At December 31, 2021 and December 31, 2020, OREO properties were measured using appraised value, and if applicable, discounted by selling costs, lack of marketability and age of appraisal. Determining the discount to appraisals for selling cost and lack of marketability and age of the appraisal relies on certain key assumptions and judgements.

Discounts for selling costs and in some instances, marketability, result when the Company markets OREO properties via local realtors. The Company works with the realtor to determine the list price, which may be set at appraised value or at a different amount based on the realtor’s advice and management’s judgement of marketability. Selling costs for improved land generally are estimated at 6% of the list price, and for raw land at 10% of the list price. If the final sale price is different from the list price, the amount of selling costs will also be different from those estimated. Discounts for age may be applied if current appraisals cannot be obtained prior to reporting dates. The most recent appraised value available may be discounted based upon management judgement.

There is uncertainty in determining discounts to appraised value. Future changes to marketability assumptions or updated appraisals may indicate a lower fair value, with a corresponding impact to net income. Ultimate proceeds from the sale of OREO property may be less than the estimated fair value, reducing net income.

73

Fair Value Summary

The following tables presentpresents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2019 2021 and December 31, 2018. 2020. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For non-marketable equity securities such as FHLB and Federal Reserve Bank of Richmond stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity. Fair values are estimated underusing the exit price notion.

 

 

December 31, 2019

 

December 31, 2021

 
     

Estimated Fair Value

     

Estimated Fair Value

 
 

Carrying
Amount

 

Level 1

 

Level 2

 

Level 3

 

Carrying
Amount

 

Level 1

 

Level 2

 

Level 3

 

Financial assets:

                 

Cash and due from banks

 $10,290  $10,290  $---  $---  $8,768  $8,768  $-  $- 

Interest-bearing deposits

  76,881   76,881   ---   ---   130,021   130,021   -   - 

Securities

  435,263   ---   435,263   ---   686,080   -   686,080   - 

Restricted securities

  1,220   ---   1,220   ---   845   -   845   - 

Mortgage loans held for sale

  905   ---   905   ---   615   0   615   0 

Loans, net

  726,588   ---   ---   718,299   795,574   -   -   791,335 

Accrued interest receivable

  4,285   ---   4,285   ---   5,104   -   5,104   - 

Bank-owned life insurance

  35,567   ---   35,567   ---   42,354   -   42,354   - 

Financial liabilities:

                 

Deposits

 $1,119,753  $---  $991,725  $128,011  $1,494,587  $-  $1,415,619  $79,115 

Accrued interest payable

  144   ---   144   ---   48   -   48   - 

  

December 31, 2020

 
      

Estimated Fair Value

 
  

Carrying
Amount

  

Level 1

  

Level 2

  

Level 3

 

Financial assets:

                

Cash and due from banks

 $13,147  $13,147  $-  $- 

Interest-bearing deposits

  120,725   120,725   -   - 

Securities

  546,742   -   546,742   - 

Restricted securities

  1,279   -   1,279   - 

Mortgage loans held for sale

  866   0   866   0 

Loans, net

  760,318   -   -   752,624 

Accrued interest receivable

  5,028   -   5,028   - 

Bank-owned life insurance

  36,444   -   36,444   - 

Interest rate loan contracts

  1   -   -   1 

Financial liabilities:

                

Deposits

 $1,297,143  $-  $1,207,561  $89,681 

Accrued interest payable

  56   -   56   - 

Forward contracts

  11   -   56   11 

 

86
74

 

  

December 31, 2018

      

Estimated Fair Value

  

Carrying
Amount

 

Level 1

 

Level 2

 

Level 3

Financial assets:

                

Cash and due from banks

 $12,882  $12,882  $---  $--- 

Interest-bearing deposits

  43,491   43,491   ---   --- 

Securities

  425,010   ---   425,010   --- 

Restricted securities

  1,220   ---   1,220   --- 

Mortgage loans held for sale

  72   ---   72   --- 

Loans, net

  702,409   ---   ---   684,565 

Accrued interest receivable

  5,160   ---   5,160   --- 

Bank-owned life insurance

  34,657   ---   34,657   --- 

Financial liabilities:

                

Deposits

 $1,051,942  $---  $950,143  $101,749 

Accrued interest payable

  89   ---   89   --- 

Note 16: 16:Components of Accumulated Other Comprehensive Income (Loss)

The following table summarizes the activity related to each component of accumulated other comprehensive income (loss) for the years ended December 31, 2017, 2018 2020 and 2019:2021:

 

  

Net Unrealized

Gain (Loss) on

Securities

 

