The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
$ in thousands, except per share data.
Note 1: Summary of Significant Accounting Policies
The consolidated financial statements include the accounts of National Bankshares, Inc. and its wholly-owned subsidiaries, the National Bank of Blacksburg, and National Bankshares Financial Services, Inc. All intercompany balances and transactions have been eliminated in consolidation.
The accounting and reporting policies of the Company conform to GAAP and to general practices within the banking industry. Subsequent events have been considered through the date of this Form 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. 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.
The Company follows the accounting guidance related to recognition and presentation of 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 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.
Equity securities with readily-determinable fair values are measured at fair value using the “exit price notion”. Changes in fair value are recognized in net income. Equity securities without readily-determinable fair values are recorded as other assets at cost less impairment, if any, and adjusted for changes resulting from observable price changes in orderly transactions for identical or similar investment of the same issuer.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value on an individual loan basis. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. The Company releases mortgage servicing rights when loans are sold on the secondary market.
Loans
The Company, through its banking subsidiary, provides mortgage, commercial, and consumer loans to customers. Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding unpaid principal balances adjusted for the allowance for 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.
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Real Estate Construction Loans. Real estate construction loans are subject to general risks from changing commercial building and housing market trends and economic conditions that may impact demand for completed properties and the costs of completion. Completed properties that do not sell or become leased within originally expected timeframes may impact the borrower’s ability to service the debt. Construction loans are underwritten against projected cash flows from rental income, business and/or personal income from an owner-occupant or the sale of the property to an end-user. Associated risks may be mitigated by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements. Risks specific to the borrower are also evaluated, including previous repayment history, debt service ability, and current and projected loan-to value ratios for the collateral.
Consumer Real Estate Loans. The Bank offers a variety of first mortgage and junior lien loans secured by primary residences within our markets. The credit quality of consumer real estate is subject to risks associated with the borrower’s repayment ability and collateral value. Credit decisions are primarily based on loan-to-value (“LTV”) ratios, debt-to-income (“DTI”) ratios, liquidity and net worth. Income and financial information is obtained from personal tax returns, personal financial statements and employment documentation. A maximum LTV ratio of 80% is generally required. The DTI ratio is limited to 43% of gross income.
Consumer real estate mortgages may have fixed interest rates for the entire term of the loan or variable interest rates subject to change after the first, third, or fifth year. Variable rates are based on the weekly average yield of United States Treasury Securities and are underwritten at fully-indexed rates.
Home equity loans are secured primarily by second mortgages on residential property. The underwriting policy for home equity loans generally permits aggregate (the total of all liens secured by the collateral property) borrowing availability up to 80% of the appraised value of the collateral. We offer both fixed rate and variable rate home equity loans, with variable rate loans underwritten at fully-indexed rates. Decisions are primarily based on LTV ratios, DTI ratios, liquidity and credit history. We do not offer home equity loan products with reduced documentation.
We do not offer certain high risk loan products such as interest-only consumer mortgage loans, hybrid loans, payment option adjustable rate mortgages (“ARMs”), reverse mortgage loans, loans with initial teaser rates or any product with negative amortization. A hybrid loan begins as a fixed rate mortgage and after a set number of years, automatically adjusts to an ARM. Payment option ARMs usually have adjustable rates, for which borrowers choose their monthly payment of either a full payment, interest only, or a minimum payment which may be lower than the payment required to reduce the balance of the loan in accordance with the originally underwritten amortization.
Commercial Real Estate Loans. Commercial real estate loans generally are secured by first mortgages on real estate, including multifamily residential real estate, commercial real estate occupied by the owner/borrower, and commercial real estate leased to non-owners. Properties financed include retail centers, office space, hotels and motels, apartments, and industrial properties. Loans in the commercial real estate segment are impacted by economic risks from changing commercial real estate markets, rental markets for multi-family housing and commercial buildings, and economic factors that would impact the businesses housed by the commercial real estate. Underwriting decisions are based upon an analysis of the economic viability of the collateral and creditworthiness of the borrower. The Bank obtains appraisals from qualified certified independent appraisers to establish the value of collateral properties. The loan amount is generally limited to 80% of the lower of cost or appraised value and is individually determined based on the property type, quality, location and financial strength of any guarantors. The property’s projected net cash flows compared to the debt service (often referred to as the “debt service coverage ratio”) is required to be 115% or greater and is computed after deduction for a vacancy factor and property expenses, as appropriate. Borrower cash flow may be supplemented by a personal guarantee from the principal(s) of the borrower and guarantees from other parties. The Bank may employ stress testing techniques on higher balance loans to determine repayment ability in a changing rate environment before granting loan approval. The Bank requires title insurance, fire, extended coverage casualty insurance and flood insurance, if appropriate, in order to protect the security interest in the underlying property.
Commercial Non Real Estate Loans. Commercial non real estate loans are secured by collateral other than real estate, or are unsecured. Credit risk for commercial non real estate loans is subject to economic conditions, borrower repayment ability and collateral value (if secured). Commercial and agricultural loans primarily finance equipment acquisition, expansion, working capital, and other general business purposes. Because these loans have a higher degree of risk, the Bank generally obtains collateral such as inventory, accounts receivables or equipment and personal guarantees from the borrowing entity’s principal owners. The Bank’s policy limits lending up to 60% of the appraised value for inventory, up to 90% of the lower of cost of market value of equipment and up to 70% for accounts receivables less than 90 days old. Credit decisions are based upon an assessment of the financial capacity of the applicant, including the primary borrower’s ability to repay within proposed terms, a risk assessment, financial strength of guarantors and adequacy of collateral. Credit agency reports of individual owners’ credit history supplement the analysis.
Public Sector and IDA Loans. Public sector and IDA loans are extended to municipalities and related entities within the Bank’s geographical footprint. Borrowers include general taxing authorities such as a city or county, industrial/economic development authorities or utility authorities. Credit risk stems from the entity’s ability to repay through either a direct obligation or assignment of specific revenues from an enterprise or other economic activity. Repayment sources are derived from taxation, such as property taxes and sales taxes, or revenue from the project financed with the loan. The Company’s underwriting considers economic and population trends of the municipality and the municipality’s reserves, pension liabilities and other liabilities.
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Consumer Non-Real Estate Loans. Consumer non-real estate includes credit cards, automobile and other consumer loans. Credit cards and certain other consumer loans are unsecured, while collateral is obtained for automobile loans and other consumer loans. Credit risk stems primarily from the borrower’s ability to repay. Our procedures for underwriting consumer loans include an assessment of an applicant’s overall financial capacity, including credit history and the ability to meet existing obligations and payments on the proposed loan. If the loan is secured by an automobile or other collateral, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount. We require borrowers to maintain collision insurance on loans secured by automobiles.
TDRs
Loan modifications are reviewed at the time of modification to determine whether the loan should be designated as TDR. When the Company grants a concession to a borrower for economic or legal reasons related to a borrower’s financial condition, the loan is classified as a TDR. When the Company grants a subsequent modification to a loan that had previously been modified but not designated as a 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. TDRs may be removed from TDR status 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.
Past due status and nonaccrual designation
A loan is considered past due when a payment of principal and/or interest is due but not paid. Credit card payments not received within 30 days after the statement date, real estate loan payments not received within the payment cycle and all other non-real estate secured loans for which payment is not made within the required payment cycle are considered 30 days past due. Management closely monitors loans past due 30-89 days and loans past due 90 or more days.
The Company considers multiple factors when determining whether to discontinue accrual of interest on individual loans. Generally loans are placed in nonaccrual status when collection of interest and/or full principal is considered doubtful. Interest accrual is discontinued at the time a commercial real estate loan or commercial non real estate loan is 90 days delinquent unless the credit is well secured and in the process of collection. Loans modified to provide relief from payments of interest or principle for more than 90 days are designated nonaccrual. Accrued interest is reversed against income when a loan is placed in nonaccrual status. Any interest payments received during a loan’s nonaccrual period are credited to the principal balance of the loan.
Loans in nonaccrual are reviewed on an individual loan basis to determine whether they may return to accrual status. To return to accrual status, the Company’s evaluation must determine that the underlying cause of the original delinquency or weakness has been resolved, such as receipt of new guarantees and/or increased cash flows that cover the debt service, and that future payments are reasonably assured. Nonaccrual loans that are not TDR are returned to accrual status when all the principal and interest amounts contractually due are current and future payments are reasonably assured. Nonaccrual TDR loans may return to accrual status after six months of timely repayment performance.
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.
Allowance for Loan Losses
The allowance for loan losses is an estimate of probable losses inherent in the 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 of the allowance is based on two accounting principles, Accounting Standards Codification (“ASC”) Topic 450-20 (Contingencies) which requires 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 of losses on impaired loans if the recorded investment exceeds fair value.
The Company evaluates the allowance each quarter through a methodology that estimates losses on individual impaired loans and evaluates the effect of numerous factors on the credit risk of groups of homogeneous loans ("collectively evaluated loans").
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Impaired loans
Impaired loans are larger non-homogeneous loans for which there is a probability that collection of principal or interest will not occur according to the contractual terms of the loan agreement, as well as loans whose terms have been modified in a TDR. The Company performs ongoing analysis of the loan portfolio to determine credit quality on an individual loan basis and to identify impaired loans. Generally, 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 which 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.
Impaired loan measurement methods
Impaired loans are individually evaluated to determine appropriate reserves and are measured at the lower of the invested amount or the fair value. Fair value of impaired loans is estimated by either the present value of the loan’s expected future cash flows (“cash flow method”) or the estimated fair value, less selling costs, of the underlying collateral (“collateral method”).
Cash flow method:
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.
Collateral method:
The collateral method is 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.
Impaired loans secured by residential 1-4 family properties with outstanding principal balances greater than $250 are valued using an appraisal. Appraisals are also used to value impaired loans secured by commercial real estate with outstanding principal balances greater than $500. Impaired 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 a real estate evaluation prepared by a third party.
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.
Evaluations 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. Multiple sources of data contribute to the 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 a loan becomes impaired if the appraisal or evaluation on file is more than 24 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 is reduced by selling costs if recovery is expected solely from the sale of collateral.
Results of fair value measurement
The estimated fair value is compared with the loan’s recorded investment (unpaid principal net of any interest payments made during the nonaccrual period and net of any partial charge-offs, accrued interest and deferred fees and costs). Any amount of recorded investment that exceeds estimated 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 in the allowance as specific reserves. Impaired loans for which collection of interest or principal is in doubt are placed in nonaccrual status. If fair value of an impaired loan is 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.
