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EX-31.(I) - EXHIBIT 31(I) - NATIONAL BANKSHARES INCex31-i.htm
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EX-32.(II) - EXHIBIT 32(II) - NATIONAL BANKSHARES INCex32-ii.htm
EX-31.(II) - EXHIBIT 31(II) - NATIONAL BANKSHARES INCex31-ii.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 September 30, 2015

[  ] 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 October 30, 2015

6,955,974

 

(This report contains 60 pages)

 

 
 

 

 

NATIONAL BANKSHARES, INC. AND SUBSIDIARIES

Form 10-Q

Index

 

Part I – Financial Information

Page

     

Item 1

Financial Statements

3

     
 

Consolidated Balance Sheets, September 30, 2015 (Unaudited) and December 31, 2014

3

     
 

Consolidated Statements of Income for the Three Months Ended September 30, 2015 and 2014 (Unaudited)

4

     
 

Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2015 and 2014 (Unaudited)

5

     
 

Consolidated Statements of Income for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)

6

     
 

Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)

7

     
 

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)

8

 

 

 
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (Unaudited)

9

 

 

 
 

Notes to Consolidated Financial Statements (Unaudited) 

10 – 34

     

Item 2

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

35 – 50

     

Item 3

Quantitative and Qualitative Disclosures About Market Risk  

50

     

Item 4

Controls and Procedures

51

     

Part II – Other Information

 
     

Item 1

Legal Proceedings

51

     

Item 1A

Risk Factors

51

     

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds 

51

     

Item 3

Defaults Upon Senior Securities

51

 

 

 

Item 4

Mine Safety Disclosures

51

 

 

 

Item 5

Other Information

51

     

Item 6

Exhibits 

51

     

Signatures

 

52

     

Index of Exhibits

53 – 54

     

Certifications

   

 

 
2

 

 

Part I

Item 1. Financial Statements 

Financial Information

 

National Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

 

   

(Unaudited)

         
   

September 30,

   

December 31,

 

$ in thousands, except per share data

 

2015

   

2014

 

Assets

               

Cash and due from banks

  $ 12,446     $ 12,894  

Interest-bearing deposits

    90,295       102,548  

Securities available for sale, at fair value

    211,232       222,844  

Securities held to maturity (fair value approximates $159,443 at September 30, 2015 and $167,703 at December 31, 2014)

    154,644       161,452  

Restricted stock, at cost

    1,129       1,089  

Loans held for sale

    1,331       291  

Loans:

               

Loans, net of unearned income and deferred fees

    625,755       605,466  

Less allowance for loan losses

    (8,117

)

    (8,263

)

Loans, net

    617,638       597,203  

Premises and equipment, net

    9,135       9,131  

Accrued interest receivable

    5,659       5,748  

Other real estate owned, net

    4,194       4,744  

Intangible assets and goodwill

    6,416       7,223  

Bank-owned life insurance

    22,248       21,797  

Other assets

    7,758       7,767  

Total assets

  $ 1,144,125     $ 1,154,731  
                 

Liabilities and Stockholders' Equity

               

Noninterest-bearing demand deposits

  $ 163,877     $ 150,744  

Interest-bearing demand deposits

    514,823       533,641  

Savings deposits

    86,659       81,297  

Time deposits

    197,171       216,746  

Total deposits

    962,530       982,428  

Accrued interest payable

    61       68  

Other liabilities

    7,142       5,932  

Total liabilities

    969,733       988,428  

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 6,955,974 shares at September 30, 2015 and 6,950,474 at December 31, 2014

    8,695       8,688  

Retained earnings

    171,996       163,287  

Accumulated other comprehensive loss, net

    (6,299

)

    (5,672

)

Total stockholders' equity

    174,392       166,303  

Total liabilities and stockholders' equity

  $ 1,144,125     $ 1,154,731  

See accompanying notes to consolidated financial statements.