Adjustments Related

to Pension Benefits

 

Accumulated Other Comprehensive

Income (Loss)

Balance at December 31, 2016

 $(3,588

)

 $(5,071

)

 $(8,659

)

Unrealized holding loss on available for sale securities net of tax of $296

  546   ---   546 

Reclassification adjustment, net of tax of ($4)

  (6

)

  ---   (6

)

Net pension gain, net of tax of $115

  ---   213   213 

Less amortization of prior service cost included in net periodic pension cost, net of tax of ($38)

  ---   (71

)

  (71

)

Reclassification of stranded tax effects from change in tax rate

  (656

)

  (1,062

)

  (1,718

)

Balance at December 31, 2017

 $(3,704

)

 $(5,991

)

 $(9,695

)

Unrealized holding gain on available for sale securities net of tax of ($595)

  (2,246

)

  ---   (2,246

)

Transfer from held-to-maturity to available-for-sale securities, net of tax $237

  891   ---   891 

Reclassification adjustment, net of tax of ($4)

  (13

)

  ---   (13

)

Net pension loss, net of tax of ($249)

  ---   (936

)

  (936

)

Less amortization of prior service cost included in net periodic pension cost, net of tax of ($24)

  ---   (86

)

  (86

)

Balance at December 31, 2018

 $(5,072

)

 $(7,013

)

 $(12,085

)

Unrealized holding loss on available for sale securities net of tax of $1,486

  5,595   ---   5,595 

Reclassification adjustment, net of tax of ($119)

  (447

)

  ---   (447

)

Net pension loss, net of tax of ($394)

  ---   (1,482

)

  (1,482

)

Less amortization of prior service cost included in net periodic pension cost, net of tax of ($23)

  ---   (87

)

  (87

)

Balance at December 31, 2019

 $76  $(8,582

)

 $(8,506

)

  

Net Unrealized

Gain (Loss) on

Securities

  

Adjustments Related

to Pension Benefits

  

Accumulated Other

Comprehensive

Income (Loss)

 

Balance at December 31, 2019

 $76  $(8,582

)

 $(8,506

)

Unrealized holding gain on available for sale securities net of tax of $3,502

  13,176   -   13,176 

Reclassification adjustment, net of tax of ($23)

  (85

)

  -   (85

)

Net pension loss, net of tax of ($393)

  -   (1,478

)

  (1,478

)

Less amortization of prior service cost included in net periodic pension cost, net of tax of ($23)

  -   (87

)

  (87

)

Balance at December 31, 2020

 $13,167  $(10,147

)

 $3,020 

Unrealized holding loss on available for sale securities net of tax of ($2,740)

  (10,308

)

      (10,308

)

Reclassification adjustment, net of tax of ($1)

  (5

)

      (5

)

Net pension gain, net of tax of $862

  0   3,244   3,244 

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

      (9

)

  (9

)

Balance at December 31, 2021

 $2,854  $(6,912

)

 $(4,058

)

 

The following table provides information regarding reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2019, 2018 2021 and 2017:2020:

 

 

December 31,

 

December 31,

 
 

2019

 

2018

 

2017

 

2021

 

2020

 

Component of Accumulated Other Comprehensive Income (Loss)

                

Reclassification out of unrealized gains and losses on available-for-sale securities:

            

Reclassification out of unrealized gains on available for sale securities:

 

Realized securities gain, net

 $(566

)

 $(17

)

 $(10

)

 $(6

)

 $(108

)

Income tax benefit

  (119

)

  (4

)

  (4

)

  (1

)

 (23

)

Realized gain on available-for-sale securities, net of tax, reclassified out of accumulated other comprehensive income (loss)

 $(447

)

 $(13

)

 $(6

)

Realized gain on available for sale securities, net of tax, reclassified out of accumulated other comprehensive loss

 $(5

)

 $(85

)

Amortization of defined benefit pension items:

             

Prior service costs(1)

 $(110

)

 $(110

)

 $(109

)

 $(11

)

 $(110

)

Income tax benefit

  (23

)

  (24

)

  (38

)

  (2

)

 (23

)

Amortization of defined benefit pension items, net of tax, reclassified out of accumulated other comprehensive income (loss)

 $(87

)

 $(86

)

 $(71

)

Amortization of defined benefit pension items, net of tax, reclassified out of accumulated other comprehensive loss

 $(9

)

 $(87

)

 

 

(1)(1)

This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. (For additional information, see Note 8, Employee Benefit Plans.)