Nonaccrual status of impaired loans
Nonaccrual status is applied 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 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.
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 historical loss rates, credit quality indicators, and qualitative factors.
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”). Net charge-offs in both calculations include charge-offs and recoveries for all loans within the class, including classified and non-classified loans, as well as impaired and TDR loans. Class historical loss rates are applied to collectively evaluated pass-rated loan balances and special mention rated loan balances, and classified historical loss rates are applied to collectively evaluated classified loan balances.
Credit quality indicators
Credit quality indicators, which the Company terms risk grades, are assigned through the Company’s credit review function for larger loans and selective review of loans that fall below credit review thresholds. Credit quality is rated based on the loan’s payment history, the borrower’s current financial situation and value of the underlying collateral.
Loans that do not indicate heightened risk are graded as “pass.” Loans that appear to have elevated credit risk because of frequent or persistent past due status, which is less than 75 days, or that show weakness in the borrower’s financial condition are risk graded “special mention.” Loans with frequent or persistent delinquency exceeding 75 days or that have a higher level of weakness in the borrower’s financial condition are graded “classified.” Classified loans have regulatory risk ratings of “substandard” and “doubtful.”
Qualitative factor allocations
The analysis of certain factors results in standard allocations to all classes. These factors include the risk from changes in lending policies, loan officers’ experience, changes in loan review, and economic 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 all real-estate secured classes 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. In 2021, the Company applied to all segments and classes an economic factor implemented to address COVID-19 uncertainty: national unemployment filings. Local unemployment filings are closely correlated to national unemployment filings and presented real-time data that was not available with local unemployment data. After a sustained period of pre-pandemic levels of national unemployment filings, the Company removed the factor in 2022.
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, and the percentage of high risk loans within the class. High risk loans include junior liens, interest only and high loan to value loans. High risk loans within each class are analyzed and allocated additional reserves based on current trends.
Allocations for qualitative factors 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.
Sales, purchases and reclassification of loans
The Company finances consumer real estate mortgages under “best efforts” contracts with mortgage purchasers. The mortgages are designated as held for sale upon initiation. There have been no major reclassifications from portfolio loans to held for sale. Mortgages held for sale are not included in the calculation of the allowance for 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 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.
Estimation of the allowance for loan losses
The estimation of the allowance involves analysis of internal and external variables, methodologies, assumptions and management’s judgment and experience. Key judgments used in determining the allowance for loan losses include internal risk rating determinations, market and collateral values, discount rates, loss rates, and management’s assessment of current economic conditions. These judgments are inherently subjective and actual losses could be greater or less than the estimate. Future estimates of the allowance could increase or decrease based on changes in the financial condition of individual borrowers, concentrations of various types of loans, economic conditions or the markets in which collateral may be sold. The estimate of the allowance accrual determines the amount of provision expense and directly affects our financial results. Please see Note 5 for additional information.
Rate Lock Commitments
The Company enters into commitments to originate mortgage loans in which the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 30 to 60 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, by committing to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Company is not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity.
The market value of rate lock commitments and best efforts contracts is not readily ascertainable because rate lock commitments and best effort contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the changes in the value of the underlying assets while taking into consideration the probability that the rate lock commitments will close. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss occurs on the rate lock commitments.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is charged to expense over the estimated useful lives of the assets on the straight-line basis. Depreciable lives include 40 years for premises, 3-10 years for furniture and equipment, and 3 years for computer software. Costs of maintenance and repairs are charged to expense as incurred and improvements are capitalized.
Other Real Estate Owned
Real estate acquired through or in lieu of foreclosure is held for sale and is initially recorded at fair value less estimated costs to sell at the date of foreclosure, establishing the cost basis of the asset. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in 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 contracts with a third party valuation expert to perform annual testing as of September 30 of each fiscal year. The impairment test for 2022 incorporated data as of September 30, 2022.
Accounting guidance provides the option of performing preliminary assessment of qualitative factors to determine whether impairment testing 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 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 bank 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 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. Based upon data at September 30, 2022, each measure indicated that the Company’s fair value exceeded its book value and no impairment was indicated.
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. The funded status of a benefit plan is measured as the difference between plan assets at fair value and the projected benefit obligation.
The Company’s actuary determines plan obligations and annual pension expense using a number of key assumptions, including the discount rate, the estimated return on plan assets and the anticipated rate of compensation increases. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may impact pension assets, liabilities or expense.
Income Taxes
Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the asset and liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes interest and penalties on income taxes as a component of income tax expense.
Trust Assets and Income
Assets (other than cash deposits) held by NBB’s Trust Department in a fiduciary or agency capacity for customers are not included in the consolidated financial statements since such items are not assets of the Company. Trust income is recognized on the accrual basis.
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 2022 and 2021, there were no potential common shares outstanding.
The following shows the weighted average number of shares used in computing earnings per common share for the years indicated.
| | 2022 | | | 2021 | |
Average number of common shares outstanding | | | 5,989,601 | | | | 6,209,929 | |
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business are recorded as liabilities when the likelihood of loss is probable and reasonably estimated. Management does not believe there are such matters that will have a material effect on the consolidated financial statements.
Advertising
The Company charges advertising costs to expenses as incurred. Advertising expenses were $163 for the year ended December 31, 2022 and $112 for the year ended December 31, 2021.
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.
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, evaluation of impairment of goodwill, and pension obligations.
Reclassifications
Certain amounts reported in prior years have been reclassified to conform to the current year’s presentation. These reclassifications had no effect on the Company’s net income or stockholders’ equity.
Recent Accounting Pronouncements
ASU 2016-13
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The ASU, as amended, requires an entity to measure expected credit losses for financial assets carried at amortized cost based on historical experience, current conditions, and reasonable and supportable forecasts. Among other things, the ASU also amended the impairment model for available for sale securities and addressed purchased financial assets with deterioration.
On January 1, 2023, the Company adopted ASU No. 2016-13 and related ASUs, in accordance with the required implementation date, and applied the standard’s provisions as a cumulative-effect adjustment to retained earnings as of January 1, 2023. Subsequent to adoption, the Company will record adjustments to its allowance(s) for credit losses and reserve for unfunded commitments through the provision for credit losses in the consolidated statements of income. In future filings, results for reporting periods beginning after January 1, 2023 will be presented under Topic 326, while periods prior to January 1, 2023 will be reported in accordance with GAAP applicable at the time period.
Upon adoption, the allowance for credit losses on loans increased from $8,225 to $10,567 and the reserve for unfunded commitments increased from $35 to $242. Based upon the nature and characteristics of our securities portfolios (including issuer specific matters) at the adoption date, macroeconomic conditions and forecasts at that date, and other management judgments, adoption did not result in an allowance for credit losses on available for sale securities. The increase to allowance for credit losses and reserve for unfunded commitments, net of tax, decreased retained earnings by $2,014 as of January 1, 2023.
The Company engaged a third-party model to tabulate its estimate of current expected credit losses, applying a probability of default/loss given default driven discounted cashflow methodology, with default defined as full or partial charge-off, nonaccrual status or past due 90 days or more. In accordance with ASC 326, the Company has segmented its loan portfolio based on similar risk characteristics, using call report code and risk rating.
The Company designated national unemployment as its forecast variable. Multiple forecasts from reputable and independent third parties are sourced to inform the Company’s reasonable and supportable forecasting of current expected credit losses. The forecast is applied over a forecast horizon selected by management at each reporting date, typically of one year and not to exceed two years, after which loss rates revert to long term historical loss experience on a straight line basis.
To further adjust the allowance for credit losses for expected losses not already included within the quantitative component of the calculation, the Company considers the following qualitative adjustment factors: changes in lending policies and procedures, changes in economic conditions, changes in the nature and volume of the loan portfolio, changes in lending management’s experience, changes in the volume and severity of past due loans, changes in the loan review system, changes in concentrations of credit, and the effect of competition, legal and regulatory requirements.
The Company’s CECL implementation process was overseen by a management committee which included the CFO, Controller, Chief Credit Officer and SVP of Credit Administration and reported to the Company’s Enterprise Risk Management Committee. The implementation process included an assessment of data availability and gap analysis, data collection, consideration and analysis of multiple loss estimation methodologies, an assessment of relevant qualitative factors and correlation analysis of multiple potential loss drivers and their impact on the Company’s historical loss experience. During 2022, the Company calculated its current expected credit losses model in parallel to its incurred loss model in order to further refine the methodology and model. In addition, the Company engaged a third-party to perform a comprehensive model validation.
SAB 119
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.
ASU 2022-03
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions”. ASU 2022-03 clarifies that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not expect the adoption of ASU 2022-03 to have a material impact on its consolidated financial statements.
ASU 2022-02
In March 2022, the FASB issued ASU No. 2022-02, “Financial Instruments-Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures.” ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of the credit losses standard (ASU 2016-13) that introduced the CECL model. The amendments eliminate the accounting guidance for TDRs by creditors that have adopted the CECL model and enhance the disclosure requirements for loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. The amendments in this ASU should be applied prospectively, except for the transition method related to the recognition and measurement of TDRs, an entity has the option to apply a modified retrospective transition method, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. For entities that have adopted ASU 2016-13, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. For entities that have not yet adopted ASU 2016-13, the effective dates for ASU 2022-02 are the same as the effective dates in ASU 2016-13. Early adoption is permitted if an entity has adopted ASU 2016-13. An entity may elect to early adopt the amendments about TDRs and related disclosure enhancements separately from the amendments related to vintage disclosures. The Company is currently assessing the impact that ASU 2022-02 will have on its consolidated financial statements.
ASU 2020-04
In March 2020, the FASB issued ASU No. 2020-04 “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 exceptions 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 global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. Subsequently, in January 2021, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2021-01 “Reference Rate Reform (Topic 848): Scope.” This ASU clarifies that certain optional expedients and exceptions 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 to 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 date that financial statements are available to be issued. An entity may elect to apply ASU No. 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. The Company has a small number of participation loans that reference LIBOR. The Company is working with the primary banks to determine appropriate actions.
Note 2: Restriction on Cash
The Company’s subsidiary bank is a member of the Federal Reserve System. The Federal Reserve does not currently require member banks to hold an average balance in order to purchase services from the Federal Reserve.
