NATIONAL BANKSHARES INC - FORM 10-Q

Attached files

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EX-31.I - EXHIBIT 31(I) - NATIONAL BANKSHARES INC	ex31i.htm
EX-32.I - EXHIBIT 32(I) - NATIONAL BANKSHARES INC	ex32i.htm
EX-31.II - EXHIBIT 31(II) - NATIONAL BANKSHARES INC	ex31ii.htm
EX-32.II - EXHIBIT 32(II) - NATIONAL BANKSHARES INC	ex32ii.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

[x]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ________

Commission File Number 0-15204

NATIONAL BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

Virginia

(State or other jurisdiction of incorporation or organization)

54-1375874

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

101 Hubbard Street P. O. Box 90002 Blacksburg, VA	24062-9002
(Address of principal executive offices)	(Zip Code)

(540) 951-6300

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [x] Yes [ ] No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [x] Non-accelerated filer [ ] Smaller reporting company [ ]

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).

[ ] Yes [x] No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

Common Stock, $1.25 Par Value

Outstanding at May 1, 2011

6,935,974

(This report contains 42 pages)

NATIONAL BANKSHARES, INC. AND SUBSIDIARIES

Form 10-Q

Index

Part I – Financial Information		Page

Item 1	Financial Statements	3

	Consolidated Balance Sheets, March 31, 2011 (Unaudited) and December 31, 2010	3 - 4

	Consolidated Statements of Income for the Three Months Ended March 31, 2011 and 2010 (Unaudited)	5 - 6

	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2011 and 2010 (Unaudited)	7

	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited)	8 - 9

	Notes to Consolidated Financial Statements (Unaudited)	10 - 26

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27 - 36

Item 3	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4	Controls and Procedures	36

Part II – Other Information

Item 1	Legal Proceedings	36

Item 1A	Risk Factors	36

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3	Defaults Upon Senior Securities	36

Item 4	Reserved	36

Item 5	Other Information	37

Item 6	Exhibits	37

Signatures		37

Index of Exhibits		38 – 39

Certifications		40 - 42

Part I

Financial Information

Item 1. Financial Statements

National Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

	(Unaudited)
	March 31,			December 31,
$ in thousands, except per share data	2011			2010
Assets
Cash and due from banks	$	11,800		$	9,858
Interest-bearing deposits		55,674			69,400
Securities available for sale, at fair value		190,844			184,907
Securities held to maturity (fair value approximates $133,858 at March 31, 2011 and $129,913 at December 31, 2010)		132,669			131,000
Mortgage loans held for sale		---			2,460
Loans:
Real estate construction loans		48,671			46,169
Real estate mortgage loans		173,785			173,533
Commercial and industrial loans		280,607			269,818
Loans to individuals		85,816			87,868
Total loans		588,879			577,388
Less unearned income and deferred fees		(977	)		(945	)
Loans, net of unearned income and deferred fees		587,902			576,443
Less allowance for loan losses		(8,245	)		(7,664	)
Loans, net		579,657			568,779
Premises and equipment, net		10,366			10,470
Accrued interest receivable		6,514			6,016
Other real estate owned, net		2,222			1,723
Intangible assets and goodwill		11,272			11,543
Other assets		25,540			26,082
Total assets	$	1,026,558		$	1,022,238

Liabilities and Stockholders' Equity
Noninterest-bearing demand deposits	$	136,769		$	131,540
Interest-bearing demand deposits		372,470			365,040
Savings deposits		58,273			55,800
Time deposits		318,383			332,203
Total deposits		885,895			884,583
Accrued interest payable		260			257
Other liabilities		6,738			8,211
Total liabilities		892,893			893,051
Commitments and contingencies		---			---


Stockholders' Equity
Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding	$	---		$	---
Common stock of $1.25 par value.
Authorized 10,000,000 shares; issued and outstanding 6,935,974 shares at March 31, 2011 and 6,933,474 shares at December 31, 2010		8,670			8,667
Retained earnings		127,218			123,161
Accumulated other comprehensive loss, net		(2,223	)		(2,641	)
Total stockholders' equity		133,665			129,187
Total liabilities and stockholders' equity	$	1,026,558		$	1,022,238

See accompanying notes to consolidated financial statements.

