# National Bankshares Inc: Form 10-Q for the period ended Mar 31, 2021

- Company: [National Bankshares Inc](/companies/nksh.md) (CIK 796534)
- Form: 10-Q
- Filed: 2021-05-12
- Accepted by EDGAR: May 12, 2021, 16:31 ET
- Period: 2021-03-31
- Accession: 0001437749-21-011843
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/796534/000143774921011843/nksh20210331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/796534/000143774921011843/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-01-01 to 2021-03-31 | $1.8m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Interest expense | 3 months, 2021-01-01 to 2021-03-31 | $855.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-01-01 to 2021-03-31 | $1.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-01-01 to 2021-03-31 | $4.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-01-01 to 2021-03-31 | $0.74 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-01-01 to 2021-03-31 | $0.74 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 3 months, 2021-01-01 to 2021-03-31 | $6.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 3 months, 2021-01-01 to 2021-03-31 | $4.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2021-03-31 | $1.57bn | us-gaap:Assets |
| Total liabilities | at 2021-03-31 | $1.38bn | us-gaap:Liabilities |
| Shareholders' equity | at 2021-03-31 | $189.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 93,296 characters.

$ in thousands, except per share data

The purpose of this discussion and analysis is to provide information about the financial condition and results of operations of the Company. Please refer to the financial statements and other information included in this report as well as the Company’s 2020 Annual Report on Form 10-K for an understanding of the following discussion and analysis. References in the following discussion and analysis to “we” or “us” refer to the Company unless the context indicates that the reference is to the Bank.

### Cautionary Statement Regarding Forward-Looking Statements

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

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

- interest rates,
- general and local economic conditions,
- the legislative/regulatory climate,
- monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury, the Office of the Comptroller of the Currency, the Federal Reserve, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation (“FDIC”), and the impact of any policies or programs implemented pursuant to financial reform legislation,
- unanticipated increases in the level of unemployment in the Company’s market,
- the quality or composition of the loan and/or investment portfolios,
- demand for loan products,
- deposit flows,
- competition,
- demand for financial services in the Company’s market,
- the real estate market in the Company’s market,
- laws, regulations and policies impacting financial institutions,
- technological risks and developments, and cyber-threats, attacks or events,
- the Company’s technology initiatives,
- steps the Company takes in response to the COVID-19 pandemic, the severity and duration of the pandemic, the uncertainty regarding new variants of COVID-19 that have emerged, the speed and efficacy of vaccine and treatment developments, the impact of loosening or tightening of government restrictions, the pace of recovery when the pandemic subsides and the heightened impact it has on many of the risks described herein,
- performance by the Company’s counterparties or vendors,
- applicable accounting principles, policies and guidelines, and
- business disruption and/or impact due to the coronavirus or similar pandemic diseases.

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

The COVID-19 pandemic and measures implemented to reduce its spread have had international impacts. The effect on the Company’s market area has been similar to that experienced by many areas across the nation, with decreased business activity, higher unemployment rates, and record filings of unemployment claims. While vaccine roll-out and other measures provide some positive indicators, the length of economic downturn is not yet known. An extended economic downturn will negatively impact business activity within the Company’s market and could lead to a higher rate of delinquent loans, charge-offs, and reduced interest and fee income.

### Cybersecurity

As a financial institution, NBI is subject to cybersecurity risks. Cybersecurity risks have expanded with the pandemic as fraudsters seek to take advantage of customer concerns and changes to work environment. The Company has not suffered any losses or breaches due to the pandemic.

We have deployed a multi-faceted approach to limit the risk and impact of unauthorized access to customer accounts and to information relevant to customer accounts. We use digital technology safeguards, internal policies and procedures, and employee training to reduce the exposure of our systems to cyber-intrusions. We do not offer online account openings or loan originations, limit the dollar amount of online banking transfers to other banks, do not permit customers to submit address changes or wire requests through online banking, require a special vetting process for commercial customers who wish to originate ACH transfers, and limit certain functionalities of mobile banking. The Company also requires assurances from key vendors regarding their cybersecurity. However, it is not possible to fully eliminate exposure. The potential for financial and reputational losses due to cyber-breaches is increased by the possibility of human error, unknown system susceptibilities, and the rising sophistication of cyber-criminals to attack systems, disable safeguards and gain access to accounts and related information.

We maintain insurance for these risks but insurance policies are subject to exceptions, exclusions and terms whose applications have not been widely interpreted in litigation. Accordingly, insurance can provide less than complete protection against the losses that result from cybersecurity breaches and pursuing recovery from insurers can result in significant expense. In addition, some risks such as reputational damage and loss of customer goodwill, which can result from cybersecurity breaches, cannot be insured against.

### Response to COVID-19 Pandemic

The global COVID-19 pandemic has affected the global economy for approximately one year. The Company has complied with national, state and local guidelines to help reduce the spread of the virus, including implementing social distancing measures for employees and serving customers primarily through digital channels, drive-thrus and ATMs, and in person when requested. We have determined to reopen our lobbies in May. Current analysis of our transactions has not shown a decline. Controls over cash and physical assets have remained in place and internal controls over financial reporting and disclosure have been maintained.

The Company continues to monitor the impact of the pandemic on significant estimates, including the allowance for loan losses, valuation of goodwill, valuation of OREO, other-than-temporary impairment of securities and pension obligations, as well as lease right-of-use assets. The impact to the allowance for loan losses is discussed under the “Asset Quality” section. Analysis as of March 31, 2021 did not indicate negative impacts to the valuation of OREO, other-than-temporary impairment of securities, pension obligations or lease right-of-use assets.

The Company also continues to monitor increased threats of fraud, including schemes against employees new to remote working arrangements, fraud related to state unemployment insurance and COVID-19 related scams against customers.

The Company’s business relies on positive relationships with customers. At this time, we feel our customer relationships remain strong and our team remains ready to provide banking services. The Company has a robust business continuity plan, and partners with vendors whom we believe also have robust business continuity plans. In implementing its business continuity plan to address the COVID-19 pandemic, the Company has not incurred material expenditures and does not anticipate material expenditures. In the event that we experience high infection rates within our staff, our ability to serve our customers would be adversely impacted for a certain period. We have implemented many measures to protect the health of our employees and continue to monitor the situation closely. Further, all critical functions are cross-trained as part of our business continuity preparedness.

The following discusses our financial position and results of operations for the three month period ended March 31, 2021 and where appropriate, the impact of the COVID-19 pandemic, as well as potential future impact.

### Non-GAAP Financial Measures

This report refers to certain financial measures that are computed under a basis other than U.S. GAAP (“non-GAAP”), including the net interest margin and the noninterest margin.

#### Return on Average Assets and Return on Average Equity

The return on average assets and return on average equity are measures of profitability. The return on average assets and return on average equity are calculated by annualizing net income and dividing by average year-to-date assets or equity, respectively. When net income includes larger nonrecurring items, the annualization magnifies their effect. In order to reduce distortion within the ratios, the Company adjusts net income for larger non-recurring items prior to annualization, and then nets the items against the annualized net income. The reconciliation of adjusted annualized net income, which is not a measurement under U.S. GAAP, is reflected in the table below.

