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EX-31.I - EXHIBIT 31.I - NATIONAL BANKSHARES INCex31-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 September 30, 2016

[  ] 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 November 4, 2016

6,957,974

 

(This report contains 59 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, 2016 (Unaudited) and December 31, 2015

3

     
 

Consolidated Statements of Income for the Three Months Ended September 30, 2016 and 2015 (Unaudited)

4

     
 

Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2016 and 2015 (Unaudited)

5

     
 

Consolidated Statements of Income for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)

6

     
 

Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)

7

     
 

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)

8

 

 

 
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (Unaudited)

9

 

 

 
 

Notes to Consolidated Financial Statements (Unaudited) 

10-33

     

Item 2

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

34-49

     

Item 3

Quantitative and Qualitative Disclosures About Market Risk  

50

     

Item 4

Controls and Procedures

50

     

Part II – Other Information

 
     

Item 1

Legal Proceedings

50

     

Item 1A

Risk Factors

50

     

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds 

50

     

Item 3

Defaults Upon Senior Securities

50

 

 

 

Item 4

Mine Safety Disclosures

50

 

 

 

Item 5

Other Information

50

     

Item 6

Exhibits 

50

     

Signatures

 

51

     

Index of Exhibits

 

52 – 53

     

Certifications

  54 – 57

 

 
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

 

2016

   

2015

 

Assets

               

Cash and due from banks

  $ 11,302     $ 12,152  

Interest-bearing deposits

    80,170       130,811  

Securities available for sale, at fair value

    291,277       236,131  

Securities held to maturity (fair value of $145,278 at September 30, 2016 and $158,032 at December 31, 2015)

    138,047       152,028  

Restricted stock, at cost

    1,170       1,129  

Loans held for sale

    434       634  

Loans:

               

Loans, net of unearned income and deferred fees

    636,241       619,008  

Less allowance for loan losses

    (8,301

)

    (8,297

)

Loans, net

    627,940       610,711  

Premises and equipment, net

    8,757       9,020  

Accrued interest receivable

    5,138       5,769  

Other real estate owned, net

    3,188       4,165  

Intangible assets and goodwill

    6,006       6,224  

Bank-owned life insurance

    22,848       22,401  

Other assets

    6,904       8,564  

Total assets

  $ 1,203,181     $ 1,199,739  
                 

Liabilities and Stockholders' Equity

               

Noninterest-bearing demand deposits

  $ 172,510     $ 166,453  

Interest-bearing demand deposits

    566,213       569,787  

Savings deposits

    95,496       90,236  

Time deposits

    175,789       192,383  

Total deposits

    1,010,008       1,018,859  

Accrued interest payable

    48       56  

Other liabilities

    8,981       8,710  

Total liabilities

    1,019,037       1,027,625  

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 6,957,974 shares at September 30, 2016 and at December 31, 2015

    8,697       8,697  

Retained earnings

    178,998       171,353  

Accumulated other comprehensive loss, net

    (3,551

)

    (7,936

)

Total stockholders' equity

    184,144       172,114  

Total liabilities and stockholders' equity

  $ 1,203,181     $ 1,199,739  

 

See accompanying notes to consolidated financial statements.

 

 
3

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Three Months Ended September 30, 2016 and 2015

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands, except per share data

 

2016

   

2015

 

Interest Income

               

Interest and fees on loans

  $ 7,409     $ 7,676  

Interest on interest-bearing deposits

    97       54  

Interest on securities – taxable

    1,381       1,678  

Interest on securities – nontaxable

    1,270       1,352  

Total interest income

    10,157       10,760  
                 

Interest Expense

               

Interest on time deposits

    238       301  

Interest on other deposits

    781       708  

Total interest expense

    1,019       1,009  

Net interest income

    9,138       9,751  

Provision for loan losses

    291       178  

Net interest income after provision for loan losses

    8,847       9,573  
                 

Noninterest Income

               

Service charges on deposit accounts

    649       571  

Other service charges and fees

    47       45  

Credit card fees

    963       972  

Trust income

    330       314  

BOLI income

    149       152  

Other income

    242       230  

Realized securities gain, net

    101       2  

Total noninterest income

    2,481       2,286  
                 

Noninterest Expense

               