 

 

Note 17. Intangible Assets and17. Goodwill

In accounting for goodwill, and intangible assets, the Company conducts an impairment review at least annually and more frequently if certain impairment indicators are evident. Accounting guidance provides Testing for 2021 and 2020 did not indicate impairment. As of December 31, 2021 and December 31, 2020, the option of performing a preliminary assessment of qualitative factors before performing more substantial testing for impairment. If the preliminary assessment indicates that it is more likely than not that fair value is belowgross carrying value a two-step test is employed to determine impairment. The Company opted not to perform the preliminary assessment and employed the two-step test to determine impairment. Based on testing for impairment of goodwill for 2019 and 2018 and testing for impairment of goodwill and intangible assets for 2017, there were was $5,848. There was no impairment charges.

Information concerning goodwill and intangible assets for years ended December 31, 2019 and 2018 is presented in the following table: accumulated amortization or impairment.

 

  

Gross Carrying Value

 

Accumulated Amortization

 

Net Carrying Value

December 31, 2019 and December 31, 2018

            

Amortizable core deposit intangibles

 $16,257  $16,257  $--- 

Unamortizable goodwill

  5,848   ---   5,848 

Intangible assets and goodwill

 $22,105  $16,257  $5,848 

Note 18: Revenue Recognition

On January 1, 2018,Substantially all of the Company adopted ASU No. 2014-09Company’s revenue is generated from contracts with customers. Noninterest revenue streams such as service charges on deposit accounts, other service charges and fees, credit and debit card fees, trust income, and annuity and insurance commissions are recognized in accordance with ASC Topic 606, “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified. Topic 606. As stated in Note 1, Summary of Significant Accounting Policies, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue. Results for reporting periods beginning after January 1, 2018 and comparative periods are presented in accordance with Topic 606.

Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as financial guarantees, derivatives, and certain credit card fees are outside the scope of the guidance. Topic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts, other service charges and fees, credit and debit card fees, trust income, and annuity and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams within the scope of Topic 606 are discussed below.

 

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, ATM fees, wire transfer fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Wire transfer fees, overdraft and nonsufficient funds fees and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

 

Other Service Charges and Fees

Other service charges include safety deposit box rental fees, check ordering charges, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Check ordering charges are transactional based, and therefore the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.

 

Credit and Debit Card Fees

Credit and

debit card fees are primarily comprised of interchange fee income and prior to mid-2017, merchant services income. The Company sold servicing rights on its merchant services portfolio in mid-2017. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa.Visa and MasterCard. Merchant services income mainly represents commission fees charged to merchants to process their debit and credit card transactions, in addition to account management fees.based upon merchant processing volume. The Company’s performance obligation for interchange fee income and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. In compliance with Topic 606, credit and debit card fee income is presented net of associated expense.

 

Trust Income

Trust income is primarily comprised of fees earned from the management and administration of trusts and estates and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Estate management fees are based upon the size of the estate. A partial fee is recognized half-way through the estate administration and the remainder of the fee is recognized when remaining assets are distributed and the estate is closed.

 

Insurance and Investment

Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue.

Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined.

 

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2019, 2018 2021 and 2017.2020.

 

 

December 31,

 

December 31,

 
 

2019

 

2018

 

2017

 

2021

 

2020

 

Noninterest Income

                

In-scope of Topic 606:

                

Service charges on deposit accounts

 $2,453  $2,678  $2,776  $2,045  $1,966 

Other service charges and fees

  198   132   205   179  162 

Credit and debit card fees

  1,398   1,431   1,205   1,869  1,400 

Trust income

  1,622   1,565   1,530   1,792  1,662 

Insurance and Investment (included within Other Income on the Consolidated Statements of Income)

  483   460   398   768  464 

Noninterest Income (in-scope of Topic 606)

 $6,154  $6,266  $6,114  $6,653  $5,654 

Noninterest Income (out-of-scope of Topic 606)

  2,636   1,463   1,522   1,773  2,290 

Total noninterest income

 $8,790  $7,729  $7,636  $8,426  $7,944 

 

 

Note 19:19: Leases

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modifiedThe Company’s leases are recorded under ASC Topic 842.842, “Leases”. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. There was no cumulative effect adjustment at adoption. The Company also elected certain practical expedients within the standard and did not reassess whether any expired or existingexamines its contracts are or contain leases, did not reassess the lease classification for any expired or existing leases and did not reassess any initial direct costs for existing leases. Prior to adoption, all of the Company’s leases were classified as operating leases and remain operating leases at adoption. As stated in to the Company’s 2018 Form 10-K, Note 1 Summary of Significant Accounting Policies, the implementation of the new standard resulted in recognition of a right-of-use asset and offsetting lease liability of $684 for leases existing at the date of adoption.