The following table details the calculation of annualized net income for the return on average assets and the return on average equity:

*$ in thousands*

|  | Three months ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Net Income | **$4,766** | $3,979 |
| Items deemed non-recurring by management: |  |  |
| Less: partnership income (1), net of tax of ($98) in 2021 and ($65) in 2020 | **(369)** | (244) |
| Securities gains, net of tax of ($1) in 2021 and ($4) in 2020 | **(4)** | (16) |
| Adjusted net income | **4,393** | 3,719 |
| Adjusted net income, annualized | **17,816** | 14,958 |
| Items deemed non-recurring by management: |  |  |
| Add: partnership income, net of tax of $98 in 2021 and $65 in 2020 | **369** | 244 |
| Add: Securities gains, net of tax of $1 in 2021 and $4 in 2020 | **4** | 16 |
| Annualized net income for ratio calculation | **$18,189** | $15,218 |

(1) During the first quarter of each year, the Company adjusts its basis in partnership interests. During 2021 and 2021, the adjustment resulted in recognition of a gain. During 2021, the Company also received a one-time payout from a partnership interest, recognized in income. Partnership income is removed from income prior to annualization in order to avoid distortion, and added back to income after annualization.

#### Net Interest Margin

The Company uses the net interest margin to measure profit on interest generating activities, as a percentage of total interest-earning assets. The net interest margin is calculated by dividing annualized taxable equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit is 21%. The reconciliation of tax equivalent net interest income, which is not a measurement under U.S. GAAP, to net interest income, is reflected in the table below.

*$ in thousands*

| GAAP measures: | Three months ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Interest and fees on loans | **$8,550** | $8,466 |
| Interest on interest-bearing deposits | **28** | 217 |
| Interest and dividends on securities - taxable | **1,783** | 2,356 |
| Interest on securities - nontaxable | **521** | 349 |
| Total interest income | **$10,882** | $11,388 |
| Interest on deposits | **$855** | $1,796 |
| Net interest income | **$10,027** | $9,592 |
| Non-GAAP measures: |  |  |
| Tax benefit on nontaxable loan income | **$75** | $123 |
| Tax benefit on nontaxable securities income | **170** | 96 |
| Total tax benefit on nontaxable interest income | **$245** | $219 |
| Total tax equivalent net interest income | **$10,272** | $9,811 |
| Total tax equivalent net interest income, annualized | **$41,659** | $39,460 |

36

#### Efficiency Ratio

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

*$ in thousands*

|  | Three months ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Noninterest expense | **$6,536** | $6,467 |
| Taxable-equivalent net interest income | **$10,272** | $9,811 |
| Noninterest income | **2,334** | 2,135 |
| Less: partnership income | **(467)** | (309) |
| Less: realized securities gains | **(5)** | (20) |
| Total income for ratio calculation | **$12,134** | $11,617 |
| Efficiency ratio | **53.87%** | 55.67% |

#### Noninterest Margin

The Company uses the noninterest margin to evaluate net noninterest expense. A lower noninterest margin indicates more effective expense management in relation to noninterest income generation. The noninterest margin is calculated as noninterest expense less noninterest income (excluding realized securities gain/loss, net), annualizing the difference, and dividing by average year-to-date assets. The annualization process excludes significant one-time items to prevent distortion. The reconciliation of adjusted noninterest income and adjusted noninterest expense, which are not measurements under GAAP, is reflected in the table below.

|  | Three months ended March 31, 2021 | 2020 |
| --- | ---: | ---: |
| Noninterest expense under GAAP | **$6,536** | $6,467 |
| Noninterest income under GAAP | **$2,334** | $2,135 |
| Less: partnership income (1) | **(467)** | (309) |
| Less: realized securities gains, net | **(5)** | (20) |
| Noninterest income for ratio calculation, non-GAAP | **$1,862** | $1,806 |
| Net noninterest expense, non-GAAP | **$4,674** | $4,661 |
| Net noninterest expense, non-GAAP, annualized | **18,956** | 18,746 |
| Add back: partnership income | **467** | 309 |
| Net noninterest expense, non-GAAP, annualized, adjusted | **19,423** | 19,055 |
| Average assets | **$1,530,908** | $1,312,427 |
| Noninterest margin | **1.27%** | 1.45% |

(1) During the first quarter of each year, the Company adjusts its basis in partnership interests. During 2021 and 2020, the adjustment resulted in recognition of a gain. During 2021, the Company also received a one-time payout from a partnership interest, recognized in income. Partnership income is removed from income prior to annualization in order to avoid distortion, and added back to income after annualization.

### Critical Accounting Policies

### General

The Company’s financial statements are prepared in accordance with U.S. GAAP. The financial information contained within our statements is, to a significant extent, financial information based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change.

### Allowance for Loan Losses

The allowance for loan losses is an estimate of probable losses inherent in our loan portfolio. The allowance is funded by the provision for loan losses, reduced by charge-offs of loans and increased by recoveries of previously charged-off loans. The determination of the allowance is based on two accounting principles, 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.

Probable losses are accrued through two calculations, individual evaluation of impaired loans and collective evaluation of the remainder of the portfolio. Impaired loans are larger non-homogeneous loans for which there is a probability that collection will not occur according to the loan terms, as well as loans whose terms have been modified in a TDR. Impaired loans that are not TDRs with an estimated impairment loss are placed on nonaccrual status. TDRs with an impairment loss may accrue interest if they have demonstrated six months of timely payment performance.

#### Impaired loans

Impaired loans are identified through the Company’s credit risk rating process. Estimated loss for an impaired loan is the amount of recorded investment that exceeds the loan’s fair value. Fair value of an impaired loan is measured by the fair value of collateral (“collateral method”), the present value of future cash flows (“cash flow method”), or observable market price. The Company applies the collateral method to collateral-dependent loans, loans for which foreclosure is imminent and to loans for which the fair value of collateral is a more reliable estimate of fair value. The cash flow method is applied to loans that are not collateral dependent and for which cash flows may be estimated.

The Company bases collateral method fair valuation upon the “as-is” value of independent appraisals or evaluations. Valuations for impaired loans secured by residential 1-4 family properties with outstanding principal balances greater than $250 are based on an appraisal. Appraisals are also used to value impaired loans secured by commercial real estate with outstanding principal balances greater than $500. Collateral-method 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 and internal valuations provide an estimate of market value. Appraisals must conform to the Uniform Standards of Professional Appraisal Practice and are prepared by an independent third-party appraiser who is certified and licensed and who is approved by the Company. Appraisals may incorporate market analysis, comparable sales analysis, cash flow analysis and market data pertinent to the property to determine market value.

Internal 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. Evaluations incorporate multiple sources of data to arrive at a property’s market value, including physical inspection, independent third-party automated tools, comparable sales analysis and local market information.

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

The appraisal or evaluation value for a collateral-dependent loan for which recovery is expected solely from the sale of collateral is reduced by estimated selling costs. Estimated losses on collateral-dependent loans, as well as any other impairment loss considered uncollectible, are charged against the allowance for loan losses. Impairment losses that are not considered uncollectible or for loans that are not collateral-dependent are accrued in the allowance. Impaired loans with partial charge-offs are maintained as impaired until the remaining balance is satisfied. Smaller homogeneous impaired loans that are not TDRs and are not part of a larger impaired relationship are collectively evaluated.

TDRs are impaired loans and are measured for impairment under the same valuation methods as other impaired loans. TDRs are maintained in nonaccrual status until the loan has demonstrated reasonable assurance of repayment with at least six months of consecutive timely payment performance.

#### Collectively evaluated loans

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

Probable loss is determined by applying historical net charge-off rates as well as additional percentages for trends and current levels of quantitative and qualitative factors. Loss rates are calculated for and applied to individual classes by averaging loss rates over the most recent eight quarters. The look-back period of eight quarters is applied consistently among all classes.

