10-Q 1 nksh20150930_10q.htm FORM 10-Q nksh20150930_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT   OF 1934

For the quarterly period ended September 30, 2015

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ________ to ________

Commission File Number 0-15204

 

NATIONAL BANKSHARES, INC.

 (Exact name of registrant as specified in its charter)

 

Virginia

(State or other jurisdiction of incorporation or organization)

54-1375874

(I.R.S. Employer Identification No.)

 

101 Hubbard Street

P. O. Box 90002

Blacksburg, VA

 

 

24062-9002

(Address of principal executive offices)

(Zip Code)

 

(540) 951-6300

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  [x] Yes   [  ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [x] Yes   [ ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act.

 

Large accelerated filer  [  ]

Accelerated filer  [x]

Non-accelerated filer  [  ]

Smaller reporting company  [  ]

 

 

(Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b–2 of the Exchange Act).

[ ] Yes   [x] No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

Common Stock, $1.25 Par Value

Outstanding at October 30, 2015

6,955,974

 

(This report contains 60 pages)

 

 
 

 

 

NATIONAL BANKSHARES, INC. AND SUBSIDIARIES

Form 10-Q

Index

 

Part I – Financial Information

Page

     

Item 1

Financial Statements

3

     
 

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

3

     
 

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

4

     
 

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

5

     
 

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

6

     
 

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

7

     
 

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

8

 

 

 
 

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

9

 

 

 
 

Notes to Consolidated Financial Statements (Unaudited) 

10 – 34

     

Item 2

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

35 – 50

     

Item 3

Quantitative and Qualitative Disclosures About Market Risk  

50

     

Item 4

Controls and Procedures

51

     

Part II – Other Information

 
     

Item 1

Legal Proceedings

51

     

Item 1A

Risk Factors

51

     

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds 

51

     

Item 3

Defaults Upon Senior Securities

51

 

 

 

Item 4

Mine Safety Disclosures

51

 

 

 

Item 5

Other Information

51

     

Item 6

Exhibits 

51

     

Signatures

 

52

     

Index of Exhibits

53 – 54

     

Certifications

   

 

 
2

 

 

Part I

Item 1. Financial Statements 

Financial Information

 

National Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

 

   

(Unaudited)

         
   

September 30,

   

December 31,

 

$ in thousands, except per share data

 

2015

   

2014

 

Assets

               

Cash and due from banks

  $ 12,446     $ 12,894  

Interest-bearing deposits

    90,295       102,548  

Securities available for sale, at fair value

    211,232       222,844  

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

    154,644       161,452  

Restricted stock, at cost

    1,129       1,089  

Loans held for sale

    1,331       291  

Loans:

               

Loans, net of unearned income and deferred fees

    625,755       605,466  

Less allowance for loan losses

    (8,117

)

    (8,263

)

Loans, net

    617,638       597,203  

Premises and equipment, net

    9,135       9,131  

Accrued interest receivable

    5,659       5,748  

Other real estate owned, net

    4,194       4,744  

Intangible assets and goodwill

    6,416       7,223  

Bank-owned life insurance

    22,248       21,797  

Other assets

    7,758       7,767  

Total assets

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

Liabilities and Stockholders' Equity

               

Noninterest-bearing demand deposits

  $ 163,877     $ 150,744  

Interest-bearing demand deposits

    514,823       533,641  

Savings deposits

    86,659       81,297  

Time deposits

    197,171       216,746  

Total deposits

    962,530       982,428  

Accrued interest payable

    61       68  

Other liabilities

    7,142       5,932  

Total liabilities

    969,733       988,428  

Commitments and contingencies

               

Stockholders' Equity

               

Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding

    ---       ---  

Common stock of $1.25 par value. Authorized 10,000,000 shares; issued and outstanding 6,955,974 shares at September 30, 2015 and 6,950,474 at December 31, 2014

    8,695       8,688  

Retained earnings

    171,996       163,287  

Accumulated other comprehensive loss, net

    (6,299

)

    (5,672

)

Total stockholders' equity

    174,392       166,303  

Total liabilities and stockholders' equity

  $ 1,144,125     $ 1,154,731  

See accompanying notes to consolidated financial statements.

 

 
3

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Three Months Ended September 30, 2015 and 2014

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands, except per share data

 

2015

   

2014

 

Interest Income

               

Interest and fees on loans

  $ 7,676     $ 7,729  

Interest on interest-bearing deposits

    54       64  

Interest on securities – taxable

    1,678       1,718  

Interest on securities – nontaxable

    1,352       1,436  

Total interest income

    10,760       10,947  
                 

Interest Expense

               

Interest on time deposits

    301       361  

Interest on other deposits

    708       786  

Total interest expense

    1,009       1,147  

Net interest income

    9,751       9,800  

Provision for loan losses

    178       356  

Net interest income after provision for loan losses

    9,573       9,444  
                 

Noninterest Income

               