Note 3: Securities
The amortized cost and fair value of debt securities available for sale, with gross unrealized gains and losses, as of the dates indicated, follows:
| | December 31, 2022 | |
Available for sale: | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
U.S. government agencies and corporations | | $ | 391,538 | | | $ | 39 | | | $ | 55,002 | | | $ | 336,575 | |
States and political subdivisions | | | 190,192 | | | | 26 | | | | 38,018 | | | | 152,200 | |
Mortgage-backed securities | | | 170,694 | | | | 22 | | | | 9,239 | | | | 161,477 | |
Corporate debt securities | | | 6,501 | | | | - | | | | 837 | | | | 5,664 | |
U.S. treasury | | | 992 | | | | - | | | | 56 | | | | 936 | |
Total securities available for sale | | $ | 759,917 | | | $ | 87 | | | $ | 103,152 | | | $ | 656,852 | |
| | December 31, 2021 | |
Available for sale: | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | |
U.S. government agencies and corporations | | $ | 279,934 | | | $ | 2,795 | | | $ | 4,710 | | | $ | 278,019 | |
States and political subdivisions | | | 195,365 | | | | 5,314 | | | | 2,007 | | | | 198,672 | |
Mortgage-backed securities | | | 204,164 | | | | 2,323 | | | | 313 | | | | 206,174 | |
Corporate debt securities | | | 3,004 | | | | 248 | | | | 37 | | | | 3,215 | |
Total securities available for sale | | $ | 682,467 | | | $ | 10,680 | | | $ | 7,067 | | | $ | 686,080 | |
The amortized cost and fair value of single maturity securities available for sale, by contractual maturity, are shown below. Mortgage-backed securities are categorized by final maturity. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | December 31, 2022 | |
Available for sale: | | Amortized Cost | | | Fair Value | |
Due in one year or less | | $ | 2,779 | | | $ | 2,738 | |
Due after one year through five years | | | 139,168 | | | | 129,798 | |
Due after five years through ten years | | | 328,812 | | | | 279,880 | |
Due after ten years | | | 289,158 | | | | 244,436 | |
Total securities available for sale | | $ | 759,917 | | | $ | 656,852 | |
Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
| | December 31, 2022 | |
| | Less Than 12 Months | | | 12 Months or More | |
| | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
U.S. government agencies and corporations | | $ | 144,574 | | | $ | 12,699 | | | $ | 190,950 | | | $ | 42,303 | |
State and political subdivisions | | | 94,657 | | | | 18,373 | | | | 52,134 | | | | 19,645 | |
Mortgage-backed securities | | | 144,198 | | | | 7,326 | | | | 15,165 | | | | 1,913 | |
Corporate debt securities | | | 4,843 | | | | 655 | | | | 821 | | | | 182 | |
U.S. treasury | | | 936 | | | | 56 | | | | - | | | | - | |
Total temporarily impaired securities | | $ | 389,208 | | | $ | 39,109 | | | $ | 259,070 | | | $ | 64,043 | |
| | December 31, 2021 | |
| | Less Than 12 Months | | | 12 Months or More | |
| | Fair Value | | | Unrealized Loss | | | Fair Value | | | Unrealized Loss | |
U.S. Government agencies and corporations | | $ | 201,650 | | | $ | 3,530 | | | $ | 26,792 | | | $ | 1,180 | |
State and political subdivisions | | | 50,659 | | | | 1,214 | | | | 20,542 | | | | 793 | |
Mortgage-backed securities | | | 13,139 | | | | 141 | | | | 4,665 | | | | 172 | |
Corporate debt securities | | | 966 | | | | 37 | | | | - | | | | - | |
Total temporarily impaired securities | | $ | 266,414 | | | $ | 4,922 | | | $ | 51,999 | | | $ | 2,145 | |
The Company had 614 securities with a fair value of $648,278 that were temporarily impaired as of December 31, 2022. The total unrealized loss on these securities was $103,152. Of the temporarily impaired total, 289 securities with a fair value of $259,070 and an unrealized loss of $64,043 have been in a continuous loss position for 12 months or more. The Company has determined that these securities are temporarily impaired as of December 31, 2022 for the reasons set out below.
U.S. Government agencies. Unrealized losses of $42,303 on 222 securities with a fair value of $190,950 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. 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 the securities to be other-than-temporarily impaired.
States and political subdivisions. The Company reviewed financial statements and cash flow information for the 58 securities with a fair value of $52,134 and unrealized losses of $19,645 and determined that the unrealized loss is 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 $1,913 on 8 securities with a fair value of $15,165 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.
Corporate debt securities. One corporate debt security with a fair value of $821 presented an unrealized loss of $182. The Company reviewed the corporation’s financial position 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 the amortized cost basis, which may be at maturity, the Company does not consider the investment to be other-than-temporarily impaired.
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.
Restricted Stock
The Company held restricted stock of $941 as of December 31, 2022 and $845 as of December 31, 2021. Restricted stock is reported separately from available for sale securities. As a member of the Federal Reserve and the FHLB, NBB is required to maintain certain minimum investments in the common stock of those entities. Required levels of investment are based upon NBB’s capital and a percentage of qualifying assets. The Company purchases stock from or sells stock back to the correspondents based on their calculations. The stock is held by member institutions only and is not actively traded.
Redemption of FHLB stock is subject to certain limitations and conditions. At its discretion, the FHLB may declare dividends on the stock. In addition to dividends, NBB also benefits from its membership with FHLB through eligibility to borrow from the FHLB, using as collateral NBB’s capital stock investment in the FHLB and qualifying NBB real estate mortgage loans totaling $645,539 as of December 31, 2022. Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and as of December 31, 2022, 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
As of December 31, 2022 and 2021, securities with a carrying value of $345,689 and $287,023, respectively, were pledged to secure municipal deposits and for other purposes as required or permitted by law.
Realized Securities Gains and Losses
The Company did not have any realized gains or losses in 2022. During 2021, the Company realized net securities gains of $6, all of which stemmed from calls of securities. Information pertaining to realized gains and losses on called securities follows:
| | For the year ended December 31, 2021 | |
| | Proceeds | | | Book Value | | | Gross Gain | | | Gross Loss | | | Net Gain | |
Available for sale | | $ | 20,377 | | | $ | 20,371 | | | $ | 6 | | | $ | - | | | $ | 6 | |
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 $18,187 at December 31, 2022 and $14,822 at December 31, 2021. During 2022, total principal additions were $5,145 and principal payments were $1,780. During 2021, total principal additions totaled $2,570 and principal payments were $3,151.
The Company held $9,509 in deposits for related parties as of December 31, 2022 and $14,460 as of December 31, 2021.
The Company leased to a director a small office space. The lease was terminated during 2022. The lease payments totaled $2 in 2022 and $5 in 2021. 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 $39 in 2022 and $113 in 2021.
Note 5: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans
Please refer to Note 1: Summary of Significant Accounting Policies for information on evaluation of collectively evaluated loans and impaired loans and associated reserves, and policies regarding nonaccruals, past due status and charge-offs.
Portfolio Segments and Classes
The Company determines major segments of loans and smaller classes within each segment based upon characteristics including collateral type and intended use, repayment sources, and (if applicable) the borrower’s business model. The methodology for calculating reserves for collectively evaluated loans is applied at the class level. The Company’s loan segments and classes within each segment are 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 Real Estate Commercial and industrial Public Sector and IDA State and political subdivisions Consumer Non-Real Estate Credit cards Automobile Other consumer loans |
Collectively 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 is estimated at the class level, by risk rating, by applying historical net charge-off rates and percentages for qualitative factors that influence credit risk. Please refer to Note 1: Summary of Significant Accounting Policies for a discussion of risk factors pertinent to each class, information on evaluation of impaired loans and associated specific reserves, and policies regarding nonaccruals, past due status and charge-offs.