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Three Months Ended March 31, 2011 and 2010

(Unaudited)

	March 31,		March 31,
$ in thousands, except per share data	2011		2010
Interest Income
Interest and fees on loans	$	9,095	$	9,176
Interest on interest-bearing deposits		32		19
Interest on securities – taxable		1,662		1,443
Interest on securities – nontaxable		1,676		1,602
Total interest income		12,465		12,240

Interest Expense
Interest on time deposits of $100,000 or more		561		946
Interest on other deposits		1,818		2,033
Total interest expense		2,379		2,979
Net interest income		10,086		9,261
Provision for loan losses		800		647
Net interest income after provision for loan losses		9,286		8,614

Noninterest Income
Service charges on deposit accounts		612		714
Other service charges and fees		58		47
Credit card fees		733		666
Trust income		246		269
BOLI income		184		185
Other income		91		104
Realized securities gains (losses), net		10		(14	)
Total noninterest income		1,934		1,971

Noninterest Expense
Salaries and employee benefits		2,904		2,856
Occupancy and furniture and fixtures		423		491
Data processing and ATM		444		357
FDIC assessment		346		263
Credit card processing		586		508
Intangible assets amortization		271		271
Net costs of other real estate owned		134		33
Franchise taxes		242		239
Other operating expenses		734		766
Total noninterest expense		6,084		5,784
Income before income taxes		5,136		4,801
Income tax expense		1,112		1,032
Net Income	$	4,024	$	3,769


Basic net income per share	$	0.58	$	0.54
Fully diluted net income per share	$	0.58	$	0.54
Weighted average number of commonshares outstanding – basic		6,933,780		6,933,474
Weighted average number of commonshares outstanding – diluted		6,957,450		6,952,812
Dividends declared per share	$	---	$	---

See accompanying notes to consolidated financial statements.

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended March 31, 2011 and 2010

(Unaudited)

$ in thousands	Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Comprehensive Income			Total
Balances at December 31, 2009	$	8,667	$	113,901	$	(492	)				$	122,076
Net income		---		3,769		---		$	3,769			3,769
Other comprehensive income, net of tax:
Unrealized gain on securities available for sale, net of income tax $350		---		---		---			650			---
Reclass adjustment, net of tax $5		---		---		---			9			---
Other comprehensive income, net of tax $355		---		---		659			659			659
Comprehensive income		---		---		---		$	4,428			---
Balances at March 31, 2010	$	8,667	$	117,670	$	167					$	126,504

Balances at December 31, 2010	$	8,667	$	123,161	$	(2,641	)				$	129,187
Net income		---		4,024		---		$	4,024			4,024
Stock options exercised		3		33		---						36
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale, net of income tax $228		---		---		---			423			---
Reclass adjustment, net of tax $(3)		---		---		---			(5	)		---
Other comprehensive income, net of tax $225		---		---		418			418			418
Comprehensive income		---		---		---		$	4,442			---
Balances at March 31, 2011	$	8,670	$	127,218	$	(2,223	)				$	133,665

See accompanying notes to consolidated financial statements.