Contracts that commence subsequent to adoption are evaluated to determine whether they are or contain a lease. A contract with a lease in accordance withis further examined to determine whether the lease is a short-term, operating or finance lease. As permitted by ASC Topic 842. The842, the Company has elected the practical expedient provided by Topic 842 not to allocate consideration in a contract between lease and non-lease components. The Company also elected, as provided by the standard, not to recognize right-of-use assets and lease liabilities forcapitalize short-term leases, defined by the standard as leases with terms of 12 months or less. Since adoption,The Company also elected the Company entered into new operating leases and recognized right-of-usepractical expedient not to separate non-lease components from lease components within a single contract.

Right-of-use assets and lease liabilities.

liabilities are recognized for operating and finance leases. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

 

Lease payments

Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred.  Payments for leases with terms longer than 12 months are included in the determination of the lease liability.  Payments may be fixed for the term of the lease or variable.  IfVariable payments result when the lease agreement providesincludes a clause providing for escalation of lease payments at specified dates. If the escalation factor is known, escalator, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability.  If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability.  TwoOne of the Company’s leases provideprovides a known escalatorsescalator that areis included in the determination of the lease liability. The remaining leases do not have variable payments during the term of the lease.

 

Options to Extend, Residual Value Guarantees, and Restrictions and Covenants

Of the Company’s sixfive operating leases at December 31, 2021, three leases offer the option to extend the lease term.  Each of the three leases provides two options of five years each. For oneTwo of the leases have two options of five years each.  At the time of capitalization, the Company iswas not reasonably certain whether it willwould exercise one option of five yearsthe options and has includeddid not include the additional time and lease paymentsperiod in the calculation of the lease liability. One of the leases has one option to extend the term for an additional five years.  The Company exercised a previous option in 2020 to extend the lease.  The lease agreement provides that the lease payment will increase at the exercise date based on the consumer price index-urbanConsumer Price Index for All Urban Consumers (“CPI-U”).  Because the CPI-U at the exercise date is unknown, the increase is not included in the cash flows determining the lease liability.  None of the Company’s leases provide for residual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations.  The Company terminated a lease prior to maturity during 2021.  The Company paid an early termination fee to the lessor of $150.

 

The Company’s lease right of use asset is included in other assets and the lease liability is included in other liabilities. The following tables present information about leases :leases:

 

 

As of

December 31, 2019

 

December 31, 2021

 

December 31, 2020

 

Lease liability

 $2,286  $1,558  $2,016 

Right-of-use asset

 $2,277  $1,532  $1,998 

Weighted average remaining lease term (in years)

  6.90   6.33  6.81 

Weighted average discount rate

  3.02

%

  3.21

%

 3.04

%

 

 

For the Years Ended December 31,

 

For the Years Ended December 31,

 
 

2019

 

2018

 

2021

 

2020

 

Lease Expense

            

Operating lease expense

 $310  

NR

  $368  $368 

Short-term lease expense

  114  

NR

   2  2 

Total lease expense

 $424  $298  $370  $370 
         

Cash paid for amounts included in lease liabilities

 $414  

NR

  $362  $360 

Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period

 $1,837  

NR

  $0  $24 

 

The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability:

 

Undiscounted Cash Flow for the

 

As of

December 31, 2019

 

As of

December 31, 2021

 

Twelve months ending December 31, 2020

 $354 

Twelve months ending December 31, 2021

  345 

Twelve months ending December 31, 2022

  349  $293 

Twelve months ending December 31, 2023

  351   291 

Twelve months ending December 31, 2024

  333   293 

Twelve months ending December 31, 2025

  244 

Twelve months ending December 31, 2026

  211 

Thereafter

  848   394 

Total undiscounted cash flows

 $2,580  $1,726 

Less: discount

  (294) $(168)

Lease liability

 $2,286  $1,558 

 

The contracts in which the Company is lessee are with parties external to the company and not related parties. The Company has a small lease relationship with a director in which the Company is lessor.

 

91
78

 

logo.jpg

Report of Independent Registered Public Accounting Firm

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and the Board of Directors

National Bankshares, Inc.

