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EX-32 - EXHIBIT 32.(I) - NATIONAL BANKSHARES INCex32-i.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 June 30, 2014

[  ] 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 August 1, 2014

6,947,974

 

(This report contains 55 pages) 

 

 
 

 

 

NATIONAL BANKSHARES, INC. AND SUBSIDIARIES

Form 10-Q

Index

 

Part I – Financial Information

Page

     

Item 1

Financial Statements

3

     
 

Consolidated Balance Sheets, June 30, 2014 (Unaudited) and December 31, 2013

3

     
 

Consolidated Statements of Income for the Three Months Ended June 30, 2014 and 2013 (Unaudited)

4

     
 

Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended June 30, 2014 and 2013 (Unaudited)

5

     
 

Consolidated Statements of Income for the Six Months Ended June 30, 2014 and 2013 (Unaudited)

6

     
 

Consolidated Statements of Comprehensive Income (Loss) for the Six Months Ended June 30, 2014 and 2013 (Unaudited)

7

     
 

Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2014 and 2013 (Unaudited)

8

 

 

 
 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (Unaudited)

9

 

 

 
 

Notes to Consolidated Financial Statements (Unaudited) 

10 - 33

     

Item 2

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

33 - 45

     

Item 3

Quantitative and Qualitative Disclosures About Market Risk  

45

     

Item 4

Controls and Procedures

46

     

Part II – Other Information

 
     

Item 1

Legal Proceedings

46

     

Item 1A

Risk Factors

46

     

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds 

46

     

Item 3

Defaults Upon Senior Securities

46

 

 

 

Item 4

Mine Safety Disclosures

46

 

 

 

Item 5

Other Information

46 - 47

     

Item 6

Exhibits 

47

     

Signatures

 

47

     

Index of Exhibits

 

48 - 49

     

Certifications

   

 

 
2

 

 

 

 

Part I

 

Item 1. Financial Statements

Financial Information

 

 

National Bankshares, Inc. and Subsidiaries

 

 

Consolidated Balance Sheets

 

 

 

   

(Unaudited)

         
   

June 30,

   

December 31,

 

$ in thousands, except per share data

 

2014

   

2013

 

Assets

               

Cash and due from banks

  $ 15,917     $ 13,283  

Interest-bearing deposits

    106,112       98,066  

Securities available for sale, at fair value

    195,407       181,712  

Securities held to maturity (fair value approximates $166,182 at June 30, 2014 and $159,337 at December 31, 2013)

    162,956       163,983  

Restricted stock, at cost

    1,089       1,414  

Mortgage loans held for sale

    383       1,276  

Loans:

               

Loans, net of unearned income and deferred fees

    593,400       595,690  

Less allowance for loan losses

    (7,971

)

    (8,227

)

Loans, net

    585,429       587,463  

Premises and equipment, net

    9,482       9,951  

Accrued interest receivable

    5,798       5,949  

Other real estate owned, net

    5,293       4,712  

Intangible assets and goodwill

    7,761       8,299  

Bank-owned life insurance

    21,491       21,181  

Other assets

    11,361       13,341  

Total assets

  $ 1,128,479     $ 1,110,630  
                 

Liabilities and Stockholders' Equity

               

Noninterest-bearing demand deposits

  $ 146,727     $ 142,645  

Interest-bearing demand deposits

    510,304       501,541  

Savings deposits

    79,255       74,141  

Time deposits

    231,177       241,709  

Total deposits

    967,463       960,036  

Accrued interest payable

    71       92  

Other liabilities

    4,149       4,610  

Total liabilities

    971,683       964,738  

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 6,947,974 shares at June 30, 2014 and December 31, 2013

    8,685       8,685  

Retained earnings

    158,863       154,171  

Accumulated other comprehensive loss, net

    (10,752

)

    (16,964

)

Total stockholders' equity

    156,796       145,892  

Total liabilities and stockholders' equity

  $ 1,128,479     $ 1,110,630  

 

See accompanying notes to consolidated financial statements.