 

 
3

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Three Months Ended September 30, 2015 and 2014

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands, except per share data

 

2015

   

2014

 

Interest Income

               

Interest and fees on loans

  $ 7,676     $ 7,729  

Interest on interest-bearing deposits

    54       64  

Interest on securities – taxable

    1,678       1,718  

Interest on securities – nontaxable

    1,352       1,436  

Total interest income

    10,760       10,947  
                 

Interest Expense

               

Interest on time deposits

    301       361  

Interest on other deposits

    708       786  

Total interest expense

    1,009       1,147  

Net interest income

    9,751       9,800  

Provision for loan losses

    178       356  

Net interest income after provision for loan losses

    9,573       9,444  
                 

Noninterest Income

               

Service charges on deposit accounts

    571       634  

Other service charges and fees

    45       42  

Credit card fees

    972       929  

Trust income

    314       296  

BOLI income

    151       153  

Other income

    234       200  

Realized securities gains, net

    2       4  

Total noninterest income

    2,289       2,258  
                 

Noninterest Expense

               

Salaries and employee benefits

    3,149       2,927  

Occupancy and furniture and fixtures

    436       403  

Data processing and ATM

    384       429  

FDIC assessment

    138       147  

Credit card processing

    701       673  

Intangible assets amortization

    269       269  

Net costs of other real estate owned

    52       98  

Franchise taxes

    329       307  

Other operating expenses

    864       862  

Total noninterest expense

    6,322       6,115  

Income before income taxes

    5,540       5,587  

Income tax expense

    1,341       1,324  
                 

Net Income

  $ 4,199     $ 4,263  

Basic net income per common share

  $ 0.60     $ 0.61  

Fully diluted net income per common share

  $ 0.60     $ 0.61  

Weighted average number of common shares outstanding – basic

    6,955,126       6,948,681  

Weighted average number of common shares outstanding – diluted

    6,959,168       6,956,777  

Dividends declared per common share

  $ ---     $ ---  

   

See accompanying notes to consolidated financial statements.

 

 
4

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Three Months Ended September 30, 2015 and 2014

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands

 

2015

   

2014

 

Net Income

  $ 4,199     $ 4,263  
                 

Other Comprehensive Income, Net of Tax

               

Unrealized holding gains on available for sale securities net of tax of $1,394 and $919 for the periods ended September 30, 2015 and 2014, respectively

    2,589       1,708  

Reclassification adjustment for gains included in net income, net of tax of $(1) and ($1) for the periods ended September 30, 2015 and 2014, respectively

    (1

)

    (3

)

Other comprehensive income, net of tax of $1,393 and $918 for the periods ended September 30, 2015 and 2014, respectively

    2,588       1,705  

Total Comprehensive Income

  $ 6,787     $ 5,968  

 

See accompanying notes to consolidated financial statements.

 

 
5

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Nine Months Ended September 30, 2015 and 2014

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands, except per share data

 

2015

   

2014

 

Interest Income

               

Interest and fees on loans

  $ 22,886     $ 23,406  

Interest on interest-bearing deposits

    173       193  

Interest on securities – taxable

    5,124       5,068  

Interest on securities – nontaxable

    4,095       4,410  

Total interest income

    32,278       33,077  
                 

Interest Expense

               

Interest on time deposits

    943       1,133  

Interest on other deposits

    2,204       2,624  

Total interest expense

    3,147       3,757  

Net interest income

    29,131       29,320  

Provision for loan losses

    734       1,160  

Net interest income after provision for loan losses

    28,397       28,160  
                 

Noninterest Income

               

Service charges on deposit accounts

    1,676       1,833  

Other service charges and fees

    164       145  

Credit card fees

    2,843       2,687  

Trust income

    902       921  

BOLI income

    451       462  

Other income

    977       783  

Realized securities gains, net

    5       5  

Total noninterest income

    7,018       6,836  
                 

Noninterest Expense

               

Salaries and employee benefits

    9,433       8,890  

Occupancy and furniture and fixtures

    1,296       1,250  

Data processing and ATM

    1,230       1,189  

FDIC assessment

    408       411  

Credit card processing

    1,986       1,887  

Intangible assets amortization

    807       807  

Net costs of other real estate owned

    569       259  

Franchise taxes

    959       874  

Other operating expenses

    2,690       2,747  

Total noninterest expense

    19,378       18,314  

Income before income taxes

    16,037       16,682  

Income tax expense

    3,762       3,906  
                 

Net Income

  $ 12,275     $ 12,776  

Basic net income per common share

  $ 1.77     $ 1.84  

Fully diluted net income per common share

  $ 1.76     $ 1.84  

Weighted average number of common shares outstanding – basic

    6,952,716       6,948,212  

Weighted average number of common shares outstanding – diluted

    6,956,689       6,960,444  

Dividends declared per common share

  $ 0.53     $ 0.55  

 

See accompanying notes to consolidated financial statements.