Blacksburg, Virginia

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of National Bankshares, Inc. and its subsidiaries (the Company) as of December 31, 20192021 and 2018,2020, the related consolidated statements of income, comprehensive income, changes in stockholders’stockholders' equity and cash flows for each of the three years in the periodthen ended, December 31, 2019, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the periodthen ended, December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 11, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOBPublic Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the auditsaudit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Critical Audit Matters

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses Loans Collectively Evaluated for Impairment Qualitative Factors

Description of the Matter

As described in Note 1 (Summary of Significant Accounting Policies) and Note 5 (Allowance for Loan Losses, Nonperforming Assets and Impaired Loans) to the consolidated financial statements, the Company maintains an allowance for loan losses to provide for probable losses inherent in the loan portfolio. The Company’s allowance for loan losses has two basic components, the general allowance and the specific allowance. As of December 31, 2021, there were no specific reserves based on analysis of individually identified impaired loans. For loans that are not specifically identified for impairment, management determine the allowance for loan losses based on historical loss experience adjusted for qualitative factors. Qualitative adjustments to the historical loss experience are established by applying a loss percentage to the loan classes established by management based on their assessment of shared risk characteristics. As of December 31, 2021, the qualitative factor adjustments represented $6.61 million of the total allowance for loan losses of $7.67 million.

Qualitative factors are determined based on management’s continuing evaluation of inputs and assumptions underlying the quality of the loan portfolio. Management evaluates qualitative factors by loan class. The primary factors considered are internal risk ratings, delinquency and nonperforming rates, product mix, changes in loan policies and procedures, changes in loan review systems, changes in economic conditions, changes in management experience, industry trends, interest rate trends, and changes in competitive, legal and regulatory environment. The analysis of certain factors results in standard allocations to all classes and other factors are analyzed for each class. Management exercised significant judgment when assessing the qualitative factors in estimating the allowance for loan losses. We identified the assessment of the qualitative factors as a critical audit matter as auditing the qualitative factors involved especially complex and subjective auditor judgment in evaluating management’s assessment of the inherently subjective estimates.

How We Addressed the Matter in Our Audit

The primary audit procedures we performed to address this critical audit matter included:

Obtain an understanding of controls over the evaluation of qualitative factors, including management's development and review of the data inputs used as the basis for the allocation factors and management's review and approval of the reasonableness of the assumptions used to develop the qualitative adjustments.

Substantively testing management’s process, including evaluating their judgments and assumptions for developing the qualitative factors, which included:

Evaluating the completeness and accuracy of data inputs used as a basis for the qualitative factors.

Evaluating the reasonableness of management’s judgments related to the determination of qualitative factors, including evaluating the metrics, including the relevance of source data and assumptions.

Evaluating the qualitative factors for directional consistency and for reasonableness.

Testing the mathematical accuracy of the allowance calculation, including the application of the qualitative factors.

/s/ YOUNT, HYDE & BARBOUR, P.C.

 

We have served as the Company’sCompany's auditor since 2000.

 

Winchester, Virginia

March 11, 2020

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors

National Bankshares, Inc. 

Blacksburg, Virginia

Opinion on the Internal Control over Financial Reporting

We have audited National Bankshares, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2019 and 2018, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements of the Company, and our report dated March 11, 2020 expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ YOUNT, HYDE & BARBOUR, P.C.

Winchester, Virginia

March 11, 20202022

 

 

Item 9. 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

 

None

 

Item 9A. Controls and Procedures

 

Disclosure 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 December 31, 20192021 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) during the yearfourth quarter ended December 31, 20192021 that have materially affected, or are reasonably likely to materially affect, the Company'sCompany’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.detected

 

Internal Control Over Financial Reporting

 

Management's Report on Internal Control Over Financial Reporting

 

To the Stockholders of National Bankshares, Inc.:

 

Management is responsible for the preparation and fair presentation of the consolidated financial statements included in this annual report. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management's judgments and estimates concerning effects of events and transactions that are accounted for or disclosed.

Management is also responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting includes those policies and procedures that pertain to the Company's ability to record, process, summarize and report reliable financial data. Management recognizes that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to consolidated financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

In order to ensure that the Company's internal control over financial reporting is effective, management regularly assesses such controls and did so most recently for its financial reporting as of December 31, 2019.2021. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO, 2013) of the Treadway Commission. Based on this assessment, management believes the Company maintained effective internal control over financial reporting as of December 31, 2019.2021. This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in its annual report.

The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the Company's accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The Audit Committee is responsible for the appointment and compensation of the independent registered public accounting firm and approves decisions regarding the appointment or removal of the Company'sCompany’s internal auditors. It meets periodically with management, the independent registered public accounting firm and the internal auditors to ensure that they are carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Company in addition to reviewing the Company's financial reports. The independent registered public accounting firm and the internal auditors have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matter which they believe should be brought to the attention of the Audit Committee. The Company's independent registered public accounting firm has also issued an attestation report on the effectiveness of internal control over financial reporting.