Salaries and employee benefits

    3,239       3,150  

Occupancy and furniture and fixtures

    463       438  

Data processing and ATM

    624       387  

FDIC assessment

    135       138  

Credit card processing

    715       701  

Intangible assets amortization

    40       269  

Net costs of other real estate owned

    71       48  

Franchise taxes

    321       329  

Other operating expenses

    1,012       859  

Total noninterest expense

    6,620       6,319  

Income before income taxes

    4,708       5,540  

Income tax expense

    880       1,341  

Net Income

  $ 3,828     $ 4,199  

Basic net income per common share

  $ 0.55     $ 0.60  

Fully diluted net income per common share

  $ 0.55     $ 0.60  

Weighted average number of common shares outstanding – basic

    6,957,974       6,955,126  

Weighted average number of common shares outstanding – diluted

    6,957,974       6,959,168  

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, 2016 and 2015

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands

 

2016

   

2015

 

Net Income

  $ 3,828     $ 4,199  
                 

Other Comprehensive Income, Net of Tax

               

Unrealized holding gain on available for sale securities net of tax of $243 and $1,394 for the periods ended September 30, 2016 and 2015, respectively

    454       2,589  

Reclassification adjustment for gain included in net income, net of tax of ($35) and ($1) for the periods ended September 30, 2016 and 2015, respectively

    (66

)

    (1

)

Other comprehensive income, net of tax of $208 and $1,393 for the periods ended September 30, 2016 and 2015, respectively

    388       2,588  

Total Comprehensive Income

  $ 4,216     $ 6,787  

 

See accompanying notes to consolidated financial statements.

 

 
5

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Nine Months Ended September 30, 2016 and 2015

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands, except per share data

 

2016

   

2015

 

Interest Income

               

Interest and fees on loans

  $ 22,032     $ 22,886  

Interest on interest-bearing deposits

    409       173  

Interest on securities – taxable

    4,625       5,124  

Interest on securities – nontaxable

    3,867       4,095  

Total interest income

    30,933       32,278  
                 

Interest Expense

               

Interest on time deposits

    765       943  

Interest on other deposits

    2,385       2,204  

Total interest expense

    3,150       3,147  

Net interest income

    27,783       29,131  

Provision for loan losses

    1,148       734  

Net interest income after provision for loan losses

    26,635       28,397  
                 

Noninterest Income

               

Service charges on deposit accounts

    1,778       1,676  

Other service charges and fees

    165       164  

Credit card fees

    2,802       2,843  

Trust income

    1,007       902  

BOLI income

    447       451  

Other income

    1,042       963  

Realized securities gain, net

    199       5  

Total noninterest income

    7,440       7,004  
                 

Noninterest Expense

               

Salaries and employee benefits

    9,714       9,433  

Occupancy and furniture and fixtures

    1,388       1,307  

Data processing and ATM

    1,630       1,230  

FDIC assessment

    421       408  

Credit card processing

    2,049       1,986  

Intangible assets amortization

    218       807  

Net costs of other real estate owned

    179       555  

Franchise taxes

    974       959  

Other operating expenses

    2,969       2,679  

Total noninterest expense

    19,542       19,364  

Income before income taxes

    14,533       16,037  

Income tax expense

    3,061       3,762  

Net Income

  $ 11,472     $ 12,275  

Basic net income per common share

  $ 1.65     $ 1.77  

Fully diluted net income per common share

  $ 1.65     $ 1.76  

Weighted average number of common shares outstanding – basic

    6,957,974       6,952,716  

Weighted average number of common shares outstanding – diluted

    6,957,974       6,956,689  

Dividends declared per common share

  $ 0.55     $ 0.53  

 

See accompanying notes to consolidated financial statements.

 

 
6

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Nine Months Ended September 30, 2016 and 2015

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands

 

2016

   

2015

 

Net Income

  $ 11,472     $ 12,275  
                 

Other Comprehensive Income (Loss), Net of Tax

               

Unrealized holding gain (loss) on available for sale securities net of tax of $2,415 and ($334) for the periods ended September 30, 2016 and 2015, respectively

    4,484       (624

)

Reclassification adjustment for gain included in net income, net of tax of ($54) for the period ended September 30, 2016 and ($2) for the period ended September 30, 2015

    (99

)

    (3

)

Other comprehensive income (loss), net of tax of $2,361 and ($336) for the periods ended September 30, 2016 and 2015, respectively

    4,385       (627

)

Total Comprehensive Income

  $ 15,857     $ 11,648  

 

See accompanying notes to consolidated financial statements.