 

 
3

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Three Months Ended June 30, 2014 and 2013

(Unaudited)

   

June 30,

   

June 30,

 

$ in thousands, except per share data

 

2014

   

2013

 

Interest Income

               

Interest and fees on loans

  $ 7,819     $ 8,192  

Interest on interest-bearing deposits

    64       58  

Interest on securities – taxable

    1,697       1,694  

Interest on securities – nontaxable

    1,474       1,618  

Total interest income

    11,054       11,562  
                 

Interest Expense

               

Interest on time deposits of $100 or more

    145       230  

Interest on other deposits

    1,150       1,318  

Total interest expense

    1,295       1,548  

Net interest income

    9,759       10,014  

Provision for loan losses

    701       355  

Net interest income after provision for loan losses

    9,058       9,659  
                 

Noninterest Income

               

Service charges on deposit accounts

    607       625  

Other service charges and fees

    38       42  

Credit card fees

    961       853  

Trust income

    332       311  

BOLI income

    177       176  

Other income

    229       223  

Realized securities gains, net

    ---       9  

Total noninterest income

    2,344       2,239  
                 

Noninterest Expense

               

Salaries and employee benefits

    3,007       2,992  

Occupancy and furniture and fixtures

    417       404  

Data processing and ATM

    394       418  

FDIC assessment

    117       136  

Credit card processing

    665       646  

Intangible assets amortization

    269       269  

Net costs of other real estate owned

    84       65  

Franchise taxes

    287       265  

Other operating expenses

    820       942  

Total noninterest expense

    6,060       6,137  

Income before income taxes

    5,342       5,761  

Income tax expense

    1,233       1,326  

Net Income

  $ 4,109     $ 4,435  

Basic net income per common share

  $ 0.59     $ 0.64  

Fully diluted net income per common share

  $ 0.59     $ 0.64  

Weighted average number of common shares outstanding – basic

    6,947,974       6,947,974  

Weighted average number of common shares outstanding – diluted

    6,960,683       6,968,348  

Dividends declared per common share

  $ 0.55     $ 0.54  

   

See accompanying notes to consolidated financial statements.

  

 
4

 

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Three Months Ended June 30, 2014 and 2013

(Unaudited)

 

   

June 30,

   

June 30,

 

$ in thousands

 

2014

   

2013

 

Net Income

  $ 4,109     $ 4,435  
                 

Other Comprehensive Income (Loss), Net of Tax

               

Unrealized holding gains (losses) on available for sale securities net of tax of $1,664 and ($4,577) for the periods ended June 30, 2014 and 2013, respectively

    3,091       (8,500

)

Reclassification adjustment, net of tax of $0 and ($3) for the periods ended June 30, 2014 and 2013, respectively

    ---       (6

)

Other comprehensive income (loss), net of tax of $1,664 and ($4,580) for the periods ended June 30, 2014 and 2013, respectively

    3,091       (8,506

)

Total Comprehensive Income (Loss)

  $ 7,200     $ (4,071

)

 

See accompanying notes to consolidated financial statements.

  

 
5

 

  

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Six Months Ended June 30, 2014 and 2013

(Unaudited)

   

June 30,

   

June 30,

 

$ in thousands, except per share data

 

2014

   

2013

 

Interest Income

               

Interest and fees on loans

  $ 15,754     $ 16,511  

Interest on interest-bearing deposits

    129       116  

Interest on securities – taxable

    3,350       3,206  

Interest on securities – nontaxable

    2,974       3,266  

Total interest income

    22,207       23,099  
                 

Interest Expense

               

Interest on time deposits of $100 or more

    298       498  

Interest on other deposits

    2,312       2,729  

Total interest expense

    2,610       3,227  

Net interest income

    19,597       19,872  

Provision for loan losses

    804       1,026  

Net interest income after provision for loan losses

    18,793       18,846  
                 

Noninterest Income

               

Service charges on deposit accounts

    1,199       1,213  

Other service charges and fees

    103       102  

Credit card fees

    1,758       1,593  

Trust income

    625       600  

BOLI income

    352       364  

Other income

    506       504  

Realized securities gains, net

    1       18  

Total noninterest income

    4,544       4,394  
                 

Noninterest Expense

               

Salaries and employee benefits

    6,006       5,932  

Occupancy and furniture and fixtures

    857       836  

Data processing and ATM

    757       811  

FDIC assessment

    264       272  

Credit card processing

    1,214       1,198  

Intangible assets amortization

    538       540  

Net costs of other real estate owned

    161       140  

Franchise taxes

    566       523  

Other operating expenses

    1,879       1,849  

Total noninterest expense

    12,242       12,101  

Income before income taxes

    11,095       11,139  

Income tax expense

    2,582       2,488  

Net Income

  $ 8,513     $ 8,651  

Basic net income per common share

  $ 1.23     $ 1.25  

Fully diluted net income per common share

  $ 1.22     $ 1.24  

Weighted average number of common shares outstanding – basic

    6,947,974       6,947,974  

Weighted average number of common shares outstanding – diluted

    6,962,274       6,968,711  

Dividends declared per common share

  $ 0.55     $ 0.54  

   

See accompanying notes to consolidated financial statements.

