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Table of Contents



 

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, 2018

[  ] 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   [x] 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 November 6, 2018

6,957,974

(This report contains 64 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, 2018 (Unaudited) and December 31, 2017

3

     
 

Consolidated Statements of Income for the Three Months Ended September 30, 2018 and 2017 (Unaudited)

4 – 5

     
 

Consolidated Statements of Comprehensive Income for the Three Months Ended September 30, 2018 and 2017 (Unaudited)

6

     
 

Consolidated Statements of Income for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)

7 – 8

     
 

Consolidated Statements of Comprehensive Income for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)

9

     
 

Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

10

 

 

 
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)

11 – 12

 

 

 
 

Notes to Consolidated Financial Statements (Unaudited)

13 – 37

     

Item 2

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

37

     

Item 3

Quantitative and Qualitative Disclosures About Market Risk

57

     

Item 4

Controls and Procedures

57

     

Part II – Other Information

 
     

Item 1

Legal Proceedings

57

     

Item 1A

Risk Factors

57

     

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

57

     

Item 3

Defaults Upon Senior Securities

57

 

 

 

Item 4

Mine Safety Disclosures

57

 

 

 

Item 5

Other Information

58

     

Item 6

Exhibits

58 - 59

     

Signatures

 

60

     

Certifications

 

61 – 64

 

 

 

Part I

Item 1. Financial Statements Financial Information  

National Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

 

   

(Unaudited)

         
   

September 30,

   

December 31,

 

(in thousands, except share and per share data)

 

2018

   

2017

 

Assets

               

Cash and due from banks

  $ 11,533     $ 12,926  

Interest-bearing deposits

    28,328       51,233  

Securities available for sale, at fair value

    448,485       331,387  

Securities held to maturity (fair value of $130,113 at December 31, 2017)

    ---       127,164  

Restricted stock, at cost

    2,708       1,200  

Loans held for sale

    1,027       260  

Loans:

               

Loans, net of unearned income and deferred fees and costs

    701,834       668,069  

Less allowance for loan losses

    (7,713

)

    (7,925

)

Loans, net

    694,121       660,144  

Premises and equipment, net

    8,727       8,221  

Accrued interest receivable

    5,589       5,297  

Other real estate owned, net

    2,214       2,817  

Intangible assets and goodwill

    5,861       5,898  

Bank-owned life insurance

    34,434       33,756  

Other assets

    15,262       16,454  

Total assets

  $ 1,258,289     $ 1,256,757  
                 

Liabilities and Stockholders' Equity

               

Noninterest-bearing demand deposits

  $ 199,953     $ 182,511  

Interest-bearing demand deposits

    584,305       622,189  

Savings deposits

    141,751       140,150  

Time deposits

    96,167       114,884  

Total deposits

    1,022,176       1,059,734  

Other borrowed funds

    35,000       ---  

Accrued interest payable

    165       62  

Other liabilities

    12,791       12,065  

Total liabilities

    1,070,132       1,071,861  

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, 2018 and at December 31, 2017

    8,698       8,698  

Retained earnings

    193,445       185,893  

Accumulated other comprehensive loss, net

    (13,986

)

    (9,695

)

Total stockholders' equity

    188,157       184,896  

Total liabilities and stockholders' equity

  $ 1,258,289     $ 1,256,757  

 

See accompanying notes to consolidated financial statements.

 

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Three Months Ended September 30, 2018 and 2017

(Unaudited)

 

   

September 30,

   

September 30,

 

(in thousands, except share and per share data)

 

2018

   

2017

 

Interest Income

               

Interest and fees on loans

  $ 8,005     $ 7,473  

Interest on interest-bearing deposits

    111       224  

Interest on securities – taxable

    1,771       1,426  

Interest on securities – nontaxable

    1,058       1,178  

Total interest income

    10,945       10,301  
                 

Interest Expense

               

Interest on time deposits

    107       130  

Interest on other deposits

    1,034       891  

Interest on borrowed funds

    104       ---  

Total interest expense

    1,245       1,021  

Net interest income

    9,700       9,280  

Provision for loan losses

    223       201  

Net interest income after provision for loan losses

    9,477       9,079  
                 

Noninterest Income

               

