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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 June 30, 2017

[  ]

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b–2 of the Exchange Act.

 

Large accelerated filer  [  ]       Accelerated filer  [x]       Non-accelerated filer  [  ]       (Do not check if a smaller reporting company)

Smaller reporting company  [  ]        Emerging growth company  [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act.

[ ] Yes   [ ] No

 

Note: the text of Form 10-Q does not, and this amendment will not, appear in the Code of Federal Regulations.

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 3, 2017

6,957,974

(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, June 30, 2017 (Unaudited) and December 31, 2016

3

     
 

Consolidated Statements of Income for the Three Months Ended June 30, 2017 and 2016 (Unaudited)

4 – 5

     
 

Consolidated Statements of Comprehensive Income for the Three Months Ended June 30, 2017 and 2016 (Unaudited)

6

     
 

Consolidated Statements of Income for the Six Months Ended June 30, 2017 and 2016 (Unaudited)

7 – 8

     
 

Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2017 and 2016 (Unaudited)

9

     
 

Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2017 and 2016 (Unaudited)

10

 

 

 
 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (Unaudited)

11 – 12

 

 

 
 

Notes to Consolidated Financial Statements (Unaudited) 

13 – 36

     

Item 2

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

36

     

Item 3

Quantitative and Qualitative Disclosures About Market Risk  

54

     

Item 4

Controls and Procedures

54

     

Part II – Other Information

 
     

Item 1

Legal Proceedings

54

     

Item 1A

Risk Factors

54

     

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds 

54

     

Item 3

Defaults Upon Senior Securities

54

 

 

 

Item 4

Mine Safety Disclosures

54

 

 

 

Item 5

Other Information

55

     

Item 6

Exhibits 

55

     

Signatures

55

     

Index of Exhibits

56 – 57

     

Certifications

58 – 60

 

2

 

 

Part I

Item 1. Financial Statements Financial Information  

     National Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

 

   

(Unaudited)

         
   

June 30,

   

December 31,

 

$ in thousands, except per share data

 

2017

   

2016

 

Assets

               

Cash and due from banks

  $ 12,936     $ 13,974  

Interest-bearing deposits

    89,096       80,268  

Securities available for sale, at fair value

    308,435       304,282  

Securities held to maturity (fair value of $135,297 at June 30, 2017 and $137,692 at December 31, 2016)

    130,712       134,957  

Restricted stock, at cost

    1,200       1,170  

Loans held for sale

    491       478  

Loans:

               

Loans, net of unearned income and deferred fees

    654,734       647,752  

Less allowance for loan losses

    (8,372

)

    (8,300

)

Loans, net

    646,362       639,452  

Premises and equipment, net

    8,557       8,853  

Accrued interest receivable

    5,139       5,260  

Other real estate owned, net

    3,008       3,156  

Intangible assets and goodwill

    5,923       5,966  

Bank-owned life insurance

    33,287       22,998  

Other assets

    14,208       13,128  

Total assets

  $ 1,259,354     $ 1,233,942  
                 

Liabilities and Stockholders' Equity

               

Noninterest-bearing demand deposits

  $ 181,868     $ 171,946  

Interest-bearing demand deposits

    618,223       604,093  

Savings deposits

    140,325       136,789  

Time deposits

    121,941       130,614  

Total deposits

    1,062,357       1,043,442  

Accrued interest payable

    43       55  

Other liabilities

    12,668       12,182  

Total liabilities

    1,075,068       1,055,679  

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 June 30, 2017 and at December 31, 2016

    8,698       8,698  

Retained earnings

    181,546       178,224  

Accumulated other comprehensive loss, net

    (5,958

)

    (8,659

)

Total stockholders' equity

    184,286       178,263  

Total liabilities and stockholders' equity

  $ 1,259,354     $ 1,233,942  

 

See accompanying notes to consolidated financial statements.