 

 

Item 9B. Other Information

 

None.

 

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

None.

Part III

 

Item 10. 10. Directors,, Executive Executive Officers and Corporate Governance

The information required by Item 10 with respect to the directors of the Company and the Company’s audit committee and the audit committee financial expert is incorporated herein by reference to the Company’s definitive Proxy Statement for the 20202022 Annual Meeting of Stockholders to be held on May 12, 202010, 2022 (“Proxy Statement”) under the headings “Proposal 1 - Election of Fourthree Class 32 Directors,” “Directors Continuing in Office” and “Corporate Governance Matters”. Information about the Company’s executive officers required by this item is included in Part I, Item I of this Form 10-K under the heading “Executive Officers of the Company”.

Based on the written representations of the Company’s directors and executive officers, during the year ended December 31, 2019, all directors and executive officers compliedThe information required by Item 10 with allrespect to applicable filing requirements under Section 16(a) of the Exchange Act.Act is incorporated herein by reference to the information that appears under the heading “Stock Ownership of Directors and Executive Officers – Delinquent Section 16(a) Reports” in the Company’s Proxy Statement.

The Company and each of its subsidiaries have adopted codes of ethics for directors, officers and employees, specifically including the Chief Executive Officer and Chief Financial Officer of Bankshares. These Codes of Ethics are available on the Company’s web site at www.nationalbankshares.com.

 

Item 11. Executive Compensation

 

The information required by Item 11 is incorporated herein by reference to the information that appears under the headings “Compensation Discussion and Analysis,” “Executive Compensation,” “Corporate Governance Matters – Board Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the Company’s Proxy Statement.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required by Item 12 is incorporated herein by reference to the information that appears under the headings “Stock Ownership of Certain Beneficial Owners” and “Stock Ownership of Directors and Executive Officers” in the Company’s Proxy Statement. As of December 31, 2019,2021, there were no equity awards outstanding, and the Company does not have any equity compensation plans in effect.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

The information required by Item 13 is incorporated herein by reference to the information that appears under the headings “Corporate Governance Matters,” “Directors Independence and Certain Transactions with Officers and Directors” and “Directors Continuing in Office” in the Company’s Proxy Statement.

 

Item 14. Principal AccountingAccountant Fees and Services

 

The information required by Item 14 is incorporated herein by reference to the information that appears under the heading “Principal Accounting Fees and Services” in the Company’s Proxy Statement.

 

 

Part IV

 

Item 15. 15. Exhibits and Financial Statement Schedules

 

(a) (1) Financial Statements

The following consolidated financial statements of National Bankshares, Inc. are included in Item 8:

Reports of Independent Registered Public Accounting Firm (Yount, Hyde & Barbour, P.C., Winchester, VA, U.S. PCAOB Auditor Firm I.D.: 613)

Consolidated Balance Sheets – As of December 31, 20192021 and 20182020

Consolidated Statements of Income – Years ended December 31, 2019, 20182021 and 20172020

Consolidated Statements of Comprehensive Income – Years ended December 31, 2019, 20182021 and 20172020

Consolidated Statements of Changes in Stockholders’ Equity – Years ended December 31, 2019, 20182021 and 20172020

Consolidated Statements of Cash Flows – Years ended December 31, 2019, 20182021 and 20172020

Notes to Consolidated Financial Statements

 

(a) (2) Financial Statement Schedules

Certain schedules to the consolidated financial statements have been omitted if they were not required by Article 9 of Regulation S-X or if, under the related instructions, they were inapplicable, or if the information is contained elsewhere in this Annual Report on Form

10-K.

 

(a) (3) Exhibits

A list of the exhibits filed or incorporated in this Form 10-K by reference is as follows:

 

Exhibit No.

Description

 

3(i)

Amended and Restated Articles of Incorporation of National Bankshares, Inc.

 

(incorporated herein by reference to Exhibit 3.1 of the Form 8-K filed on March 16, 2006)

3(ii)

Amended By-lawsBylaws of National Bankshares, Inc.