Service charges on deposit accounts

    673       710  

Other service charges and fees

    20       42  

Credit and debit card fees

    362       315  

Trust income

    355       365  

BOLI income

    222       233  

Other income

    282       215  

Realized securities gain, net

    ---       4  

Total noninterest income

    1,914       1,884  
                 

Noninterest Expense

               

Salaries and employee benefits

    3,639       3,478  

Occupancy and furniture and fixtures

    433       459  

Data processing and ATM

    684       565  

FDIC assessment

    88       93  

Intangible assets amortization

    12       13  

Net costs of other real estate owned

    274       58  

Franchise taxes

    314       332  

Other operating expenses

    1,019       1,033  

Total noninterest expense

    6,463       6,031  

Income before income taxes

    4,928       4,932  

Income tax expense

    677       1,147  

(continued)

 

 

Net Income

  $ 4,251     $ 3,785  

Basic net income per common share

  $ 0.61     $ 0.54  

Fully diluted net income per common share

  $ 0.61     $ 0.54  

Weighted average number of common shares outstanding – basic and diluted

    6,957,974       6,957,974  

Dividends declared per common share

    ---       ---  

 

See accompanying notes to consolidated financial statements.

 

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Three Months Ended September 30, 2018 and 2017

(Unaudited)

 

   

September 30,

   

September 30,

 

(in thousands)

 

2018

   

2017

 

Net Income

  $ 4,251     $ 3,785  
                 

Other Comprehensive Loss, Net of Tax

               

Unrealized holding loss on available for sale securities net of tax of ($517) and ($219) for the periods ended September 30, 2018 and 2017, respectively

    (1,945

)

    (407 )

Reclassification adjustment for gain included in net income, net of tax of ($1) for the period ended September 30, 2017

    ---       (3

)

Other comprehensive loss, net of tax

    (1,945

)

    (410

)

Total Comprehensive Income

  $ 2,306     $ 3,375  

 

See accompanying notes to consolidated financial statements.

 

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

 

   

September 30,

   

September 30,

 

(in thousands, except share and per share data)

 

2018

   

2017

 

Interest Income

               

Interest and fees on loans

  $ 23,159     $ 22,379  

Interest on interest-bearing deposits

    509       603  

Interest on securities – taxable

    5,125       4,225  

Interest on securities – nontaxable

    3,362       3,627  

Total interest income

    32,155       30,834  
                 

Interest Expense

               

Interest on time deposits

    344       410  

Interest on other deposits

    3,023       2,687  

Interest on borrowed funds

    104       ---  

Total interest expense

    3,471       3,097  

Net interest income

    28,684       27,737  

Provision for loan losses

    93       724  

Net interest income after provision for loan losses

    28,591       27,013  
                 

Noninterest Income

               

Service charges on deposit accounts

    2,037       2,067  

Other service charges and fees

    87       152  

Credit and debit card fees

    1,071       854  

Trust income

    1,131       1,127  

BOLI income

    678       522  

Other income

    801       735  

Realized securities gain, net

    ---       8  

Total noninterest income

    5,805       5,465  
                 

Noninterest Expense

               

Salaries and employee benefits

    10,878       10,420  

Occupancy and furniture and fixtures

    1,396       1,366  

Data processing and ATM

    2,024       1,673  

FDIC assessment

    269       279  

Intangible assets amortization

    37       56  

Net costs of other real estate owned

    523       142  

Franchise taxes

    965       983  

Write-down of insurance receivable

    2,010       ---  

Other operating expenses

    2,949       3,369  

Total noninterest expense

    21,051       18,288  

Income before income taxes

    13,345       14,190  

Income tax expense

    1,757       3,186  

(continued)

 

 

Net Income

  $ 11,588     $ 11,004  

Basic net income per common share

  $ 1.67     $ 1.58  

Fully diluted net income per common share

  $ 1.67     $ 1.58  

Weighted average number of common shares outstanding – basic and diluted

    6,957,974       6,957,974  

Dividends declared per common share

  $ 0.58     $ 0.56  

 

See accompanying notes to consolidated financial statements.