 

3

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Three Months Ended June 30, 2017 and 2016

(Unaudited)

 

   

June 30,

   

June 30,

 

$ in thousands, except per share data

 

2017

   

2016

 

Interest Income

               

Interest and fees on loans

  $ 7,453     $ 7,289  

Interest on interest-bearing deposits

    231       150  

Interest on securities – taxable

    1,397       1,567  

Interest on securities – nontaxable

    1,214       1,286  

Total interest income

    10,295       10,292  
                 

Interest Expense

               

Interest on time deposits

    135       181  

Interest on other deposits

    913       882  

Total interest expense

    1,048       1,063  

Net interest income

    9,247       9,229  

Provision for loan losses

    464       654  

Net interest income after provision for loan losses

    8,783       8,575  
                 

Noninterest Income

               

Service charges on deposit accounts

    692       569  

Other service charges and fees

    41       46  

Credit and debit card fees

    1,019       969  

Trust income

    361       354  

BOLI income

    146       151  

Other income

    192       455  

Realized securities gain, net

    4       74  

Total noninterest income

    2,455       2,618  
                 

Noninterest Expense

               

Salaries and employee benefits

    3,438       2,907  

Occupancy and furniture and fixtures

    469       448  

Data processing and ATM

    541       595  

FDIC assessment

    91       145  

Credit and debit card processing

    725       712  

Intangible assets amortization

    12       68  

Net costs of other real estate owned

    55       39  

Franchise taxes

    329       322  

Other operating expenses

    1,038       1,002  

Total noninterest expense

    6,698       6,238  

Income before income taxes

    4,540       4,955  

Income tax expense

    970       1,090  
           

(continued

)

 

4

 

 

 

Net Income

  $ 3,570     $ 3,865  

Basic net income per common share

  $ 0.51     $ 0.56  

Fully diluted net income per common share

  $ 0.51     $ 0.56  

Weighted average number of common shares outstanding – basic and diluted

    6,957,974       6,957,974  

Dividends declared per common share

  $ 0.56     $ 0.55  

 

See accompanying notes to consolidated financial statements.

 

5

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Three Months Ended June 30, 2017 and 2016

(Unaudited)

 

   

June 30,

   

June 30,

 

$ in thousands

 

2017

   

2016

 

Net Income

  $ 3,570     $ 3,865  
                 

Other Comprehensive Income, Net of Tax

               

Unrealized holding gain on available for sale securities net of tax of $874 and $368 for the periods ended June 30, 2017 and 2016, respectively

    1,626       684  

Reclassification adjustment for gain included in net income, net of tax of ($16) for the period ended June 30, 2016

    ---       (30

)

Other comprehensive income, net of tax of $874 and $352 for the periods ended June 30, 2017 and 2016, respectively

    1,626       654  

Total Comprehensive Income

  $ 5,196     $ 4,519  

 

See accompanying notes to consolidated financial statements.

 

6

 

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Six Months Ended June 30, 2017 and 2016

(Unaudited)

 

   

June 30,

   

June 30,

 

$ in thousands, except per share data

 

2017

   

2016

 

Interest Income

               

Interest and fees on loans

  $ 14,906     $ 14,623  

Interest on interest-bearing deposits

    379       312  

Interest on securities – taxable

    2,799       3,244  

Interest on securities – nontaxable

    2,449       2,597  

Total interest income

    20,533       20,776  
                 

Interest Expense

               

Interest on time deposits

    280       375  

Interest on other deposits

    1,796       1,756  

Total interest expense

    2,076       2,131  

Net interest income

    18,457       18,645  

Provision for loan losses

    523       857  

Net interest income after provision for loan losses

    17,934       17,788  
                 

Noninterest Income

               

Service charges on deposit accounts

    1,357       1,129  

Other service charges and fees

    110       118  

Credit and debit card fees

    1,917       1,839  

Trust income

    762       677  

BOLI income

    289       298  

Other income

    520       800  

Realized securities gain, net

    4       98  

Total noninterest income

    4,959       4,959  
                 

Noninterest Expense

               

Salaries and employee benefits

    6,981       6,475  

Occupancy and furniture and fixtures

    907       925  

Data processing and ATM

    1,106       1,006  

FDIC assessment

    186       286  

Credit and debit card processing

    1,380       1,334  

Intangible assets amortization

    43       178  

Net costs of other real estate owned

    84       108  

Franchise taxes

    651       653  

Other operating expenses

    2,297       1,957  

Total noninterest expense

    13,635       12,922  

Income before income taxes

    9,258       9,825  

Income tax expense

    2,039       2,181  
           

(continued

)

 

7

 

 

 

Net Income

  $ 7,219     $ 7,644  

Basic net income per common share

  $ 1.04     $ 1.10  

Fully diluted net income per common share

  $ 1.04     $ 1.10  

Weighted average number of common shares outstanding – basic and diluted

    6,957,974       6,957,974  

Dividends declared per common share

  $ 0.56     $ 0.55  

 

See accompanying notes to consolidated financial statements.