A detailed analysis showing the allowance roll-forward by portfolio segment follows:
| | Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2022 | |
| | Real Estate Construction | | | Consumer Real Estate | | | Commercial Real Estate | | | Commercial Non Real Estate | | | Public Sector and IDA | | | Consumer Non-Real Estate | | | Unallocated | | | Total | |
Balance, December 31, 2021 | | $ | 422 | | | $ | 1,930 | | | $ | 3,121 | | | $ | 1,099 | | | $ | 297 | | | $ | 444 | | | $ | 361 | | | $ | 7,674 | |
Charge-offs | | | - | | | | (13 | ) | | | - | | | | (2 | ) | | | - | | | | (352 | ) | | | - | | | | (367 | ) |
Recoveries | | | - | | | | 29 | | | | 49 | | | | 11 | | | | - | | | | 123 | | | | - | | | | 212 | |
Provision for (recovery of) loan losses | | | 28 | | | | 253 | | | | 472 | | | | (178 | ) | | | 22 | | | | 291 | | | | (182 | ) | | | 706 | |
Balance, December 31, 2022 | | $ | 450 | | | $ | 2,199 | | | $ | 3,642 | | | $ | 930 | | | $ | 319 | | | $ | 506 | | | $ | 179 | | | $ | 8,225 | |
| | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2020 | | $ | 503 | | | $ | 2,165 | | | $ | 3,853 | | | $ | 670 | | | $ | 339 | | | $ | 555 | | | $ | 396 | | | $ | 8,481 | |
Charge-offs | | | - | | | | (13 | ) | | | - | | | | (526 | ) | | | - | | | | (216 | ) | | | - | | | | (755 | ) |
Recoveries | | | - | | | | 20 | | | | 159 | | | | 33 | | | | - | | | | 134 | | | | - | | | | 346 | |
Provision for (recovery of) loan losses | | | (81 | ) | | | (242 | ) | | | (891 | ) | | | 922 | | | | (42 | ) | | | (29 | ) | | | (35 | ) | | | (398 | ) |
Balance, December 31, 2021 | | $ | 422 | | | $ | 1,930 | | | $ | 3,121 | | | $ | 1,099 | | | $ | 297 | | | $ | 444 | | | $ | 361 | | | $ | 7,674 | |
A detailed analysis showing the allowance and loan portfolio by segment and evaluation method follows:
| | Allowance for Loan Losses by Segment and Evaluation Method as of | |
| | December 31, 2022 | |
| | Real Estate Construction | | | Consumer Real Estate | | | Commercial Real Estate | | | Commercial Non Real Estate | | | Public Sector and IDA | | | Consumer Non- Real Estate | | | Unallocated | | | Total | |
Individually evaluated | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Collectively evaluated | | | 450 | | | | 2,199 | | | | 3,642 | | | | 930 | | | | 319 | | | | 506 | | | | 179 | | | | 8,225 | |
Total | | $ | 450 | | | $ | 2,199 | | | $ | 3,642 | | | $ | 930 | | | $ | 319 | | | $ | 506 | | | $ | 179 | | | $ | 8,225 | |
| | Loans by Segment and Evaluation Method as of | |
| | December 31, 2022 | |
| | Real Estate Construction | | | Consumer Real Estate | | | Commercial Real Estate | | | Commercial Non Real Estate | | | Public Sector and IDA | | | Consumer Non-Real Estate | | | Unallocated | | | Total | |
Individually evaluated | | $ | - | | | $ | 186 | | | $ | 2,583 | | | $ | 263 | | | $ | - | | | $ | - | | | $ | - | | | $ | 3,032 | |
Collectively evaluated | | | 54,579 | | | | 220,866 | | | | 435,305 | | | | 57,389 | | | | 48,074 | | | | 33,948 | | | | - | | | | 850,161 | |
Total | | $ | 54,579 | | | $ | 221,052 | | | $ | 437,888 | | | $ | 57,652 | | | $ | 48,074 | | | $ | 33,948 | | | $ | - | | | $ | 853,193 | |
| | Allowance for Loan Losses 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 | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Collectively evaluated | | | 422 | | | | 1,930 | | | | 3,121 | | | | 1,099 | | | | 297 | | | | 444 | | | | 361 | | | | 7,674 | |
Total | | $ | 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 | | $ | - | | | $ | 191 | | | $ | 5,386 | | | $ | 301 | | | $ | - | | | $ | - | | | $ | - | | | $ | 5,878 | |
Collectively evaluated | | | 48,841 | | | | 208,786 | | | | 400,336 | | | | 59,963 | | | | 47,899 | | | | 32,026 | | | | - | | | | 797,851 | |
Total | | $ | 48,841 | | | $ | 208,977 | | | $ | 405,722 | | | $ | 60,264 | | | $ | 47,899 | | | $ | 32,026 | | | $ | - | | | $ | 803,729 | |
A summary of ratios for the allowance for loan losses, as of the dates indicated, follows:
| | December 31, | |
| | 2022 | | | 2021 | |
Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees and costs | | | 0.96 | % | | | 0.96 | % |
Ratio of net charge-offs to average loans, net of unearned income and deferred fees and costs | | | 0.02 | % | | | 0.05 | % |
A summary of nonperforming assets, as of the dates indicated, follows:
| | December 31, | |
| | 2022 | | | 2021 | |
Nonperforming assets: | | | | | | | | |
Nonaccrual loans | | $ | 91 | | | $ | - | |
TDR loans in nonaccrual | | | 2,756 | | | | 2,873 | |
Total nonperforming loans | | | 2,847 | | | | 2,873 | |
Other real estate owned, net | | | 662 | | | | 957 | |
Total nonperforming assets | | $ | 3,509 | | | $ | 3,830 | |
Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned | | | 0.41 | % | | | 0.48 | % |
Ratio of allowance for loan losses to nonperforming loans(1) | | | 288.90 | % | | | 267.11 | % |
| (1) | The Company defines nonperforming loans as total nonaccrual and TDR loans that are nonaccrual. Loans 90 days past due and still accruing and accruing TDR loans are excluded. |
As of December 31, 2022, OREO is comprised of one construction property. There is no residential real estate in OREO. As of December 31, 2022, $155 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, | |
| | 2022 | | | 2021 | |
Loans past due 90 days or more and still accruing | | $ | 8 | | | $ | 90 | |
Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees and costs | | | 0.00 | % | | | 0.01 | % |
Accruing TDR loans | | $ | 276 | | | $ | 3,005 | |
Impaired loans: | | | | | | | | |
Impaired loans with no valuation allowance | | $ | 3,032 | | | $ | 5,878 | |
Impaired loans with a valuation allowance | | | - | | | | - | |
Total impaired loans | | $ | 3,032 | | | $ | 5,878 | |
Valuation allowance | | $ | - | | | $ | - | |
Impaired loans, net of allowance | | $ | 3,032 | | | $ | 5,878 | |
Average recorded investment in impaired loans(1) | | $ | 3,047 | | | $ | 5,901 | |
Income recognized on impaired loans, after designation as impaired | | $ | 18 | | | $ | 137 | |
Amount of income recognized on a cash basis | | $ | - | | | $ | - | |
| (1) | Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status. |
No interest income was recognized on nonaccrual loans for the years ended December 31, 2022 or 2021. 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, 2022 | |
| | 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 | | $ | 186 | | | $ | 186 | | | $ | 186 | | | $ | - | | | $ | - | |
Commercial Real Estate(2) | | | | | | | | | | | | | | | | | | | | |
Commercial real estate, owner occupied | | | 3,248 | | | | 2,583 | | | | 2,583 | | | | - | | | | - | |
Commercial Non Real Estate(2) | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | 285 | | | | 263 | | | | 263 | | | | - | | | | - | |
Total | | $ | 3,719 | | | $ | 3,032 | | | $ | 3,032 | | | $ | - | | | $ | - | |
| | 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 | |
Consumer Real Estate(2) | | | | | | | | | | | | | | | | | | | | |
Investor-owned residential real estate | | $ | 191 | | | $ | 191 | | | $ | 191 | | | $ | - | | | $ | - | |
Commercial Real Estate(2) | | | | | | | | | | | | | | | | | | | | |
Commercial real estate, owner occupied | | | 3,256 | | | | 2,665 | | | | 2,665 | | | | - | | | | - | |
Commercial real estate, other | | | 2,721 | | | | 2,721 | | | | 2,721 | | | | - | | | | - | |
Commercial Non Real Estate(2) | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | 310 | | | | 301 | | | | 301 | | | | - | | | | - | |
Total | | $ | 6,478 | | | $ | 5,878 | | | $ | 5,878 | | | $ | - | | | $ | - | |
| (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. |
Information on the average investment and interest income of impaired loans is presented in the tables below:
| | For the Year Ended December 31, 2022 | |
| | Average Recorded Investment(1) | | | Interest Income Recognized | |
Consumer Real Estate(2) | | | | | | | | |
Investor-owned residential real estate | | $ | 188 | | | $ | 13 | |
Commercial Real Estate(2) | | | | | | | | |
Commercial real estate, owner occupied | | | 2,587 | | | | 5 | |
Commercial real estate, other | | | 729 | | | | - | |
Commercial Non Real Estate(2) | | | | | | | | |
Commercial and industrial | | | 272 | | | | - | |
Total | | $ | 3,776 | | | $ | 18 | |
| | 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 | |
(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, 2022 | |
| | 30 – 89 Days Past Due and Accruing | | | 90 or More Days Past Due | | | 90 or More Days Past Due and Accruing | | | Nonaccruals(2) | |
Consumer Real Estate(1) | | | | | | | | | | | | | | | | |
Equity line | | $ | 16 | | | $ | - | | | $ | - | | | $ | - | |
Residential closed-end first liens | | | 750 | | | | 91 | | | | - | | | | 91 | |
Investor-owned residential real estate | | | 408 | | | | - | | | | - | | | | - | |
Commercial Real Estate(1) | | | | | | | | | | | | | | | | |
Commercial real estate, owner occupied | | | - | | | | 252 | | | | - | | | | 2,493 | |
Commercial Non Real Estate(1) | | | | | | | | | | | | | | | | |
Commercial and industrial | | | 16 | | | | - | | | | - | | | | 263 | |
Consumer Non-Real Estate (1) | | | | | | | | | | | | | | | | |
Credit cards | | | 3 | | | | 2 | | | | 2 | | | | - | |
Automobile | | | 102 | | | | - | | | | - | | | | - | |
Other consumer loans | | | 93 | | | | 6 | | | | 6 | | | | - | |
Total | | $ | 1,388 | | | $ | 351 | | | $ | 8 | | | $ | 2,847 | |
(1) | Only classes with past due or nonaccrual loans are presented. |
(2) | Includes current and past due loans in nonaccrual status. Includes impaired loans in nonaccrual status. |
| | December 31, 2021 | |
| | 30 – 89 Days Past Due and Accruing | | | 90 or More Days Past Due | | | 90 or More Days Past Due and Accruing | | | Nonaccruals(2) | |
Real Estate Construction(1) | | | | | | | | | | | | | | | | |
Construction, other | | $ | 14 | | | $ | - | | | $ | - | | | $ | - | |
Consumer Real Estate(1) | | | | | | | | | | | | | | | | |
Equity lines | | | 50 | | | | 29 | | | | 29 | | | | - | |
Residential closed-end first liens | | | 715 | | | | 58 | | | | 58 | | | | - | |
Commercial Real Estate(1) | | | | | | | | | | | | | | | | |
Commercial real estate, owner occupied | | | 12 | | | | 266 | | | | - | | | | 2,572 | |
Commercial Non Real Estate(1) | | | | | | | | | | | | | | | | |
Commercial and industrial | | | 13 | | | | - | | | | - | | | | 301 | |
Consumer Non-Real Estate (1) | | | | | | | | | | | | | | | | |
Credit cards | | | 2 | | | | 2 | | | | 2 | | | | - | |
Automobile | | | 93 | | | | - | | | | - | | | | - | |
Other consumer loans | | | 88 | | | | 1 | | | | 1 | | | | - | |
Total | | $ | 987 | | | $ | 356 | | | $ | 90 | | | $ | 2,873 | |
| (1) | Only classes with past due or nonaccrual loans are presented. |
| (2) | Includes current and past due loans in nonaccrual status. Includes impaired loans in nonaccrual status. |
Determination of risk grades was completed for the portfolio as of December 31, 2022 and 2021. The following displays non-impaired gross loans by credit quality indicator as of the dates indicated:
| | December 31, 2022 | |
| | Pass | | | Special Mention | | | Classified | |
Real Estate Construction | | | | | | | | | | | | |
Construction, 1-4 family residential | | $ | 12,538 | | | $ | - | | | $ | - | |
Construction, other | | | 41,741 | | | | - | | | | 300 | |
Consumer Real Estate | | | | | | | | | | | | |
Equity lines | | | 15,026 | | | | - | | | | - | |
Residential closed-end first liens | | | 122,187 | | | | - | | | | 461 | |
Residential closed-end junior liens | | | 2,446 | | | | - | | | | - | |
Investor-owned residential real estate | | | 80,143 | | | | - | | | | 603 | |
Commercial Real Estate | | | | | | | | | | | | |
Multifamily residential real estate | | | 127,312 | | | | - | | | | - | |
Commercial real estate owner-occupied | | | 126,550 | | | | - | | | | - | |
Commercial real estate, other | | | 181,443 | | | | - | | | | - | |
Commercial Non Real Estate | | | | | | | | | | | | |
Commercial and industrial | | | 57,381 | | | | - | | | | 8 | |
Public Sector and IDA | | | | | | | | | | | | |
States and political subdivisions | | | 48,074 | | | | - | | | | - | |
Consumer Non-Real Estate | | | | | | | | | | | | |
Credit cards | | | 4,597 | | | | - | | | | - | |
Automobile | | | 9,932 | | | | - | | | | 3 | |
Other consumer | | | 19,398 | | | | - | | | | 18 | |
Total | | $ | 848,768 | | | $ | - | | | $ | 1,393 | |
| | December 31, 2021 | |
| | 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 | |
Residential closed-end first liens | | | 106,107 | | | | - | | | | 275 | |
Residential closed-end junior liens | | | 2,715 | | | | - | | | | - | |
Investor-owned residential real estate | | | 85,460 | | | | - | | | | 612 | |
Commercial Real Estate | | | | | | | | | | | | |
Multifamily residential real estate | | | 106,644 | | | | - | | | | - | |
Commercial real estate owner-occupied | | | 125,605 | | | | - | | | | 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 | |
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
Total TDRs amounted to $3,032 at December 31, 2022 and $5,878 at December 31, 2021. 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 did not recognize any new TDRs during 2022, and recognized 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. Restructuring of 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. Impairment measurement for all three loans at December 31, 2021 was based upon collateral and did not result in a specific allocation.
