# National Bankshares Inc: Form 10-Q for the period ended Mar 31, 2023

- Company: [National Bankshares Inc](/companies/nksh.md) (CIK 796534)
- Form: 10-Q
- Filed: 2023-05-11
- Accepted by EDGAR: May 11, 2023, 12:49 ET
- Period: 2023-03-31
- Accession: 0001437749-23-013831
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/796534/000143774923013831/nksh20230331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/796534/000143774923013831/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $1.8m | us-gaap:RevenueFromContractWithCustomerIncludingAssessedTax |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $3.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $948.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $4.5m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.77 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $4.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $5.9m | us-gaap:PaymentsOfDividends |
| Share repurchases | 3 months, 2023-01-01 to 2023-03-31 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Total assets | at 2023-03-31 | $1.65bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $1.52bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $131.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,132 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 2022 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, effects of or changes in:

- interest rates,
- general and local economic conditions,
- monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury, the Office of the Comptroller of the Currency, the Federal Reserve, the Consumer Financial Protection Bureau and the Federal Deposit Insurance Corporation, and the impact of any policies or programs implemented pursuant to financial reform legislation,
- unanticipated increases in the level of unemployment in the Company’s market,
- 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,
- geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the U.S. or other governments in response to acts or threats of terrorism and/or military conflicts,
- the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events,
- the Company's ability to identify, attract, and retain experienced management, relationship managers, and support personnel, particularly in a competitive labor environment,
- performance by the Company’s counterparties or vendors,
- applicable accounting principles, policies and guidelines, and
- the impact of the COVID-19 pandemic, including the adverse impact on our business and operations and on our customers.

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.

### Cybersecurity

The Company considers cybersecurity risk to be one of the greatest risks to its business. We have deployed a multi-faceted approach to limit the risk and impact of unauthorized access to customer accounts and to information relevant to customer accounts. We use digital technology safeguards, internal policies and procedures, and employee training to reduce the exposure of our systems to cyber-intrusions. The Company also requires assurances from key vendors regarding their cybersecurity.

We control functionalities of online and mobile banking to reduce risk. We do not offer online account openings or loan originations. We do not permit customers to submit address changes through online banking, and we limit the dollar amount of online banking transfers to other banks. We require a special vetting process for commercial customers who wish to originate ACH transfers and for customers who submit wire requests through online banking.

Further, the Company has a program to identify, mitigate and manage its cybersecurity risks. The program includes penetration testing and vulnerability assessment, technological defenses such as antivirus software, patch management, firewall management, email and web protections, an intrusion prevention system, a cybersecurity insurance policy which covers some but not all losses arising from cybersecurity breaches, as well as ongoing employee training. The cost of these measures was $63 for the three months ended March 31, 2023 and $94 for the three months ended March 31, 2022. These costs are included in various categories of noninterest expense.

However, it is not possible to fully eliminate exposure. The potential for financial and reputational losses due to cyber-breaches is increased by the possibility of human error, unknown system susceptibilities, and the rising sophistication of cyber-criminals to attack systems, disable safeguards and gain access to accounts and related information. We maintain insurance for these risks but insurance policies are subject to exceptions, exclusions and terms whose applications have not been widely interpreted in litigation. Accordingly, insurance can provide less than complete protection against the losses that result from cybersecurity breaches and pursuing recovery from insurers can result in significant expense. In addition, some risks such as reputational damage and loss of customer goodwill, which can result from cybersecurity breaches, cannot be insured against.

### Critical Accounting Policies

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

Critical accounting policies are most important to the portrayal of the Company’s financial condition or results of operations and require Management’s most difficult, subjective, and complex judgments about matters that are inherently uncertain. If conditions occur that differ from our assumptions, depending upon the severity of such differences, the Company’s financial condition or results of operations may be materially impacted. The Company has designated three policies as critical, including those governing the allowance for credit losses, goodwill and the pension plan. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them as needed. Please refer to the Company’s 2022 Form 10-K, Note 1: Summary of Significant Accounting Policies for information on these and other accounting policies. For information on the Company’s policies on the ACLL beginning with adoption of CECL on January 1, 2023, please refer to Note 1: General.