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2011 and 2010

(Unaudited)

	March 31,			March 31,
$ in thousands	2011			2010
Cash Flows from Operating Activities
Net income	$	4,024		$	3,769
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		800			647
Depreciation of bank premises and equipment		209			223
Amortization of intangibles		271			271
Amortization of premiums and accretion of discounts, net		61			79
(Gains) losses on sales and calls of securities available for sale, net		(8	)		14
(Gains) on calls of securities held to maturity, net		(2	)		---
Losses and write-downs on other real estate owned		100			29
Net change in:
Mortgage loans held for sale		2,460			(1,232	)
Accrued interest receivable		(498	)		64
Other assets		228			(63	)
Accrued interest payable		3			56
Other liabilities		(1,368	)		740
Net cash provided by operating activities		6,280			4,597

Cash Flows from Investing Activities
Net change interest-bearing deposits		13,726			(22,976	)
Proceeds from calls, principal payments, sales and maturities of securities available for sale		10,659			13,782
Proceeds from calls, principal payments and maturities of securities held to maturity		5,449			9,833
Purchases of securities available for sale		(16,000	)		(6,359	)
Purchases of securities held to maturity		(7,138	)		(6,030	)
Collections of loan participations		25			66
Loan originations and principal collections, net		(12,622	)		671
Proceeds from disposal of other real estate owned		295			210
Recoveries on loans charged off		25			24
Additions to bank premises and equipment		(105	)		(324	)
Net cash used in investing activities		(5,686	)		(11,103	)

Cash Flows from Financing Activities
Net change in time deposits		(13,820	)		(5,188	)
Net change in other deposits		15,132			10,544
Stock options exercised		36			---
Net cash provided by financing activities		1,348			5,356
Net change in cash and due from banks		1,942			(1,150	)
Cash and due from banks at beginning of period		9,858			12,894
Cash and due from banks at end of period	$	11,800		$	11,744

Supplemental Disclosures of Cash Flow Information
Interest paid on deposits and borrowed funds	$	2,376	$	2,923
Income taxes paid	$	---	$	576

Supplemental Disclosure of Noncash Activities
Loans charged against the allowance for loan losses	$	243	$	456
Loans transferred to other real estate owned	$	894	$	680
Unrealized gains on securities available for sale	$	643	$	1,014

See accompanying notes to consolidated financial statements.

National Bankshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

March 31, 2011

(Unaudited)

$ in thousands, except per share data and % data

Note 1: General

The consolidated financial statements of National Bankshares, Inc. (“NBI”) and its wholly-owned subsidiaries, The National Bank of Blacksburg (“NBB”) and National Bankshares Financial Services, Inc. (“NBFS”) (collectively, the “Company”), conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of management, all adjustments consisting of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of results of operations for the full year or any other interim period. The interim period consolidated financial statements and financial information included in this Form 10-Q should be read in conjunction with the notes to consolidated financial statements included in the Company’s 2010 Form 10-K. The Company posts all reports required to be filed under the Securities and Exchange Act of 1934 on its web site at www.nationalbankshares.com.

Subsequent events have been considered through the date when the Form 10-Q was issued.

Note 2: Stock-Based Compensation

The Company had a stock option plan, the 1999 Stock Option Plan, that was adopted in 1999 and that was terminated on March 9, 2009. From 1999 to 2005, incentive stock options were granted annually to key employees of NBI and its subsidiaries. None have been granted since 2005. All of the outstanding stock options are vested. Because there have been no options granted in 2011 and all options were fully vested at December 31, 2008, there is no expense included in net income for the periods presented.

Options	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2011		109,500	$	22.14
Exercised		2,500		14.825
Forfeited or expired		---		---
Outstanding March 31, 2011		107,000	$	22.31		4.28	$	706
Exercisable at March 31, 2011		107,000	$	22.31		4.28	$	706

During the three months ended March 31, 2011, there were 2,500 shares exercised with an intrinsic value of $35. During the first three months of 2010, there were no stock options exercised.

Note 3: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans

The allowance for loan losses methodology incorporates individual evaluation of impaired loans and collective evaluation of groups of non-impaired loans. The Company performs ongoing analysis of the loan portfolio to determine credit quality and identify impaired loans. Credit quality is rated based on the loan’s payment history, the borrower’s current financial situation and value of the underlying collateral.