Service charges on deposit accounts

    571       634  

Other service charges and fees

    45       42  

Credit card fees

    972       929  

Trust income

    314       296  

BOLI income

    151       153  

Other income

    234       200  

Realized securities gains, net

    2       4  

Total noninterest income

    2,289       2,258  
                 

Noninterest Expense

               

Salaries and employee benefits

    3,149       2,927  

Occupancy and furniture and fixtures

    436       403  

Data processing and ATM

    384       429  

FDIC assessment

    138       147  

Credit card processing

    701       673  

Intangible assets amortization

    269       269  

Net costs of other real estate owned

    52       98  

Franchise taxes

    329       307  

Other operating expenses

    864       862  

Total noninterest expense

    6,322       6,115  

Income before income taxes

    5,540       5,587  

Income tax expense

    1,341       1,324  
                 

Net Income

  $ 4,199     $ 4,263  

Basic net income per common share

  $ 0.60     $ 0.61  

Fully diluted net income per common share

  $ 0.60     $ 0.61  

Weighted average number of common shares outstanding – basic

    6,955,126       6,948,681  

Weighted average number of common shares outstanding – diluted

    6,959,168       6,956,777  

Dividends declared per common share

  $ ---     $ ---  

   

See accompanying notes to consolidated financial statements.

 

 
4

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Three Months Ended September 30, 2015 and 2014

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands

 

2015

   

2014

 

Net Income

  $ 4,199     $ 4,263  
                 

Other Comprehensive Income, Net of Tax

               

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

    2,589       1,708  

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

    (1

)

    (3

)

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

    2,588       1,705  

Total Comprehensive Income

  $ 6,787     $ 5,968  

 

See accompanying notes to consolidated financial statements.

 

 
5

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

Nine Months Ended September 30, 2015 and 2014

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands, except per share data

 

2015

   

2014

 

Interest Income

               

Interest and fees on loans

  $ 22,886     $ 23,406  

Interest on interest-bearing deposits

    173       193  

Interest on securities – taxable

    5,124       5,068  

Interest on securities – nontaxable

    4,095       4,410  

Total interest income

    32,278       33,077  
                 

Interest Expense

               

Interest on time deposits

    943       1,133  

Interest on other deposits

    2,204       2,624  

Total interest expense

    3,147       3,757  

Net interest income

    29,131       29,320  

Provision for loan losses

    734       1,160  

Net interest income after provision for loan losses

    28,397       28,160  
                 

Noninterest Income

               

Service charges on deposit accounts

    1,676       1,833  

Other service charges and fees

    164       145  

Credit card fees

    2,843       2,687  

Trust income

    902       921  

BOLI income

    451       462  

Other income

    977       783  

Realized securities gains, net

    5       5  

Total noninterest income

    7,018       6,836  
                 

Noninterest Expense

               

Salaries and employee benefits

    9,433       8,890  

Occupancy and furniture and fixtures

    1,296       1,250  

Data processing and ATM

    1,230       1,189  

FDIC assessment

    408       411  

Credit card processing

    1,986       1,887  

Intangible assets amortization

    807       807  

Net costs of other real estate owned

    569       259  

Franchise taxes

    959       874  

Other operating expenses

    2,690       2,747  

Total noninterest expense

    19,378       18,314  

Income before income taxes

    16,037       16,682  

Income tax expense

    3,762       3,906  
                 

Net Income

  $ 12,275     $ 12,776  

Basic net income per common share

  $ 1.77     $ 1.84  

Fully diluted net income per common share

  $ 1.76     $ 1.84  

Weighted average number of common shares outstanding – basic

    6,952,716       6,948,212  

Weighted average number of common shares outstanding – diluted

    6,956,689       6,960,444  

Dividends declared per common share

  $ 0.53     $ 0.55  

 

See accompanying notes to consolidated financial statements.

 

 
6

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Nine Months Ended September 30, 2015 and 2014

(Unaudited)

 

   

September 30,

   

September 30,

 

$ in thousands

 

2015

   

2014

 

Net Income

  $ 12,275     $ 12,776  
                 

Other Comprehensive Income (Loss), Net of Tax

               

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

    (624

)

    7,920  

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

    (3

)

    (3

)

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

    (627

)

    7,917  

Total Comprehensive Income

  $ 11,648     $ 20,693  

 

See accompanying notes to consolidated financial statements.

 

 
7

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months September 30, 2015 and 2014

(Unaudited)

 

$ in thousands

 

Common Stock

   

Retained Earnings

   

Accumulated Other Comprehensive Loss

   

Total

 

Balances at December 31, 2013

  $ 8,685     $ 154,171     $ (16,964

)

  $ 145,892  

Net income

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

Dividends $0.55 per share

    ---       (3,821

)

    ---       (3,821

)

Exercise of stock options

    3       55       ---       58  

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

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

Balances at September 30, 2014

  $ 8,688     $ 163,181     $ (9,047

)

  $ 162,822  
                                 

Balances at December 31, 2014

  $ 8,688     $ 163,287     $ (5,672

)

  $ 166,303  

Net income

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

Dividends $0.53 per share

    ---       (3,686

)

    ---       (3,686

)

Exercise of stock options

    7       120       ---       127  

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

    ---       ---       (627

)

    (627

)

Balances at September 30, 2015

  $ 8,695     $ 171,996     $ (6,299

)

  $ 174,392  

 

See accompanying notes to consolidated financial statements.