 

 
7

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended September 30, 2016 and 2015

(Unaudited)

 

$ in thousands

 

Common Stock

   

Retained Earnings

   

Accumulated Other Comprehensive Loss

   

Total

 

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  
                                 

Balances at December 31, 2015

  $ 8,697     $ 171,353     $ (7,936

)

  $ 172,114  

Net income

    ---       11,472       ---       11,472  

Dividends $0.55 per share

    ---       (3,827

)

    ---       (3,827

)

Other comprehensive income, net of tax of $2,361

    ---       ---       4,385       4,385  

Balances at September 30, 2016

  $ 8,697     $ 178,998     $ (3,551

)

  $ 184,144  

 

See accompanying notes to consolidated financial statements.

 

 
8

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2016 and 2015

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands

 

2016

   

2015

 

Cash Flows from Operating Activities

               

Net income

  $ 11,472     $ 12,275  

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

               

Provision for loan losses

    1,148       734  

Depreciation of bank premises and equipment

    596       561  

Amortization of intangibles

    218       807  

Amortization of premiums and accretion of discounts, net

    70       89  

Loss on disposal of premises and equipment

    ---       15  

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

    (153

)

    (5

)

Gain on calls of securities held to maturity, net

    (46

)

    ---  

Loss and write-down on other real estate owned, net

    101       398  

Increase in cash value of bank-owned life insurance

    (447

)

    (451

)

Originations of mortgage loans held for sale

    (11,215

)

    (13,500

)

Proceeds from sale of mortgage loans held for sale

    11,609       12,654  

Gain on sale of mortgage loans held for sale

    (194

)

    (194

)

Net change in:

               

Accrued interest receivable

    631       89  

Other assets

    (701

)

    345  

Accrued interest payable

    (8

)

    (7

)

Other liabilities

    271       1,210  

Net cash provided by operating activities

    13,352       15,020  
                 

Cash Flows from Investing Activities

               

Net change interest-bearing deposits

    50,641       12,253  

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

    205,110       51,620  

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

    13,941       6,709  

Purchases of securities available for sale

    (253,341

)

    (40,957

)

Net change in restricted stock

    (41

)

    (40

)

Purchases of loan participations

    (3,115

)

    (402 )

Collections of loan participations

    791       1,964  

Loan originations and principal collections, net

    (16,176

)

    (23,473

)

Proceeds from sale of other real estate owned

    876       773  

Recoveries on loans charged off

    123       122  

Proceeds from sale and purchases of premises and equipment, net

    (333

)

    (580

)

Net cash (used in) provided by investing activities

    (1,524

)

    7,989  
                 

Cash Flows from Financing Activities

               

Net change in time deposits

    (16,594

)

    (19,575

)

Net change in other deposits

    7,743       (323

)

Cash dividends paid

    (3,827

)

    (3,686

)

Stock options exercised

    ---       127  

Net cash used in financing activities

    (12,678

)

    (23,457

)

Net change in cash and due from banks

    (850

)

    (448

)

Cash and due from banks at beginning of period

    12,152       12,894  

Cash and due from banks at end of period

  $ 11,302     $ 12,446  
                 

Supplemental Disclosures of Cash Flow Information

               

Interest paid on deposits and borrowed funds

  $ 3,158     $ 3,154  

Income taxes paid

    2,780       3,380  
                 

Supplemental Disclosure of Noncash Activities

               

Loans charged against the allowance for loan losses

  $ 1,267     $ 1,002  

Loans transferred to other real estate owned

    ---       620  

Unrealized net gain (loss) on securities available for sale

    6,746       (963

)

 

See accompanying notes to consolidated financial statements.

 

 
9

 

 

National Bankshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2016

(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 nine month period ended September 30, 2016 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 2015 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 un-exercised stock options expired in November 2015. There were 5,500 stock options exercised during the nine months ended September 30, 2015.