 

(incorporated herein by reference to Exhibit 3(ii)3.2 of the Form 8-K filed on July 9, 2014)April 14, 2021)

44(i)

Specimen copy of certificate for National Bankshares, Inc. common stock

 

(incorporated herein by reference to Exhibit 4(a) of the Annual Report on Form 10-K for fiscal year ended December 31, 1993)

4(ii)

Description of National Bankshares, Inc.’s Securities

Filed herewith

*10(i)

Employee Lease Agreement dated August 14, 2002, between National Bankshares, Inc. and The National Bank of Blacksburg

 

(incorporated herein by reference to Exhibit 10 of Form 10-Q for the period ended September 30, 2002)

*10(ii)

Executive Employment Agreement dated March 11, 2015, between National Bankshares, Inc. and F. Brad Denardo

 

(incorporated herein by reference to Exhibit 10.2 of the Form 8-K filed on March 11, 2015)

*10(iii)

Salary Continuation Agreement dated February 8, 2006, between The National Bank of Blacksburg and F. Brad Denardo

 

(incorporated herein by reference to Exhibit 99 of the Form 8-K filed on February 8, 2006)

*10(iv)

First Amendment, dated December 19, 2007, to The National Bank of Blacksburg Salary Continuation Agreement for F. Brad Denardo

(incorporated herein by reference to Exhibit 10 of the Form 8-K filed on December 19, 2007)
*10(v)Second Amendment, dated June 12, 2008, to The National Bank of Blacksburg Salary Continuation Agreement for F. Brad Denardo(incorporated herein by reference to Exhibit 10 of the Form 8-K filed on June 12, 2008)
*10(vi)Third Amendment, dated December 17, 2008, to The National Bank of Blacksburg Salary Continuation Agreement for F. Brad Denardo(incorporated herein by reference to Exhibit 10(iii) of the Annual Report on Form 10-K for fiscal year ended December 31, 2008)
*10(vii)Second Salary Continuation Agreement dated June 26, 2016 between The National Bank of Blacksburg and F. Brad Denardo(incorporated herein by reference to Exhibit 10.1 of the Form 8-K filed on July 20, 2016)

*10(iv)10(viii)

Salary Continuation Agreement dated February 8, 2006, between

The National Bank of Blacksburg and David K. Skeens

 

(incorporated herein by reference to Exhibit 10.2 of the Form 8-K filed on January 25, 2012)

*10(v)

First Amendment, dated December 19, 2007, to The National Bank of Blacksburg Salary Continuation Agreement for F. Brad Denardo

(incorporated herein by reference to Exhibit 10 of the Form 8-K filed on December 19, 2007)

*10(vi)10(ix)

First Amendment, dated December 19, 2007, to The National Bank of Blacksburg Salary Continuation Agreement for David K. Skeens

 

(incorporated herein by reference to Exhibit 10.2 of the Form 8-K filed on January 25, 2012)

*10(vii)10(x)

Second Amendment, dated June 12, 2008, to The National Bank of Blacksburg Salary Continuation Agreement for F. Brad Denardo

(incorporated herein by reference to Exhibit 10 of the Form 8-K filed on June 12, 2008)

*10(viii)

Second Amendment, dated December 17, 2008, to The National Bank of Blacksburg Salary Continuation Agreement for David K. Skeens

(incorporated herein by reference to Exhibit 10.2 of the Form 8-K filed on January 25, 2012)

*10(ix)

Third Amendment, dated December 17, 2008, to The National Bank of Blacksburg Salary Continuation Agreement for F. Brad DenardoDavid K. Skeens

 

(incorporated herein by reference to Exhibit 10(iii)10.2 of the Annual ReportForm 8-K filed on Form 10-K for fiscal year ended December 31, 2008)January 25, 2012)

*10(x)10(xi)

Third Amendment, dated January 20, 2012, to The National Bank of Blacksburg Salary Continuation Agreement for David K. Skeens

 

(incorporated herein by reference to Exhibit 10.2 of the Form 8-K filed on January 25, 2012)

*10(xi)

10(xii)

Fourth Amendment, dated August 16, 2021, to National Bankshares, Inc. Salary Continuation Agreement dated May 24, 2013 betweenfor David K. Skeens

The National Bank of Blacksburg and Paul A. Mylum

 

(incorporated herein by reference to Exhibit 10.1 of the Form 8-K filed on March 8, 2018)

*10(xii)

Second Salary Continuation Agreement dated June 26, 2016 between

The National Bank of Blacksburg and F. Brad Denardo

(incorporated herein by reference to Exhibit 10.1 of the Form 8-K filed on JulyAugust 20, 2016)

2021)

*10(xiii)

Salary Continuation Agreement dated February 8, 2006 between

The National Bankshares, Inc. and Lara E. Ramsey

 

(incorporated herein by reference to Exhibit 10.1 of the Form 8-K filed on March 6, 2017)

*10(xiv)