8

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Six Months Ended June 30, 2017 and 2016

(Unaudited)

 

   

June 30,

   

June 30,

 

$ in thousands

 

2017

   

2016

 

Net Income

  $ 7,219     $ 7,644  
                 

Other Comprehensive Income, Net of Tax

               

Unrealized holding gain on available for sale securities net of tax of $1,454 and $2,170 for the periods ended June 30, 2017 and 2016, respectively

    2,701       4,032  

Reclassification adjustment for gain included in net income, net of tax of ($18) for the period ended June 30, 2016

    ---       (34

)

Other comprehensive income, net of tax of $1,454 and $2,152 for the periods ended June 30, 2017 and 2016, respectively

    2,701       3,998  

Total Comprehensive Income

  $ 9,920     $ 11,642  

 

See accompanying notes to consolidated financial statements.

 

9

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Six Months Ended June 30, 2017 and 2016

(Unaudited)

 

$ in thousands

 

Common

Stock

   

Retained Earnings

   

Accumulated Other Comprehensive Loss

   

Total

 

Balances at December 31, 2015

  $ 8,698     $ 171,353     $ (7,937

)

  $ 172,114  

Net income

    ---       7,644       ---       7,644  

Dividends $0.55 per share

    ---       (3,828

)

    ---       (3,828

)

Other comprehensive income, net of tax of $2,152

    ---       ---       3,998       3,998  

Balances at June 30, 2016

  $ 8,698     $ 175,169     $ (3,939

)

  $ 179,928  
                                 

Balances at December 31, 2016

  $ 8,698     $ 178,224     $ (8,659

)

  $ 178,263  

Net income

    ---       7,219       ---       7,219  

Dividends $0.56 per share

    ---       (3,897

)

    ---       (3,897

)

Other comprehensive income, net of tax of $1,454

    ---       ---       2,701       2,701  

Balances at June 30, 2017

  $ 8,698     $ 181,546     $ (5,958

)

  $ 184,286  

 

See accompanying notes to consolidated financial statements.

 

10

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2017 and 2016

(Unaudited)

 

   

June 30,

   

June 30,

 

$ in thousands

 

2017

   

2016

 

Cash Flows from Operating Activities

               

Net income

  $ 7,219     $ 7,644  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

               

Provision for loan losses

    523       857  

Depreciation of bank premises and equipment

    400       393  

Amortization of intangibles

    43       178  

Amortization of premiums and accretion of discounts, net

    31       48  

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

    ---       (52

)

Gain on calls of securities held to maturity, net

    (4

)

    (46

)

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

    49       55  

Increase in cash value of bank-owned life insurance

    (289

)

    (298

)

Originations of mortgage loans held for sale

    (4,889

)

    (6,431

)

Proceeds from sale of mortgage loans held for sale

    4,953       6,508  

Gain on sale of mortgage loans held for sale

    (77

)

    (106

)

Net change in:

               

Accrued interest receivable

    121       510  

Other assets

    (2,534

)

    (1,307

)

Accrued interest payable

    (12

)

    ---  

Other liabilities

    486       (133

)

Net cash provided by operating activities

    6,020       7,820  
                 

Cash Flows from Investing Activities

               

Net change in interest-bearing deposits

    (8,828

)

    54,919  

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

    9,334       122,457  

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

    4,204       13,591  

Purchases of securities available for sale

    (9,318

)

    (183,355

)

Net change in restricted stock

    (30

)

    (41

)

Purchase of BOLI

    (10,000

)