The following table presents TDRs by class that occurred during the year ended December 31, 2021.
| | TDRs that occurred during the year ended December 31, 2021 | |
| | | | | | Recorded Investment Outstanding | |
| | Number of Contracts | | | Pre-Modification | | | Post-Modification (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) | Post-modification outstanding recorded investment considers amounts immediately following the modification. Amounts do not reflect balances at the end of the period. |
Defaulted TDRs
The Company analyzed its TDR portfolio for loans that defaulted during 2022 and 2021, and that were modified within 12 months prior to default. The Company designates three circumstances that indicate default: one or more payments that occur more than 90 days past the due date, charge-off, or foreclosure after the date of restructuring.
Of the Company’s TDRs at December 31, 2022 and December 31, 2021, none of the defaulted TDRs were modified within 12 months prior to default.
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, | |
| | 2022 | | | 2021 | |
Premises | | $ | 15,435 | | | $ | 14,933 | |
Furniture and equipment | | | 6,658 | | | | 6,819 | |
Premises and equipment | | $ | 22,093 | | | $ | 21,752 | |
Accumulated depreciation | | | (11,722 | ) | | | (12,030 | ) |
Premises and equipment, net | | $ | 10,371 | | | $ | 9,722 | |
Depreciation expense for the years ended December 31, 2022 and 2021 amounted to $609 and $636, respectively.
Premises includes construction in process. NBB has purchased land and developed plans for a new branch building in Roanoke, Virginia. The amount included in construction in process totals $1,586 as of December 31, 2022.
Note 7: Deposits
The aggregate amounts of time deposits in denominations of $250 or more at December 31, 2022 and 2021 were $18,610 and $14,600, respectively. At December 31, 2022, the scheduled maturities of time deposits are as follows:
Year of Maturity |
|
Time Deposits |
|
2023 |
|
$ |
54,048 |
|
2024 |
|
|
5,349 |
|
2025 |
|
|
2,837 |
|
2026 |
|
|
3,002 |
|
2027 |
|
|
2,393 |
|
Thereafter |
|
|
- |
|
Total time deposits |
|
$ |
67,629 |
|
At December 31, 2022 and 2021, overdraft demand deposits reclassified to loans totaled $277 and $170, respectively.
Note 8: Employee Benefit Plans
401(k) Plan
The Company has a Retirement Accumulation Plan qualifying under Internal Revenue Code Section 401(k), in which NBB and NBFS are participating employers. Eligible participants may contribute up to 100% of their total annual compensation to the plan, subject to certain limits based on federal tax laws. Employee contributions are matched by the employer based on a percentage of an employee’s total annual compensation contributed to the plan. For the years ended December 31, 2022 and 2021, the Company contributed $392 and $402 respectively.
Employee Stock Ownership Plan
The Company has a non-leveraged Employee Stock Ownership Plan (“ESOP”) which enables employees of NBI and its subsidiaries who have one year of service and who have attained the age of 21 prior to the plan’s January 1 and July 1 enrollment dates to own NBI common stock. Contributions to the ESOP, which are not mandatory, are determined annually by the NBI Board of Directors. Contribution expense amounted to $400 for the year ended December 31, 2022 and $360 for the year ended December 31, 2021. Dividends on ESOP shares are charged to retained earnings. As of December 31, 2022, the number of shares held by the ESOP was 181,365. 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 2022 and 2021, based on the present value of the retirement benefits, amounted to $326 and $296 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-2 compensation during their final years of employment. Information pertaining to activity in the plan during the years indicated, is as follows:
| | December 31, | |
| | 2022 | | | 2021 | |
Change in benefit obligation | | | | | | | | |
Projected benefit obligation at beginning of year | | $ | 35,312 | | | $ | 34,852 | |
Service cost (1) | | | 1,297 | | | | 1,445 | |
Interest cost | | | 817 | | | | 736 | |
Actuarial gain (2) | | | (11,566 | ) | | | (786 | ) |
Benefits paid | | | (2,732 | ) | | | (935 | ) |
Projected benefit obligation at end of year | | $ | 23,128 | | | $ | 35,312 | |
| | | | | | | | |
Change in plan assets | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 36,187 | | | $ | 32,415 | |
Actual return on plan assets | | | (3,709 | ) | | | 4,707 | |
Benefits paid | | | (2,732 | ) | | | (935 | ) |
Fair value of plan assets at end of year | | $ | 29,746 | | | $ | 36,187 | |
| | | | | | | | |
Funded status at the end of the year | | $ | 6,618 | | | $ | 875 | |
Amounts recognized in the Consolidated Balance Sheet | | | | | | | | |
Deferred tax liabilities | | $ | (1,390 | ) | | $ | (184 | ) |
Other assets | | | 6,618 | | | | 875 | |
Total amounts recognized in the Consolidated Balance Sheet | | $ | 5,228 | | | $ | 691 | |
| | | | | | | | |
Amounts recognized in accumulated other comprehensive loss, net | | | | | | | | |
Net loss | | $ | (2,968 | ) | | $ | (8,749 | ) |
Deferred tax asset | | | 623 | | | | 1,837 | |
Amount recognized | | $ | (2,345 | ) | | $ | (6,912 | ) |
| | | | | | | | |
Accrued/Prepaid benefit cost, net | | | | | | | | |
Benefit obligation | | $ | (23,128 | ) | | $ | (35,312 | ) |
Fair value of assets | | | 29,746 | | | | 36,187 | |
Unrecognized net actuarial loss | | | 2,968 | | | | 8,749 | |
Deferred tax liability | | | (2,013 | ) | | | (2,021 | ) |
Prepaid benefit cost included in other assets | | $ | 7,573 | | | $ | 7,603 | |
| | | | | | | |
Components of net periodic benefit cost | | | | | | | | |
Service cost (1) | | $ | 1,297 | | | $ | 1,445 | |
Interest cost (3) | | | 817 | | | | 736 | |
Expected return on plan assets (3) | | | (2,517 | ) | | | (2,220 | ) |
Amortization of prior service cost (3) | | | - | | | | (11 | ) |
Recognized net actuarial loss (3) | | | 441 | | | | 833 | |
Net periodic benefit cost | | $ | 38 | | | $ | 783 | |
| | | | | | | | |
Other changes in plan assets and benefit obligations recognized in other comprehensive loss | | | | | | | | |
Net gain | | $ | (5,781 | ) | | $ | (4,106 | ) |
Amortization of prior service cost | | | - | | | | 11 | |
Deferred income tax expense | | | 1,214 | | | | 860 | |
Total recognized | | $ | (4,567 | ) | | $ | (3,235 | ) |
| | | | | | | | |
Total recognized in net periodic benefit cost and other comprehensive loss | | $ | (5,743 | ) | | $ | (3,312 | ) |
| | | | | | | | |
Weighted average assumptions at end of the year | | | | | | | | |
Discount rate used for net periodic pension cost | | | 2.50 | % | | | 2.25 | % |
Discount rate used for disclosure | | | 5.00 | % | | | 2.50 | % |
Expected return on plan assets | | | 7.50 | % | | | 7.50 | % |
Rate of compensation increase | | | 3.00 | % | | | 3.00 | % |
| (1) | Cost is included in Salaries and Employee Benefits expense on the Consolidates Statements of Income. |
| (2) | Actuarial gain in 2022 is composed of loss due to demographic changes of $66 and gain due to change in discount rate of ($11,632). Actuarial 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). |
| (3) | Cost is included in other operating expense on the Consolidated Statements of Income. |
Long Term Rate of Return
The Company, as plan sponsor, selects the expected long term rate-of-return-on-assets assumption in consultation with its investment advisors and actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience, which may not continue over the measurement period, but higher significance is placed on current forecasts of future long term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, and solely for this purpose, the plan is assumed to continue in force and not terminate during the period during which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).
The Company’s Pension Administrative Committee Policy (the “Policy”) sets requirements for monitoring the investment management of its qualified plans. The Policy includes a statement of general investment principles and a listing of specific investment guidelines, to which the committee may make documented exceptions. The guidelines state that, unless otherwise indicated, all investments that are permitted under the prudent investor rule shall be permissible investments for the defined benefit pension plan. All plan assets are to be invested in marketable securities. Certain investments are prohibited, including commodities and future contracts, private placements, repurchase agreements, options and derivatives. The Policy establishes quality standards for fixed income investments and mutual funds included in the pension plan trust. The Policy also outlines diversification standards.