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

Qualitative factors are evaluated and allocations are applied to each class. Qualitative factors include delinquency rates, loan quality and concentrations, loan officers’ experience, changes in lending policies and changes in the loan review process. Economic factors such as unemployment rates, bankruptcy rates and others are evaluated, with standard allocations applied consistently to relevant classes.

The Company accrues additional allocations for criticized loans within each class and for loans designated high risk. Criticized loans include classified loans as well as loans rated “special mention.” Loans rated special mention indicate weakened credit quality but to a lesser degree than classified loans. High risk loans are defined as junior lien mortgages, loans with high loan-to-value ratios and loans with terms that require interest only payments. Both criticized loans and high risk loans are included in the base risk analysis for each class and are allocated additional reserves.

#### Estimation of the allowance for loan losses

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

The estimate of the allowance for March 31, 2021 considered market conditions as of March 31, 2021 where possible, and the most recent available information when data was not available as of March 31, 2021, portfolio conditions and levels of delinquencies at March 31, 2021, and net charge-offs in the eight quarters prior to the quarter ended March 31, 2021. Some of the available economic data lags the reporting date by one to three months. Delinquency levels at March 31, 2021 are lower than they might otherwise have been due to modifications granted to qualifying borrowers in accordance with regulatory guidance and legislative provisions in the CARES Act and CAA, including loan payment extensions, interest only periods and rate reductions to borrowers. Past due status will not occur during the period in which a payment is extended. Providing an interest only period affords borrowers lower payments during the interest only period. When extension periods and interest only periods expire, there may be increases in past dues that will increase the requirement for the allowance for loan loss. Management used its best judgement and efforts in incorporating possible impacts as of March 31, 2021 in estimating the allowance for loan losses, but if the current economic challenges worsen, the ultimate amount of loss could vary from that estimate. For additional discussion of the allowance, see Note 3 to the consolidated financial statements and “Asset Quality,” and “Provision and Allowance for Loan Losses.”

### Goodwill

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 impairment testing in the fourth quarter of each year. The Company’s most recent impairment test was performed using data from September 30, 2020. Accounting guidance provides the option of performing preliminary assessment of qualitative factors before performing more substantial testing for impairment. The Company opted not to perform the preliminary assessment. The Company’s goodwill impairment analysis considered three valuation techniques appropriate to the measurement. The first technique uses the Company’s market capitalization as an estimate of fair value; the second technique estimates fair value using current market pricing multiples for companies comparable to the Company; while the third technique uses current market pricing multiples for change-of-control transactions involving companies comparable to the Company. The analysis did not result in an impairment assessment.

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

### Pension Plan

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

### Overview

National Bankshares, Inc. is a financial holding company that was organized in 1986 under the laws of Virginia and is registered under the Bank Holding Company Act of 1956. NBI has two wholly-owned subsidiaries, the National Bank of Blacksburg and National Bankshares Financial Services, Inc. NBB is a community bank and does business as National Bank from twenty-five office locations and one loan production office. NBB is the source of nearly all of the Company’s revenue. NBFS does business as National Bankshares Investment Services and National Bankshares Insurance Services. Income from NBFS is not significant at this time, nor is it expected to be so in the near future.

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

### Lending

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

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

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

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

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

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

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

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

*Public Sector and Industrial Development Loans.* The Bank provides both long and short term loans to municipalities and other governmental entities within its geographical footprint. Borrowers include general taxing authorities such as a city or county, industrial/economic development authorities or utility authorities. Repayment sources are derived from taxation, such as property taxes and sales taxes, or revenue from the project financed with the loan. The Company’s underwriting considers local economic and population trends, reserves and liabilities, including pension liabilities.

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

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

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

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

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

*SBA Paycheck Protection Program.* The SBA Paycheck Protection Program provides loans to aid small businesses in maintaining their payroll for up to 24 weeks. Through the program, banks may fund loans to qualifying borrowers with the expectation that the SBA will either pay off the loans and forgive the borrower’s debt, or guarantee the loans until the borrower pays off the debt. The loans bear a contractual interest rate of 1%, bolstered by an origination fee to be recognized over the life of the loan. Loans that are forgiven or paid off prior to maturity result in recognition of the outstanding origination fee at the date of forgiveness or payoff. The Company has assisted local businesses through the PPP by providing 1,164 loans totaling $80,999 since the program’s inception in April of 2020. To date, 544 PPP loans with original balances totaling $35,862 have been forgiven or paid off. As of March 31, 2021, the Company held $43,631 in PPP loans, net of deferred fees and costs. The current application period ends May 31, 2021.

### Other Products and Services

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

### Performance Summary

The following table presents the Company’s key performance ratios for the three months ended March 31, 2021 and March 31, 2020 and the year ended December 31, 2020. The measures for March 31, 2021 and March 31, 2020 are annualized, except for basic and fully diluted earnings per share.

|  | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Twelve Months Ended December 31, 2020 |
| --- | ---: | ---: | ---: |
| Return on average assets (1) | **1.19%** | 1.16% | 1.15% |
| Return on average equity (1) (4) | **9.30%** | 8.03% | 8.21% |
| Basic and fully diluted earnings per share (4) | **$0.74** | $0.61 | $2.48 |
| Net interest margin (2) | **2.89%** | 3.20% | 2.98% |
| Noninterest margin (3) | **1.27%** | 1.45% | 1.22% |
| Efficiency ratio (5) | **53.87%** | 55.67% | 53.46% |

(1) Return on average assets and return on average equity are non-GAAP measures. Components of U.S. GAAP net income that are deemed non-recurring by management are removed prior to annualizing the adjusted net income. The adjusted net income is annualized. Items deemed non-recurring by management are added back to the annualized adjusted net income, and the total is divided by average assets for return on average assets, or divided by average equity for return on average equity. See “Non-GAAP Financial Measures” above.

(2) Net interest margin is a non-GAAP measure. Tax advantaged portions of net interest income are adjusted to their fully-taxable equivalent basis and divided by average earning assets. See “Non-GAAP Financial Measures” above.

(3) Noninterest margin is a non-GAAP measure. Noninterest income is adjusted for items deemed by management to be non-recurring and securities gains and losses. Adjusted noninterest income is subtracted from noninterest expense and the difference is annualized, then non-recurring items are added back and the sum is divided by average year-to-date assets. See “Non-GAAP Financial Measures” above.

(4) During the three months ended March 31, 2021, the Company repurchased 111,832 shares under its publicly announced stock repurchase plan. The repurchase reduced shareholders equity by $3,991. See “Non-GAAP Financial Measures” above.

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

### Growth

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

|  | March 31, 2021 | December 31, 2020 | Percent Change |
| --- | ---: | ---: | ---: |
| Interest-bearing deposits | **$135,142** | $120,725 | 11.94% |
| Securities available for sale and restricted stock | **572,204** | 548,021 | 4.41% |
| Loans, net | **770,824** | 760,318 | 1.38% |
| Deposits | **1,358,588** | 1,297,143 | 4.74% |
| Total assets | **1,568,210** | 1,519,673 | 3.19% |

42

### Asset Quality

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

|  | March 31, 2021 | March 31, 2020 | December 31, 2020 |
| --- | ---: | ---: | ---: |
| Nonperforming loans | **$3,691** | $3,452 | $3,685 |
| Loans past due 90 days or more, and still accruing | **12** | 170 | 17 |
| Other real estate owned | **957** | 1,584 | 1,553 |
| Allowance for loan losses to loans net of unearned income and deferred fees and costs | **1.10%** | 0.99% | 1.10% |
| Allowance for loan losses net of unearned income and deferred fees and costs, excluding SBA PPP loans | **1.16%** | N/A | 1.16% |
| Net charge-off ratio | **0.00%** | 0.06% | 0.05% |
| Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned | **0.60%** | 0.69% | 0.68% |
| Ratio of allowance for loan losses to nonperforming loans | **231.27%** | 209.73% | 230.15% |

The Company’s risk analysis at March 31, 2021 determined an allowance for loan losses of $8,536 or 1.10% of loans net of unearned income and deferred fees and costs. Included in loans net of unearned income and deferred fees and costs are $43,631 in PPP loans. Because PPP loans are guaranteed by the U.S. Small Business Administration, they are not included in the calculation for the allowance for loan losses. If the PPP loans are removed from loans net of unearned income and deferred fees and costs, the allowance ratio is 1.16%. The allowance at December 31, 2020 was $8,481 or 1.10% of loans net of unearned income and deferred fees and costs.