Impaired loans are those loans that have been modified in a troubled debt restructure and larger, non-homogeneous loans that are in nonaccrual or exhibit payment history or financial status that indicate the probability that collection will not occur according to the loan’s terms. Generally, impaired loans are risk rated “classified” or “other assets especially mentioned.” Impaired loans are measured at the lower of the invested amount or the fair market value. Impaired loans with an impairment loss are designated nonaccrual. Please refer to Note 1 of the 10-K, “Summary of Significant Accounting Policies” for additional information on evaluation of impaired loans and associated specific reserves, and policies regarding nonaccruals, past due status and charge-offs.

Using a risk-based perspective, the Company determined five major categories, called segments, within the non-impaired portfolio. Characteristics of loans within portfolio segments are further analyzed to determine sub-groups. These characteristics include collateral type, repayment sources, and (if applicable) the borrower’s business model. Subgroups with total balances exceeding 5% of Tier I and Tier II Capital are designated as loan classes.

The Company’s segments consist of real estate-secured consumer loans, non-real estate-secured consumer loans, commercial real estate, commercial and industrial loans and construction, development and land loans. Consumer real estate is composed of loans to purchase or build a primary residence as well as equity lines secured by a primary residence. Consumer non-real estate contains credit cards, automobile and other installment loans, and deposit overdrafts. Commercial real estate is composed of all commercial loans that are secured by real estate. The commercial and industrial segment is commercial loans that are not secured by real estate. Construction, development and other land loans are composed of loans to developers of residential and commercial properties.

The Company’s segments and classes are as follows:

Consumer Real Estate

Equity lines

Closed-end consumer real estate

Consumer construction

Consumer, Non-Real Estate

Credit cards

Consumer, general

Consumer overdraft

Commercial & Industrial

Commercial & industrial

Construction, Development and Land

Residential

Commercial

Commercial Real Estate

College housing

Office/Retail space

Nursing homes

Hotels

Municipalities

Medical professionals

Religious organizations

Convenience stores

Entertainment and sports

Nonprofits

Restaurants

General contractors

Other commercial real estate

Risk factors are analyzed for each class to estimate collective reserves. Factors include allocations for the historical charge-off percentage and changes in national and local economic and business conditions, in the nature and volume of the portfolio, in loan officers’ experience and in loan quality. Increased allocations for the risk factors applied to each class are made for special mention and classified loans. The Company allocates additional reserves for “high risk” loans, determined to be junior lien mortgages, high loan-to-value loans and interest-only loans.

An analysis of the allowance for loan losses follows:

	Three Months ended March 31,						Year ended December 31,
	2011			2010			2010
Balance at beginning of period	$	7,664		$	6,926		$	6,926
Provision for loan losses		800			647			3,409
Loans charged off		(244	)		(456	)		(2,810	)
Recoveries of loans previously charged off		25			24			139
Balance at the end of period	$	8,245		$	7,141		$	7,664
Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees		1.40	%		1.21	%		1.33	%
Ratio of net charge-offs to average loans, net of unearned income and deferred fees(1)		0.15	%		0.30	%		0.46	%
Ratio of allowance for loan losses to nonperforming loans(2)		96.58	%		92.23	%		91.01	%

(1)	Net charge-offs are on an annualized basis.

(2)	The Company defines nonperforming loans as total nonaccrual and restructured loans. Loans 90 days past due and still accruing are excluded.

A detailed analysis showing the allowance roll-forward by portfolio segment follows:

March 31, 2011

	Consumer Real Estate			Consumer Non-Real Estate			Commercial Real Estate			Commercial & Industrial		Construction, Development & Other Land			Unallocated			Total
Allowance for Loan Losses
Beginning Balance	$	1,059		$	586		$	4,033		$	1,108	$	749		$	129		$	7,664
Charge-offs		(36	)		(90	)		(118	)		---		---			---			(244	)
Recoveries		7			18			---			---		---			---			25
Provision for loan losses		72			(50	)		740			113		(59	)		(16	)		800
Ending Balance	$	1,102		$	464		$	4,655		$	1,221	$	690		$	113		$	8,245