 

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

 

   

September 30,

   

September 30,

 

(in thousands)

 

2018

   

2017

 

Net Income

  $ 11,588     $ 11,004  
                 

Other Comprehensive Income (Loss), Net of Tax

               

Unrealized holding gain (loss) on available for sale securities net of tax of ($1,378) and $1,235 for the periods ended September 30, 2018 and 2017, respectively

    (5,182

)

    2,294  

Unrealized holding gain on securities transferred from held to maturity to available for sale, net of tax of $237 for the period ended September 30, 2018

    891       ---  

Reclassification adjustment for gain included in net income, net of tax of ($1) for the period ended September 30, 2017.

    ---       (3

)

Other comprehensive income (loss), net of tax

    (4,291

)

    2,291  

Total Comprehensive Income

  $ 7,297     $ 13,295  

 

See accompanying notes to consolidated financial statements.

 

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

 

Three Months Ended September 30, 2018 and 2017

(in thousands)

 

Common

Stock

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Loss

   

Total

 

Balances at June 30, 2017

  $ 8,698     $ 181,546     $ (5,958

)

  $ 184,286  

Net income

    ---       3,785       ---       3,785  

Other comprehensive loss, net of tax of ($220)

    ---       ---       (410 )     (410 )

Balances at September 30, 2017

  $ 8,698       185,331       (6,368

)

    187,661  
                                 

Balances at June 30, 2018

  $ 8,698     $ 189,194     $ (12,041

)

  $ 184,851  

Net income

    ---       4,251       ---       4,251  

Other comprehensive loss, net of tax of ($517)

    ---       ---       (1,945

)

    (1,945

)

Balances at September 30, 2018

  $ 8,698     $ 193,445     $ (13,986

)

  $ 188,157  

 

See accompanying notes to consolidated financial statements.

 

 

Nine Months Ended September 30, 2018 and 2017

(in thousands)

 

Common

Stock

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Loss

   

Total

 

Balances at December 31, 2016

  $ 8,698     $ 178,224     $ (8,659

)

  $ 178,263  

Net income

    ---       11,004       ---       11,004  

Dividends $0.56 per share

    ---       (3,897

)

    ---       (3,897

)

Other comprehensive income, net of tax of $1,234

    ---       ---       2,291       2,291  

Balances at September 30, 2017

  $ 8,698       185,331       (6,368

)

    187,661  
                                 

Balances at December 31, 2017

  $ 8,698     $ 185,893     $ (9,695

)

  $ 184,896  

Net income

    ---       11,588       ---       11,588  

Dividends $0.58 per share

    ---       (4,036

)

    ---       (4,036

)

Other comprehensive loss, net of tax of ($1,141)

    ---       ---       (4,291

)

    (4,291

)

Balances at September 30, 2018

  $ 8,698     $ 193,445     $ (13,986

)

  $ 188,157  

 

See accompanying notes to consolidated financial statements.

 

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

 

   

September 30,

   

September 30,

 

(in thousands)

 

2018

   

2017

 

Cash Flows from Operating Activities

               

Net income

  $ 11,588     $ 11,004  

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

               

Provision for loan losses

    93       724  

Depreciation of bank premises and equipment

    595       601  

Amortization of intangibles

    37       56  

Amortization of premiums and accretion of discounts, net

    43       44  

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

    ---       (4

)

Gain on calls of securities held to maturity, net

    ---       (4

)

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

    464       79  

Increase in cash value of bank-owned life insurance

    (678

)

    (522

)

Origination of mortgage loans held for sale

    (11,032

)

    (9,666

)

Proceeds from sale of mortgage loans held for sale

    10,430       9,777  

Gain on sale of mortgage loans held for sale

    (165

)

    (138

)

Write-down of insurance receivable

    2,010       ---  

Net change in:

               

Accrued interest receivable

    (292

)

    137  

Other assets

    323       (1,661

)

Accrued interest payable

    103       (4

)

Other liabilities

    726       616  

Net cash provided by operating activities

    14,245       11,039  
                 

Cash Flows from Investing Activities

               