 

 
6

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Nine Months Ended September 30, 2015 and 2014

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands

 

2015

   

2014

 

Net Income

  $ 12,275     $ 12,776  
                 

Other Comprehensive Income (Loss), Net of Tax

               

Unrealized holding gains (losses) on available for sale securities net of tax of ($334) and $4,264 for the periods ended September 30, 2015 and 2014, respectively

    (624

)

    7,920  

Reclassification adjustment for gains included in net income, net of tax of ($2) and ($2) for the periods ended September 30, 2015 and 2014, respectively

    (3

)

    (3

)

Other comprehensive income (loss), net of tax of ($336) and $4,263 for the periods ended September 30, 2015 and 2014, respectively

    (627

)

    7,917  

Total Comprehensive Income

  $ 11,648     $ 20,693  

 

See accompanying notes to consolidated financial statements.

 

 
7

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months September 30, 2015 and 2014

(Unaudited)

 

$ in thousands

 

Common Stock

   

Retained Earnings

   

Accumulated Other Comprehensive Loss

   

Total

 

Balances at December 31, 2013

  $ 8,685     $ 154,171     $ (16,964

)

  $ 145,892  

Net income

    ---       12,776       ---       12,776  

Dividends $0.55 per share

    ---       (3,821

)

    ---       (3,821

)

Exercise of stock options

    3       55       ---       58  

Other comprehensive income, net of tax of $4,263

    ---       ---       7,917       7,917  

Balances at September 30, 2014

  $ 8,688     $ 163,181     $ (9,047

)

  $ 162,822  
                                 

Balances at December 31, 2014

  $ 8,688     $ 163,287     $ (5,672

)

  $ 166,303  

Net income

    ---       12,275       ---       12,275  

Dividends $0.53 per share

    ---       (3,686

)

    ---       (3,686

)

Exercise of stock options

    7       120       ---       127  

Other comprehensive loss, net of tax of ($336)

    ---       ---       (627

)

    (627

)

Balances at September 30, 2015

  $ 8,695     $ 171,996     $ (6,299

)

  $ 174,392  

 

See accompanying notes to consolidated financial statements.

 

 
8

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2015 and 2014

(Unaudited)

   

September 30,

   

September 30,

 

$ in thousands

 

2015

   

2014

 

Cash Flows from Operating Activities

               

Net income

  $ 12,275     $ 12,776  

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

               

Provision for loan losses

    734       1,160  

Depreciation of bank premises and equipment

    561       541  

Amortization of intangibles

    807       807  

Amortization of premiums and accretion of discounts, net

    89       109  

Losses on disposal of premises and equipment

    15       94  

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

    (5

)

    (4

)

Gains on calls of securities held to maturity, net

    ---       (1

)

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

    398       76  

Increase in cash value of bank-owned life insurance

    (451

)

    (462

)

Originations of mortgage loans held for sale

    (13,500

)

    (7,409

)

Proceeds from sale of mortgage loans held for sale

    12,654       8,074  

Gains on sale of mortgage loans held for sale

    (194

)

    (114

)

Net change in:

               

Accrued interest receivable

    89       241  

Other assets

    345       (252

)

Accrued interest payable

    (7

)

    (25

)

Other liabilities

    1,210       (163

)

Net cash provided by operating activities

    15,020       15,448  
                 

Cash Flows from Investing Activities

               

Net change interest-bearing deposits

    12,253       10,445  

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

    51,620       8,774  

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

    6,709       7,808  

Purchases of securities available for sale

    (40,957

)

    (19,906

)

Purchases of securities held to maturity

    ---       (6,381

)

Net change in restricted stock

    (40

)

    325  

Purchases of loan participations

    (402

)

    ---  

Collections of loan participations

    1,964       1,513  

Loan originations and principal collections, net

    (23,473

)

    (4,030

)

Proceeds from sale of other real estate owned

    773       329  

Recoveries on loans charged off

    122       212  

Proceeds from sale and purchases of premises and equipment, net

    (580

)

    (129

)

Net cash provided by (used in) investing activities

    7,989       (1,040

)

                 

Cash Flows from Financing Activities

               

Net change in time deposits

    (19,575

)

    (17,779

)

Net change in other deposits

    (323

)

    6,666  

Cash dividends paid

    (3,686

)

    (3,821

)

Stock options exercised

    127       58  

Net cash used in financing activities

    (23,457

)

    (14,876

)

Net change in cash and due from banks

    (448

)

    (468

)

Cash and due from banks at beginning of period

    12,894       13,283  

Cash and due from banks at end of period

  $ 12,446     $ 12,815  
                 

Supplemental Disclosures of Cash Flow Information

               

Interest paid on deposits and borrowed funds

  $ 3,154     $ 3,782  

Income taxes paid

    3,380       3,892  
                 

Supplemental Disclosure of Noncash Activities

               

Loans charged against the allowance for loan losses

  $ 1,002     $ 1,568  

Loans transferred to other real estate owned

    620       838  

Unrealized net gains (losses) on securities available for sale

    (963

)

    12,180  

  

See accompanying notes to consolidated financial statements.

