NATIONAL BANKSHARES INC - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - NATIONAL BANKSHARES INC	Financial_Report.xls
EX-31 - EXHIBIT 31.(II) - NATIONAL BANKSHARES INC	ex31-ii.htm
EX-31 - EXHIBIT 31.(I) - NATIONAL BANKSHARES INC	ex31-i.htm
EX-32 - EXHIBIT 32.(II) - NATIONAL BANKSHARES INC	ex32-ii.htm
EX-32 - EXHIBIT 32.(I) - NATIONAL BANKSHARES INC	ex32-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

	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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

---

Provision for loan losses

(187

)

(244

)

970

274

(269

)

701

Balance, June 30, 2014

663

1,554

3,790

1,056

278

552

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

)

(70

)

(943

)

(79

)

---

(150

)

---

(1,244

)

Recoveries

---

131

---

184

Provision for loan losses

(198

)

(73

)

1,023

146

(207

)

804

Balance, June 30, 2014

663

1,554

3,790

1,056

278

552

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

	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

---

---

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.

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.

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

Residential closed-end junior liens

248

---

248

Investor-owned residential real estate

---

Commercial Real Estate⁽²⁾

Multifamily real estate

NATIONAL BANKSHARES INC - FORM 10-Q - August 6, 2014

Attached files