 

 
8

 

 

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2015 and 2014

(Unaudited)

   

September 30,

   

September 30,

 

$ in thousands

 

2015

   

2014

 

Cash Flows from Operating Activities

               

Net income

  $ 12,275     $ 12,776  

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

               

Provision for loan losses

    734       1,160  

Depreciation of bank premises and equipment

    561       541  

Amortization of intangibles

    807       807  

Amortization of premiums and accretion of discounts, net

    89       109  

Losses on disposal of premises and equipment

    15       94  

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

    (5

)

    (4

)

Gains on calls of securities held to maturity, net

    ---       (1

)

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

    398       76  

Increase in cash value of bank-owned life insurance

    (451

)

    (462

)

Originations of mortgage loans held for sale

    (13,500

)

    (7,409

)

Proceeds from sale of mortgage loans held for sale

    12,654       8,074  

Gains on sale of mortgage loans held for sale

    (194

)

    (114

)

Net change in:

               

Accrued interest receivable

    89       241  

Other assets

    345       (252

)

Accrued interest payable

    (7

)

    (25

)

Other liabilities

    1,210       (163

)

Net cash provided by operating activities

    15,020       15,448  
                 

Cash Flows from Investing Activities

               

Net change interest-bearing deposits

    12,253       10,445  

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

    51,620       8,774  

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

    6,709       7,808  

Purchases of securities available for sale

    (40,957

)

    (19,906

)

Purchases of securities held to maturity

    ---       (6,381

)

Net change in restricted stock

    (40

)

    325  

Purchases of loan participations

    (402

)

    ---  

Collections of loan participations

    1,964       1,513  

Loan originations and principal collections, net

    (23,473

)

    (4,030

)

Proceeds from sale of other real estate owned

    773       329  

Recoveries on loans charged off

    122       212  

Proceeds from sale and purchases of premises and equipment, net

    (580

)

    (129

)

Net cash provided by (used in) investing activities

    7,989       (1,040

)

                 

Cash Flows from Financing Activities

               

Net change in time deposits

    (19,575

)

    (17,779

)

Net change in other deposits

    (323

)

    6,666  

Cash dividends paid

    (3,686

)

    (3,821

)

Stock options exercised

    127       58  

Net cash used in financing activities

    (23,457

)

    (14,876

)

Net change in cash and due from banks

    (448

)

    (468

)

Cash and due from banks at beginning of period

    12,894       13,283  

Cash and due from banks at end of period

  $ 12,446     $ 12,815  
                 

Supplemental Disclosures of Cash Flow Information

               

Interest paid on deposits and borrowed funds

  $ 3,154     $ 3,782  

Income taxes paid

    3,380       3,892  
                 

Supplemental Disclosure of Noncash Activities

               

Loans charged against the allowance for loan losses

  $ 1,002     $ 1,568  

Loans transferred to other real estate owned

    620       838  

Unrealized net gains (losses) on securities available for sale

    (963

)

    12,180  

  

See accompanying notes to consolidated financial statements.

 

 
9

 

 

National Bankshares, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

September 30, 2015

(Unaudited)

 

$ in thousands, except per share data

 

Note 1: General

 

The consolidated financial statements of National Bankshares, Inc. (“NBI”) and its wholly-owned subsidiaries, The National Bank of Blacksburg (“NBB”) and National Bankshares Financial Services, Inc. (“NBFS”) (collectively, the “Company”), conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of management, all adjustments consisting of normal recurring adjustments, which are necessary for a fair presentation of the consolidated financial statements, have been included.  The results of operations for the three and nine month periods ended September 30, 2015 are not necessarily indicative of results of operations for the full year or any other interim period.  The interim period consolidated financial statements and financial information included in this Form 10-Q should be read in conjunction with the notes to consolidated financial statements included in the Company’s 2014 Form 10-K.  The Company posts all reports required to be filed under the Securities and Exchange Act of 1934 on its web site at www.nationalbankshares.com.

 

Note 2: Stock-Based Compensation

 

The Company’s 1999 Stock Option Plan was terminated on March 9, 2009. Incentive stock options were granted annually to key employees of NBI and its subsidiaries from 1999 to 2005 and none have been granted since 2005. All of the stock options are vested.