The preferred target allocation for the assets of the defined benefit pension plan is 65% in equity securities and 35% in fixed income securities. Equity securities include investments in large-cap and mid-cap companies primarily located in the United States, although a small number of international large-cap companies are included. There are also investments in mutual funds holding the equities of large-cap and mid-cap U.S. companies. Fixed income securities include U.S. government agency securities and corporate bonds from companies representing diversified industries. There are no investments in hedge funds, private equity funds or real estate. The Company’s required minimum pension contribution for 2023 has not yet been determined. Fair value measurements of the pension plan’s assets are presented below:
| | Fair Value Measurements at December 31, 2022 | |
Asset Category | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Cash | | $ | 415 | | | $ | 415 | | | $ | - | | | $ | - | |
Equity securities: | | | | | | | | | | | | | | | | |
U. S. companies | | | 15,459 | | | | 15,459 | | | | - | | | | - | |
International companies | | | 770 | | | | 770 | | | | - | | | | - | |
Equities mutual funds (1) | | | 6,090 | | | | 6,090 | | | | - | | | | - | |
State and political subdivisions | | | 51 | | | | - | | | | 51 | | | | - | |
Corporate bonds – investment grade (2) | | | 6,961 | | | | - | | | | 6,961 | | | | - | |
Total pension plan assets | | $ | 29,746 | | | $ | 22,734 | | | $ | 7,012 | | | $ | - | |
| | Fair Value Measurements at December 31, 2021 | |
Asset Category | | Total | | | Level 1 | | | Level 2 | | | Level 3) | |
Cash | | $ | 1,390 | | | $ | 1,390 | | | $ | - | | | $ | - | |
Equity securities: | | | | | | | | | | | | | | | | |
U. S. companies | | | 19,758 | | | | 19,758 | | | | - | | | | - | |
International companies | | | 2,722 | | | | 2,722 | | | | - | | | | - | |
Equities mutual funds (1) | | | 5,257 | | | | 5,257 | | | | - | | | | - | |
State and political subdivisions | | | 57 | | | | - | | | | 57 | | | | - | |
Corporate bonds – investment grade (2) | | | 7,003 | | | | - | | | | 7,003 | | | | - | |
Total pension plan assets | | $ | 36,187 | | | $ | 29,127 | | | $ | 7,060 | | | $ | - | |
| (1) | This category comprises actively managed equity funds invested in large-cap and mid-cap U.S. companies. |
| (2) | This category represents investment grade bonds of U.S. issuers from diverse industries. |
Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows:
2023 | | | $ | 2,802 | |
2024 | | | $ | 1,494 | |
2025 | | | $ | 861 | |
2026 | | | $ | 1,877 | |
2027 | | | $ | 1,801 | |
2028 - 2032 | | | $ | 11,054 | |
Note 9: Income Taxes
The Company files United States federal income tax returns, and Virginia, West Virginia and North Carolina state income tax returns. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2019. Allocation of income tax expense between current and deferred portions is as follows:
| | Year ended December 31, | |
| | 2022 | | | 2021 | |
Current | | $ | 5,940 | | | $ | 4,099 | |
Deferred (benefit) expense | | | (109 | ) | | | 152 | |
Total income tax expense | | $ | 5,831 | | | $ | 4,251 | |
59
The following reconciles the “expected” income tax expense, computed by applying the U.S. federal income tax rate of 21% to income before tax expense, with the reported income tax expense:
| | Year ended December 31, | |
| | 2022 | | | 2021 | |
Computed “expected” income tax expense | | $ | 6,670 | | | $ | 5,173 | |
Tax-exempt interest income | | | (728 | ) | | | (763 | ) |
Nondeductible interest expense | | | 24 | | | | 25 | |
Other, net | | | (135 | ) | | | (184 | ) |
Reported income tax expense | | $ | 5,831 | | | $ | 4,251 | |
The components of net deferred tax assets, included in other assets, are as follows:
| | December 31, | |
| | 2022 | | | 2021 | |
Deferred tax assets: | | | | | | | | |
Allowance for loan losses and unearned fee income | | $ | 1,906 | | | $ | 1,774 | |
Valuation allowance on other real estate owned | | | 248 | | | | 186 | |
Defined benefit pension plan | | | 623 | | | | 1,837 | |
Deferred compensation and other liabilities | | | 919 | | | | 899 | |
Net unrealized loss on securities available for sale | | | 21,644 | | | | - | |
Lease accounting | | | 303 | | | | 327 | |
SBA fees | | | - | | | | 9 | |
Total deferred tax assets | | $ | 25,643 | | | $ | 5,032 | |
| | | | | | | | |
Deferred tax liabilities: | | | | | | | | |
Fixed assets | | $ | (463 | ) | | $ | (415 | ) |
Goodwill | | | (1,228 | ) | | | (1,228 | ) |
Defined benefit pension plan, prepaid portion | | | (2,013 | ) | | | (2,021 | ) |
Net unrealized loss on securities available for sale | | | - | | | | (759 | ) |
Lease accounting | | | (297 | ) | | | (321 | ) |
Discount accretion of securities | | | (84 | ) | | | (27 | ) |
Total deferred tax liabilities | | | (4,085 | ) | | | (4,771 | ) |
Net deferred tax assets (liabilities) | | $ | 21,558 | | | $ | 261 | |
The Company determined that no valuation allowance for gross deferred tax assets was necessary at December 31, 2022 and 2021.
Note 10: Restrictions on Dividends
The Company’s principal source of funds for dividend payments is dividends received from its subsidiary bank. For the years ended December 31, 2022 and 2021, dividends received from the subsidiary bank were $25,000 and $14,508, respectively.
Substantially all of NBI’s retained earnings are undistributed earnings of its sole banking subsidiary, which are restricted by various regulations administered by federal bank regulatory agencies. Bank regulatory agencies restrict, unless prior approval is obtained, the total dividend payments of a bank in any calendar year to the bank’s retained net income of that year to date, as defined, combined with its retained net income of the preceding two years, less any dividends paid. During 2022 and 2021, 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, 2022, NBB had no retained net income free of restriction. The Bank remains in a highly capitalized position and the Company intends to request approval for additional dividends in 2023.
Note 11: Minimum Regulatory Capital Requirement
Under the Federal Reserve’s Small Bank Holding Company Policy Statement, the Company is exempt from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements.
NBB is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on NBI’s and NBB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, NBB must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
The Bank is subject to the Basel III Capital Rules as applied by the Office of the Comptroller of the Currency. The Basel III Capital Rules require the Bank to comply with minimum capital ratios plus a “capital conservation buffer” designed to absorb losses during periods of economic stress. The rules set forth minimum amounts and ratios for CET1 capital, Tier 1 capital and total capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined).
NBB’s CET1 capital includes common stock and related surplus and retained earnings. The Basel III Capital Rules provide an option to exclude components of accumulated other comprehensive 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. As of December 31, 2022 and 2021, 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 $1,092,101 at December 31, 2022 and $989,503 as of December 31, 2021. Management believes, as of December 31, 2022 and 2021, that NBB met all capital adequacy requirements to which it is subject.
As of December 31, 2022, 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 are presented in the following tables.
December 31, 2022 | | Actual | | | Minimum Capital Requirement(1) | | | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
Total Capital (to Risk Weighted Assets) | | $ | 191,883 | | | | 17.57 | % | | $ | 114,671 | | | | 10.50 | % | | $ | 109,210 | | | | 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets) | | $ | 183,623 | | | | 16.81 | % | | $ | 92,829 | | | | 8.50 | % | | $ | 87,368 | | | | 8.00 | % |
Common Equity Tier 1 Capital (to Risk Weighted Assets) | | $ | 183,623 | | | | 16.81 | % | | $ | 76,447 | | | | 7.00 | % | | $ | 70,987 | | | | 6.50 | % |
Tier 1 Capital (to Average Assets) | | $ | 183,623 | | | | 10.50 | % | | $ | 69,925 | | | | 4.00 | % | | $ | 87,406 | | | | 5.00 | % |
December 31, 2021 | | Actual | | | Minimum Capital Requirement(1) | | | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions | |
| | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | |
Total Capital (to Risk Weighted Assets) | | $ | 192,907 | | | | 19.50 | % | | $ | 103,898 | | | | 10.50 | % | | $ | 98,950 | | | | 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets) | | $ | 185,187 | | | | 18.72 | % | | $ | 84,108 | | | | 8.50 | % | | $ | 79,160 | | | | 8.00 | % |
Common Equity Tier 1 Capital (to Risk Weighted Assets) | | $ | 185,187 | | | | 18.72 | % | | $ | 69,265 | | | | 7.00 | % | | $ | 64,318 | | | | 6.50 | % |
Tier 1 Capital (to Average Assets) | | $ | 185,187 | | | | 11.16 | % | | $ | 66,348 | | | | 4.00 | % | | $ | 82,935 | | | | 5.00 | % |
| (1) | Except with regard to NBB’s Tier 1 capital to average assets ratio, the minimum capital requirement includes the Basel III Capital Rules’ capital conservation buffer (2.50%) which is added to the minimum capital requirements for capital adequacy purposes. NBB’s capital conservation buffer consists of additional CET1 above regulatory minimum requirement. Failure to maintain the prescribed levels would result in limitations on capital distributions and discretionary bonuses to executives. |
Note 12: Condensed Financial Statements of Parent Company
Financial information pertaining only to NBI (Parent) as of the dates and for the years indicated, is as follows:
Condensed Balance Sheets | | December 31, | |
| | 2022 | | | 2021 | |
Assets | | | | | | | | |
Cash due from subsidiaries | | $ | 14,927 | | | $ | 2,324 | |
Investments in subsidiaries | | | 107,746 | | | | 189,027 | |
Refundable income taxes | | | 70 | | | | 647 | |
Other assets | | | 648 | | | | 847 | |
Total assets | | $ | 123,391 | | | $ | 192,845 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | |
Other liabilities | | $ | 704 | | | $ | 1,094 | |
Stockholders’ equity | | | 122,687 | | | | 191,751 | |
Total liabilities and stockholders’ equity | | $ | 123,391 | | | $ | 192,845 | |
Condensed Statements of Income | | Years ended December 31, | |
| | 2022 | | | 2021 | |
Income | | | | | | | | |
Dividends from subsidiaries | | $ | 25,000 | | | $ | 14,508 | |
Gain on sale of private equity investments | | | 3,823 | | | | - | |
Other income | | | - | | | | 1 | |
Total income | | | 28,823 | | | | 14,509 | |
Expenses | | | | | | | | |
Other expenses | | | 1,220 | | | | 1,135 | |
Income before income tax (expense) benefit and equity in undistributed net income of subsidiaries | | | 27,604 | | | | 13,374 | |
Applicable income tax (expense) benefit | | | 491 | | | | (293 | ) |
Income before equity (deficit) in undistributed net income of subsidiaries | | | 27,112 | | | | 13,667 | |
Equity (deficit) in undistributed net income of subsidiaries | | | (1,180 | ) | | | 6,715 | |
Net income | | $ | 25,932 | | | $ | 20,382 | |
Condensed Statements of Cash Flows | | Years ended December 31, | |
| | 2022 | | | 2021 | |
Cash Flows from Operating Activities | | | | | | | | |
Net income | | $ | 25,932 | | | $ | 20,382 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
(Equity) deficit in undistributed net income of subsidiaries | | | 1,180 | | | | (6,715 | ) |
Net change in refundable income taxes due from subsidiaries | | | 576 | | | | (201 | ) |
Net change in other assets | | | 593 | | | | 221 | |
Net change in other liabilities | | | (390 | ) | | | (217 | ) |
Net cash provided by operating activities | | | 27,891 | | | | 13,470 | |
| | | | | | | | |
Cash Flows from Investing Activities | | | | | | | | |
Net change in interest-bearing deposits | | | - | | | | 10,027 | |
Net cash provided by investing activities | | | - | | | | 10,027 | |
| | | | | | | |
Cash Flows from Financing Activities | | | | | | | | |
Cash dividends paid | | | (8,950 | ) | | | (8,806 | ) |
Shares repurchased | | | (6,338 | ) | | | (13,354 | ) |
Net cash used in financing activities | | | (15,288 | ) | | | (22,160 | ) |
Net change in cash | | | 12,603 | | | | 1,337 | |
Cash due from subsidiaries at beginning of year | | | 2,324 | | | | 987 | |
Cash due from subsidiaries at end of year | | $ | 14,927 | | | $ | 2,324 | |
Note 13: Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and interest rate locks. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may require collateral or other security to support the following financial instruments with credit risk.