    ---  

Purchases of loan participations

    (672

)

    (1,446

)

Collections of loan participations

    743       584  

Loan originations and principal collections, net

    (7,702

)

    (12,097

)

Proceeds from sales of other real estate owned

    196       685  

Recoveries on loans charged off

    101       92  

Proceeds from sale and purchases of premises and equipment, net

    (104

)

    (92

)

Net cash used in investing activities

    (22,076

)

    (4,703

)

           

(continued

)

 

11

 

 

 

Cash Flows from Financing Activities

               

Net change in time deposits

    (8,673

)

    (11,931

)

Net change in other deposits

    27,588       14,810  

Cash dividends paid

    (3,897

)

    (3,828

)

Net cash provided by (used in) financing activities

    15,018       (949

)

Net change in cash and due from banks

    (1,038

)

    2,168  

Cash and due from banks at beginning of period

    13,974       12,152  

Cash and due from banks at end of period

  $ 12,936     $ 14,320  
                 

Supplemental Disclosures of Cash Flow Information

               

Interest paid on deposits and borrowed funds

  $ 2,088     $ 2,131  

Income taxes paid

    2,151       2,250  
                 

Supplemental Disclosure of Noncash Activities

               

Loans charged against the allowance for loan losses

  $ 552     $ 1,051  

Loans transferred to other real estate owned

    97       ---  

Unrealized net gain on securities available for sale

    4,155       6,150  

 

See accompanying notes to consolidated financial statements.

 

12

 

 

National Bankshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

June 30, 2017

(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 month period ended June 30, 2017 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 2016 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:     

 

Loan Portfolio

 

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

 

   

June 30,

2017

   

December 31,

2016

 

Real estate construction

  $ 34,567     $ 36,345  

Consumer real estate

    162,368       157,718  

Commercial real estate

    331,713       336,457  

Commercial non real estate

    43,539       39,024  

Public sector and IDA

    49,533       45,474  

Consumer non real estate

    33,672       33,528  

Gross loans

    655,392       648,546  

Less unearned income and deferred fees and costs

    (658

)

    (794

)

Loans, net of unearned income and deferred fees and costs

  $ 654,734     $ 647,752  

 

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

 

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

Impaired loans are those loans that have been modified in a troubled debt restructure (“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 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 2016 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 or accrued interest, 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, with amounts below fair value accrued in the allowance for loan losses. TDRs that experience a payment default are examined to determine whether the default indicates collateral dependency or cash flows below those that were included 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.

 

13

 

 

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” or lower. 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 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, levels of 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 2016 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.

 

14

 

 

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 Six Months Ended June 30, 2017

 
   

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, 2016

  $ 438     $ 1,830     $ 3,738     $ 1,063     $ 330     $ 644     $ 257     $ 8,300  

Charge-offs

    ---       (138

)

    (122

)

    (73

)

    ---       (219

)

    ---       (552

)

Recoveries

    ---       1       36       10       ---       54       ---       101  

Provision for loan losses

    (87

)

    340       116       103       83       218       (250

)

    523  

Balance, June 30, 2017

  $ 351     $ 2,033     $ 3,768     $ 1,103     $ 413     $ 697     $ 7     $ 8,372  

 

   

Activity in the Allowance for Loan Losses for the Six Months Ended June 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

)

    (89

)

    (125

)

    (708

)

    ---       (100

)

    ---       (1,051

)

Recoveries

    ---       1       59       1       ---       31       ---       92  

Provision for loan losses

    (32

)

    (2

)

    (574

)

    1,537       (55

)

    (3

)

    (14

)

    857  

Balance, June 30, 2016

  $ 515     $ 1,776     $ 3,469     $ 1,485     $ 381     $ 555     $ 14     $ 8,195  

 

   

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

)

    (133

)

    (488

)

    (883

)

    ---       (273

)

    ---       (1,806

)

Recoveries

    ---       2       83       10       ---       64       ---       159  

Provision for loan losses

    (109

)

    95       34       1,281       (106

)

    226       229       1,650  

Balance, December 31, 2016

  $ 438     $ 1,830     $ 3,738     $ 1,063     $ 330     $ 644     $ 257     $ 8,300  