 

Options

 

Shares

   

Weighted
Average
Exercise
Price Per Share

   

Weighted
Average
Remaining
Contractual
Term

   


Aggregate
Intrinsic
Value

 

Outstanding at January 1, 2015

    20,500     $ 23.00                  

Exercised

    (5,500

)

    23.00                  

Forfeited or expired

    ---                          

Outstanding September 30, 2015

    15,000     $ 23.00       0.107     $ 122  

Exercisable at September30, 2015

    15,000     $ 23.00       0.107     $ 122  

 

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

 

 
10

 

 

 

Note 3:     Loan Portfolio

 

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

 

   

September 30,
 2015

   

December 31,

2014

 

Real estate construction

  $ 44,886     $ 45,562  

Consumer real estate

    144,990       147,039  

Commercial real estate

    315,008       310,762  

Commercial non real estate

    39,255       33,413  

Public sector and IDA

    52,330       41,361  

Consumer non real estate

    30,140       28,182  

Gross loans

    626,609       606,319  

Less unearned income and deferred fees

    (854

)

    (853

)

Loans, net of unearned income and deferred fees

  $ 625,755     $ 605,466  

 

Note 4:     Allowance for Loan Losses, Nonperforming Assets and Impaired Loans

 

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

Impaired loans are those loans that have been modified in a troubled debt restructure (“TDR” or “restructure”) and larger, non-homogeneous loans that are in nonaccrual or exhibit payment history or financial status that indicate the probability that collection will not occur when due according to the loan’s original terms. Generally, impaired loans are given risk ratings that indicate higher risk, such as “classified” or “other assets especially mentioned.” Impaired loans are individually evaluated to determine appropriate reserves and are measured at the lower of the invested amount or the fair market value. Impaired loans that are not troubled debt restructures and for which fair value measurement indicates an impairment loss are designated nonaccrual. A restructured loan that maintains current status for at least six months may be in accrual status. Please refer to Note 1 of the Company’s 2014 Form 10-K, “Summary of Significant Accounting Policies” for additional information on evaluation of impaired loans and associated specific reserves, and policies regarding nonaccruals, past due status and charge-offs.

Troubled debt restructures impact the estimation of the appropriate level of the allowance for loan losses. If the restructuring included forgiveness of a portion of principal, the charge-off is included in the historical charge-off rates applied to the collective evaluation methodology. Further, restructured loans are individually evaluated for impairment and any amount of book value that exceeds fair value is accrued in the allowance for loan losses. TDRs that experience a payment default are examined to determine whether the default indicates collateral dependency or a decline in estimates of cash flow used in the fair value measurement. TDRs that are determined to be collateral-dependent, as well as all impaired loans that are determined to be collateral dependent, are charged down to fair value net of estimated costs to dispose. Deficiencies indicated by impairment measurements for TDRs that are not collateral dependent may be accrued in the allowance for loan losses or charged off if deemed uncollectible.

The Company evaluated characteristics in the loan portfolio and determined major segments and smaller classes within each segment. These characteristics include collateral type, repayment sources, and (if applicable) the borrower’s business model. The methodology for calculating reserves for collectively-evaluated loans is applied at the class level.

 

 
11

 

 

Portfolio Segments and Classes

The segments and classes used in determining the allowance for loan losses are as follows.

 

Real Estate Construction

Commercial Non Real Estate

Construction, residential

Commercial and Industrial

Construction, other

 
  Public Sector and IDA

Consumer Real Estate

Public sector and IDA

Equity lines

 

Residential closed-end first liens

Consumer Non Real Estate

Residential closed-end junior liens

Credit cards

Investor-owned residential real estate

Automobile
  Other consumer loans
Commercial Real Estate  
Multifamily real estate  
Commercial real estate, owner-occupied  
Commercial real estate, other  

 

Historical Loss Rates

The Company’s allowance methodology for collectively-evaluated loans applies historical loss rates by class to current class balances as part of the process of determining required reserves. Class loss rates are calculated as the net charge-offs for the class as a percentage of average class balance. The loss rate for the current quarter is averaged with that of prior periods to obtain the historical loss rate. Two loss rates for each class are calculated: total net charge-offs for the class as a percentage of average class loan balance (“class loss rate”), and total net charge-offs for the class as a percentage of average classified loans in the class (“classified loss rate”). Classified loans are those with risk ratings of “substandard” or higher. Net charge-offs in both calculations include charge-offs and recoveries of classified and non-classified loans as well as those associated with impaired loans. Class historical loss rates are applied to non-classified loan balances at the reporting date, and classified historical loss rates are applied to classified balances at the reporting date.

 

Risk Factors

In addition to historical loss rates, risk factors pertinent to credit risk for each class are analyzed to estimate reserves for collectively-evaluated loans. Factors include changes in national and local economic and business conditions, the nature and volume of classes within the portfolio, loan quality, loan officers’ experience, lending policies and the Company’s loan review system.