December 31, 2010

	Consumer Real Estate			Consumer Non-Real Estate			Commercial Real Estate			Commercial & Industrial			Construction, Development & Land			Unallocated			Total
Allowance for Loan Losses
Beginning Balance	$	249		$	1,049		$	4,321		$	459		$	562		$	286		$	6,926
Charge-offs		(89	)		(358	)		(1,021	)		(927	)		(415	)		---			(2,810	)
Recoveries		10			67			61			1			---			---			139
Provision for loan losses		889			(172	)		672			1,575			602			(157	)		3,409
Ending Balance	$	1,059		$	586		$	4,033		$	1,108		$	749		$	129		$	7,664

An analysis of the components of the ending balance of the allowance for loan losses by portfolio segment follows:

March 31, 2011

	Consumer Real Estate		Consumer Non-Real Estate		Commercial Real Estate		Commercial & Industrial		Construction, Development & Other Land		Unallocated		Total
Allowance for loans individually evaluated for impairment	$	30	$	---	$	626	$	558	$	42	$	---	$	1,256
Allowance for loans collectively evaluated for impairment		1,072		464		4,029		663		648		113		6,989
Total allowance for loan losses	$	1,102	$	464	$	4,655	$	1,221	$	690	$	113	$	8,245

December 31, 2010

	Consumer Real Estate		Consumer Non-Real Estate		Commercial Real Estate		Commercial & Industrial		Construction, Development & Other Land		Unallocated		Total
Allowance for loans individually evaluated for impairment	$	27	$	---	$	565	$	508	$	100	$	---	$	1,200
Allowance for loans collectively evaluated for impairment		1,032		586		3,468		600		649		129		6,464
Total allowance for loan losses	$	1,059	$	586	$	4,033	$	1,108	$	749	$	129	$	7,664

The ending balance of loans associated with the components of the allowance for loan losses follows:

March 31, 2011

	Consumer Real Estate		Consumer Non-Real Estate		Commercial Real Estate		Commercial & Industrial		Construction, Development & Other Land		Unallocated		Total
Loans individually evaluated for impairment	$	614	$	---	$	5,172	$	608	$	1,536	$	---	$	7,930
Loans collectively evaluated for impairment		115,438		30,566		350,893		38,597		44,478		---		579,972
Total loans	$	116,052	$	30,566	$	356,065	$	39,205	$	46,014	$	---	$	587,902

December 31, 2010

	Consumer Real Estate		Consumer Non-Real Estate		Commercial Real Estate		Commercial & Industrial		Construction, Development & Other Land		Unallocated		Total
Loans individually evaluated for impairment	$	505	$	---	$	5,151	$	698	$	2,437	$	---	$	8,791
Loans collectively evaluated for impairment		108,855		35,679		343,780		36,374		42,964		---		567,652
Total loans	$	109,360	$	35,679	$	348,931	$	37,072	$	45,401	$	---	$	576,443

A summary of nonperforming assets follows:

	March 31,						December 31,
	2011			2010			2010
Nonperforming assets:
Nonaccrual loans	$	7,653		$	7,743		$	1,938
Restructured loans not in nonaccrual		884			---			6,483
Total nonperforming loans		8,537			7,743			8,421
Other real estate owned, net		2,222			2,567			1,723
Total nonperforming assets	$	10,759		$	10,310		$	10,144
Ratio of nonperforming assets to loans, net of unearned income and deferred fees, plus other real estate owned		1.83	%		1.75	%		1.75	%

A summary of loans past due 90 days or more and impaired loans follows:

	March 31,						December 31,
	2011			2010			2010
Loans past due 90 days or more and still accruing	$	1,078		$	2,217		$	1,336
Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees		0.18	%		0.38	%		0.23	%
Impaired loans:
Total impaired loans	$	7,930		$	7,743		$	8,791
Impaired loans with a valuation allowance	$	7,084		$	7,693		$	7,676
Valuation allowance		1,256			2,438			1,200
Impaired loans, net of allowance	$	5,828		$	5,255		$	6,476
Impaired loans with no valuation allowance	$	846		$	50		$	1,115
Average recorded investment in impaired loans(1)	$	7,690		$	7,712		$	7,526
Income recognized on impaired loans	$	20		$	---		$	17
Amount of income recognized on a cash basis	$	---		$	---		$	---

(1) Recorded investment includes principle and accrued interest.