 

15

 

 

   

Allowance for Loan Losses as of June 30, 2017

 
   

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     $ 1     $ ---     $ ---     $ ---     $ ---     $ 23  

Collectively evaluated for impairment

    351       2,011       3,767       1,103       413       697       7       8,349  

Total

  $ 351     $ 2,033     $ 3,768     $ 1,103     $ 413     $ 697     $ 7     $ 8,372  

 

   

Allowance for Loan Losses as of December 31, 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

  $ ---     $ 25     $ 1     $ ---     $ ---     $ ---     $ ---     $ 26  

Collectively evaluated for impairment

    438       1,805       3,737       1,063       330       644       257       8,274  

Total

  $ 438     $ 1,830     $ 3,738     $ 1,063     $ 330     $ 644     $ 257     $ 8,300  

 

   

Loans as of June 30, 2017

 
   

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

  $ 3,300     $ 1,115     $ 5,646     $ 137     $ ---     $ 2     $ ---     $ 10,200  

Collectively evaluated for impairment

    31,267       161,253       326,067       43,402       49,533       33,670       ---       645,192  

Total

  $ 34,567     $ 162,368     $ 331,713     $ 43,539     $ 49,533     $ 33,672     $ ---     $ 655,392  

 

   

Loans as of December 31, 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

  $ 270     $ 877     $ 7,782     $ 241     $ ---     $ 3     $ ---     $ 9,173  

Collectively evaluated for impairment

    36,075       156,841       328,675       38,783       45,474       33,525       ---       639,373  

Total

  $ 36,345     $ 157,718     $ 336,457     $ 39,024     $ 45,474     $ 33,528     $ ---     $ 648,546  

 

16

 

 

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

 

   

As of and for the

 
   

Six Months Ended

June 30,

   

Year Ended

December 31,

 
   

2017

   

2016

   

2016

 

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

    1.28

%

    1.30

%

    1.28

%

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

    0.14

%

    0.31

%

    0.26

%

 

(1)

Net charge-offs are on an annualized basis.

 

A summary of nonperforming assets follows.

 

   

June 30,

   

December 31,

 
   

2017

   

2016

   

2016

 

Nonperforming assets:

                       

Nonaccrual loans

  $ 9     $ 1,751     $ 1,168  

Restructured loans in nonaccrual

    3,188       4,454       4,687  

Total nonperforming loans

    3,197       6,205       5,855  

Other real estate owned, net

    3,008       3,425       3,156  

Total nonperforming assets

  $ 6,205     $ 9,630     $ 9,011  

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

    0.94

%

    1.52

%

    1.38

%

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

    261.87

%

    132.07

%

    141.76

%

 

(1)

The Company defines nonperforming loans as nonaccrual loans and restructured loans that are nonaccrual. Nonperforming loans do not include loans 90 days past due and still accruing or accruing restructured loans.

 

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

 

   

June 30,

   

December 31,

 
   

2017

   

2016

   

2016

 

Loans past due 90 days or more and still accruing

  $ 259     $ 316     $ 63  

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

    0.04

%

    0.05

%

    0.01

%

Accruing restructured loans

  $ 3,711     $ 4,729     $ 3,769  

Impaired loans:

                       

Impaired loans with no valuation allowance

  $ 9,320     $ 8,902     $ 8,269  

Impaired loans with a valuation allowance

    880       1,798       904  

Total impaired loans

  $ 10,200     $ 10,700     $ 9,173  

Valuation allowance

    (23

)

    (71

)

    (26

)

Impaired loans, net of allowance

  $ 10,177     $ 10,629     $ 9,147  

Average recorded investment in impaired loans(1)

  $ 12,017     $ 14,147     $ 11,585  

Interest income recognized on impaired loans, after designation as impaired

  $ 192     $ 149     $ 553  

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.

 

17

 

 

Nonaccrual loan relationships that meet the Company’s balance threshold of $250 and all TDRs are designated as impaired. The Company also designates as impaired other loan relationships that meet the Company’s balance threshold of $250 and for which the Company does not expect to collect according to the note’s contractual terms. No interest income was recognized on nonaccrual loans for the six months ended June 30, 2017 or June 30, 2016 or for the year ended December 31, 2016.