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

NBI has two wholly-owned subsidiaries, the National Bank of Blacksburg and National Bankshares Financial Services, Inc. NBB is a community bank and does business as National Bank from 24 office locations and three loan production offices. NBB is the source of nearly all of the Company’s revenue. 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.

### Non-GAAP Financial Measures

This report refers to certain financial measures that are computed under a basis other than GAAP (“non-GAAP”). The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The methodology for determining these non-GAP measures may differ among companies and are supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP. Details on non-GAAP measures follow.

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

The adjusted return on average assets and adjusted return on average equity are measures of profitability, calculated by annualizing net income and dividing by average year-to-date assets or equity, respectively. Larger nonrecurring income or expenses are not annualized, in order to reduce distortion within the ratios. During the three months ended March 31, 2023, the recorded income from the adjustment of basis in partnership interests, the net gains on the sale of securities and expenses incurred to respond to a threatened proxy contest initiated by an activist shareholder were removed from the annualization. For the three months ended March 31, 2022, the income recorded from the adjustment of basis in partnership interests was removed from the annualization. The tables below present the reconciliation of adjusted annualized net income, which is not a measurement under GAAP, for the three month periods ended March 31, 2023 and 2022.

| Annualized Net Income | Three Months Ended March 31, 2023 | March 31, 2022 |
| --- | ---: | ---: |
| Net income (GAAP) | **$4,531** | $4,886 |
| Less: items deemed by Management to be non-recurring: |  |  |
| Partnership income net of tax of ($44) and ($77) for the periods ended March 31, 2023 and 2022, respectively | **(164)** | (290) |
| Securities gain, net of tax of ($3) for the period ended March 31, 2023 | **(9)** | - |
| Proxy contest-related expense, net of tax of $93 for the period ended March 31, 2023 | **348** | - |
| Adjusted net income | **$4,706** | $4,596 |
| Adjusted net income, annualized | **$19,085** | $18,639 |
| Add: items deemed by Management to be non-recurring: |  |  |
| Partnership income net of tax of $44 and $77 for the periods ended March 31, 2023 and 2022, respectively | **164** | 290 |
| Securities gain, net of tax of $3 for the period ended March 31, 2023 | **9** | - |
| Proxy contest-related expense, net of tax of ($93) for the period ended March 31, 2023 | **(348)** | - |
| Annualized net income for ratio calculation (non-GAAP) | **$18,910** | $18,929 |

Unrealized losses on securities available for sale decrease total assets and stockholders' equity through accumulated other comprehensive loss. Along with the return on average assets, the Company considers the ratio, adjusted to exclude the impact of unrealized losses. Along with the return on average equity, the Company considers the ratio adjusted to exclude other comprehensive loss. The adjustments to average assets and average stockholders' equity are presented in the table below.

| Average Assets Excluding Unrealized Loss on Securities | Three Months Ended March 31, 2023 | March 31, 2022 |
| --- | ---: | ---: |
| Average assets (GAAP) | **$1,625,041** | $1,703,280 |
| Average unrealized loss on securities | **98,823** | 6,836 |
| Average deferred tax asset, unrealized loss on securities | **(20,753)** | (1,436) |
| Average assets excluding unrealized loss on securities (non-GAAP) | **$1,703,111** | $1,708,680 |
| Average Stockholders’ Equity Excluding AOCI |  |  |
| Average stockholders’ equity (GAAP) | **$123,996** | $185,324 |
| Average accumulated other comprehensive loss | **80,415** | 12,312 |
| Average stockholders’ equity excluding AOCI (non-GAAP) | **$204,411** | $197,636 |

The return on average assets and return on average equity under GAAP and adjusted for non-GAAP considerations, are presented in the table below:

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Return on average assets (GAAP) | **1.13%** | 1.16% |
| Adjusted return on average assets (non-GAAP) | **1.16%** | 1.11% |
| Adjusted return on average assets excluding unrealized losses on securities (non-GAAP) | **1.11%** | 1.11% |
| Return on average equity (GAAP) | **14.82%** | 10.69% |
| Adjusted return on average equity (non-GAAP) | **15.25%** | 10.21% |
| Adjusted return on average equity excluding accumulated other comprehensive loss (non-GAAP) | **9.25%** | 9.58% |