The determination of the appropriate level for the allowance for loan losses resulted in a provision of $50 for the three months ended March 31, 2021, compared with a provision of $479 for the three month period ended March 31, 2020. To determine the appropriate level of the allowance for loan losses, the Company considers credit risk for certain loans designated as impaired and for non-impaired (“collectively evaluated”) loans.

### Individually Evaluated Impaired Loans

Individually evaluated impaired loans at March 31, 2021 were $4,939 gross and $4,940 net of unearned income and deferred fees and costs, with specific allocations to the allowance for loan losses of $18. Individually evaluated impaired loans totaled $4,903 gross and $4,905 net of unearned income and deferred fees and costs, with specific allocations to the allowance for loan losses totaling $75 at December 31, 2020. The specific allocation is determined based on criteria particular to each impaired loan.

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

Individually evaluated impaired loans include TDRs. In the ordinary course of business, the Company grants modification requests when deemed appropriate. Modifications may be granted for competitive reasons or to strengthen repayment prospects for borrowers who may or may not be experiencing financial difficulty. The Company reviews all modifications to determine whether, at the time of the modification, the borrower is experiencing financial difficulty and whether the Company provided a concession that it would not otherwise consider. Loans with modifications that meet these criteria are designated TDR.

The CARES Act, the CAA and regulatory agencies provided guidance allowing banks to forego TDR designation for COVID-19 related accommodations to loans that meet certain criteria. In accordance with the guidance, the Company did not designate TDR status for modifications to loans impacted by the pandemic that met the criteria. Additional tracking mechanisms implemented at the beginning of the pandemic continue to aid the Company in monitoring COVID-19 related modifications.

As the pandemic continues, some borrowers who received COVID-19 related modifications have requested subsequent accommodations. When the Company grants subsequent modifications to a loan that received a COVID-19 modification, management assesses risk rating and accrual status for the loan. Every modification is reviewed for TDR indicators with additional evaluation and documentation requirements for all COVID-19 related modifications to loans over $250,000.

### Collectively Evaluated Loans

Collectively evaluated loans totaled $776,305 gross and $774,421 net of unearned income and deferred fees and costs, with an allowance of $8,518 or 1.10% of loans net of unearned income and deferred fees and costs at March 31, 2021. Excluding PPP loans, the collectively evaluated allowance ratio was 1.16% at March 31, 2021. At December 31, 2020, collectively evaluated loans totaled $765,124 gross and $763,894 net of unearned income and deferred fees and costs, with an allowance of $8,406 or 1.10%. Excluding PPP loans, the collectively evaluated allowance ratio was 1.16% at December 31, 2020.

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

#### Net Charge-Offs

Net charge-off rates for each class are averaged over eight quarters and applied to the class balance. Increases in the net charge-off rate increase the required allowance for collectively-evaluated loans, while decreases in the net charge-off rate decrease the required allowance for collectively-evaluated loans.

On a portfolio level, the Company experienced a net recovery of loan losses of $5 for the three months ended March 31, 2021. Net charge-offs for the three months ended March 31, 2020 were $102 or 0.06% of average loans, while net charge-offs for the 12 months ended December 31, 2020 were $373 or 0.05% of average loans.

The eight-quarter average historical loss rate was 0.05% as of March 31, 2021, 0.07% as of December 31, 2020 and 0.08% as of March 31, 2020.

#### Economic Factors

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

The Company sources economic data pertinent to its market from the most recently available publications. However, some economic indicators lag the report date by one to three months. In periods of low volatility, lagging indicators are accepted as reasonably representative of current conditions. The COVID-19 pandemic has introduced significant uncertainty which results in the need for greater timeliness in information.

To incorporate timely information to the assessment of economic impact to credit risk, at the beginning of the pandemic the Company implemented a qualitative factor for national unemployment filings. Unemployment filings for the Company’s market area is not available on a timely basis, however national data is available on a timely basis and historical analysis shows a strong correlation between national and local unemployment filings. National unemployment claims escalated sharply beginning in the latter half of March 2020. Weekly claims peaked at the beginning of April 2020 and have fallen since, but for the three months ended March 31, 2021, remain approximately four times pre-pandemic levels. The Company assessed this as a significant impact to credit risk at March 31, 2021.

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

Business and personal bankruptcy filing data was available as of December 2020. Higher bankruptcy filings indicate heightened credit risk and increase the allowance for loan losses, while lower bankruptcy filings have a beneficial impact on credit risk. Compared with data available at December 31, 2020, business and personal bankruptcies were slightly lower and resulted in slightly lower allocations.

Residential vacancy rates and housing inventory impact the Company’s residential construction customers and the consumer real estate market. Higher levels increase credit risk. The residential vacancy rate at March 31, 2021 was measured as of the fourth quarter of 2020 and while still lower than normal levels, worsened slightly from the data incorporated into the December 31, 2020 calculation, resulting in a higher allocation. Housing inventory data was available as of March 31, 2021. Levels were similar to those at December 31, 2020, resulting in a similar allocation.

#### Asset Quality Indicators

Asset quality indicators, including past due levels, nonaccrual levels and internal risk ratings, are evaluated at the class level.

The Company provided COVID-19 related accommodations to qualifying borrowers without which additional loans may have been included in past due data at March 31, 2021. The Company followed its normal risk rating practices and in keeping with the regulatory guidance, did not automatically downgrade the risk rating on loans that received COVID-19 accommodations. Without the regulatory provision, additional loans may have been included in criticized assets as of March 31, 2021.

Loans past due and loans designated nonaccrual indicate heightened credit risk. Increases in past due and nonaccrual loans increase the required level of the allowance for loan losses and decreases in past due and nonaccrual loans reduce the required level of the allowance for loan losses.

Accruing loans past due 30-89 days were 0.23% of total loans net of unearned income and deferred fees and costs at March 31, 2021, an increase from 0.19% at December 31, 2020. Accruing loans past due 90 days or more were 0.00% of total loans, net of unearned income and deferred fees and costs at March 31, 2021 and December 31, 2020. Nonaccrual loans at March 31, 2021 were 0.47% of total loans net of unearned income and deferred fees and costs, slightly lower than 0.48% at December 31, 2020.

Loans rated “special mention” and “classified” (together, “criticized assets”) indicate heightened credit risk. Higher levels of criticized assets increase the required level of the allowance for collectively-evaluated loans, while lower levels of criticized assets reduce the required level of the allowance for collectively-evaluated loans. Loans rated special mention receive a 50% greater allocation for qualitative risk factors, and loans rated classified receive a 100% greater allocation for qualitative risk factors. A classified loss rate is also applied to classified loans, calculated as net charge offs divided by classified loans.

Collectively evaluated loans rated “special mention” were $8,021 at March 31, 2021, slightly lower than $8,035 at December 31, 2020. Collectively evaluated loans rated classified were $605 at March 31, 2021, an increase from $473 at December 31, 2020.