  

 
6

 

  

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Six Months Ended June 30, 2014 and 2013

(Unaudited)

 

   

June 30,

   

June 30,

 

$ in thousands

 

2014

   

2013

 

Net Income

  $ 8,513     $ 8,651  
                 

Other Comprehensive Income (Loss), Net of Tax

               

Unrealized holding gains (losses) on available for sale securities net of tax of $3,345 and ($5,094) for the periods ended June 30, 2014 and 2013, respectively

    6,212       (9,458

)

Reclassification adjustment, net of tax of $0 and ($6) for the periods ended June 30, 2014 and 2013, respectively

    ---       (12

)

Other comprehensive income (loss), net of tax of $3,345 and ($5,100) for the periods ended June 30, 2014 and 2013, respectively

    6,212       (9,470

)

Total Comprehensive Income

  $ 14,725     $ (819

)

 

See accompanying notes to consolidated financial statements.

 

 
7

 

  

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Six Months June 30, 2014 and 2013

(Unaudited)

 

$ in thousands

 

Common

Stock

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Loss

   

Total

 

Balances at December 31, 2012

  $ 8,685     $ 144,162     $ (2,738

)

  $ 150,109  

Net income

    ---       8,651       ---       8,651  

Dividends $0.54 per share

    ---       (3,752

)

    ---       (3,752

)

Other comprehensive loss, net of tax( $5,100)

    ---       ---       (9,470

)

    (9,470

)

Balances at June 30, 2013

  $ 8,685     $ 149,061     $ (12,208

)

  $ 145,538  
                                 

Balances at December 31, 2013

  $ 8,685     $ 154,171     $ (16,964

)

  $ 145,892  

Net income

    ---       8,513       ---       8,513  

Dividends $0.55 per share

    ---       (3,821

)

    ---       (3,821

)

Other comprehensive income, net of tax $3,345

    ---       ---       6,212       6,212  

Balances at June 30, 2014

  $ 8,685     $ 158,863     $ (10,752

)

  $ 156,796  

 

See accompanying notes to consolidated financial statements.

 

 
8

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2014 and 2013

(Unaudited)

   

June 30,

   

June 30,

 

$ in thousands

 

2014

   

2013

 

Cash Flows from Operating Activities

               

Net income

  $ 8,513     $ 8,651  

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

               

Provision for loan losses

    804       1,026  

Depreciation of bank premises and equipment

    355       364  

Amortization of intangibles

    538       540  

Amortization of premiums and accretion of discounts, net

    74       85  

Losses on disposal of fixed assets

    94       ---  

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

    ---       (18

)

Gains on calls of securities held to maturity, net

    (1

)

    ---  

Losses and write-downs on other real estate owned, net

    23       64  

Increase in cash value of bank-owned life insurance

    (310

)

    (335

)

Net change in:

               

Mortgage loans held for sale

    893       846  

Accrued interest receivable

    151       (44

)

Other assets

    (1,366

)

    1,311  

Accrued interest payable

    (21

)

    (13

)

Other liabilities

    (461

)

    (446

)

Net cash provided by operating activities

    9,286       12,031  
                 

Cash Flows from Investing Activities

               

Net change interest-bearing deposits

    (8,046

)

    32,725  

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

    3,828       53,195  

Proceeds from calls, principal payments and maturities of securities held to maturity

    6,342       7,044  

Purchases of securities available for sale

    (7,974

)

    (83,993

)

Purchases of securities held to maturity

    (5,381

)

    (13,484

)

Net change in restricted stock

    325       275  

Purchases of loan participations

    ---       (900

)

Collections of loan participations

    1,373       91  

Loan originations and principal collections, net

    (1,165

)

    3,025  

Proceeds from disposal of other real estate owned

    234       803  

Recoveries on loans charged off

    184       61  

Proceeds from sale and purchases of bank premises and equipment, net

    22       (185

)

Net cash used in investing activities

    (10,258

)

    (1,343

)

Cash Flows from Financing Activities

               

Net change in time deposits

    (10,532

)

    (18,138

)