The analysis of certain factors results in standard allocations to all segments and classes. These factors include loan officers’ average years of experience, the risk from changes in lending policies, and the risk from changes in loan review. Factors analyzed for each class, with resultant allocations based upon the level of risk assessed for each class, include levels of past due loans, nonaccrual loans, current class balance as a percentage of total loans, and the percentage of high risk loans (defined to be junior lien mortgages, high loan-to-value loans, and interest only loans) within the class. Additionally, factors specific to each segment are analyzed and result in allocations to the segment.

Real estate construction loans are subject to general risks from changing commercial building and housing market trends and economic conditions that may impact demand for completed properties and the costs of completion. These risks are measured by market-area unemployment rates, bankruptcy rates, housing and commercial building market trends, and interest rates.

The credit quality of consumer real estate is subject to risks associated with the borrower’s repayment ability and collateral value, measured generally by analyzing local unemployment and bankruptcy trends, local housing market trends, and interest rates.

The commercial real estate segment includes loans secured by multifamily residential real estate, commercial real estate occupied by the owner/borrower, and commercial real estate leased to non-owners. Loans in the commercial real estate segment are impacted by economic risks from changing commercial real estate markets, rental markets for multi-family housing and commercial buildings, business bankruptcy rates, local unemployment and interest rate trends that would impact the businesses housed by the commercial real estate.

Commercial non real estate loans are secured by collateral other than real estate, or are unsecured. Credit risk for commercial non real estate loans is subject to economic conditions, generally monitored by local business bankruptcy trends, and interest rates. Public sector and IDA loans are extended to municipalities and related entities. Credit risk is based upon the entity’s ability to repay and interest rate trends.

Consumer non real estate includes credit cards, automobile and other consumer loans. Credit cards and certain other consumer loans are unsecured, while collateral is obtained for automobile loans and other consumer loans. Credit risk stems primarily from the borrower’s ability to repay, measured by average unemployment, average personal bankruptcy rates and interest rates.

Factor allocations applied to each class are increased for loans rated special mention and classified. The Company allocates additional reserves for “high risk” loans. High risk loans include junior liens, interest only and high loan to value loans.

 

 
12

 

 

A detailed analysis showing the allowance roll-forward by portfolio segment and related loan balance by segment follows.

 

   

Activity in the Allowance for Loan Losses for the Nine Months Ended September 30, 2015

 
   

Real Estate Construction

   

Consumer Real Estate

   

Commercial Real Estate

   

Commercial Non Real Estate

   

Public Sector and IDA

   

Consumer Non Real Estate

   

Unallocated

   

Total

 

Balance, December 31, 2014

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

Charge-offs

    ---       (201

)

    (155

)

    (453

)

    ---       (193

)

    ---       (1,002

)

Recoveries

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

Provision for loan losses

    (77

)

    332       420       (153

)

    170       21       21       734  

Balance, September 30, 2015

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

 

 

   

Activity in the Allowance for Loan Losses for the Nine Months Ended September 30, 2014

 
   

Real Estate Construction

   

Consumer Real Estate

   

Commercial Real Estate

   

Commercial Non Real Estate

   

Public Sector and IDA

   

Consumer Non Real Estate

   

Unallocated

   

Total

 

Balance, December 31, 2013

  $ 863     $ 1,697     $ 3,685     $ 989     $ 132     $ 576     $ 285     $ 8,227  

Charge-offs

    (2

)

    (97

)

    (1,115

)

    (79

)

    ---       (275

)

    ---       (1,568

)

Recoveries

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

Provision for loan losses

    (277

)

    78       1,072       22       148       261       (144

)

    1,160  

Balance, September 30, 2014

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

 

 

   

Activity in the Allowance for Loan Losses for the Year Ended December 31, 2014

 
   

Real Estate Construction

   

Consumer Real Estate

   

Commercial Real Estate

   

Commercial Non Real Estate

   

Public Sector and IDA

   

Consumer Non Real Estate

   

Unallocated

   

Total

 

Balance, December 31, 2013

  $ 863     $ 1,697     $ 3,685     $ 989     $ 132     $ 576     $ 285     $ 8,227  

Charge-offs

    (2

)

    (222

)

    (1,201

)

    (89

)

    ---       (346

)

    ---       (1,860

)

Recoveries

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

Provision for loan losses

    (249

)

    187       1,003       443       195       299       (237

)

    1,641  

Balance, December 31, 2014

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

 

 
13

 

 

   

Allowance for Loan Losses as of September 30, 2015

 
   

Real Estate Construction

   

Consumer Real Estate

   

Commercial Real Estate

   

Commercial Non Real Estate

   

Public Sector and IDA

   

Consumer Non Real Estate

   

Unallocated

   

Total

 

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Total

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

 

 

   

Allowance for Loan Losses as of December 31, 2014

 
   

Real Estate Construction

   

Consumer Real Estate

   

Commercial Real Estate

   

Commercial Non Real Estate

   

Public Sector and IDA

   

Consumer Non Real Estate

   

Unallocated

   

Total

 

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Total

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

 

 

   

Loans as of September 30, 2015

 
   

Real Estate Construction

   