 

 
9

 

 

National Bankshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(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 three and nine month periods ended September 30, 2015 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 2014 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.

 

Note 2: Stock-Based Compensation

 

The Company’s 1999 Stock Option Plan 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, 2015

    20,500     $ 23.00                  

Exercised

    (5,500

)

    23.00                  

Forfeited or expired

    ---                          

Outstanding September 30, 2015

    15,000     $ 23.00       0.107     $ 122  

Exercisable at September30, 2015

    15,000     $ 23.00       0.107     $ 122  

 

There were 5,500 shares with an intrinsic value of $35 exercised during the nine months ended September 30, 2015. There were 2,500 shares with an intrinsic value of $15 exercised during 2014.

 

 
10

 

 

 

Note 3:     Loan Portfolio

 

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

 

   

September 30,
 2015

   

December 31,

2014

 

Real estate construction

  $ 44,886     $ 45,562  

Consumer real estate

    144,990       147,039  

Commercial real estate

    315,008       310,762  

Commercial non real estate

    39,255       33,413  

Public sector and IDA

    52,330       41,361  

Consumer non real estate

    30,140       28,182  

Gross loans

    626,609       606,319  

Less unearned income and deferred fees

    (854

)

    (853

)

Loans, net of unearned income and deferred fees

  $ 625,755     $ 605,466  

 

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 when due according to the loan’s original 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 restructured loan that maintains current status for at least six months may be in accrual status. Please refer to Note 1 of the Company’s 2014 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 that are determined to be collateral-dependent, as well as all impaired loans that are determined to be collateral dependent, are charged down to fair value net of estimated costs to dispose. 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. High risk loans include junior liens, interest only and high loan to value 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 Nine Months Ended September 30, 2015

 
   

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, 2014

  $ 612     $ 1,662       3,537     $ 1,475     $ 327     $ 602     $ 48     $ 8,263  

Charge-offs

    ---       (201

)

    (155

)

    (453

)

    ---       (193

)

    ---       (1,002

)

Recoveries

    ---       1       36       1       ---       84       ---       122  

Provision for loan losses

    (77

)

    332       420       (153

)

    170       21       21       734  

Balance, September 30, 2015

  $ 535     $ 1,794     $ 3,838     $ 870     $ 497     $ 514     $ 69     $ 8,117  

 

 

   

Activity in the Allowance for Loan Losses for the Nine Months Ended September 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

)

    (97

)

    (1,115

)

    (79

)

    ---       (275

)

    ---       (1,568

)

Recoveries

    ---       ---       33       132       ---       47       ---       212  

Provision for loan losses

    (277

)

    78       1,072       22       148       261       (144

)

    1,160  

Balance, September 30, 2014

  $ 584     $ 1,678     $ 3,675     $ 1,064     $ 280     $ 609     $ 141     $ 8,031  

 

 

   

Activity in the Allowance for Loan Losses for the Year Ended December 31, 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

)

    (222

)

    (1,201

)

    (89

)

    ---       (346

)

    ---       (1,860

)

Recoveries

    ---       ---       50       132       ---       73       ---       255  

Provision for loan losses

    (249

)

    187       1,003       443       195       299       (237

)

    1,641  

Balance, December 31, 2014

  $ 612     $ 1,662     $ 3,537     $ 1,475     $ 327     $ 602     $ 48     $ 8,263  

 

 
13

 

 

   

Allowance for Loan Losses as of September 30, 2015

 
   

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

  $ ---     $ 25     $ 119     $ ---     $ ---     $ ---     $ ---     $ 144  

Collectively evaluated for impairment

    535       1,769       3,719       870       497       514       69       7,973  

Total

  $ 535     $ 1,794     $ 3,838     $ 870     $ 497     $ 514     $ 69     $ 8,117  

 

 

   

Allowance for Loan Losses as of December 31, 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

  $ ---     $ 14     $ 258     $ 10     $ ---     $ ---     $ ---     $ 282  

Collectively evaluated for impairment

    612       1,648       3,279       1,465       327       602       48       7,981  

Total

  $ 612     $ 1,662     $ 3,537     $ 1,475     $ 327     $ 602     $ 48     $ 8,263  

 