 




Options

 




Shares

   


Weighted-
Average
Exercise
Price

   

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 at September 30, 2015

    15,000     $ 23.00       0.107     $ 122  

Exercisable at September 30, 2015

    15,000     $ 23.00       0.107     $ 122  

 

Note 3:     

 

Loan Portfolio

 

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

 

   

September 30,

2016

   

December 31,

2015

 

Real estate construction

  $ 40,190     $ 48,251  

Consumer real estate

    151,152       143,504  

Commercial real estate

    325,089       309,378  

Commercial non real estate

    41,570       37,571  

Public sector and IDA

    45,957       51,335  

Consumer non real estate

    33,079       29,845  

Gross loans

    637,037       619,884  

Less unearned income and deferred fees

    (796

)

    (876

)

Loans, net of unearned income and deferred fees

  $ 636,241     $ 619,008  

 

 
10

 

 

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 contractual 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 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 2015 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 incorporated in 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 sell. 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

Construction, residential

Construction, other

 

Consumer Real Estate

Equity lines

Residential closed-end first liens

Residential closed-end junior liens

Investor-owned residential real estate

 

Commercial Real Estate

Multifamily real estate

Commercial real estate, owner-occupied

Commercial real estate, other

Commercial Non Real Estate

Commercial and industrial

 

Public Sector and IDA

Public sector and IDA

 

Consumer Non Real Estate

Credit cards

Automobile

Other consumer loans

 

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 Company averages loss rates for the most recent 8 quarters to determine the historical loss rate for each class.

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”, “doubtful” or “loss”. 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 loan balances that are not individually evaluated at the reporting date.

 

 
11

 

 

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 loan review, unemployment levels, bankruptcy rates, the interest rate environment, and the competitive, legal and regulatory environments.

Factors analyzed for each class, with resultant allocations based upon the level of risk assessed for each class, include the risk from changes in lending policies, levels of past due loans, nonaccrual loans, current class balance as a percentage of total loans, and the percentage of high risk loans within the class. Additionally, factors specific to each segment are analyzed and result in allocations to the segment. Please refer to the Company’s 2015 10-K, Note 1: Summary of Significant Accounting Policies for a discussion of risk factors pertinent to each class.

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 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 increased to a greater extent for loans rated classified. The Company allocates additional reserves for “high risk” loans. High risk loans include junior liens, interest only and high loan to value 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 Nine Months Ended September 30, 2016

 
   

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, 2015

  $ 576     $ 1,866     $ 4,109     $ 655     $ 436     $ 627     $ 28     $ 8,297  

Charge-offs

    (29

)

    (131

)

    (149

)

    (767

)

    ---       (191

)

    ---       (1,267

)

Recoveries

    ---       2       71       6       ---       44       ---       123  

Provision for loan losses

    (43

)

    111       (525

)

    1,493       (66

)

    152       26       1,148  

Balance, September 30, 2016

  $ 504     $ 1,848     $ 3,506     $ 1,387     $ 370     $ 632     $ 54     $ 8,301  

 

 
12

 

 

   

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 Year Ended December 31, 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

    ---       (205

)

    (1,114

)

    (490

)

    ---       (311

)

    ---       (2,120

)

Recoveries

    ---       2       49       1       ---       93       ---       145  

Provision for loan losses

  $ (36

)

  $ 407     $ 1,637     $ (331

)

  $ 109     $ 243     $ (20

)

  $ 2,009  

Balance, December 31, 2015

  $ 576     $ 1,866     $ 4,109     $ 655     $ 436     $ 627     $ 28     $ 8,297  

 

   

Allowance for Loan Losses as of September 30, 2016

 
   

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

  $ ---     $ 27     $ ---     $ ---     $ ---     $ ---     $ ---     $ 27  

Collectively evaluated for impairment

    504       1,821       3,506       1,387       370       632       54       8,274  

Total

  $ 504     $ 1,848     $ 3,506     $ 1,387     $ 370     $ 632     $ 54     $ 8,301  

 

   

Allowance for Loan Losses as of December 31, 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

  $ ---     $ 22     $ 23     $ ---     $ ---     $ ---     $ ---     $ 45  

Collectively evaluated for impairment

    576       1,844       4,086       655       436       627       28       8,252  

Total

  $ 576     $ 1,866     $ 4,109     $ 655     $ 436     $ 627     $ 28     $ 8,297  

 

 
13

 

 

   

Loans as of September 30, 2016

 
   

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

  $ 273     $ 889     $ 8,448     $ 297     $ ---     $ 3     $ ---     $ 9,910  

Collectively evaluated for impairment

    39,917       150,263       316,641       41,273       45,957       33,076       ---       627,127  