Consumer Real Estate

   

Commercial Real Estate

   

Commercial Non Real Estate

   

Public Sector and IDA

   

Consumer Non Real Estate

   

Unallocated

   

Total

 

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Total loans

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

 

 

   

Loans as of December 31, 2014

 
   

Real Estate Construction

   

Consumer Real Estate

   

Commercial Real Estate

   

Commercial Non Real Estate

   

Public Sector and IDA

   

Consumer Non Real Estate

   

Unallocated

   

Total

 

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

Total

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

 

 
14

 

 

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

 

   

As of the

Nine Months Ended

September 30,

   

For the

Year Ended

December 31,

 
   

2015

   

2014

   

2014

 

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

    1.30

%

    1.35

%

    1.36

%

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

    0.19

%

    0.31

%

    0.27

%

 

(1)

Net charge-offs are on an annualized basis.

 

 

A summary of nonperforming assets follows.

 

   

September 30,

   

December 31,

 
   

2015

   

2014

   

2014

 

Nonperforming assets:

                       

Nonaccrual loans

  $ 3,207     $ 5,366     $ 3,999  

Restructured loans in nonaccrual

    5,781       2,360       5,288  

Total nonperforming loans

    8,988       7,726       9,287  

Other real estate owned, net

    4,194       5,145       4,744  

Total nonperforming assets

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

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

    2.09

%

    2.14

%

    2.30

%

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

    90.31

%

    103.95

%

    88.97

%

 

(1)     The Company defines nonperforming loans as nonaccrual loans. Loans 90 days or more past due and still accruing and accruing restructured loans are excluded.

 

 

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

 

   

September 30,

   

December 31,

 
   

2015

   

2014

   

2014

 

Loans past due 90 days or more and still accruing

  $ 47     $ 485     $ 207  

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

    0.01

%

    0.08

%

    0.03

%

Accruing restructured loans

  $ 6,080     $ 5,947     $ 6,040  

Impaired loans:

                       

Impaired loans with no valuation allowance

  $ 12,548     $ 9,223     $ 7,615  

Impaired loans with a valuation allowance

    2,464       5,964       7,506  

Total impaired loans

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

Valuation allowance

    (144

)

    (296

)

    (282

)

Impaired loans, net of allowance

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

Average recorded investment in impaired loans(1)

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

Interest income recognized on impaired loans, after designation as impaired

  $ 267     $ 384     $ 473  

Amount of income recognized on a cash basis

  $ ---     $ ---     $ ---  

 

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

 

 
15

 

 

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

 

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

 

   

Impaired Loans as of September 30, 2015

 
   

Principal Balance

   

(A)

Total Recorded Investment(1)

   

Recorded Investment(1) in (A) for Which There is No Related Allowance

   

Recorded Investment(1) in (A) for Which There is a Related Allowance

   

Related Allowance

 

Consumer Real Estate(2)

                                       

Residential closed-end first liens

  $ 718     $ 675     $ 306     $ 369     $ 14  

Residential closed-end junior liens

    223       223       ---       223       7  

Investor-owned residential real estate

    75       75       ---       75       4  

Commercial Real Estate(2)

                                       

Multifamily real estate

    2,900       2,665       868       1,797       119  

Commercial real estate, owner-occupied

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

Commercial real estate, other

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

Commercial Non Real Estate(2)

                                       

Commercial and Industrial

    1,005       997       997       ---       ---  

Total

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

 

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

(2)     Only classes with impaired loans are shown.

 

 

   

Impaired Loans as of December 31, 2014

 
   

Principal Balance

   

(A)

Total Recorded Investment(1)

   

Recorded Investment(1) in (A) for Which There is No Related Allowance

   

Recorded Investment(1) in (A) for Which There is a Related Allowance

   

Related Allowance

 

Consumer Real Estate(2)

                                       

Residential closed-end first liens

  $ 530     $ 503     $ 311     $ 192     $ 2  

Residential closed-end junior liens

    239       239       ---       239       8  

Investor-owned residential real estate

    77       77       ---       77       4  

Commercial Real Estate(2)

                                       

Multifamily real estate

    2,911       2,735       868       1,866       170  

Commercial real estate, owner occupied

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

Commercial real estate, other

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

Commercial Non Real Estate(2)

                                       

Commercial and Industrial

    678       678       50       628       10  

Total

  $ 15,434     $ 15,121     $ 7,615     $ 7,506     $ 282  

 

(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.