Net change in other deposits

    17,959       9,893  

Cash dividends paid

    (3,821

)

    (3,752

)

Net cash provided by (used in) financing activities

    3,606       (11,997

)

Net change in cash and due from banks

    2,634       (1,309

)

Cash and due from banks at beginning of period

    13,283       14,783  

Cash and due from banks at end of period

  $ 15,917     $ 13,474  
                 

Supplemental Disclosures of Cash Flow Information

               

Interest paid on deposits and borrowed funds

  $ 2,631     $ 3,240  

Income taxes paid

    2,922       2,428  
                 

Supplemental Disclosure of Noncash Activities

               

Loans charged against the allowance for loan losses

  $ 1,244     $ 1,484  

Loans transferred to other real estate owned

    838       401  

Unrealized net gains (losses) on securities available for sale

    9,557       (14,570

)

   

See accompanying notes to consolidated financial statements.

 

 
9

 

 

National Bankshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2014

(Unaudited)

 

$ in thousands, except per share 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 six months ended June 30, 2014 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 2013 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. Incentive stock options were granted annually to key employees of NBI and its subsidiaries from 1999 to 2005 and none have been granted since 2005. All of the stock options are vested.

 

Options

 

Shares

   

Weighted
Average
Exercise
Price Per Share

   

Weighted
Average
Remaining
Contractual
Term

   


Aggregate
Intrinsic
Value

 

Outstanding at January 1, 2014

    46,000     $ 23.96                  

Exercised

    ---       ---                  

Forfeited or expired

    ---       ---                  

Outstanding June 30, 2014

    46,000     $ 23.96       0.86     $ 319  

Exercisable at June 30, 2014

    46,000     $ 23.96       0.86     $ 319  

 

There were no shares exercised during the six months ended June 30, 2014 or June 30, 3013. As of June 30, 2014, there was no unrecognized compensation expense related to stock options.

 

 

 
10

 

  

Note 3:

Loan Portfolio

 

The loan portfolio, excluding loans held for sale, was comprised of the following.

 

   

June 30,

2014

   

December 31,

2013

 

Real estate construction

  $ 45,953     $ 45,925  

Consumer real estate

    145,664       145,499  

Commercial real estate

    305,511       311,266  

Commercial non real estate

    32,045       31,262  

Public sector and IDA

    36,107       34,220  

Consumer non real estate

    29,004       28,423  

Gross loans

    594,284       596,595  

Less unearned income and deferred fees

    (884

)

    (905

)

Loans, net of unearned income and deferred fees

  $ 593,400     $ 595,690  

 

Note 4:

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 to identify impaired loans. Credit quality is rated based on the loan’s payment history, the borrower’s current financial situation and the value of the underlying collateral.

Impaired loans are those loans that have been modified in a troubled debt restructure (“TDR” or “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 given risk ratings that indicate higher risk, such as “classified” or “other assets especially mentioned.” Impaired loans are individually evaluated to determine appropriate reserves and are measured at the lower of the invested amount or the fair market value. Impaired loans that are not troubled debt restructures and for which fair value measurement indicates an impairment loss are designated nonaccrual. A troubled debt restructure with an impairment loss may accrue interest if the loan shows a satisfactory repayment history for at least 6 months. Please refer to Note 1 of the Company’s 2013 Form 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.

Troubled debt restructures impact the estimation of the appropriate level of the allowance for loan losses. If the restructuring included forgiveness of a portion of principal, the charge-off is included in the historical charge-off rates applied to the collective evaluation methodology. Further, restructured loans are individually evaluated for impairment and any amount of book value that exceeds fair value is accrued in the allowance for loan losses. TDRs that experience a payment default are examined to determine whether the default indicates collateral dependency or a decline in estimates of cash flow used in the fair value measurement. TDRs, as well as all impaired loans, that are determined to be collateral dependent are charged down to fair value. Deficiencies indicated by impairment measurements for TDRs that are not collateral dependent may be accrued in the allowance for loan losses or charged off if deemed uncollectible.

The Company evaluated characteristics in the loan portfolio and determined major segments and smaller classes within each segment. These characteristics include collateral type, repayment sources, and (if applicable) the borrower’s business model. The methodology for calculating reserves for collectively-evaluated loans is applied at the class level.

  

 
11

 

  

Portfolio Segments and Classes

The segments and classes used in determining the allowance for loan losses are as follows.