A detailed analysis of investment in impaired loans, associated reserves and interest income recognized, segregated by loan class follows:

March 31, 2011

	Average Recorded Investment in Impaired Loans		Unpaid Principal Balance of Impaired Loans		(A) Total Recorded Investment in Impaired Loans		Recorded Investment in (A) for Which There is No Related Allowance		Recorded Investment in (A) for Which There is a Related Allowance		Related Allowance for Impaired Loans		Interest Income Recognized
Consumer Real Estate
Closed-end Consumer Real Estate	$	542	$	614	$	614	$	75	$	539	$	30	$	1

Commercial Real Estate
Hotels		3,496		3,502		3,502		285		3,217		113		---
Medical Professionals		52		79		79		---		79		79		5
College Housing		121		82		82		---		82		---		---
Undeveloped Land		254		252		254		254		---		---		3
Other Commercial Real Estate		1,159		1,257		1,259		---		1,259		434		10

Commercial & Industrial
Commercial & Industrial		608		608		608		---		608		558		---

Construction, Development and Land
Residential		1,458		1,536		1,536		358		1,178		42		1

Total	$	7,690	$	7,930	$	7,934	$	972	$	6,962	$	1,256	$	20

December 31, 2010

	Average Recorded Investment in Impaired Loans		Unpaid Principal Balance of Impaired Loans		(A) Total Recorded Investment in Impaired Loan		Recorded Investment in (A) for Which There is No Related Allowance		Recorded Investment in (A) for Which There is a Related Allowance		Related Allowance for Impaired Loans		Interest Income Recognized
Consumer Real Estate
Closed-end Consumer Real Estate	$	337	$	505	$	505	$	---	$	505	$	26	$	---

Commercial Real Estate
Office & Retail		253		---		---		---		---		---		---
Hotel		2,767		3,509		3,509		287		3,222		267		---
Convenience stores		49		577		592		592		---		---		15
Other commercial real estate		337		1,065		1,066		---		1,066		299		1

Commercial & Industrial
Commercial & Industrial		1,183		698		698		---		698		508		---

Construction, Development and Land
Residential		2,579		2,185		2,185		---		2,185		100		---
Commercial		21		252		253		253		---		---		1

Total	$	7,526	$	8,791	$	8,808	$	1,132	$	7,676	$	1,200	$	17

Note: Only classes with impaired loans are shown.

The Company collects and discloses data in compliance with accounting guidance in effect for the year disclosed. The table above and the following tables disclose information only for December 31, 2010 and March 31, 2011, following accounting guidance adopted during 2010. Information for periods prior to December 31, 2010 was collected according to guidance in effect at that time and is not available in the format adopted in 2010.

An analysis of past due and nonaccrual loans follows:

March 31, 2011
	30 – 89 Days Past Due		90 or More Days Past Due		90 Days Past Due and Still Accruing		Nonaccruals (Including Impaired Nonaccruals)
Consumer Real Estate
Equity Lines	$	30	$	---	$	---	$	---
Closed-ended Consumer Real Estate		948		1,514		321		1,193
Consumer Construction		---		---		---		---

Consumer, Non-Real Estate
Credit Cards		24		28		28		---
Consumer General		246		65		65		---
Consumer Overdraft		---		---		---		---