First Amendment, dated December 19, 2007, to National Bankshares, Inc. Salary Continuation Agreement for Lara E. Ramsey

 

(incorporated herein by reference to Exhibit 10.1 of the Form 8-K filed on March 6, 2017)

*10(xv)

Second Amendment, dated December 17, 2008, to National Bankshares, Inc. Salary Continuation Agreement for Lara E. Ramsey

 

(incorporated herein by reference to Exhibit 10.1 of the Form 8-K filed on March 6, 2017)

*10(xvi)

Third Amendment, dated June 22, 2016, to National Bankshares, Inc. Salary Continuation Agreement for Lara E. Ramsey

 

(incorporated herein by reference to Exhibit 10.1 of the Form 8-K filed on March 6, 2017)

*10(xvii)

Fourth Amendment, dated August 16, 2021, to National Bankshares, Inc. Salary Continuation Agreement for Lara E. Ramsey

(incorporated herein by reference to Exhibit 10.3 of the Form 8-K filed on August 20, 2021)

*10(xviii)Salary Continuation Agreement dated May 24, 2013 between The National Bank of Blacksburg and Paul A. Mylum(incorporated herein by reference to Exhibit 10.1 of the Form 8-K filed on March 8, 2018)

*10(xix)

First Amendment, dated August 16, 2021, to National Bankshares, Inc. Salary Continuation Agreement for Paul A. Mylum

(incorporated herein by reference to Exhibit 10.2 of the Form 8-K filed on August 20, 2021)

+21

Subsidiaries of the Registrant

 

Filed herewith

+31(i)

Section 906302 Certification of Chief Executive Officer

 

Filed herewith

+31(ii)

Section 906302 Certification of Chief Financial Officer

 

Filed herewith

+32(i)

18 U.S.C. Section 1350 Certification of Chief Executive Officer

 

Filed herewith

+32(ii)

18 U.S.C. Section 1350 Certification of Chief Financial Officer

 

Filed herewith

+101

The following materials from National Bankshares, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2019,2021, formatted in XBRL (ExtensibleiXBRL (Inline Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Changes in Shareholders’Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements.

 

Filed herewith

104Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)Filed herewith

*Indicates a management contract or compensatory plan or arrangement.

+Filed with this Annual Report on Form 10-K.

 

Item 16. Form 10-K Summary

 

Not applicable.

 

 

SignaturesSignatures

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

NATIONAL BANKSHARES, INC.
 

/s/By: /s/ F. BRAD DENARDO

By: F. Brad Denardo

Chairman, President and Chief Executive Officer

(Principal Executive Officer)

 

Date: March 11, 20202022

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

 

 

Date

Title

/s/ LAWRENCE J. BALL

03/March 11,/2020 2022

Director

Lawrence J. Ball

  
   

/s/ F. BRAD DENARDO

03/March 11,/2020 2022

Chairman, President and CEO, National Bankshares, Inc.

F. Brad Denardo

 

(Principal Executive Officer)

  

Director

/s/ JOHN E. DOOLEY

03/March 11,/2020 2022

Director

John E. Dooley

  
   

/s/ MICHAEL E. DYE

03/March 11,/2020 2022

Director

Michael E. Dye

  
   

/s/ NORMAN V. FITZWATER, III

03/March 11,/2020 2022

Director

Norman V. Fitzwater, III

  
   

/s/ CHARLES E. GREEN, III

03/March 11,/2020 2022

Director

CharlesCharles. E. Green, III

  
   

/s/ MILDRED R. JOHNSON

03/March 11,/2020 2022

Director

Mildred R. Johnson

  
   

/s/ MARY G. MILLER

03/March 11,/2020 2022

Director

Mary G. Miller

  
   

/s/ WILLIAM A. PEERY

03/March 11,/2020 2022

Director

William A. Peery

  
  

(c(continued)ontinued)

 

 

/s/ DAVID K. SKEENS03/11/2020Treasurer and CFO, National Bankshares, Inc.
David K. Skeens(Principal Financial Officer)
(Principal Accounting Officer)

/s/ GLENN P. REYNOLDS

03/March 11,/2020 2022

Director

Glenn P. Reynolds

  
   

/s/ DAVID K. SKEENS

March 11, 2022

Treasurer and CFO, National Bankshares, Inc.

David K. Skeens

(Principal Financial Officer)

(Principal Accounting Officer)

/s/ JAMES C. THOMPSON

03/March 11,/2020 2022

Director

James C. Thompson

  
   

/s/ J. LEWIS WEBB, JR.

03/11/2020

Director

J. Lewis Webb, Jr.

 

 

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