 

Real Estate Construction

Commercial Non Real Estate

Construction, residential

Commercial and Industrial

Construction, other

 

 

Public Sector and IDA

Consumer Real Estate

Public sector and IDA

Equity lines

 

Residential closed-end first liens

Consumer Non Real Estate

Residential closed-end junior liens

Credit cards

Investor-owned residential real estate

Automobile

 

 Other consumer loans

Commercial Real Estate

 

Multifamily real estate  
Commercial real estate, owner-occupied  

Commercial real estate, other

 

 

Historical Loss Rates

The Company’s allowance methodology for collectively-evaluated loans applies historical loss rates by class to current class balances as part of the process of determining required reserves. Class loss rates are calculated as the net charge-offs for the class as a percentage of average class balance. The loss rate for the current quarter is averaged with that of prior periods to obtain the historical loss rate. Two loss rates for each class are calculated: total net charge-offs for the class as a percentage of average class loan balance (“class loss rate”), and total net charge-offs for the class as a percentage of average classified loans in the class (“classified loss rate”). Classified loans are those with risk ratings of “substandard” or higher. Net charge-offs in both calculations include charge-offs and recoveries of classified and non-classified loans as well as those associated with impaired loans. Class historical loss rates are applied to non-classified loan balances at the reporting date, and classified historical loss rates are applied to classified balances at the reporting date.

 

Risk Factors

In addition to historical loss rates, risk factors pertinent to credit risk for each class are analyzed to estimate reserves for collectively-evaluated loans. Factors include changes in national and local economic and business conditions, the nature and volume of classes within the portfolio, loan quality, loan officers’ experience, lending policies and the Company’s loan review system.

The analysis of certain factors results in standard allocations to all segments and classes. These factors include loan officers’ average years of experience, the risk from changes in lending policies, and the risk from changes in loan review. Factors analyzed for each class, with resultant allocations based upon the level of risk assessed for each class, include levels of past due loans, nonaccrual loans, current class balance as a percentage of total loans, and the percentage of high risk loans (defined to be junior lien mortgages, high loan-to-value loans, and interest only loans) within the class. Additionally, factors specific to each segment are analyzed and result in allocations to the segment.

Real estate construction loans are subject to general risks from changing commercial building and housing market trends and economic conditions that may impact demand for completed properties and the costs of completion. These risks are measured by market-area unemployment rates, bankruptcy rates, housing and commercial building market trends, and interest rates.

The credit quality of consumer real estate is subject to risks associated with the borrower’s repayment ability and collateral value, measured generally by analyzing local unemployment and bankruptcy trends, local housing market trends, and interest rates.

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

Commercial non real estate loans are secured by collateral other than real estate, or are unsecured. Credit risk for commercial non real estate loans is subject to economic conditions, generally monitored by local business bankruptcy trends, and interest rates. Public sector and IDA loans are extended to municipalities and related entities. Credit risk is based upon the entity’s ability to repay and interest rate trends.

Consumer non real estate includes credit cards, automobile and other consumer loans. Credit cards and certain other consumer loans are unsecured, while collateral is obtained for automobile loans and other consumer loans. Credit risk stems primarily from the borrower’s ability to repay, measured by average unemployment, average personal bankruptcy rates and interest rates.

Factor allocations applied to each class are increased for loans rated special mention and classified. The Company allocates additional reserves for “high risk” loans.

 

 
12

 

 

A detailed analysis showing the allowance roll-forward by portfolio segment and related loan balance by segment follows.

 

   

Activity in the Allowance for Loan Losses for the Three Months Ended June 30, 2014

 
   

 

Real Estate

Construction

   

 

Consumer

Real Estate

   

 

Commercial

Real Estate

   

Commercial

Non Real

Estate

   

Public

Sector and

IDA

   

 

Consumer Non

Real Estate

   

Unallocated

   

Total

 

Balance, March 31, 2014

  $ 850     $ 1,814     $ 3,694     $ 861     $ 202     $ 529     $ 347     $ 8,297  

Charge-offs

    ---       (16

)

    (891

)

    (79

)

    ---       (67

)

    ---       (1,053

)

Recoveries

    ---       ---       17       ---       ---       9       ---       26  

Provision for loan losses

    (187

)

    (244

)

    970       274       76       81       (269

)

    701  

Balance, June 30, 2014

  $ 663     $ 1,554     $ 3,790     $ 1,056     $ 278     $ 552     $ 78     $ 7,971  

  

   