The following table presents the unfunded balance of financial instruments that pose credit risk:
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Commitments to extend credit |
|
$ |
197,459 |
|
|
$ |
181,395 |
|
Standby letters of credit |
|
|
17,021 |
|
|
|
13,984 |
|
Mortgage loans sold with potential recourse |
|
|
8,654 |
|
|
|
18,287 |
|
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 2022, the Company originated $7,882 and sold $8,654 mortgage loans to investors, compared with $17,672 originated and $18,287 sold in 2021. Every contract with each investor contains certain recourse language. In general, the Company may be required to repurchase a previously sold mortgage loan if there is major noncompliance with defined loan origination or documentation standards, including fraud, negligence or material misstatement in the loan documents. Repurchase may also be required if necessary governmental loan guarantees are canceled or never issued, or if an investor is forced to buy back a loan after it has been resold as a part of a loan pool. In addition, the Company may have an obligation to repurchase a loan if the mortgagor defaults early in the loan term. This potential default period is approximately 12 months after sale of a loan to the investor.
At December 31, 2022, the Company had locked-rate commitments to originate mortgage loans of $95. There were no loans held for sale at December 31, 2022. 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 $15 in deposits with correspondent institutions at December 31, 2022 that were not insured by the FDIC.
Note 14: Concentrations of Credit Risk
The Company does a general banking business, serving the commercial and personal banking needs of its customers. NBB’s primary service area is defined as the Virginia counties of Albemarle, Augusta, Bedford, Bland, Botetourt, Buchanan, Carroll, Craig, Floyd, Franklin, Giles, Grayson, Montgomery, Pulaski, Roanoke, Rockbridge, Rockingham, Russell, Tazewell, Smyth, Washington, Wythe, and the cities of Bristol, Buena Vista, Charlottesville, Galax, Harrisonburg, Lexington, Lynchburg, Radford, Roanoke, Salem, Staunton, and Waynesboro. The service area also includes the West Virginia counties of Mercer, Monroe and McDowell and the Tennessee city of Bristol and counties of Sullivan and Washington. Substantially all of NBB’s loans are made in its primary service area. Additionally, the Company occasionally participates in loans in nearby higher growth metropolitan areas. Real estate mortgage loans secured by property outside NBB’s primary service area are not considered an out of market exception when the customer is located within the primary service area. All other loans that are out of the primary service area and do not also have collateral within the primary service area require policy exception approval. The ultimate collectability of NBB’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, is influenced by the economic conditions of the market area. The Company’s operating results are therefore closely correlated with the economic trends within this area.
Commercial real estate as of December 31, 2022 and 2021 represented approximately 51% and 50%, respectively, of the loan portfolio, at $437,888 and $405,722, respectively. Included in commercial real estate are loans for college housing and professional office buildings that comprised $196,398 and $201,858 as of December 31, 2022 and 2021, respectively, corresponding to approximately 23% of the loan portfolio as of December 31, 2022 and 25% of the loan portfolio as of December 31, 2021. Loans secured by residential real estate were $221,052, or approximately 26% of the portfolio, and $208,977, or 26% of the portfolio as of December 31, 2022 and 2021, 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: Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP requires that valuation techniques maximize the use of the observable inputs and minimize the use of the unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:
| Level 1 – | Valuation is based on quoted prices in active markets for identical assets and liabilities. |
| Level 2 – | Valuation is based on observable inputs including: ● quoted prices in active markets for similar assets and liabilities, ● quoted prices for identical or similar assets and liabilities in less active markets, ● inputs other than quoted prices that are observable, and ● model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market. |
| Level 3 – | Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. |
Fair value is best determined by quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from disclosure requirements. Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.
The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the consolidated financial statements:
Financial Instruments Measured At Fair Value on a Recurring Basis
Securities Available for Sale
Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). The carrying value of restricted Federal Reserve Bank of Richmond and Federal Home Loan Bank of Atlanta stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following tables.
The following tables present the balances of financial assets measured at fair value on a recurring basis:
| | | | | Fair Value Measurement Using | |
December 31, 2022 | | Balance | | | Level 1 | | | Level 2 | | | Level 3 | |
U.S. government agencies and corporations | | $ | 336,575 | | | $ | - | | | $ | 336,575 | | | $ | - | |
States and political subdivisions | | | 152,200 | | | | - | | | | 152,200 | | | | - | |
Mortgage-backed securities | | | 161,477 | | | | - | | | | 161,477 | | | | - | |
Corporate debt securities | | | 5,664 | | | | - | | | | 5,664 | | | | - | |
U.S. treasury | | | 936 | | | | | | | | 936 | | | | | |
Total securities available for sale | | $ | 656,852 | | | $ | - | | | $ | 656,852 | | | $ | - | |
| | | | | Fair Value Measurement Using | |
December 31, 2021 | | Balance | | | Level 1 | | | Level 2 | | | Level 3 | |
U.S. Government agencies and corporations | | $ | 278,019 | | | $ | - | | | $ | 278,019 | | | $ | - | |
States and political subdivisions | | | 198,672 | | | | - | | | | 198,672 | | | | - | |
Mortgage-backed securities | | | 206,174 | | | | - | | | | 206,174 | | | | - | |
Corporate debt securities | | | 3,215 | | | | - | | | | 3,215 | | | | - | |
Total securities available for sale | | $ | 686,080 | | | $ | - | | | $ | 686,080 | | | $ | - | |
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 had one rate lock commitment as of December 31, 2022, resulting in an interest rate loan contract and forward sales commitment. The interest rate lock was at market value as of December 31, 2022 and did not result in recognition of an asset or liability. The Company did not have any interest rate loan contracts or forward contracts as of December 31, 2021.
Financial Instruments Measured at Fair Value on a Non-Recurring Basis
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the consolidated financial statements:
Loans Held for Sale
Loans held for sale are carried at the lower of cost or fair value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the years ended December 31, 2022 and 2021.
Impaired Loans
Impaired loans are measured at fair value on a nonrecurring basis. If an individually 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 may be measured using one of three methods. Each method falls within a different level of the fair value 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 may be categorized in Level 2 or Level 3.
Loans valued using the collateral method may be secured by real estate or business assets including equipment, inventory, and accounts receivable. Real estate collateral secures most loans and valuation is based upon the “as-is” value of independent appraisals or evaluations. Appraisals are used to value loans secured by residential 1-4 family properties with outstanding principal balances greater than $250 and commercial real estate loans with outstanding principal balances greater than $500. Appraisals or real estate evaluations prepared by a third party may be used to value loans with principal balances below these thresholds.
Appraisals of less than 24 months of age, conducted by independent, licensed appraisers using observable market data analyzed through an income or sales valuation approach result in Level 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 based on evaluations are categorized as Level 3. The value of business equipment is based upon an outside appraisal (Level 2) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 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 December 31, 2022 and December 31, 2021, measurement of the Company’s impaired loans did not result in any specific allocations.
Other Real Estate Owned
Certain assets such as OREO are measured at fair value less cost to sell. Valuation of OREO is determined using current appraisals from independent parties, a Level 2 input. The Company works with a realtor to determine the list price, which may be set at appraised value or at a different amount based on the realtor’s advice and management’s judgement of marketability. Discounts to appraisals for selling costs or for marketability result in a Level 3 estimate.
The following table summarizes the Company’s OREO measured at fair value on a nonrecurring basis as of the dates indicated.
| | | | | | | Carrying Value | |
Date | Description | | Balance | | | Level 1 | | | Level 2 | | | Level 3 | |
December 31, 2022 | OREO net of valuation allowance | | $ | 662 | | | $ | - | | | $ | - | | | $ | 662 | |
December 31, 2021 | OREO net of valuation allowance | | | 957 | | | | - | | | | - | | | | 957 | |
The following table presents information about OREO and Level 3 fair value measurements as of the dates indicated.
Date | Valuation Technique | Unobservable Input | | Discount | |
December 31, 2022 | Discounted appraised value | Selling cost | | | 7.00 | % |
December 31, 2022 | Discounted appraised value | Discount for lack of marketability | | | 34.72 | % |
December 31, 2021 | Discounted appraised value | Selling cost | | | 6.20 | % |
As of December 31, 2022 and December 31, 2021, the Company held a single OREO property, measured using appraised value, discounted by selling costs. During 2022, the Company reduced the list price as part of a marketing strategy and recorded an additional discount for marketability.
There is uncertainty in determining discounts to appraised value. If the final sale price is different from the list price, the amount of selling costs will also be different from those estimated. 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.