#### Other Factors

The Company considers other factors that impact credit risk, including the interest rate environment, the competitive, legal and regulatory environments, changes in lending policies and loan review, changes in management, and high risk loans, as well as a factor added to measure the risk from loans that received a COVID-19 modification and then received a subsequent COVID-19 modification.

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

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

Lending policies, loan review procedures and management’s experience influence credit risk. Since December 31, 2020, there have been no changes to the Company’s lending policies or loan review procedures, or changes in management’s experience.

Levels of high risk loans are considered in the determination of the level of the allowance for loan loss. High risk loans are defined by the Company as loans secured by junior liens, interest only loans and loans with a high loan-to-value ratio. A decrease in the level of high risk loans within a class decreases the required allocation for the loan class, and an increase in the level of high risk loans within a class increases the required allocation for the loan class. Total high risk loans decreased $10,752 or 9.50% from the level at December 31, 2020, resulting in a decreased allocation.

In light of COVID-19 related modifications, the Company considers the impact to credit risk of certain loans granted COVID-19 related modifications. The loans captured in the analysis were granted COVID-19 related modifications subsequent to initial COVID-19 related modifications, have not yet emerged from the modification period and are flagged by credit review procedures for additional monitoring. The loans within this population at March 31, 2021 decreased significantly from December 31, 2020, resulting in a decreased allocation.

#### 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. The unallocated surplus at March 31, 2021 is $356 or 4.4% in excess of the calculated requirement. The unallocated surplus at December 31, 2020 was $396 or 4.9% in excess of the calculated requirement. The surplus provides some mitigation of the uncertainty surrounding the impact of COVID-19.

### Conclusion

The calculation of the appropriate level for the allowance for loan losses incorporates analysis of multiple factors and requires management’s prudent and informed judgment. The most recently available data showed improvements that decreased the required level of the allowance for loan losses at March 31, 2021 from December 31, 2020 including loans considered high risk, business and personal bankruptcy filings and certain loans with COVID-19 related modifications. Other indicators showed worsening from levels at December 31, 2020 and increased the required level of the allowance for loan losses, including the unemployment rate and some asset quality indicators. Continued high national unemployment filings contributed to the allowance for loan losses. The Company also maintained its unallocated surplus at 4.4% to mitigate some of the uncertainty caused by the pandemic. Based on analysis of historical indicators, asset quality and economic factors, management believes the level of allowance for loan losses is reasonable for the credit risk in the loan portfolio as of December 31, 2020.

Please refer to Note 3: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans for further information on collectively evaluated loans, individually evaluated impaired loans and the unallocated portion of the allowance for loan losses.

The following table discloses the OREO in physical possession and in process at each reporting date:

| Other Real Estate Owned(1) | March 31, 2021 | March 31, 2020 | December 31, 2020 |
| --- | ---: | ---: | ---: |
| Real estate construction | **$957** | $1,443 | $1,443 |
| Consumer real estate | **-** | 141 | 110 |
| Total other real estate owned | **$957** | $1,584 | $1,553 |
| Loans in process of foreclosure | **$734** | $558 | $1,344 |

(1) Net of valuation allowance.

OREO decreased $596 from December 31, 2020 and $627 from March 31, 2020. As of March 31, 2021, loans in various stages of foreclosure totaled $734, of which $80 are secured by residential real estate. Loans currently in the process of foreclosure may impact OREO in future quarters. It is not possible to accurately predict the future total of OREO because property sold at foreclosure may be acquired by third parties and OREO properties are regularly marketed and sold.

The Company continues to monitor risk levels within the loan portfolio. As of March 31, 2021, the effect of the COVID-19 pandemic has not impacted real estate values in the Company’s market. If the pandemic increases unemployment in the Company’s market, real estate values could decline, causing reduced collateral values for existing OREO properties which may result in loss recognition. The Company is working diligently with borrowers to provide payment relief, however if the pandemic results in increased foreclosures, OREO properties will increase.

### Modifications and TDRs

### Modifications

In the ordinary course of business the Company modifies loan terms on a case-by-case basis, including consumer and commercial loans, for a variety of reasons. Modifications may include rate reductions, payment extensions of varying lengths of time, a change in amortization term or method or other arrangements. Payment extensions allow borrowers temporary payment relief and result in extending the original contractual maturity by the number of months for which the extension was granted. The Company may grant payment extensions to borrowers who have demonstrated a willingness and ability to repay their loan but who are experiencing consequences of a specific unforeseen temporary hardship. If the temporary event is not expected to impact a borrower’s ability to repay the debt, and if the Company expects to collect all amounts due including interest accrued at the contractual interest rate for the extension period at contractual maturity, the modification is not designated a TDR.

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

The Company codes modifications to assist in identifying TDRs. During the three months ended March 31, 2021, the Company provided 244 modifications for competitive reasons to loans totaling $34,209. The modifications were not TDRs and were not related to COVID-19. For the three months ended March 31, 2020, the Company provided non-TDR modifications for competitive reasons to 273 loans totaling $37,350. For the twelve months ended December 31, 2020, the Company provided non-TDR modifications for competitive reasons to 1,047 loans totaling $152,681.

### COVID-19 Modifications

The COVID-19 pandemic has negatively impacted a significant number of the Company’s borrowers, and is likely to continue to adversely impact some borrowers for the foreseeable future. Since the pandemic began in March 2020, the Company provided modifications related to COVID-19 financial difficulty, including payment extensions and interest only periods. Under the CARES Act, CAA and regulatory guidance, modifications (generally of no more than six months in duration) to loans that were not more than 30 days past due as of December 31, 2019 are not considered for TDR designation. The modifications met the requirements specified and as such were not designated as TDRs. The Company followed its normal risk rating and nonaccrual designation procedures and did not automatically downgrade or designate as nonaccrual if the loan was modified for COVID-19 related difficulty.

The following tables provide information regarding COVID-19 related modifications for the three months ended March 31, 2021 and March 31, 2020, and the 12 months ended December 31, 2020.

*Three Months Ended March 31, 2021*

| Modifications To Borrowers Experiencing COVID-19 Related Financial Difficulty | Number | Amount (in thousands) |
| --- | ---: | ---: |
| Payment extensions(1) | **31** | **$12,074** |
| Interest-only period for amortizing loans(1) | **8** | **22,135** |
| Total | **39** | **$34,209** |

*Three Months Ended March 31, 2020*

| Modifications To Borrowers Experiencing COVID-19 Related Financial Difficulty | Number | Amount (in thousands) |
| --- | ---: | ---: |
| Rate reductions (2) | 1 | $16 |
| Payment extensions (1) | 62 | 31,589 |
| Maturity date extensions | 1 | 315 |
| Total | 64 | $31,920 |

*Twelve Months Ended December 31, 2020*

| Modifications To Borrowers Impacted by the COVID-19 Pandemic | Number | Amount (in thousands) |
| --- | ---: | ---: |
| Rate reductions (2) | 5 | $442 |
| Payment extensions (1) | 350 | 121,676 |
| Maturity date extension | 2 | 729 |
| Interest-only period for amortizing loans (1) | 31 | 59,982 |
| Total | 388 | $182,829 |

(1) Modifications for payment extensions and interest-only periods are governed by an agreements that provide a date at which the modifications will expire.