Net change in interest-bearing deposits

    22,905       22,008  

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

    22,424       10,589  

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

    6,430       6,466  

Purchase of securities available for sale

    (24,263

)

    (12,081

)

Purchases of securities held to maturity

    ---       (1,319

)

Net change in restricted stock

    (1,508

)

    (30

)

Purchase of BOLI

    ---       (10,000

)

Purchase of loan participations

    (7,726

)

    (1,296

)

Collection of loan participations

    856       751  

Loan originations and principal collections, net

    (27,382

)

    (12,851

)

Proceeds from sale of other real estate owned

    139       251  

Recoveries on loans charged off

    182       138  

Proceeds from sale and purchases of premises and equipment, net

    (1,101

)

    (207

)

Net cash used in investing activities

    (9,044

)

    2,419

 

(continued)

 

 

Cash Flows from Financing Activities

               

Net change in time deposits

    (18,717

)

    (11,895

)

Net change in other deposits

    (18,841

)

    426  

Cash dividends paid

    (4,036

)

    (3,897

)

Borrowing advances

    35,000       ---  

Net cash used in financing activities

    (6,594

)

    (15,366

)

Net change in cash and due from banks

    (1,393

)

    (1,908

)

Cash and due from banks at beginning of period

    12,926       13,974  

Cash and due from banks at end of period

  $ 11,533     $ 12,066  
                 

Supplemental Disclosures of Cash Flow Information

               

Interest paid on deposits and borrowed funds

  $ 3,368     $ 3,101  

Income taxes paid

    1,054       2,872  
                 

Supplemental Disclosure of Noncash Activities

               

Loans charged against the allowance for loan losses

  $ 487     $ 689  

Loans transferred to other real estate owned

    ---       97  

Unrealized net gain (loss) on securities available for sale

    (6,560

)

    3,525  

Unrealized net gain on securities transferred from held to maturity to available for sale

    1,128       ---  

Fair value of securities transferred from held to maturity to available for sale

    119,790       ---  

 

See accompanying notes to consolidated financial statements.

 

 

National Bankshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2018

(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, 2018 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 2017 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.

 

Accounting Standards Adopted in 2018

 

ASU No. 2014-09, “Revenue from Contracts with Customers”

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies generally will be required to use more judgment and make more estimates than under current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Subsequent to the issuance of ASU 2014-09, the FASB issued targeted updates to clarify specific implementation issues including ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application.

Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the new guidance did not have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company completed its overall assessment of revenue streams and review of related contracts potentially affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, merchant income, bank-financed sales of other real estate owned and annuity and insurance commissions. Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company currently recognizes revenue for these revenue streams. The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). Based on its evaluation, the Company determined that the classification of certain debit and credit card related costs should change (i.e., cost previously recorded as expense is now recorded as contra-revenue). The Company identified $2,093 previously presented as credit card processing expense for the nine months ended September 30, 2017 and $715 for the three months ended September 30, 2017, and reclassified it to net against credit card fee income. The Company adopted ASU 2014-09 and its related amendments on its required effective date of January 1, 2018 utilizing the full retrospective approach. There was no impact to net income. Consistent with the full retrospective approach, the Company adjusted prior period amounts for the debit and credit card costs reclassifications noted above.

 

 

ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities”

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP. The provisions of the ASU that apply to the Company are as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (4) require use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (6) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material impact on the Company’s Consolidated Financial Statements. In accordance with (4) above, the Company measured the fair value of its loan portfolio and time deposit portfolio as of September 30, 2018 using an exit price notion (see Note 14 Fair Value of Assets and Liabilities).

 

ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”

In March 2017, the FASB issued ASU No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” Under the new guidance, employers are required to present the service cost component of the net periodic benefit cost in the same income statement line item (e.g., Salaries and Employee Benefits) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components of net periodic benefit cost separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Employers will apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The Company adopted ASU No. 2017-07 on January 1, 2018 and utilized the ASU’s practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other postretirement benefit plan footnote and re-classified non-servicing components of net periodic pension cost from compensation expense to other noninterest expense. ASU No. 2017-07 did not have a material impact on the Company’s Consolidated Financial Statements.