 

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, 2017

 
   

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, other

  $ 3,300     $ 3,300     $ 3,300     $ ---     $ ---  

Consumer Real Estate(2)

                                       

Residential closed-end first liens

    635       596       264       332       12  

Residential closed-end junior liens

    184       184       ---       184       6  

Investor-owned residential real estate

    351       335       263       72       4  

Commercial Real Estate(2)

                                       

Commercial real estate, owner-occupied

    2,996       2,991       2,699       292       1  

Commercial real estate, other

    2,952       2,655       2,655       ---       ---  

Commercial Non Real Estate(2)

                                       

Commercial and industrial

    153       137       137       ---       ---  

Consumer Non Real Estate(2)

                                       

Automobile

    2       2       2       ---       ---  

Total

  $ 10,573     $ 10,200     $ 9,320     $ 880     $ 23  

 

(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.

 

18

 

 

   

Impaired Loans as of December 31, 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     $ 270     $ 270     $ ---     $ ---  

Consumer Real Estate(2)

                                       

Residential closed-end first liens

    648       609       267       342       14  

Residential closed-end junior liens

    195       195       ---       195       7  

Investor-owned residential real estate

    73       73       ---       73       4  

Commercial Real Estate(2)

                                       

Multifamily real estate

    1,364       1,091       1,091       ---       ---  

Commercial real estate, owner occupied

    4,005       3,957       3,663       294       1  

Commercial real estate, other

    2,997       2,734       2,734       ---       ---  

Commercial Non Real Estate(2)

                                       

Commercial and industrial

    255       241       241       ---       ---  

Consumer Non Real Estate(2)

                                       

Automobile

    3       3       3       ---       ---  

Total

  $ 9,820     $ 9,173     $ 8,269     $ 904     $ 26  
   

(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.

 

The following tables show the average recorded investment and interest income recognized for impaired loans.

 

   

For the Six Months Ended

June 30, 2017

 
   

Average

Recorded

Investment(1)

   

Interest

Income

Recognized

 

Real Estate Construction(2)

               

Construction 1-4 family residential

  $ 3,335     $ 89  

Consumer Real Estate(2)

               

Residential closed-end first liens

    603       18  

Residential closed-end junior liens

    190       6  

Investor-owned residential real estate

    335       2  

Commercial Real Estate(2)

               

Multifamily real estate

    887       ---  

Commercial real estate, owner occupied

    3,777       77  

Commercial real estate, other

    2,681       ---  

Commercial Non Real Estate(2)

               

Commercial and industrial

    207       ---  

Consumer Non Real Estate(2)

               

Automobile

    2       ---  

Total

  $ 12,017     $ 192  

 

(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.

 

19

 

 

 

   

For the Six Months Ended

June 30, 2016

 
   

Average

Recorded

Investment(1)

   

Interest

Income

Recognized

 

Real Estate Construction(2)

               

Construction 1-4 family residential

  $ 678     $ ---  

Consumer Real Estate(2)

               

Residential closed-end first liens

    664       20  

Residential closed-end junior liens

    213       7  

Investor-owned residential real estate

    75       2  

Commercial Real Estate(2)

               

Multifamily real estate

    1,595       ---  

Commercial real estate, owner occupied

    4,807       120  

Commercial real estate, other

    5,203       ---  

Commercial Non Real Estate(2)

               

Commercial and Industrial

    912       ---  

Total

  $ 14,147     $ 149  

 

(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.

 

   

For the Year Ended

December 31, 2016

 
   

Average

Recorded

Investment(1)

   

Interest

Income

Recognized

 

Real Estate Construction(2)

               

Construction 1-4 family residential

  $ 462     $ 10  

Consumer Real Estate(2)

               

Residential closed-end first liens

    642       38  

Residential closed-end junior liens

    207       13  

Investor-owned residential real estate

    74       4  

Commercial Real Estate(2)

               

Multifamily real estate

    1,366       12  

Commercial real estate, owner occupied

    4,342       206  

Commercial real estate, other

    3,947       263  

Commercial Non Real Estate(2)

               

Commercial and industrial

    541       7  

Consumer Non Real Estate(2)

               

Automobile

    4       ---  

Total

  $ 11,585     $ 553  

 

(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.