Activity in the Allowance for Loan Losses for the Six Months Ended June 30, 2014

 
   

Real Estate

Construction

   

Consumer

Real Estate

   

Commercial

Real Estate

   

Commercial

Non Real

Estate

   

Public

Sector and

IDA

   

Consumer Non

Real Estate

   

Unallocated

   

Total

 

Balance, December 31, 2013

  $ 863     $ 1,697     $ 3,685     $ 989     $ 132     $ 576     $ 285     $ 8,227  

Charge-offs

    (2

)

    (70

)

    (943

)

    (79

)

    ---       (150

)

    ---       (1,244

)

Recoveries

    ---       ---       25       131       ---       28       ---       184  

Provision for loan losses

    (198

)

    (73

)

    1,023       15       146       98       (207

)

    804  

Balance, June 30, 2014

  $ 663     $ 1,554     $ 3,790     $ 1,056     $ 278     $ 552     $ 78     $ 7,971  

  

   

Activity in the Allowance for Loan Losses for the Three Months Ended June 30, 2013

 
   

Real Estate

Construction

   

Consumer

Real Estate

   

Commercial

Real Estate

   

Commercial

Non Real

Estate

   

Public

Sector and

IDA

   

Consumer Non

Real Estate

   

Unallocated

   

Total

 

Balance, March 31, 2013

  $ 1,173     $ 1,846     $ 3,289     $ 1,276     $ 110     $ 585     $ 12     $ 8,291  

Charge-offs

    ---       (46

)

    ---       (556

)

    ---       (128

)

    ---       (730

)

Recoveries

    ---       1       4       ---       ---       31       ---       36  

Provision for loan losses

    (141

)

    (131

)

    (264

)

    761       1       25       104       355  

Balance, June 30, 2013

  $ 1,032     $ 1,670     $ 3,029     $ 1,481     $ 111     $ 513     $ 116     $ 7,952  

 

   

Activity in the Allowance for Loan Losses for the Six Months Ended June 30, 2013

 
   

Real Estate

Construction

   

Consumer

Real Estate

   

Commercial

Real Estate

   

Commercial

Non Real

Estate

   

Public

Sector and

IDA

   

Consumer Non

Real Estate

   

Unallocated

   

Total

 

Balance, December 31, 2012

  $ 1,070     $ 2,263     $ 3,442     $ 959     $ 142     $ 424     $ 49     $ 8,349  

Charge-offs

    (184

)

    (99

)

    (35

)

    (960

)

    ---       (206

)

    ---       (1,484

)

Recoveries

    ---       1       4       16       ---       40       ---       61  

Provision for loan losses

    146       (495

)

    (382

)

    1,466       (31

)

    255       67       1,026  

Balance, June 30, 2013

  $ 1,032     $ 1,670     $ 3,029     $ 1,481     $ 111     $ 513     $ 116     $ 7,952  

   

 
13

 

 

 

   

Allowance for Loan Losses as of June 30, 2014

 
   

Real Estate

Construction

   

Consumer

Real Estate

   

Commercial

Real Estate

   

Commercial

Non Real

Estate

   

Public

Sector and

IDA

   

Consumer Non

Real Estate

   

Unallocated

   

Total

 

Individually evaluated for impairment

  $ ---     $ 13     $ 277     $ 1     $ ---     $ ---     $ ---     $ 291  

Collectively evaluated for impairment

    663       1,541       3,513       1,055       278       552       78       7,680  

Total

  $ 663     $ 1,554     $ 3,790     $ 1,056     $ 278     $ 552     $ 78     $ 7,971  

 

   

Allowance for Loan Losses as of December 31, 2013

 
   

 

Real Estate

Construction

   

 

Consumer

Real Estate

   

Commercial

Real Estate

   

Commercial

Non Real

Estate

   

Public

Sector and

IDA

   

Consumer Non

Real Estate

   

Unallocated

   

Total

 

Individually evaluated for impairment

  $ ---     $ 10     $ 610     $ 4     $ ---     $ ---     $ ---     $ 624  

Collectively evaluated for impairment

    863       1,687       3,075       985       132       576       285       7,603  

Total

  $ 863     $ 1,697     $ 3,685     $ 989     $ 132     $ 576     $ 285     $ 8,227  

 

   

Loans as of June 30, 2014

 
   

 

Real Estate

Construction

   

 

Consumer

Real Estate

   

Commercial

Real Estate

   

Commercial

Non Real

Estate

   