Fair Value Summary
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2022 and December 31, 2021. Fair values are estimated using the exit price notion.
| | | | | Estimated Fair Value | |
December 31, 2022 | | Carrying Amount | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial assets: | | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 12,403 | | | $ | 12,403 | | | $ | - | | | $ | - | |
Interest-bearing deposits | | | 59,026 | | | | 59,026 | | | | - | | | | - | |
Securities available for sale | | | 656,852 | | | | - | | | | 656,852 | | | | - | |
Restricted stock, at cost | | | 941 | | | | - | | | | 941 | | | | - | |
Loans, net | | | 844,519 | | | | - | | | | - | | | | 781,749 | |
Accrued interest receivable | | | 6,001 | | | | - | | | | 6,001 | | | | - | |
Bank-owned life insurance | | | 43,312 | | | | - | | | | 43,312 | | | | - | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Deposits | | $ | 1,542,725 | | | $ | - | | | $ | 1,475,096 | | | $ | 67,542 | |
Accrued interest payable | | | 106 | | | | - | | | | 106 | | | | - | |
| | | | | Estimated Fair Value | |
December 31, 2021 | | Carrying Amount | | | Level 1 | | | Level 2 | | | Level 3 | |
Financial assets: | | | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 8,768 | | | $ | 8,768 | | | $ | - | | | $ | - | |
Interest-bearing deposits | | | 130,021 | | | | 130,021 | | | | - | | | | - | |
Securities available for sale | | | 686,080 | | | | - | | | | 686,080 | | | | - | |
Restricted stock, at cost | | | 845 | | | | - | | | | 845 | | | | - | |
Mortgage loans held for sale | | | 615 | | | | - | | | | 615 | | | | - | |
Loans, net | | | 795,574 | | | | - | | | | - | | | | 791,335 | |
Accrued interest receivable | | | 5,104 | | | | - | | | | 5,104 | | | | - | |
Bank-owned life insurance | | | 42,354 | | | | - | | | | 42,354 | | | | - | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Deposits | | $ | 1,494,587 | | | $ | - | | | $ | 1,415,619 | | | $ | 79,115 | |
Accrued interest payable | | | 48 | | | | - | | | | 48 | | | | - | |
Note 16: Components of Accumulated Other Comprehensive Income (Loss)
The following table summarizes the activity related to each component of accumulated other comprehensive loss for the years ended December 31, 2022 and 2021:
|
|
Net Unrealized Gain (Loss) on Securities |
|
|
Adjustments Related to Pension Benefits |
|
|
Accumulated Other Comprehensive Income (Loss) |
|
Balance as of December 31, 2020 |
|
$ |
13,176 |
|
|
$ |
(10,147 |
) |
|
$ |
3,020 |
|
Unrealized holding loss on available for sale securities net of tax of ($2,740) |
|
|
(10,308 |
) |
|
|
- |
|
|
|
(10,308 |
) |
Reclassification adjustment for gains included in net income, net of tax of ($1) |
|
|
(5 |
) |
|
|
- |
|
|
|
(5 |
) |
Net pension gain, net of tax of $862 |
|
|
- |
|
|
|
3,244 |
|
|
|
3,244 |
|
Less amortization of prior service cost included in net periodic pension cost, net of tax of ($2) |
|
|
- |
|
|
|
(9 |
) |
|
|
(9 |
) |
Balance as of December 31, 2021 |
|
$ |
2,854 |
|
|
$ |
(6,912 |
) |
|
$ |
(4,058 |
) |
Unrealized holding loss on available for sale securities net of tax of ($22,403) |
|
|
(84,275 |
) |
|
|
- |
|
|
|
(84,275 |
) |
Net pension gain, net of tax of $1,214 |
|
|
- |
|
|
|
4,567 |
|
|
|
4,567 |
|
Balance as of December 31, 2022 |
|
$ |
(81,421 |
) |
|
$ |
(2,345 |
) |
|
$ |
(83,766 |
) |
The following table provides information regarding reclassifications out of accumulated other comprehensive loss for the years ended December 31, 2022 and 2021:
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Component of Accumulated Other Comprehensive Income (Loss) |
|
|
|
|
|
|
|
|
Reclassification out of unrealized losses on available for sale securities: |
|
|
|
|
|
|
|
|
Realized securities gain, net |
|
$ |
- |
|
|
$ |
(6 |
) |
Income tax benefit |
|
|
- |
|
|
|
(1 |
) |
Realized gain on available for sale securities, net of tax, reclassified out of accumulated other comprehensive loss |
|
$ |
- |
|
|
$ |
(5 |
) |
Amortization of defined benefit pension items: |
|
|
|
|
|
|
|
|
Prior service costs(1) |
|
$ |
- |
|
|
$ |
(11 |
) |
Income tax benefit |
|
|
- |
|
|
|
(2 |
) |
Amortization of defined benefit pension items, net of tax, reclassified out of accumulated other comprehensive loss |
|
$ |
- |
|
|
$ |
(9 |
) |
|
(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. Goodwill
In accounting for goodwill, the Company conducts an impairment review at least annually and more frequently if certain impairment indicators are evident. As of December 31, 2022 and December 31, 2021, the gross carrying value of goodwill was $5,848. Testing for 2022 and 2021 did not indicate impairment.
Note 18: Revenue Recognition
Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams such as service charges on deposit accounts, other service charges and fees, credit and debit card fees, trust income, and annuity and insurance commissions are recognized in accordance with ASC Topic 606, “Revenue from Contracts with Customers”. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as financial guarantees, derivatives, and certain credit card fees are outside the scope of the guidance. Noninterest revenue streams within the scope of Topic 606 are discussed below.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, ATM fees, wire transfer fees, and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Wire transfer fees, overdraft and nonsufficient funds fees and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.
Other Service Charges and Fees
Other service charges include safe deposit box rental fees, check ordering charges, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Check ordering charges are transactional based, and therefore the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.
Credit and Debit Card Fees
Credit and debit card fees are primarily comprised of interchange fee income and merchant services income. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa and MasterCard. Merchant services income mainly represents commission fees based upon merchant processing volume. The Company’s performance obligation for interchange fee income and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. In compliance with Topic 606, credit and debit card fee income is presented net of associated expense.
Trust Income
Trust income is primarily comprised of fees earned from the management and administration of trusts and estates and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Estate management fees are based upon the size of the estate. A partial fee is recognized half-way through the estate administration and the remainder of the fee is recognized when remaining assets are distributed and the estate is closed.
Insurance and Investment
Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue.
Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined.
OREO Gains and Losses
The Company records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Company finances the sale of OREO to the buyer, the Company assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2022 and 2021.
|
|
December 31, |
|
|
|
2022 |
|
|
2021 |
|
Noninterest Income |
|
|
|
|
|
|
|
|
In-scope of Topic 606: |
|
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
$ |
2,425 |
|
|
$ |
2,045 |
|
Other service charges and fees |
|
|
214 |
|
|
|
179 |
|
Credit and debit card fees |
|
|
1,916 |
|
|
|
1,869 |
|
Trust income |
|
|
1,817 |
|
|
|
1,792 |
|
Insurance and Investment (included within Other Income on the Consolidated Statements of Income) |
|
|
622 |
|
|
|
768 |
|
Noninterest Income (in-scope of Topic 606) |
|
$ |
6,994 |
|
|
$ |
6,653 |
|
Noninterest Income (out-of-scope of Topic 606) |
|
|
5,407 |
|
|
|
1,773 |
|
Total noninterest income |
|
$ |
12,401 |
|
|
$ |
8,426 |
|
Note 19: Leases
The Company’s leases are recorded under ASC Topic 842, “Leases”. The Company examines its contracts to determine whether they are or contain a lease. A contract with a lease is further examined to determine whether the lease is a short-term, operating or finance lease. As permitted by ASC Topic 842, the Company elected not to capitalize short-term leases, defined by the standard as leases with terms of 12 months or less. The Company also elected the practical expedient not to separate non-lease components from lease components within a single contract.
Right-of-use assets and lease liabilities are recognized for operating and finance leases. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease.
Lease payments
Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred. Payments for leases with terms longer than 12 months are included in the determination of the lease liability. Payments may be fixed for the term of the lease or variable. Variable payments result when the lease agreement includes a clause providing for escalation of lease payments at specified dates. If the escalation factor is known, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability. If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability. One of the Company’s leases provides a known escalator that is included in the determination of the lease liability. The remaining leases do not have variable payments during the term of the lease.
Options to Extend, Residual Value Guarantees, and Restrictions and Covenants
Of the Company’s seven operating leases as of December 31, 2022, four leases offer the option to extend the lease term. Two of the leases have two options of five years each and one lease has two options of three years each. At the time of capitalization, the Company was not reasonably certain whether it would exercise the options and did not include the time period in the calculation of the lease liability. Another lease has one option to extend the term for an additional five years. The Company exercised a previous option in 2020 to extend the lease. The lease agreement provides that the lease payment will increase at the exercise date based on the Consumer Price Index for All Urban Consumers (“CPI-U”). Because the CPI-U at the exercise date is unknown, the increase is not included in the cash flows determining the lease liability. None of the Company’s leases provide for residual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations. The Company terminated a lease prior to maturity during 2021. The Company paid an early termination fee to the lessor of $150.
The contracts in which the Company is lessee are with parties external to the Company and not related parties. The Company’s lease right of use asset is included in other assets and the lease liability is included in other liabilities. The following tables present information about leases:
70
|
|
December 31, 2022 |
|
|
December 31, 2021 |
|
Lease liability |
|
$ |
1,444 |
|
|
$ |
1,558 |
|
Right-of-use asset |
|
$ |
1,415 |
|
|
$ |
1,532 |
|
Weighted average remaining lease term (years) |
|
|
5.14 |
|
|
|
6.33 |
|
Weighted average discount rate |
|
|
3.29 |
% |
|
|
3.21 |
% |
|
|
For the Years Ended December 31, |
|
|
|
2022 |
|
|
2021 |
|
Lease Expense |
|
|
|
|
|
|
|
|
Operating lease expense |
|
$ |
331 |
|
|
$ |
368 |
|
Short-term lease expense |
|
|
2 |
|
|
|
2 |
|
Total lease expense |
|
$ |
333 |
|
|
$ |
370 |
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in lease liabilities |
|
$ |
331 |
|
|
$ |
362 |
|
Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period |
|
$ |
161 |
|
|
$ |
- |
|
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, 2022 |
|
Twelve months ending December 31, 2023 |
|
$ |
360 |
|
Twelve months ending December 31, 2024 |
|
|
346 |
|
Twelve months ending December 31, 2025 |
|
|
260 |
|
Twelve months ending December 31, 2026 |
|
|
211 |
|
Twelve months ending December 31, 2027 |
|
|
188 |
|
Thereafter |
|
|
206 |
|
Total undiscounted cash flows |
|
$ |
1,571 |
|
Less: discount |
|
$ |
(127 |
) |
Lease liability |
|
$ |
1,444 |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of National Bankshares, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of National Bankshares, Inc. and its subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive (loss) income, changes in stockholders' equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
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, 2022, there were no specific reserves based on analysis of individually identified impaired loans. For loans that were not specifically identified for impairment, management determined 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, 2022, the qualitative factor adjustments represented $7.44 million of the total allowance for loan losses of $8.23 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:
● | Obtaining 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, 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's auditor since 2000.
Winchester, Virginia
March 10, 2023