#### Net Interest Margin

The Company uses the adjusted net interest margin to measure profit on interest generating activities, as a percentage of total interest-earning assets. The adjusted net interest margin is calculated by dividing annualized fully taxable equivalent (“FTE”) net interest income by total average earning assets. The portion of interest income that is nontaxable is grossed up to the tax equivalent by adding the tax benefit. 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 GAAP, to net interest income, is reflected in the table below.

| Net Interest Income, FTE | Three Months Ended March 31, 2023 | March 31, 2022 |
| --- | ---: | ---: |
| Total interest income (GAAP) | **$14,044** | $11,050 |
| FTE adjustment | **209** | 227 |
| Total interest income (non-GAAP) | **14,253** | 11,277 |
| Total interest expense (GAAP) | **3,098** | 655 |
| Net interest income, FTE (non-GAAP) | **$11,155** | $10,622 |
| Average balance of interest-earning assets | **$1,667,191** | $1,525,651 |
| Net interest margin | **2.88%** | 2.81% |

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

#### Efficiency Ratio

The efficiency ratio is computed by dividing noninterest expense by the sum of FTE net interest income and noninterest income, excluding certain items Management deems unusual or non-recurring. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. The components of the efficiency ratio calculation are summarized in the following table.

| Noninterest Expense for Efficiency Ratio | Three Months Ended March 31, 2023 | March 31, 2022 |
| --- | ---: | ---: |
| Noninterest expense (GAAP) | **$7,664** | $6,613 |
| Less: proxy contest-related expense | **(441)** | - |
| Noninterest expense for efficiency ratio (non-GAAP) | **$7,223** | $6,613 |
| **Total Income for Efficiency Ratio** |  |  |
| Noninterest income (GAAP) | **$2,199** | $2,291 |
| Less: securities gains | **(12)** | - |
| Less: partnership income | **(208)** | (367) |
| Noninterest income (non-GAAP) | **1,979** | 1,924 |
| Net interest income, FTE (non-GAAP) | **11,155** | 10,622 |
| Total income for efficiency ratio (non-GAAP) | **$13,134** | $12,546 |
| Efficiency ratio | **54.99%** | 52.71% |

34

### Performance Summary

The following table presents the Company’s key performance indicators for the three months ended March 31, 2023 and March 31, 2022. Income and expense items are annualized for the ratios, except for basic and fully diluted earnings per share.

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net Income | **$4,531** | $4,886 |
| Return on average assets | **1.13%** | 1.16% |
| Adjusted return on average assets (1) | **1.16%** | 1.11% |
| Adjusted return on average assets excluding unrealized losses on securities(1) | **1.11%** | 1.11% |
| Return on average equity | **14.82%** | 10.69% |
| Adjusted return on average equity (1) (2) | **15.25%** | 10.21% |
| Adjusted return on average equity excluding accumulated other comprehensive loss(1)(2) | **9.25%** | 9.58% |
| Basic and fully diluted earnings per share (2) | **$0.77** | $0.81 |
| Net interest margin (1) | **2.79%** | 2.65% |
| Efficiency ratio (1) | **54.99%** | 52.71% |

(1) See “Non-GAAP Financial Measures” above.

(2) During the three months ended March 31, 2022, the Company repurchased 41,185 shares under its publicly announced stock repurchase plan. The repurchase reduced stockholders equity by $1,522.

Net income and earnings per share for the three months ended March 31, 2023 decreased when compared with the same period of 2022. Contributing to the decrease were pre-tax expenses totaling $441 incurred to respond to a threatened proxy contest initiated by an activist stockholder. The Company announced on March 31, 2023 that the activist had withdrawn its nominees for the Company’s Board of Directors with no concessions or negotiated settlement with the Company.

For the three months ended March 31, 2023, adjusted return on average assets and adjusted return on average equity, excluding the impact of unrealized losses on available for sale securities, remained at similar levels as those for the three months ended March 31, 2022. The Company’s efficiency ratio continues to reflect the Company’s commitment to control expenses.