 

 
16

 

 

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

 

   

For the Nine Months Ended

September 30, 2015

 
   

Average Recorded

Investment(1)

   

Interest Income Recognized

 

Consumer Real Estate(2)

               

Residential closed-end first liens

  $ 685     $ 33  

Residential closed-end junior liens

    231       11  

Investor-owned residential real estate

    76       4  

Commercial Real Estate(2)

               

Multifamily real estate

    2,670       ---  

Commercial real estate, owner occupied

    5,302       86  

Commercial real estate, other

    5,924       128  

Commercial Non Real Estate(2)

               

Commercial and Industrial

    1,014       5  

Total

  $ 15,902     $ 267  

 

(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, 2014

 
   

Average Recorded

Investment(1)

   

Interest Income Recognized

 

Consumer Real Estate(2)

               

Residential closed-end first liens

  $ 385     $ 19  

Residential closed-end junior liens

    251       12  

Investor-owned residential real estate

    78       4  

Commercial Real Estate(2)

               

Multifamily real estate

    2,807       ---  

Commercial real estate, owner occupied

    5,606       153  

Commercial real estate, other

    6,134       164  

Commercial Non Real Estate(2)

               

Commercial and Industrial

    713       32  

Consumer Non Real Estate(2)

               

Automobile

    ---       ---  

Total

  $ 15,974     $ 384  

 

(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.

 

 
17

 

 

   

For the Year Ended

December 31, 2014

 
   

Average Recorded

Investment(1)

   

Interest Income Recognized

 

Consumer Real Estate(2)

               

Residential closed-end first liens

    555       31  

Residential closed-end junior liens

    249       16  

Investor-owned residential real estate

    77       5  
                 

Commercial Real Estate(2)

               

Multifamily real estate

    2,773       ---  

Commercial real estate, owner occupied

    5,836       203  

Commercial real estate, other

    6,114       175  
                 

Commercial Non Real Estate(2)

               

Commercial and Industrial

    707       43  

Total

  $ 16,311     $ 473  

 

(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 for which impairment measurement does not indicate a loss and that maintains current status for at least six months may be returned to accrual status.

 

 
18

 

 

 

An analysis of past due and nonaccrual loans follows.

 

September 30, 2015

                               
   

30 – 89 Days Past Due

   

90 or More Days Past Due

   

90 or More Days Past Due and Still Accruing

   

Nonaccruals (Including Impaired Nonaccruals)

 

Real Estate Construction(1)

                               

Construction, other

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

Consumer Real Estate(1)

                               

Equity lines

    63       ---       ---       ---  

Residential closed-end first liens

    1,305       46       46       3  

Residential closed-end junior liens

    64       ---       ---          

Investor-owned residential real estate

    ---       ---       ---       12  

Commercial Real Estate(1)

                               

Multifamily real estate

    547       2,665       ---       2,665  

Commercial real estate, owner-occupied

    269       1,519       ---       2,542  

Commercial real estate, other

    59       ---       ---       2,883  

Commercial Non Real Estate(1)

                               

Commercial and Industrial

    71       883       ---       883  

Consumer Non Real Estate(1)

                               

Credit cards

    9       1       1       ---  

Automobile

    175       ---       ---       ---  

Other consumer loans

    63       ---       ---       ---  

Total

  $ 2,652     $ 5,114     $ 47     $ 8,988  

 

December 31, 2014

                               
   

30 – 89 Days Past Due

   

90 or More Days Past Due

   

90 or More Days Past Due and Still Accruing

   

Nonaccruals (Including Impaired Nonaccruals)

 

Real Estate Construction(1)

                               

Construction, other

    28       ---       ---       ---  

Consumer Real Estate(1)

                               

Equity Lines

    25       ---       ---       ---  

Residential closed-end first liens

    719       185       80       105  

Residential closed-end junior liens

    74       1       1       ---  

Investor-owned residential real estate

    336       45       ---       59  

Commercial Real Estate(1)

                               

Multifamily real estate

    850       868       ---       2,735  

Commercial real estate, owner occupied

    ---       1,066       102       2,573  

Commercial real estate, other

    ---       70       ---       3,066  

Commercial Non Real Estate(1)

                               

Commercial and Industrial

    153       43       ---       749  

Consumer Non Real Estate(1)

                               

Credit cards

    3       4       4       ---  

Automobile

    205       20       20       ---  

Other consumer loans

    54       ---       ---       ---  

Total

  $ 2,447     $ 2,302     $ 207     $ 9,287  

 

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

 

 
19

 

 

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.” 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 September 30, 2015 and December 31, 2014.

 

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

 

September 30, 2015

   

Pass

   

Special

Mention

   

Classified (Excluding Impaired)

 

Real Estate Construction

                       

Construction, 1-4 family residential

  $ 10,532     $ 3,768     $ ---  

Construction, other

    30,586       ---       ---  

Consumer Real Estate

                       

Equity lines

    15,715       17       78  

Closed-end first liens

    78,380       464       830  

Closed-end junior liens

    4,653       55       63  

Investor-owned residential real estate

    42,283       611       868  

Commercial Real Estate

                       

Multifamily residential real estate

    75,085       1,345       1,815  

Commercial real estate owner-occupied

    124,459       1,278       1,316  

Commercial real estate, other

    95,149       1,519       ---  

Commercial Non Real Estate

                       

Commercial and Industrial

    37,217       357       684  

Public Sector and IDA

                       