 

 

Note 2:     Loan Portfolio

 

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

 

   

September 30,

2018

   

December 31,

2017

 

Real estate construction

  $ 42,548     $ 34,694  

Consumer real estate

    171,679       166,965  

Commercial real estate

    346,756       340,414  

Commercial non real estate

    44,497       40,518  

Public sector and IDA

    59,369       51,443  

Consumer non real estate

    37,587       34,648  

Gross loans

    702,436       668,682  

Less unearned income and deferred fees and costs

    (602

)

    (613

)

Loans, net of unearned income and deferred fees and costs

  $ 701,834     $ 668,069  

 

 

 

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

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected when due according to the contractual terms of the loan agreement. 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 that collection probably will not occur when due according to the loan’s terms. Generally, impaired loans are given risk ratings that indicate higher risk, such as “classified” or “other assets especially mentioned.” Impaired loans are individually evaluated to determine appropriate reserves and are measured at the lower of the invested amount or the fair 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: 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 restructurings 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. Restructured loans are individually evaluated for impairment, and the amount of a restructured loan’s book value in excess of its fair value is accrued as a specific allocation in the allowance for loan losses. If a TDR loan payment exceeds 90 days past due, it is examined to determine whether the late payment indicates collateral dependency or cash flows below those that were used in the fair value measurement. TDRs, as well as all impaired loans, that are determined to be collateral dependent are charged down to fair value. Deficiencies indicated by impairment measurements for TDRs that are not collateral dependent may be accrued in the allowance for loan losses or charged off if deemed uncollectible.

 

Collectively-Evaluated Loans

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 the risk from changes in lending policies, loan officers’ average years of experience, unemployment levels, bankruptcy rates, interest rate environment, and competition/legal/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 loan review, 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 Note 1: Summary of Significant Accounting Policies of Form 10-K 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, 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 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, 2018

 
   

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, 2017

  $ 337     $ 2,027     $ 3,044     $ 1,072     $ 419     $ 707     $ 319     $ 7,925  

Charge-offs

    ---       (36

)

    ---       (107

)

    ---       (344

)

    ---       (487

)

Recoveries

    ---       2       37       22       ---       121       ---       182  

Provision for (recovery of) loan losses

    137       185       (42

)

    (305

)

    151       240       (273

 

)

    93  

Balance, September 30, 2018

  $ 474     $ 2,178     $ 3,039     $ 682     $ 570     $ 724     $ 46     $ 7,713  

 

 

   

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

    ---       (146

)

    (122

)

    (73

)

    ---       (348

)

    ---       (689

)

Recoveries

    ---       1       44       14       ---       79       ---       138  

Provision for (recovery of) loan losses

    (140

)

    337       33       111       55       357       (29

)

    724  

Balance, September 30, 2017

  $ 298     $ 2,022     $ 3,693     $ 1,115     $ 385     $ 732     $ 228     $ 8,473  

 

   

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

    ---       (146

)

    (139

)

    (82

)

    ---       (452

)

    ---       (819

)

Recoveries

    ---       1       131       23       ---       132       ---       287  

Provision for (recovery of) loan losses

    (101

)

    342       (686

)

    68       89       383       62       157  

Balance, December 31, 2017

  $ 337     $ 2,027     $ 3,044     $ 1,072     $ 419     $ 707     $ 319     $ 7,925  

 

   

Allowance for Loan Losses as of September 30, 2018

 
   

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     $ ---     $ 142     $ ---     $ ---     $ ---     $ 156  

Collectively evaluated for impairment

    474       2,164       3,039       540       570       724       46       7,557  

Total

  $ 474     $ 2,178     $ 3,039     $ 682     $ 570     $ 724     $ 46     $ 7,713  

 

   

Allowance for Loan Losses as of December 31, 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

  $ ---     $ 16     $ ---     $ 160     $ ---     $ 1     $ ---     $ 177  

Collectively evaluated for impairment

    337       2,011       3,044       912       419       706       319       7,748  

Total

  $ 337     $ 2,027     $ 3,044     $ 1,072     $ 419     $ 707     $ 319     $ 7,925  