### Key Assets and Liabilities

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

|  | March 31, 2023 | December 31, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Interest-bearing deposits | **$42,966** | $59,026 | (27.21)% |
| Securities available for sale | **651,047** | 656,852 | (0.88)% |
| Loans, net | **846,315** | 844,519 | 0.21% |
| Total assets | **1,654,277** | 1,677,551 | (1.39)% |
| Deposits | **1,511,452** | 1,542,725 | (2.03)% |

35

### Asset Quality

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

|  | March 31, 2023 | March 31, 2022 | December 31, 2022 |
| --- | ---: | ---: | ---: |
| Nonaccrual loans | **$2,814** | $2,862 | $2,847 |
| Loans past due 90 days or more, and still accruing | **33** | 381 | 8 |
| Other real estate owned | **662** | 957 | 662 |
| ACLL to loans net of unearned income and deferred fees and costs | **1.24%** | 0.95% | 0.96% |
| Net charge-off (recovery) ratio | **(0.04)%** | 0.01% | 0.02% |
| Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned | **0.41%** | 0.47% | 0.41% |
| Ratio of ACLL to nonperforming loans | **378.46%** | 272.12% | 288.90% |

The Company adopted the CECL model on January 1, 2023, resulting in an increase to the ACLL of $2,342, from the $8,225 allowance for loan losses at December 31, 2022. For information on the Company’s policies on the ACLL, please refer to Note 1: General. Please refer to the Company’s 2022 Form 10-K, Note 1: Summary of Significant Accounting Policies for information on the Company’s application of previous GAAP in determining the allowance for loan losses.

The Company’s risk analysis under the CECL model at March 31, 2023 determined an ACLL of $10,650, or 1.24% of loans net of unearned income and deferred fees and costs. This compares with an allowance of $8,225 as of December 31, 2022, or 0.96% of loans. The allowance for loan losses at March 31, 2022 was $7,788, or 0.95% of loans. To determine the appropriate level of the ACLL, the Company considers credit risk for individually evaluated loans and for groups of loans evaluated collectively.

### Individually Evaluated Loans

Individually evaluated loans were $4,130 as of March 31, 2023, an increase from $3,032 as of December 31, 2022. The increase was due to a change in the way that the Company identifies individually evaluated loans under CECL. Please refer to Note 1: General for information on the Company’s identification of individually evaluated loans. None of the Company’s individually evaluated loans as of March 31, 2023 were determined to be collateral dependent and were measured using the DCF method, resulting in an allocation of $434.

### Collectively Evaluated Loans

Collectively evaluated loans totaled $853,266, with an ACLL of $10,216 as of March 31, 2023. At December 31, 2022, collectively evaluated loans totaled $850,161, with an allowance of $8,225.

Collectively evaluated loans are divided into pools based upon risk characteristics. Utilizing historical loss information, the Company calculates a probability of default and loss given default for each pool, which is adjusted for a reasonable and supportable forecast. Loan pools are allocated additional loss estimates based upon the Company’s analysis of qualitative factors including economic measures, asset quality indicators, loan characteristics, and changes to internal Company policies and management.

#### Reasonable and Supportable Forecast

To estimate cash flows, the Company adjusted its historical loss information with a forecast of the national unemployment rate. The forecast applied at March 31, 2023 projects that unemployment will rise over the next 12 months, which increases the loss estimate. The Company determined that 12 months represents a reasonable and supportable forecast period as of March 31, 2023, and set a period of 12 months to revert to historical losses on a straight-line basis.

#### Qualitative Factors: Economic

The Company sources economic data pertinent to its market from the most recently available publications, including business and personal bankruptcy filings, the residential vacancy rate and the inventory of new and existing homes.

Higher bankruptcy filings indicate heightened credit risk and increase the ACLL, while lower bankruptcy filings have a beneficial impact on credit risk. Compared with data available at December 31, 2022, business bankruptcy filings slightly increased and personal bankruptcy filings slightly decreased.

Residential vacancy rates and housing inventory impact the Company’s residential construction customers and the consumer real estate market. Higher levels increase credit risk. The residential vacancy rate available at March 31, 2023 improved from the data incorporated into the December 31, 2022 calculation, resulting in a lower allocation. Housing data available as of March 31, 2023 showed slightly lower inventory than at December 31, 2022, resulting in a lower allocation.

#### Qualitative Factors: Asset Quality Indicators

Accruing past due loans are analyzed at the class level and compared with previous levels. Increases in past due loans indicate heightened credit risk. Accruing loans past due 30-89 days were 0.14% of total loans at March 31, 2023, a decrease from 0.16% at December 31, 2022. Accruing loans past due 90 days or more were a very small percentage of the loan portfolio as of March 31, 2023 and at December 31, 2022.