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

#### Methodology

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

#### Subsequent Requests for Modification

Certain borrowers who received initial COVID-19 related modifications requested and were granted a subsequent modification. Of the COVID-19 related modifications provided from the beginning of the pandemic in March 2020 through March 31, 2021, 147 loans totaling $103,693 were recipients of initial and subsequent modifications. If borrowers continue to suffer adverse impacts from the pandemic and the Company’s analysis indicates a modification will bolster the prospect of full repayment in the future, the Company expects to continue to work with borrowers. Future concessions may result in a loan being designated TDR, impaired and/or nonaccrual, and may result in a downgrade in the risk rating, based upon individual borrower circumstances and regulatory and accounting guidance.

#### Loans Remaining Within the Modification Period at March 31, 2021

Of the loans modified for pandemic related hardships, 13 loans remained in their modification period at March 31, 2021: seven loans totaling $7.8 million remained in deferral and another six loans totaling $14.4 million remained on interest-only payments. To account for the possible increase in credit risk from loans that have not emerged from their modification period, the Company added an allocation to the allowance for loan losses.

#### TDR Designation

Modifications of loan terms to borrowers experiencing financial difficulty are made in an attempt to protect as much of the Company’s investment in the loan as possible. Restructuring generally results in a loan with either lower payments or a maturity extended beyond that originally required, and is expected to result in a lower risk of loss associated with nonperformance than the pre-modified loan. The Company restructured loan terms for certain qualified financially distressed borrowers who agreed to work in good faith and demonstrated the ability to make the restructured payments.

The determination of whether a modification should be designated a TDR requires consideration of all facts and circumstances surrounding the transaction. With the exception of borrowers who fall under the CARES Act and CAA discussed above, modifications in which the borrower is experiencing financial difficulty and for which the Company makes a concession to the original contractual loan terms are designated TDRs. Concessions may include one or a combination of the following: a reduction of the stated interest rate below market rate for loans of similar terms and credit quality, an extension of the maturity date at an interest rate below a comparable market rate, restructuring an amortizing loan to interest only for a period, or forgiveness of principal or accrued interest.

All TDR loans are individually evaluated for impairment for purposes of determining the allowance for loan losses. TDR loans that do not demonstrate current payments for at least six months are maintained on nonaccrual until the borrower demonstrates sustained repayment history under the restructured terms and continued repayment is not in doubt. Otherwise, interest income is recognized using a cost recovery method.

The Company’s TDRs were $4,285 at March 31, 2021, an increase from $4,249 at December 31, 2020. Accruing TDR loans amounted to $1,378 at March 31, 2021 and $1,410 at December 31, 2020. The following tables present the past due status of TDRs as of the dates indicated.

|  | TDR Status as of March 31, 2021 Total TDR Loans | Accruing Current | 30-89 Days Past Due | 90+ Days Past Due | Nonaccrual |
| --- | ---: | ---: | ---: | ---: | ---: |
| Consumer real estate | **$193** | **$193** | **$-** | **$-** | **$-** |
| Commercial real estate | **3,265** | **358** | **-** | **-** | **2,907** |
| Commercial non-real estate | **826** | **182** | **644** | **-** | **-** |
| Consumer non-real estate | **1** | **1** | **-** | **-** | **-** |
| Total TDR Loans | **$4,285** | **$734** | **$644** | **$-** | **$2,907** |

|  | TDR Status as of December 31, 2020 Total TDR Loans | Accruing Current | 30-89 Days Past Due | 90+ Days Past Due | Nonaccrual |
| --- | ---: | ---: | ---: | ---: | ---: |
| Consumer real estate | $194 | $194 | $- | $- | $- |
| Commercial real estate | 3,202 | - | 363 | - | 2,839 |
| Commercial non-real estate | 851 | 188 | 663 | - | - |
| Consumer non-real estate | 2 | 1 | - | 1 | - |
| Total TDR Loans | $4,249 | $383 | $1,026 | $1 | $2,839 |

Please refer to Note 3: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans for information on TDRs.

### Net Interest Income

The net interest income analysis for the three months ended March 31, 2021 and 2020 follows:

| Interest-earning assets: | Three Months Ended March 31, 2021 Average Balance | Interest | Average Yield/ Rate | March 31, 2020 Average Balance | Interest | Average Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans, net (1)(2)(3)(4) | **$770,182** | **$8,625** | **4.54%** | $731,353 | $8,589 | 4.72% |
| Taxable securities (5)(6) | **467,963** | **1,783** | **1.55%** | 397,836 | 2,356 | 2.38% |
| Nontaxable securities (1)(5) | **82,398** | **691** | **3.40%** | 37,295 | 445 | 4.80% |
| Interest-bearing deposits | **119,311** | **28** | **0.10%** | 66,583 | 217 | 1.31% |
| Total interest-earning assets | **$1,439,854** | **$11,127** | **3.13%** | $1,233,067 | $11,607 | 3.79% |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Interest-bearing demand deposits | **$762,524** | **$718** | **0.38%** | $630,467 | $1,115 | 0.71% |
| Savings deposits | **174,599** | **47** | **0.11%** | 147,344 | 122 | 0.33% |
| Time deposits | **88,103** | **90** | **0.41%** | 126,269 | 559 | 1.78% |
| Total interest-bearing liabilities | **$1,025,226** | **$855** | **0.34%** | $904,080 | $1,796 | 0.80% |
| Net interest income and interest rate spread |  | **$10,272** | **2.79%** |  | $9,811 | 2.99% |
| Net yield on average interest‑earning assets |  |  | **2.89%** |  |  | 3.20% |

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

(2) Included in interest income are loan fees of $558 and $21 for the three months ended March 31, 2021 and 2020, respectively.

(3) Nonaccrual loans are included in average balances for yield computations.

(4) Includes loans held for sale.

(5) Daily averages are shown at amortized cost.

(6) Includes restricted stock.

The net interest margin decreased 31 basis points when the three month periods ended March 31, 2021 and March 31, 2020 are compared. The low interest rate environment that impacted net interest income for the three months ended March 31, 2021 began with Federal Reserve rate cuts on March 3 and March 16, 2020, decreasing the target Fed Funds rate from 1.75% to 0.25%. The Company reacted by reducing interest rates on customer deposits. The cost of interest-bearing liabilities decreased from 0.80% for the three months ended March 31, 2020 to 0.34% for the three months ended March 31, 2021. The Company also experienced high levels of calls on securities and loan refinance activity that resulted in a decrease in the yield on earning assets(1) from 3.79% for the three months ended March 31, 2020 to 3.13% for the three months ended March 31, 2021. The Company’s yield on earning assets and cost of funds are largely dependent on the interest rate environment.

Fees and interest income from PPP loans helped increase the net interest margin. For the three months ended March 31, 2021, PPP loans increased average loans by $38,222. Interest on PPP loans totaled $100 and net fees recognized in interest income totaled $550. If PPP loans are excluded, the net interest margin for the three months ended March 31, 2021 would have been 2.71%. Net deferred fees on PPP loans at March 31, 2021 were $1,506.

### Provision and Allowance for Loan Losses

The calculation of the allowance for loan losses resulted in a provision for loan losses of $50 for the three month period ended March 31, 2021, compared with a provision for loan losses of $479, for the same period ended March 31, 2020. The provision for loan losses is the result of a detailed analysis to estimate an adequate allowance for loan losses. The ratio of the allowance for loan losses to total loans at March 31, 2021 was 1.10%, compared with 1.10% at December 31, 2020 and 0.99% at March 31, 2020. The net charge-off ratio was 0.00% (annualized) for the three months ended March 31, 2021, 0.06% (annualized) for the three months ended March 31, 2020 and 0.05% for the year ended December 31, 2020. See “Asset Quality” for additional information.