 

   

Loans as of September 30, 2015

 
   

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

  $ ---     $ 973     $ 13,042     $ 997     $ ---     $ ---     $ ---     $ 15,012  

Collectively evaluated for impairment

    44,886       144,017       301,966       38,258       52,330       30,140       ---       611,597  

Total loans

  $ 44,886     $ 144,990     $ 315,008     $ 39,255     $ 52,330     $ 30,140     $ ---     $ 626,609  

 

 

   

Loans as of December 31, 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

  $ ---     $ 819     $ 13,624     $ 678     $ ---     $ ---     $ ---     $ 15,121  

Collectively evaluated for impairment

    45,562       146,220       297,138       32,735       41,361       28,182       ---       591,198  

Total

  $ 45,562     $ 147,039     $ 310,762     $ 33,413     $ 41,361     $ 28,182     $ ---     $ 606,319  

 

 
14

 

 

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

 

   

As of the

Nine Months Ended

September 30,

   

For the

Year Ended

December 31,

 
   

2015

   

2014

   

2014

 

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

    1.30

%

    1.35

%

    1.36

%

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

    0.19

%

    0.31

%

    0.27

%

 

(1)

Net charge-offs are on an annualized basis.

 

 

A summary of nonperforming assets follows.

 

   

September 30,

   

December 31,

 
   

2015

   

2014

   

2014

 

Nonperforming assets:

                       

Nonaccrual loans

  $ 3,207     $ 5,366     $ 3,999  

Restructured loans in nonaccrual

    5,781       2,360       5,288  

Total nonperforming loans

    8,988       7,726       9,287  

Other real estate owned, net

    4,194       5,145       4,744  

Total nonperforming assets

  $ 13,182     $ 12,871     $ 14,031  

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

    2.09

%

    2.14

%

    2.30

%

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

    90.31

%

    103.95

%

    88.97

%

 

(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.

 

   

September 30,

   

December 31,

 
   

2015

   

2014

   

2014

 

Loans past due 90 days or more and still accruing

  $ 47     $ 485     $ 207  

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

    0.01

%

    0.08

%

    0.03

%

Accruing restructured loans

  $ 6,080     $ 5,947     $ 6,040  

Impaired loans:

                       

Impaired loans with no valuation allowance

  $ 12,548     $ 9,223     $ 7,615  

Impaired loans with a valuation allowance

    2,464       5,964       7,506  

Total impaired loans

  $ 15,012     $ 15,187     $ 15,121  

Valuation allowance

    (144

)

    (296

)

    (282

)

Impaired loans, net of allowance

  $ 14,868     $ 14,891     $ 14,839  

Average recorded investment in impaired loans(1)

  $ 15,902     $ 15,974     $ 16,311  

Interest income recognized on impaired loans, after designation as impaired

  $ 267     $ 384     $ 473  

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.

 

 
15

 

 

Nonaccrual loans that meet the Company’s balance threshold of $250 and all TDRs are designated as impaired. No interest income was recognized on nonaccrual loans for the nine months ended September 30, 2015 or September 30, 2014 or for the year ended December 31, 2014.

 

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

 

   

Impaired Loans as of September 30, 2015

 
   

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

  $ 718     $ 675     $ 306     $ 369     $ 14  

Residential closed-end junior liens

    223       223       ---       223       7  

Investor-owned residential real estate

    75       75       ---       75       4  

Commercial Real Estate(2)

                                       

Multifamily real estate

    2,900       2,665       868       1,797       119  

Commercial real estate, owner-occupied

    4,555       4,489       4,489       ---       ---  

Commercial real estate, other

    6,013       5,888       5,888       ---       ---  

Commercial Non Real Estate(2)

                                       

Commercial and Industrial

    1,005       997       997       ---       ---  

Total

  $ 15,489     $ 15,012     $ 12,548     $ 2,464     $ 144  

 

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

(2)     Only classes with impaired loans are shown.

 

 

   

Impaired Loans as of December 31, 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

  $ 530     $ 503     $ 311     $ 192     $ 2  

Residential closed-end junior liens

    239       239       ---       239       8  

Investor-owned residential real estate

    77       77       ---       77       4  

Commercial Real Estate(2)

                                       

Multifamily real estate

    2,911       2,735       868       1,866       170  

Commercial real estate, owner occupied

    4,919       4,821       3,314       1,508       74  

Commercial real estate, other

    6,080       6,068       3,072       2,996       14  

Commercial Non Real Estate(2)

                                       

Commercial and Industrial

    678     &nb