#### Qualitative Factors: Other Considerations

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

The interest rate environment impacts variable rate loans. When interest rates increase, the payment on variable rate loans increases, which may increase credit risk. The Federal Reserve increased the target Fed Funds rate multiple times in 2022, as well as in February and March of 2023, resulting in an increased allocation as of March 31, 2023, compared with the allocation for December 31, 2022.

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, 2022. The legal and regulatory environments also remain in a similar posture to December 31, 2022.

Lending policies, loan review procedures and Management’s experience influence credit risk. Except for the adoption of CECL, policies, procedures and management remain similar to those at December 31, 2022.

Levels of high risk loans are considered in the determination of the level of the ACLL. A decrease in the level of high risk loans within a class decreases the required allocation for the loan class, and an increase in the level of high risk loans within a class increases the required allocation for the loan class. Total high risk loans increased 7.33% from the level at December 31, 2022, resulting in an increased allocation.

#### Unallocated Surplus

The unallocated surplus as of March 31, 2023 is $480, or 4.72% in excess of the calculated requirement. The unallocated surplus at December 31, 2022 was $179, or 2.23% in excess of the calculated requirement. The surplus provides some mitigation of current economic uncertainty that may impact credit risk.

### Conclusion

The calculation of the ACLL resulted in a provision for credit losses of $2 for the three month period ended March 31, 2023, compared with a provision of $134 for the three month period ended March 31, 2022. The provision for 2023 and 2022 reflect loan growth and changes in factors detailed in “Asset Quality” above.

### Provision for Credit Loss

The calculation of the allowance for credit losses resulted in a provision for credit losses of $2 for the three month period ended March 31, 2023, compared with a provision of $134 for the three month period ended March 31, 2022. The provision for 2023 and 2022 reflect loan growth and changes in factors detailed in “Asset Quality” above.

### Loan Modifications

In the ordinary course of business the Company modifies loan terms on a case-by-case basis 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. 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.

The Company reviews modifications to determine whether the borrower is experiencing financial difficulty, including indicators of default, bankruptcy, going concern, insufficient projected cash flows and inability to obtain financing from other sources. If a modification is made to a borrower experiencing financial difficulty, the loan’s risk rating is downgraded to special mention or classified, resulting in individual evaluation for the ACL.

#### Modifications That Are Not for Borrowers Experiencing Financial Difficulty

During the three months ended March 31, 2023, the Company provided 201 modifications for competitive reasons to loans totaling $30,508. During the three months ended March 31, 2022, the Company provided 235 modifications to loans totaling $39,182. The modifications were not to borrowers experiencing financial difficulty.

### Other Real Estate Owned

As of March 31, 2023, OREO of $662 is comprised of one construction property. Loans in various stages of foreclosure totaled $95, all of which are secured by residential real estate. Loans currently in the process of foreclosure may increase OREO in future quarters. It is not possible to accurately predict the future total of OREO because property sold at foreclosure may be acquired by third parties and OREO properties are regularly marketed and sold. The Company continues to monitor risk levels within the loan portfolio. If the Company’s market experiences an economic downturn, real estate values could decline and foreclosure activity could increase. A decline in value may result in loss recognition for OREO, while an increase in foreclosures may increase the number of OREO properties.

### Net Interest Income

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

| Interest-earning assets: | Three Months Ended March 31, 2023 Average Balance | Interest | Average Yield/Rate | 2022 Average Balance | Interest | Average Yield/Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Loans (1)(2)(3)(4) | **$855,093** | **$9,414** | **4.46%** | $803,693 | $8,181 | 4.13% |
| Taxable securities (5)(6) | **678,543** | **4,118** | **2.46%** | 628,311 | 2,473 | 1.60% |
| Nontaxable securities (1)(5) | **67,335** | **493** | **2.97%** | 76,709 | 574 | 3.03% |
| Interest-bearing deposits | **19,715** | **228** | **4.69%** | 114,254 | 49 | 0.17% |
| Total interest-earning assets | **$1,620,686** | **$14,253** | **3.57%** | $1,622,967 | $11,277 | 2.82% |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Interest-bearing demand deposits | **$856,591** | **$2,373** | **1.12%** | $886,829 | $580 | 0.27% |
| Savings deposits | **208,376** | **81** | **0.16%** | 212,920 | 38 | 0.07% |
| Time deposits | **91,666** | **359** | **1.59%** | 77,989 | 37 | 0.19% |
| Borrowings | **23,962** | **285** | **4.82%** | - | - | - |
| Total interest-bearing liabilities | **$1,180,595** | **$3,098** | **1.06%** | $1,177,738 | $655 | 0.23% |
| Net interest income and interest rate spread |  | **$11,155** | **2.51%** |  | $10,622 | 2.59% |
| Net yield on average interest‑earning assets |  |  | **2.79%** |  |  | 2.65% |