### Noninterest Income

|  | Three Months Ended March 31, 2021 | March 31, 2020 | Percent Change |
| --- | ---: | ---: | ---: |
| Service charges on deposits | **$469** | $582 | **(19.42)%** |
| Other service charges and fees | **41** | 39 | **5.13%** |
| Credit and debit card fees | **434** | 306 | **41.83%** |
| Trust fees | **415** | 434 | **(4.38)%** |
| BOLI income | **206** | 221 | **(6.79)%** |
| Gain on sale of mortgage loans | **137** | 94 | **45.74%** |
| Other income | **627** | 439 | **42.82%** |
| Realized securities gain, net | **5** | 20 | **(75.00)%** |

Service charges on deposit accounts decreased 19.42% for the three month period ended March 31, 2021 when compared with the same period ended March 31, 2020, primarily due to decreased nonsufficient funds and overdraft charges. The COVID-19 pandemic amplified a trend of increased vigilance and caution in customer deposit activity to avoid overdrafts and other fees.

Other service charges and fees increased 5.13% when the three month period ended March 31, 2021 is compared with the same period ended March 31, 2020. Other service charges include charges for official checks, income from the sale of checks to customers, safe deposit box rent, fees for letters of credit and the income earned from commissions on the sale of credit life, accident and health insurance. Other service charges and fees benefitted from an updated fee structure implemented during the third quarter of 2020.

Credit and debit card fees are presented net of interchange expense. Credit and debit card fees increased $128 for the three month period ended March 31, 2021 when compared with the same period last year. Credit and debit card fees are based on volume and other factors.

Income from trust fees decreased $19 for the three month period ended March 31, 2021, compared with the same period ended March 31, 2020. Trust income varies depending on the total assets held in trust accounts, the type of accounts under management and financial market conditions.

Bank owned life insurance (“BOLI”) income decreased $15 for the three month period ended March 31, 2021 when compared with the same period ended March 31, 2020.

Gain on sale of mortgage loans increased $43 or 45.74% from $94 for the three months ended March 31, 2020 to $137 for the three months ended March 31, 2021. The Company originates consumer real estate mortgage loans to be kept in portfolio and to be sold on the secondary market under best efforts contracts. Beginning at the end of March 2020, the pandemic and a low interest rate environment spurred robust consumer real estate purchase and refinance activity.

Other income includes revenue from investment and insurance sales and other miscellaneous components. These areas fluctuate with market conditions and competitive factors. Other income increased $188 for the three months ended March 31, 2021 when compared with the same period ended March 31, 2020, primarily due to the receipt of a one-time bonus payment from a partnership investment.

The Company realized a gain of $5 on the call and sale of securities during the three month period ended March 31, 2021 and realized a gain of $20 during the three month period ended March 31, 2020. Net realized securities gains and losses are market driven.

### Noninterest Expense

|  | Three Months Ended March 31, 2021 | March 31, 2020 | Percent Change |
| --- | ---: | ---: | ---: |
| Salaries and employee benefits | **$3,906** | $3,873 | **0.85%** |
| Occupancy, furniture and fixtures | **488** | 450 | **8.44%** |
| Data processing and ATM | **778** | 791 | **(1.64)%** |
| FDIC assessment | **83** | - | **100.00%** |
| Net costs of other real estate owned | **37** | 22 | **68.18%** |
| Franchise taxes | **335** | 343 | **(2.33)%** |
| Other operating expenses | **909** | 988 | **(8.00)%** |

Total noninterest expense increased $69 or 1.07% for the three month period ended March 31, 2021 when compared with the same period of 2020.

Salaries and employee benefits increased $33 or 0.85% for the three month period ended March 31, 2021 when compared with the same period in 2020. This expense category includes employee salaries, payroll taxes, insurance and fringe benefits, employee stock ownership plan contribution accruals, the service component of net periodic pension cost, and salary continuation expenses.

Occupancy, furniture and fixtures expense increased $38 or 8.44% when the three month periods ended March 31, 2021 and March 31, 2020 are compared.

Data processing and ATM expense decreased $13 for the three month period ended March 31, 2021, compared with the same period in 2020.

Federal Deposit Insurance (“FDIC”) assessment expense increased $83 for the three month period ended March 31, 2021 when compared with the same period of 2020. The FDIC assessment is accrued based on a method provided by the FDIC. During the third quarter of 2019, the FDIC notified the Bank that it was eligible to use small bank assessment credits. The credits fully offset the Bank’s September 30, 2019, December 31, 2019 and March 31, 2020 assessment payments. The calculation is based on average assets divided by average tangible equity and incorporates risk-based factors to determine the amount of the assessment.

Net costs of OREO increased $15 for the three month period ended March 31, 2021, compared with the same period in 2020. The cost of OREO includes maintenance costs as well as valuation write-downs and gains and losses on the sale of properties. The expense varies with the number of properties, the maintenance required and changes in the real estate market. OREO properties are accounted for at fair value less cost to sell upon foreclosure and are thereafter periodically appraised to determine market value. Declines in market value are recognized through valuation expense. There were no write downs on OREO properties during the three months ended March 31, 2020 and March 31, 2019. The Company recognized a loss on the sale of OREO of $26 for the three months ended March 31, 2021 and $4 for the three months ended March 31, 2020.

Franchise tax expense decreased $8 or 2.33% when the three month period ended March 31, 2021 is compared with the three month period ended March 31, 2020. Franchise tax is primarily based on capital levels of the subsidiary bank.

The category of other operating expenses includes noninterest expense items such as professional services, stationery and supplies, telephone costs, postage, charitable donations, losses and other expenses. Other operating expense decreased $79 or 8.00% for the three month period ended March 31, 2021, compared with the same period of 2020.

### Cybersecurity Risks

The Company considers cybersecurity rick to be one of the greatest risks to its business. The Company has a program to identify, mitigate and manage its cybersecurity risks. The program includes penetration testing and vulnerability assessment, technological defenses such as antivirus software, patch management, firewall management, email and web protections, an intrusion prevention system, a cybersecurity insurance policy which covers some but not all losses arising from cybersecurity breaches, as well as ongoing employee training. The costs of these measures were $98 for the three months ended March 31, 2021 and $93 for the three months ended March 31, 2020. These costs are included in various categories of noninterest expense.

### Income Tax

Income tax expense for the first three months of 2021 was $1,009, compared with $802 for the first three months of 2020. The Company’s federal statutory corporate tax rate is 21%. The Company’s effective tax rate for the three month period ended March 31, 2021 was 17.47%, compared with 16.77% for the three month period ended March 31, 2020.

### Balance Sheet

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

| Assets | March 31, 2021 | December 31, 2020 | Percent Change |
| --- | ---: | ---: | ---: |
| Interest-bearing deposits | **$119,311** | $81,639 | **46.14%** |
| Securities available for sale and restricted stock | **559,411** | 474,934 | **17.79%** |
| Loans, net | **760,823** | 760,641 | **0.02%** |
| Total assets | **1,530,908** | 1,403,671 | **9.06%** |
| Liabilities and stockholders’ equity |  |  |  |
| Noninterest-bearing demand deposits | **$289,803** | $248,392 | **16.67%** |
| Interest-bearing demand deposits | **762,524** | 669,383 | **13.91%** |
| Savings deposits | **174,599** | 158,334 | **10.27%** |
| Time deposits | **88,103** | 112,463 | **(21.66)%** |
| Stockholders’ equity | **195,595** | 195,768 | **(0.09)%** |

### Securities

Securities available for sale are measured at fair value on a recurring basis. Market conditions at March 31, 2021 are reflected in the presentation of securities available for sale. While we do not expect significant changes in future judgements or methodologies used to determine the fair value of the securities portfolio, market volatility associated with the COVID-19 pandemic, or any future national or global concern, will impact the value of securities. Management regularly monitors the quality of the securities portfolio and closely follows the uncertainty in the economy and the volatility of financial markets. The value of individual securities will be written down if the decline in fair value is considered to be other than temporary based upon the totality of circumstances. See Note 4: Securities for additional information.