 

 

   

Loans as of September 30, 2018

 
   

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

  $ 2,470     $ 1,688     $ 6,610     $ 1,149     $ ---     $ 17     $ ---     $ 11,934  

Collectively evaluated for impairment

    40,078       169,991       340,146       43,348       59,369       37,570       ---       690,502  

Total

  $ 42,548     $ 171,679     $ 346,756     $ 44,497     $ 59,369     $ 37,587     $ ---     $ 702,436  

 

   

Loans as of December 31, 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

  $ 2,882     $ 1,267     $ 6,516     $ 1,229     $ ---     $ 30     $ ---     $ 11,924  

Collectively evaluated for impairment

    31,812       165,698       333,898       39,289       51,443       34,618       ---       656,758  

Total

  $ 34,694     $ 166,965     $ 340,414     $ 40,518     $ 51,443     $ 34,648     $ ---     $ 668,682  

 

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

 

   

As of and for the

 
   

Nine Months Ended

September,

   

Year Ended

December 31,

 
   

2018

   

2017

   

2017

 

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

    1.10

%

    1.28

%

    1.19

%

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

    0.06

%

    0.11

%

    0.08

%

 

(1)

Net charge-offs are on an annualized basis.

 

A summary of nonperforming assets follows.

 

   

September 30,

   

December 31,

 
   

2018

   

2017

   

2017

 

Nonperforming assets:

                       

Nonaccrual loans

  $ 220     $ 7     $ 6  

Restructured loans in nonaccrual

    2,856       3,149       2,763  

Total nonperforming loans

    3,076       3,156       2,769  

Other real estate owned, net

    2,214       2,923       2,817  

Total nonperforming assets

  $ 5,290     $ 6,079     $ 5,586  

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

    0.75

%

    0.92

%

    0.83

%

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

    250.75

%

    268.47

%

    286.20

%

 

(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.

 

   

September 30,

   

December 31,

 
   

2018

   

2017

   

2017

 

Loans past due 90 days or more and still accruing

  $ 63     $ 250     $ 51  

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

    0.01

%

    0.04

%

    0.01

%

Accruing restructured loans

  $ 7,843     $ 4,815     $ 5,134  

Impaired loans:

                       

Impaired loans with no valuation allowance

  $ 10,530     $ 10,522     $ 10,444  

Impaired loans with a valuation allowance

    1,404       1,637       1,480  

Total impaired loans

  $ 11,934     $ 12,159     $ 11,924  

Valuation allowance

    (156

)

    (186

)

    (177

)

Impaired loans, net of allowance

  $ 11,778     $ 11,973     $ 11,747  

Average recorded investment in impaired loans(1)

  $ 12,684     $ 12,541     $ 13,344  

Interest income recognized on impaired loans, after designation as impaired

  $ 414     $ 387     $ 528  

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 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 nine months ended September 30, 2018 or September 30, 2017 or for the year ended December 31, 2017.

 

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, 2018

 
   

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

  $ 2,470     $ 2,470     $ 2,470     $ ---     $ ---  

Consumer Real Estate(2)

                                       

Residential closed-end first liens

    928       882       707       175       10  

Residential closed-end junior liens

    150       150       ---       150       4  

Investor-owned residential real estate

    678       656       656       ---       ---  

Commercial Real Estate(2)

                                       

Multifamily

    294       294       294       ---       ---  

Commercial real estate, owner-occupied

    3,529       3,520       3,520       ---       ---  

Commercial real estate, other

    3,152       2,796       2,796       ---       ---  

Commercial Non Real Estate(2)

                                       

Commercial and industrial

    1,158       1,149       70       1,079       142  

Consumer Non Real Estate(2)

                                       

Automobile

    17       17       17       ---       ---  

Total

  $ 12,376     $ 11,934     $ 10,530     $ 1,404     $ 156  

 

(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, 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 1-4 family residential

  $ 2,882     $ 2,882     $ 2,882     $ ---     $ ---  

Consumer Real Estate(2)