(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 $40 for the three months ended March 31, 2023. For the three months ended March 31, 2022, interest income included loan fees of $88.

(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.

Federal Reserve interest rate increases beginning in March 2022 expanded interest income when results for the three months ended March 31, 2023 are compared with results for the three months ended March 31, 2022. During the first quarter of 2023, the Company responded to increased competition for deposits with a CD promotion and other deposit rate increases. Also during the first quarter of 2023, the Company obtained temporary advances from the FHLB that were repaid due to the success of the deposit strategy.

### Noninterest Income

|  | Three Months Ended March 31, 2023 | 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Service charges on deposits | **$592** | $562 | **5.34%** |
| Other service charges and fees | **53** | 55 | **(3.64)%** |
| Credit and debit card fees, net | **467** | 440 | **6.14%** |
| Trust income | **445** | 443 | **0.45%** |
| BOLI income | **239** | 238 | **0.42%** |
| Gain on sale of mortgage loans | **16** | 61 | **(73.77)%** |
| Other income | **375** | 492 | **(23.78)%** |
| Gain on sale of securities | **12** | - | **100.00%** |
| Total noninterest income | **$2,199** | $2,291 | **(4.02)%** |

The decrease in total noninterest income is primarily attributable to a decrease in the gain on sale of mortgage loans and other income. Federal Reserve interest rate increases, beginning in 2022, have dampened real estate refinance and purchase financing activity. Other income includes revenue from investment and insurance sales, adjustments to partnership basis and other miscellaneous components. These areas fluctuate with market conditions and competitive factors. Other income decreased for the three month period ended March 31, 2023 compared to the same period in 2022 due to a decrease in income from partnership interests.

### Noninterest Expense

|  | Three Months Ended March 31, 2023 | 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Salaries and employee benefits | **$4,434** | $3,978 | **11.46%** |
| Occupancy, furniture and fixtures | **542** | 492 | **10.16%** |
| Data processing and ATM | **873** | 787 | **10.93%** |
| FDIC assessment | **117** | 111 | **5.41%** |
| Net costs of other real estate owned | **11** | 10 | **10.00%** |
| Franchise taxes | **375** | 362 | **3.59%** |
| Professional services | **753** | 225 | **234.67%** |
| Other operating expenses | **559** | 648 | **(13.73)%** |
| Total noninterest expense | **$7,664** | $6,613 | **15.89%** |

The increase in total noninterest expense is primarily attributable to salaries and employee benefits expense and professional services expense.

Salaries and employee benefits includes employee salaries, payroll taxes, insurance and fringe benefits, ESOP contribution accruals, the service component of net periodic pension cost, and salary continuation expenses. The expense increased when the three month period ended March 31, 2023 are compared with the same period ended March 31, 2022. Like many employers, the Company faced challenges to hiring enough qualified employees in recent years. Since increasing its starting salary in 2022, the Company has been able to attract a better pool of applicants and fill needed positions.

Professional services expense increased primarily due to the $441 expense incurred to respond to the previously mentioned proxy contest.

### Income Tax

Income tax expense was $948 for the three months ended March 31, 2023 and $1,053 for the same period of 2022. The Company’s federal statutory tax rate is 21%. The Company’s effective tax rate was 17.30% for the three month period ended March 31, 2023, compared with 17.73% for the three month period ended March 31, 2022.