Commercial Real Estate
College Housing		681		182		---		182
Office/Retail		---		---		---		---
Nursing Homes		---		---		---		---
Hotels		624		526		---		3,502
Municipalities		---		---		---		---
Medical Professionals		---		---		---		---
Religious Organizations		---		---		---		---
Convenience Stores		38		---		---		---
Entertainment and Sports		---		---		---		---
Nonprofits		---		---		---		---
Restaurants		332		---		---		---
General Contractors		---		66		43		163
Other Commercial Real Estate		1,159		1,191		582		609

Commercial and Industrial
Commercial and Industrial		14		507		39		468

Construction, Development and Land
Residential		---		1,301		---		1,536
Commercial		---		---		---		---
Total	$	4,096	$	5,380	$	1,078	$	7,653

December 31, 2010
	30 – 89 Days Past Due		90 or More Days Past Due		90 Days Past Due and Still Accruing		Nonaccruals (Including Impaired Nonaccruals)
Consumer Real Estate
Equity Lines	$	69	$	---	$	---	$	---
Closed-ended Consumer Real Estate		1,868		1,178		612		783
Consumer Construction		---		---		---		---

Consumer, Non-Real Estate
Credit Cards		67		42		29		---
Consumer General		518		45		37		---
Consumer Overdraft		---		---		---		---

Commercial Real Estate
College Housing		224		262		---		---
Office/Retail		---		---		---		---
Nursing Homes		---		---		---		---
Hotels		---		802		---		3,509
Municipalities		---		---		---		---
Medical Professionals		---		181		---		---
Religious Organizations		---		---		---		---
Convenience Stores		9		577		577		---
Entertainment and Sports		---		---		---		---
Nonprofits		---		---		---		---
Restaurants		---		---		---		---
General Contractors		---		85		---		---
Other Commercial Real Estate		792		136		---		715

Commercial and Industrial
Commercial and Industrial		740		609		81		879

Construction, Development and Land
Residential		---		2,185		---		2,185
Commercial		25		---		---		---
Total	$	4,312	$	6,102	$	1,336	$	8,071

Nonaccrual loans that meet the Company’s balance thresholds are designated as impaired. Total nonaccrual loans at March 31, 2011 were $7,653, of which $6,794 were impaired, compared with $7,743 in nonaccruals at March 31, 2010, all of which were impaired. As of December 31, 2010 nonaccruals totaled $8,071, of which $7,612 were impaired. No interest income was recognized on nonaccrual loans for the three months ended March 31, 2011 or March 31, 2010.

Loans past due greater than 90 days that continue to accrue interest totaled $1,078 at March 31, 2011, compared with $1,336 at December 31, 2010, and $2,217 at March 31, 2010.

The estimate of credit risk for non-impaired loans is obtained by applying allocations for internal and external factors. The allocations are increased for loans that exhibit greater credit quality risk.

Credit quality indicators, which the Company terms risk grades, are assigned through the Company’s credit review function for larger loans and selective review of loans that fall below credit review thresholds. Loans that do not indicate heightened risk are graded as “pass.” Loans that appear to have elevated credit risk because of frequent or persistent past due status, which is less than 75 days, or that show weakness in the borrower’s financial condition are risk graded “special mention.” Loans with frequent or persistent delinquency exceeding 75 days or that have a higher level of weakness in the borrower’s financial condition are graded “classified.” Classified loans have regulatory risk ratings of “substandard” and “doubtful.” Allocations are increased by 50% and by 100% for loans with grades of “special mention” and “classified,” respectively.

Determination of risk grades was completed for the portfolio as of March 31, 2011 and 2010.

The following displays non-impaired loans by credit quality indicator:

March 31, 2011

	Pass		Special Mention		Classified (Excluding Impaired)
Consumer Real Estate
Equity Lines	$	16,286	$	20	$	25
Closed-end Consumer Real Estate		93,083		620		2,413
Consumer Construction		2,991		---		---

Consumer, Non-Real Estate
Credit Cards		6,418		---		24
Consumer General		23,594		89		165
Consumer Overdraft		276		---

NATIONAL BANKSHARES INC - FORM 10-Q - May 9, 2011

Attached files