                                       

Residential closed-end first liens

    807       768       590       178       10  

Residential closed-end junior liens

    174       174       ---       174       6  

Investor-owned residential real estate

    347       325       325       ---       ---  

Commercial Real Estate(2)

                                       

Multifamily real estate

    303       303       303       ---       ---  

Commercial real estate, owner occupied

    3,619       3,611       3,611       ---       ---  

Commercial real estate, other

    2,921       2,602       2,602       ---       ---  

Commercial Non Real Estate(2)

                                       

Commercial and industrial

    1,236       1,229       126       1,103       160  

Consumer Non Real Estate(2)

                                       

Automobile

    30       30       5       25       1  

Total

  $ 12,319     $ 11,924     $ 10,444     $ 1,480     $ 177  

 

(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 Nine Months Ended

September 30, 2018

 
   

Average

Recorded

Investment(1)

   

Interest

Income

Recognized

 

Real Estate Construction(2)

               

Construction 1-4 family residential

  $ 2,697     $ 108  

Consumer Real Estate(2)

               

Residential closed-end first liens

    891       40  

Residential closed-end junior liens

    162       7  

Investor-owned residential real estate

    661       18  

Commercial Real Estate(2)

               

Multifamily real estate

    298       12  

Commercial real estate, owner occupied

    3,934       145  

Commercial real estate, other

    2,829       55  

Commercial Non Real Estate(2)

               

Commercial and industrial

    1,188       28  

Consumer Non Real Estate(2)

               

Automobile

    24       1  

Total

  $ 12,684     $ 414  

 

(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 Nine Months Ended

September 30, 2017

 
   

Average

Recorded

Investment(1)

   

Interest

Income

Recognized

 

Real Estate Construction(2)

               

Construction 1-4 family residential

  $ 3,323     $ 133  

Consumer Real Estate(2)

               

Residential closed-end first liens

    1,107       30  

Residential closed-end junior liens

    188       8  

Investor-owned residential real estate

    333       12  

Commercial Real Estate(2)

               

Multifamily real estate

    310       12  

Commercial real estate, owner occupied

    3,420       140  

Commercial real estate, other

    2,658       45  

Commercial Non Real Estate(2)

               

Commercial and industrial

    1,187       6  

Consumer Non Real Estate

               

Automobile

    15       1  

Total

  $ 12,541     $ 387  

 

(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, 2017

 
   

Average

Recorded

Investment(1)

   

Interest

Income

Recognized

 

Real Estate Construction(2)

               

Construction 1-4 family residential

  $ 3,298     $ 177  

Consumer Real Estate(2)

               

Residential closed-end first liens

    781       57  

Residential closed-end junior liens

    185       11  

Investor-owned residential real estate

    329       1  

Commercial Real Estate(2)

               

Multifamily real estate

    748       16  

Commercial real estate, owner occupied

    4,047       200  

Commercial real estate, other

    2,638       ---  

Commercial Non Real Estate(2)

               

Commercial and industrial

    1,282       64  

Consumer Non Real Estate(2)

               

Automobile

    36       2  

Total

  $ 13,344     $ 528  

 

(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.

 

 

An analysis of past due and nonaccrual loans follows.

 

September 30, 2018

                               
   

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

    70       ---       ---       ---  

Residential closed-end first liens

    1,388       63       38       163  

Residential closed-end junior liens

    12       ---       ---       ---  

Investor-owned residential real estate

    54       ---       ---       200  

Commercial Real Estate(1)

                               

Multifamily real estate

    294       195       ---       195  

Commercial real estate, owner-occupied

    379       ---       ---       ---  

Commercial real estate, other

    ---       2,510       ---       2,510  

Commercial Non Real Estate(1)

                               

Commercial and industrial

    196       ---       ---       8  

Consumer Non Real Estate(1)

                               

Credit cards

    7       5       5       ---  

Automobile

    322       10       10       ---  

Other consumer loans

    46       10       10       ---  

Total

  $ 2,768     $ 2,793     $ 63     $ 3,076  

 

(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.

 

December 31, 2017