### Balance Sheet

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

| Assets | March 31, 2023 | December 31, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Interest-bearing deposits | **$19,715** | $88,963 | **(77.84)%** |
| Securities available for sale, at fair value | **645,097** | 683,183 | **(5.57)%** |
| Loans, net of unearned income and deferred fees and costs and the allowance for credit losses | **844,411** | 825,110 | **2.34%** |
| Total assets | **1,625,041** | 1,705,614 | **(4.72)%** |
| Liabilities and stockholders’ equity |  |  |  |
| Noninterest-bearing demand deposits | **$308,908** | $338,269 | **(8.68)%** |
| Interest-bearing demand deposits | **856,591** | 910,989 | **(5.97)%** |
| Savings deposits | **208,376** | 216,414 | **(3.71)%** |
| Time deposits | **91,666** | 77,686 | **18.00%** |
| Stockholders’ equity | **123,996** | 145,641 | **(14.86)%** |

The declines in interest-bearing deposits and non-time customer deposits were the result of increased competition for customer deposits. The decline in stockholders’ equity resulted from other comprehensive loss related to the securities available for sale portfolio. Changes in securities, loans and deposits are discussed below.

### Securities

|  | March 31, 2023 | December 31, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Amortized cost | **$739,265** | $759,917 | **(2.72)%** |
| Unrealized loss | **(88,218)** | (103,065) | **14.41%** |
| Securities available for sale | **$651,047** | $656,852 | **(0.88)%** |

Securities available for sale are presented at fair value as of each reporting date. During the three months ended March 31, 2023, the amortized cost of securities available for sale decreased from December 31, 2022 by $20,652, while a partial reversal of unrealized losses increased the fair value from December 31, 2022. The decrease in amortized cost was primarily due to sale of securities with an amortized cost of $17,987, which resulted in a net gain of $12. The sales were part of the Company’s interest rate risk management strategy.

Most of the Company’s securities were purchased during periods prior to the Federal Reserve’s interest rate increases that began in March of 2022. The fair value of bonds moves inversely to interest rate changes, as well as expectations of interest rate changes. The Company’s Asset Liability Management Committee is closely monitoring interest rate risk on all of the Company’s financial assets and liabilities. At this time, there are no credit risk concerns on securities available for sale and no associated ACL. Please refer to Note 1: General and Note 3: Securities for additional information.

### Loans

|  | March 31, 2023 | December 31, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Real estate construction loans | **$54,052** | $54,579 | **(0.97)%** |
| Consumer real estate loans | **223,438** | 221,052 | **1.08%** |
| Commercial real estate loans | **438,843** | 437,888 | **0.22%** |
| Commercial non real estate loans | **60,516** | 57,652 | **4.97%** |
| Public sector and IDA | **47,359** | 48,074 | **(1.49)%** |
| Consumer non real estate | **33,188** | 33,948 | **(2.24)%** |
| Less: unearned income and deferred fees and costs | **(431)** | (449) | **4.01%** |
| Loans, net of unearned income and deferred fees and costs | **$856,965** | $852,744 | **0.49%** |

40

Loans increased slightly from December 31, 2022. Loan demand has contracted under current economic conditions but the Company is positioned to continue to make every loan that meets its underwriting standards.

### Deposits

|  | March 31, 2023 | December 31, 2022 | Percent Change |
| --- | ---: | ---: | ---: |
| Noninterest-bearing demand deposits | **$311,137** | $327,713 | **(5.06)%** |
| Interest-bearing demand deposits | **871,748** | 933,269 | **(6.59)%** |
| Saving deposits | **202,996** | 214,114 | **(5.19)%** |
| Time deposits | **125,571** | 67,629 | **85.68%** |
| Total deposits | **$1,511,452** | $1,542,725 | **(2.03)%** |

The Company’s deposits experienced increased competitive pressure during the first quarter of 2023, continuing a trend that began impacting the Company during the fourth quarter of 2022. The Company responded to the trend early in the quarter with special CD offering rates, as well as improved rates on other deposits that substantially reversed the trend later in the quarter, at costs well below the cost of borrowing.

The Company’s deposit base is diverse, including individuals, businesses and municipalities within its market area. The Company does not have any brokered deposits. Depositors are insured up to the FDIC maximum of $250 thousand. Municipal deposits, which account for approximately one-fourth of the Company’s deposits, have additional security from bonds pledged as collateral, in accordance with state regulation. Of the Company’s non-municipal deposits, approximately 24% are uninsured.

### 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. During the first quarter of 2023, the Company accessed FHLB borrowings to reinforce liquidity. The advances were fully repaid during March 2023, due to the success of the Company’s deposit strategy. As of March 31, 2023, the Company did not have purchased deposits, discount window borrowings or short-term borrowings.