Public

Sector and

IDA

   

Consumer Non

Real Estate

   

Unallocated

   

Total

 

Individually evaluated for impairment

  $ ---     $ 694     $ 10,404     $ 46     $ ---     $ ---     $ ---     $ 11,144  

Collectively evaluated for impairment

    45,953       144,970       295,107       31,999       36,107       29,004       ---       583,140  

Total loans

  $ 45,953     $ 145,664     $ 305,511     $ 32,045     $ 36,107     $ 29,004     $ ---     $ 594,284  

 

   

Loans as of December 31, 2013

 
   

 

Real Estate

Construction

   

 

Consumer

Real Estate

   

Commercial

Real Estate

   

Commercial

Non Real

Estate

   

Public

Sector and

IDA

   

Consumer Non

Real Estate

   

Unallocated

   

Total

 

Individually evaluated for impairment

  $ ---     $ 780     $ 12,079     $ 102     $ ---     $ 24     $ ---     $ 12,985  

Collectively evaluated for impairment

    45,925       144,719       299,187       31,160       34,220       28,399       ---       583,610  

Total

  $ 45,925     $ 145,499     $ 311,266     $ 31,262     $ 34,220     $ 28,423     $ ---     $ 596,595  

  

A summary of ratios for the allowance for loan losses follows.

 

   

Six Months Ended

June 30,

   

Year Ended

December 31,

 
   

2014

   

2013

   

2013

 

Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees

    1.34

%

    1.35

%

    1.38

%

Ratio of net charge-offs to average loans, net of unearned income and deferred fees(1)

    0.36

%

    0.49

%

    0.28

%

 

(1)

Net charge-offs are on an annualized basis.

 

 
14

 

  

A summary of nonperforming assets follows.

 

    June 30,     December 31,  
    2014     2013     2013  
Nonperforming assets:                        

Nonaccrual loans

  $ 2,335     $ 10,428     $ 5,732  

Restructured loans in nonaccrual

    2,674       1,522       852  

Total nonperforming loans

    5,009       11,950       6,584  

Other real estate owned, net

    5,293       969       4,712  

Total nonperforming assets

  $ 10,302     $ 12,919     $ 11,296  

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

    1.72

%

    2.19

%

    1.88

%

Ratio of allowance for loan losses to nonperforming loans(1)

    159.13

%

    66.54

%

    124.95

%

  

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

 

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

 

   

June 30,

   

December 31,

 
   

2014

   

2013

   

2013

 

Loans past due 90 days or more and still accruing

  $ 266     $ 125     $ 190  

Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees

    0.04

%

    0.02

%

    0.03

%

Accruing restructured loans

  $ 6,240     $ 6,234     $ 6,191  

Impaired loans:

                       

Impaired loans with no valuation allowance

  $ 8,155     $ 15,946     $ 10,372  

Impaired loans with a valuation allowance

    2,989       1,449       2,613  

Total impaired loans

  $ 11,144     $ 17,395     $ 12,985  

Valuation allowance

    (291

)

    (273

)

    (624

)

Impaired loans, net of allowance

  $ 10,853     $ 17,122     $ 12,361  

Average recorded investment in impaired loans(1)

  $ 11,898     $ 17,889     $ 16,654  

Interest income recognized on impaired loans, after designation as impaired

  $ 191     $ 77     $ 267  

Amount of income recognized on a cash basis

  $ ---     $ ---     $ ---  

 

(1)      Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.

 

Nonaccrual loans that meet the Company’s balance threshold of $250 and TDRs are designated as impaired. No interest income was recognized on nonaccrual loans for the six months ended June 30, 2014 or June 30, 2013 or for the year ended December 31, 2013.

 

 
15

 

  

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

 

   

Impaired Loans as of June 30, 2014

 
   

Principal Balance

   

 

(A)

Total

Recorded

Investment(1)

   

Recorded

Investment(1) in (A)

for Which There is

No Related

Allowance

   

Recorded

Investment(1) in

(A) for Which

There is a Related

Allowance

   

Related

Allowance

 

Consumer Real Estate(2)

                                       

Residential closed-end first liens

  $ 396     $ 369     $ 168     $ 201     $ 3  

Residential closed-end junior liens

    248       248       ---       248       6  

Investor-owned residential real estate

    77       77       ---       77       4  

Commercial Real Estate(2)

                                       

Multifamily real estate

    3,237       2,823       868       1,955