### Loans

|  | March 31, 2021 | December 31, 2020 | Percent Change |
| --- | ---: | ---: | ---: |
| Real estate construction loans | **$42,570** | $42,266 | **0.72%** |
| Consumer real estate loans | **186,906** | 181,782 | **2.82%** |
| Commercial real estate loans | **392,461** | 393,115 | **(0.17)%** |
| Commercial non-real estate loans | **87,258** | 78,771 | **10.77%** |
| Public sector and IDA | **39,788** | 40,983 | **(2.92)%** |
| Consumer non-real estate | **32,261** | 33,110 | **(2.56)%** |
| Less: unearned income and deferred fees and costs | **(1,884)** | (1,228) | **(53.42)%** |
| Loans, net of unearned income and deferred fees and costs | **$779,360** | $768,799 | **1.37%** |

The Company’s loans, net of unearned income and deferred fees and costs, increased $10,561 or 1.37% from $768,799 at December 31, 2020 to $779,360 at March 31, 2021. Real estate construction, consumer real estate, and commercial non-real estate increased from December 31, 2020 while commercial real estate, public sector and IDA loans and consumer non real estate loans decreased. Included in commercial non-real estate loans are PPP loans of $45,137 at March 31, 2021 and $36,903 at December 31, 2020. Loan demand other than PPP loans has softened due to unemployment and decreased economic activity, as well as hiring freezes at universities within the Company’s market area, all stemming from the COVID-19 pandemic.

### Deposits

|  | March 31, 2021 | December 31, 2020 | Percent Change |
| --- | ---: | ---: | ---: |
| Noninterest-bearing demand deposits | **$319,126** | $276,793 | **15.29%** |
| Interest-bearing demand deposits | **766,582** | 763,293 | **0.43%** |
| Saving deposits | **183,231** | 167,475 | **9.41%** |
| Time deposits | **89,649** | 89,582 | **0.07%** |
| Total deposits | **$1,358,588** | $1,297,143 | **4.74%** |

Total deposits increased $61,445 or 4.74% from $1,297,143 at December 31, 2020 to $1,358,588 at March 31, 2021. Deposits do not include any brokered deposits.

### Liquidity

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

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

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

The Company monitors factors that may increase its liquidity needs. Some of these factors include deposit trends, large depositor activity, maturing deposit promotions, interest rate sensitivity, maturity and repricing timing gaps between assets and liabilities, the level of unfunded loan commitments, loan growth and share repurchase activity within the Company’s own stock. At March 31, 2021, the Company’s liquidity is sufficient to meet projected trends in these areas.

To monitor and estimate liquidity levels, the Company performs stress testing under varying assumptions on credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows. The Company’s Contingency Funding Plan sets forth avenues for rectifying liquidity shortfalls. At March 31, 2021, the analysis indicated adequate liquidity under the tested scenarios.

The Company utilizes several other strategies to maintain sufficient liquidity. Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s own policy range of 65% to 75%. At March 31, 2021, the loan to deposit ratio was 57.37%. The investment strategy takes into consideration the term of the investment, and securities in the available for sale portfolio are laddered based upon projected funding needs.

The Company’s liquidity position was strong prior to the COVID-19 pandemic and has increased due to government transfer payments and softened loan demand. In response to the pandemic, the Federal Reserve and the FHLB have increased their credit offerings in order to support member banks. Further, securities with an amortized cost of $3,072 will mature within one year or less, and up to $77,418 may be called. The Company is closely monitoring liquidity as the impact of the pandemic evolves.

### Capital Resources

Total stockholders’ equity at March 31, 2021 was $189,069, a decrease of $11,538 or 5.75%, from the $200,607 at December 31, 2020. On June 1, 2020, the Company’s Board of Directors approved the repurchase of up to 1,000,000 shares of the Company’s common stock. The authorization began June 1, 2020 and expires May 31, 2021. During the first three months of 2021, the Company repurchased 111,832 shares under the program. The repurchases reduced shareholders equity by $3,991. The Company did not repurchase any shares during the quarter ended March 31, 2020. The Company’s subsidiary bank is subject to various capital requirements administered by banking agencies. Risk based capital ratios for the Bank are shown in the following tables.

|  | NBB | Regulatory Capital Minimum Ratios | Regulatory Capital Minimum Ratios with Capital Conservation Buffer |
| --- | ---: | ---: | ---: |
| Common Equity Tier I Capital Ratio | **18.80%** | 4.50% | 7.00% |
| Tier I Capital Ratio | **18.80%** | 6.00% | 8.50% |
| Total Capital Ratio | **19.73%** | 8.00% | 10.50% |
| Leverage Ratio | **11.48%** | 4.00% | 4.00% |

Risk-based capital ratios are calculated in compliance with FDIC rules based on Basel III capital requirements. Banks are subject to an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments. The Bank’s ratios are well above the required minimums and the capital conservation buffer at March 31, 2021.

### Off-Balance Sheet Arrangements

In the normal course of business, NBB extends lines of credit and letters of credit to its customers. Depending on their needs, customers may draw upon lines of credit at any time in any amount up to a pre-approved limit. Standby letters of credit are issued for two purposes. Financial letters of credit guarantee payments to facilitate customer purchases. Performance letters of credit guarantee payment if the customer fails to complete a specific obligation.

Historically, the full approved amount of letters and lines of credit has not been drawn at any one time. The Company has developed plans to meet a sudden and substantial funding demand. These plans include accessing a line of credit with a correspondent bank, borrowing from the FHLB, selling available for sale investments or loans and raising additional deposits.

The Company sells mortgages on the secondary market. Our agreement with the purchaser provides for strict underwriting and documentation requirements. Violation of the representations and warranties of the agreement would entitle the purchaser to recourse provisions. The Company has determined that its risk in this area is not significant because of a low volume of secondary market mortgage loans and high underwriting standards. The Company estimates a potential loss reserve for recourse provisions that is not material as of March 31, 2021. To date, no recourse provisions have been invoked. If funds were needed, the Company would access the same sources as noted above for funding lines and letters of credit.

There were no material changes in off-balance sheet arrangements during the three months ended March 31, 2021, except for normal seasonal fluctuations in the total of mortgage loan commitments.

### Contractual Obligations

The Company had no finance lease or purchase obligations and no long-term debt at March 31, 2021.

## Market risk

As filed, 448 characters.

The Company considers interest rate risk to be a significant market risk and has systems in place to measure the exposure of net interest income to adverse movement in interest rates. Interest rate shock analyses provide management with an indication of potential economic loss due to future rate changes. There have not been any changes which would significantly alter the results disclosed as of December 31, 2020 in the Company’s 2020 Form 10-K.

## Controls and procedures

As filed, 1,529 characters.

The Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of March 31, 2021 to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

### Part II

### Other Information

## Risk factors

As filed, 234 characters.

Please refer to the “Risk Factors” previously disclosed in Item 1A of our 2020 Annual Report on Form 10-K and the factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” in Part I. Item 2 of this Form 10-Q.

Filed May 12, 2021.
Source: SEC EDGAR, the filing index for accession 0001437749-21-011843. Last ingested by Listed: Nov 3, 2026, 16:02 ET. No prices; not investment advice.