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

Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve discount window. As of March 31, 2023, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at the Federal Reserve discount window.

As of March 31, 2023, the Company had $402,089 of borrowing capacity from the FHLB and an unsecured federal funds line of credit with an affiliated bank of $10,000, with no amounts advanced against those lines. Additionally, the Company had $15,629 of unused capacity at the Federal Reserve Bank discount window. In an abundance of caution, the Company pledged additional securities to the Federal Reserve Bank discount window during April 2023, increasing borrowing capacity to $67,878 as of April 30, 2023.

The Company monitors factors that may increase its liquidity needs. Some of these factors include deposit trends, large depositor activity, maturing deposit promotions, interest rate sensitivity, maturity and repricing timing gaps between assets and liabilities, the level of unfunded loan commitments and loan growth. As of March 31, 2023, the Company’s liquidity is sufficient to meet projected trends.

To monitor and estimate liquidity levels, the Company performs stress testing under varying assumptions on credit sensitive liabilities and the sources and amounts of balance sheet and external liquidity available to replace outflows. The Company’s Contingency Funding Plan sets forth avenues for rectifying liquidity shortfalls. As of March 31, 2023, the analysis indicated adequate liquidity under the tested scenarios.

The Company utilizes several other strategies to maintain sufficient liquidity. Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s internally-set target range. As of March 31, 2023, the loan to deposit ratio was 56.70%. 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.

### Capital Resources

Total stockholders’ equity at March 31, 2023 was $131,043, an increase of $8,356, or 6.81%, from the $122,687 at December 31, 2022. The increase in stockholders’ equity reflects net income for the three months ended March 31, 2023, reduced by payment of a special one-time cash dividend, and increased by improvement in the unrealized loss on securities available for sale.

During the first quarter of 2023, the Company paid a special one-time cash dividend of $1.00 per common share. The dividend rewarded stockholders for the Company’s positive performance during 2022, which included a one-time gain on the sale of a private equity investment.

The Company qualifies as a small bank holding company under the Federal Reserve’s Small Bank Holding Company Policy Statement, which exempts bank holding companies with less than $3 billion in assets from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements. NBB is subject to various capital requirements administered by banking agencies, including an additional capital conservation buffer in order to make capital distributions or discretionary bonus payments. Risk-based capital ratios are calculated in compliance with OCC rules based on the Basel III Capital Rules. The Bank’s ratios are well above the required minimums as of March 31, 2023. Risk based capital ratios for NBB 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 | **17.00%** | 4.50% | 7.00% |
| Tier I Capital Ratio | **17.00%** | 6.00% | 8.50% |
| Total Capital Ratio | **18.00%** | 8.00% | 10.50% |
| Leverage Ratio | **11.01%** | 4.00% | 4.00% |

### 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. 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.

While it would be possible for customers to fully draw on approved lines of credit and for beneficiaries to call all letters of credit, historically this has not occurred. In the event of a sudden and substantial draw on these lines, the Company would be able to access multiple options, including its lines of credit with correspondents, raising additional deposits, or selling securities available for sale or loans. The Company estimates an ACL on unfunded loan commitments under the CECL model.

The Company 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, 2023. 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, 2023.

### Contractual Obligations

The Company had no finance lease or purchase obligations and no long-term debt at March 31, 2023.

## Controls and procedures

As filed, 2,044 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, 2023 to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Company's management, including the Company's principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Effective January 1, 2023, the Company adopted ASC 326, Financial Instruments – Credit Losses. The Company implemented changes to the policies, processes, and controls over the estimation of the allowance for credit losses to support the adoption of ASC 326. Many controls under this new standard mirror controls under prior GAAP. New controls were established over the review of economic forecasting projections obtained from independent third parties. Except as related to the adoption of ASC 326, there were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three months ended March 31, 2023, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

### Part II

### Other Information

## Risk factors

As filed, 234 characters.

Please refer to the “Risk Factors” previously disclosed in Item 1A of our 2022 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 11, 2023.
Source: SEC EDGAR, the filing index for accession 0001437749-23-013831. Last ingested by Listed: Nov 3, 2026, 16:02 ET. No prices; not investment advice.