Total loans

  $ 40,190     $ 151,152     $ 325,089     $ 41,570     $ 45,957     $ 33,079     $ ---     $ 637,037  

 

   

Loans as of December 31, 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

  $ 718     $ 962     $ 12,575     $ 1,091     $ ---     $ ---     $ ---     $ 15,346  

Collectively evaluated for impairment

    47,533       142,542       296,803       36,480       51,335       29,845       ---       604,538  

Total

  $ 48,251     $ 143,504     $ 309,378     $ 37,571     $ 51,335     $ 29,845     $ ---     $ 619,884  

 

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,

 
   

2016

   

2015

   

2015

 

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

    1.30

%

    1.30

%

    1.34

%

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

    0.25

%

    0.19

%

    0.32

%

 

(1)

Net charge-offs are on an annualized basis.

 

A summary of nonperforming assets follows.

 

   

September 30,

   

December 31,

 
   

2016

   

2015

   

2015

 

Nonperforming assets:

                       

Nonaccrual loans

  $ 1,592     $ 3,207     $ 2,043  

Restructured loans in nonaccrual

    3,901       5,781       4,639  

Total nonperforming loans

    5,493       8,988       6,682  

Other real estate owned, net

    3,188       4,194       4,165  

Total nonperforming assets

  $ 8,681     $ 13,182     $ 10,847  

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

    1.36

%

    2.09

%

    1.74

%

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

    151.12

%

    90.31

%

    124.17

%

 

(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.

 

 
14

 

 

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

 

   

September 30,

   

December 31,

 
   

2016

   

2015

   

2015

 

Loans past due 90 days or more and still accruing

  $ 195     $ 47     $ 156  

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

    0.03

%

    0.01

%

    0.03

%

Accruing restructured loans

  $ 4,662     $ 6,080     $ 8,814  

Impaired loans:

                       

Impaired loans with no valuation allowance

  $ 9,290     $ 12,548     $ 12,973  

Impaired loans with a valuation allowance

    620       2,464       2,373  

Total impaired loans

  $ 9,910     $ 15,012     $ 15,346  

Valuation allowance

    (27

)

    (144

)

    (45

)

Impaired loans, net of allowance

  $ 9,883     $ 14,868     $ 15,301  

Average recorded investment in impaired loans(1)

  $ 12,908     $ 15,902     $ 17,297  

Interest income recognized on impaired loans, after designation as impaired

  $ 476     $ 267     $ 769  

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 all TDRs are designated as impaired. No interest income was recognized on nonaccrual loans for the nine months ended September 30, 2016 or September 30, 2015 or for the year ended December 31, 2015.

 

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, 2016

 
   

Principal

Balance

   

Total

Recorded

Investment(1)

   

Recorded

Investment(1)for

Which There is No

Related Allowance

   

Recorded

Investment(1) for

Which There is a

Related Allowance

   

Related

Allowance

 

Real Estate Construction(2)

                                       

Construction 1-4 family residential

  $ 280     $ 273     $ 273     $ ---     $ ---  

Consumer Real Estate(2)

                                       

Residential closed-end first liens

    653       615       269       346       15  

Residential closed-end junior liens

    201       201       ---       201       8  

Investor-owned residential real estate

    73       73       ---       73       4  

Commercial Real Estate(2)

                                       

Multifamily real estate

    1,732       1,459       1,459       ---       ---  

Commercial real estate, owner-occupied

    4,277       4,228       4,228       ---       ---  

Commercial real estate, other

    3,012       2,761       2,761       ---       ---  

Commercial Non Real Estate(2)

                                       

Commercial and industrial

    311       297       297       ---       ---  

Consumer Non Real Estate

                                       

Automobile

    3       3       3       ---       ---  

Total

  $ 10,542     $ 9,910     $ 9,290     $ 620     $ 27  

 

(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.

 

 
15

 

 

   

Impaired Loans as of December 31, 2015

 
   

Principal

Balance

   

Total

Recorded

Investment(1)

   

Recorded

Investment(1) for

Which There is No

Related Allowance

   

Recorded

Investment(1) for

Which There is a

Related Allowance

   

Related

Allowance

 

Real Estate Construction(2)

                                       

Construction 1-4 family residential

  $ 718