 

The Company reviews nonaccrual loans on an individual loan basis to determine whether future payments are reasonably assured. To satisfy this criteria, the Company’s evaluation must determine that the underlying cause of the original delinquency or weakness that indicated nonaccrual status has been resolved, such as receipt of new guarantees, increased cash flows that cover the debt service or other resolution. Nonaccrual loans that demonstrate reasonable assurance of future payments and that have made at least six consecutive payments in accordance with repayment terms and timeframes may be returned to accrual status.

A restructured loan that maintains current status for at least six months may be returned to accrual status.

 

20

 

 

An analysis of past due and nonaccrual loans follows.

 

June 30, 2017

                               
   

30 – 89 Days

Past Due and

Accruing

   

90 or More

Days Past Due

   

90 or More Days

Past Due and

Accruing

   

Nonaccruals(2)

 

Consumer Real Estate(1)

                               

Equity lines

   $ 91      $ ---      $ ---      $ ---  

Residential closed-end first liens

    901       ---       ---       ---  

Residential closed-end junior liens

    185       ---       ---       ---  

Investor-owned residential real estate

    165       8       ---       271  

Commercial Real Estate(1)

                               

Multifamily real estate

    57       ---       ---       ---  

Commercial real estate, owner-occupied

    122       133       ---       133  

Commercial real estate, other

    ---       ---       ---       2,655  

Commercial Non Real Estate(1)

                               

Commercial and industrial

    258       318       200       136  

Consumer Non Real Estate(1)

                               

Credit cards

    2       5       5       ---  

Automobile

    132       33       33       2  

Other consumer loans

    75       21       21       ---  

Total

  $ 1,988     $ 518     $ 259     $ 3,197  

 

(1)   Only classes with past-due or nonaccrual loans are shown.

(2)   Includes current and past due loans in nonaccrual status. Includes impaired loans in nonaccrual status.

 

21

 

 

December 31, 2016

                               
   

30 – 89 Days

Past Due and

Accruing

   

90 or More

Days Past Due

   

90 or More

Days Past Due

and Accruing

   

Nonaccruals(2)

 

Real Estate Construction(1)

                               

Construction, residential

  $ ---     $ ---     $ ---     $ 270  

Construction, other

    25       ---       ---       ---  

Consumer Real Estate(1)

                               

Equity lines

    10       ---       ---       ---  

Residential closed-end first liens

    1,498       6       6       ---  

Residential closed-end junior liens

    114       36       36       ---  

Investor-owned residential real estate

    56       234       ---       253  

Commercial Real Estate(1)

                               

Multifamily real estate

    132       1,091       ---       1,091  

Commercial real estate, owner occupied

    339       202       ---       1,183  

Commercial real estate, other

    ---       80       ---       2,814  

Commercial Non Real Estate(1)

                               

Commercial and industrial

    6       218       ---       241  

Consumer Non Real Estate(1)

                               

Credit cards

    8       5       5       ---  

Automobile

    234       12       12       3  

Other consumer loans

    131       4       4       ---  

Total

  $ 2,553     $ 1,888     $ 63     $ 5,855  

 

(1)   Only classes with past-due or nonaccrual loans are shown.

(2)   Includes current and past due loans in nonaccrual status. Includes impaired loans in nonaccrual status.

 

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

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

Determination of risk grades was completed for the portfolio as of June 30, 2017 and December 31, 2016.

 

22

 

 

The following displays collectively-evaluated loans by credit quality indicator.

 

June 30, 2017

   

Pass

   

Special

Mention(1)

   

 

Classified(1)

 

Real Estate Construction

                       

Construction, 1-4 family residential

  $ 12,034     $ ---     $ ---  

Construction, other

    19,233       ---       ---  

Consumer Real Estate

                       

Equity lines

    16,941       49       58  

Closed-end first liens

    84,718       1,817       995  

Closed-end junior liens

    4,711       32       15  

Investor-owned residential real estate