States and political subdivisions

    52,330       ---       ---  

Consumer Non Real Estate

                       

Credit cards

    5,981       ---       ---  

Automobile

    12,134       123       39  

Other consumer

    11,819       31       13  

Total

  $ 596,323     $ 9,568     $ 5,706  

 

 
20

 

 

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

 

December 31, 2014

   

Pass

   

Special

Mention (Excluding Impaired)

   

Classified (Excluding Impaired)

 

Real Estate Construction

                       

Construction, 1-4 family residential

  $ 14,222     $ ---     $ 2,265  

Construction, other

    29,047       ---       28  

Consumer Real Estate

                       

Equity lines

    15,861       59       60  

Closed-end first liens

    78,806       1,566       1,412  

Closed-end junior liens

    4,258       21       95  

Investor-owned residential real estate

    42,781       688       614  

Commercial Real Estate

                       

Multifamily residential real estate

    73,611       1,397       850  

Commercial real estate owner-occupied

    125,643       202       2,855  

Commercial real estate, other

    90,821       1,177       582  

Commercial Non Real Estate

                       

Commercial and Industrial

    31,247       97       1,390  

Public Sector and IDA

                       

States and political subdivisions

    41,361       ---       ---  

Consumer Non Real Estate

                       

Credit cards

    5,705       ---       ---  

Automobile

    11,505       93       128  

Other consumer

    10,745       ---       6  

Total

  $ 575,613     $ 5,300     $ 10,285  

 

Sales, Purchases and Reclassification of Loans

The Company finances mortgages under “best efforts” contracts with mortgage purchasers. The mortgages are designated as held for sale upon initiation. There have been no reclassifications from portfolio loans to held for sale. There have been no loans held for sale transferred to portfolio loans. Occasionally, the Company purchases or sells participations in loans. All participation loans purchased met the Company’s normal underwriting standards at the time the participation was entered. Participation loans are included in the appropriate portfolio balances to which the allowance methodology is applied.

 

 
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Troubled Debt Restructurings

 

The Company modifies loans in troubled debt restructurings. Total troubled debt restructurings amounted to $11,861 at September 30, 2015, $11,328 at December 31, 2014, and $8,307 at September 30, 2014. The following tables present restructurings by class that occurred during the nine month periods ended September 30, 2015 and September 30, 2014. The Company did not modify any loans in troubled debt restructures during the three-month periods ended September 30, 2015 or September 30, 2014.

 

Note: Only classes with restructured loans are presented.

 

   

Restructurings That Occurred During the Nine Months Ended September 30, 2015

 
   

Number of Contracts

   

Pre-Modification Outstanding Principal Balance

   

Post-Modification Outstanding Principal Balance

 

Commercial Real Estate

                       

Commercial real estate, owner occupied

    1     $ 994     $ 907  

Total

    1     $ 994     $ 907  

 

During the nine-month period ended September 30, 2015, the Company restructured 1 loan to provide payment relief. The restructuring provided payment relief by reducing principal, capitalizing interest and re-amortizing payments. The restructured loan is in nonaccrual status. The fair value measurement of the restructured loan as of September 30, 2015 resulted in no specific allocations to the allowance for loan losses.

 

   

Restructurings That Occurred During the Nine Months Ended September 30, 2014

 
   

Number of Contracts

   

Pre-Modification Outstanding Principal Balance

   

Post-Modification Outstanding Principal Balance

 

Commercial Real Estate

                       

Multifamily real estate

    1     $ 2,484     $ 2,484  

Commercial real estate, owner occupied

    1       184       209  

Total

    2     $ 2,668     $ 2,693  

 

During the nine-month period ended September 30, 2014, the Company restructured two loans. One multifamily real estate loan was restructured to provide payment relief. The Company reduced the loan’s interest rate and re-amortized payments. One commercial real estate, owner occupied loan was restructured pursuant to bankruptcy court orders. The restructuring provided payment relief by capitalizing interest, reducing the interest rate and re-amortizing payments. The fair value measurements of the restructured loans as of September 30, 2014 resulted in specific allocations to the allowance for loan losses totaling $249.

 

The Company analyzed its TDR portfolio for loans that defaulted during the three and nine month periods ended September 30, 2015 and September 30, 2014, and that were modified within 12 months prior to default. The Company defines default as one or more payments that occur more than 90 days past the due date, charge-offs, or foreclosure after the date of restructuring. There were no restructured loans that defaulted and were modified within 12 months prior to default for the three or nine month periods ended September 30, 2015 and 2014.

 

 
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Note 5: Securities

 

The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities available for sale by major security type are as follows.

 

   

September 30, 2015

 
   

Amortized

Costs

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Values

 

Available for Sale:

                               

U.S. Government agencies and corporations

  $ 190,723     $ 757     $ 4,557     $ 186,923  

States and political subdivisions

    16,348       601       ---       16,949  

Mortgage-backed securities

    1,355       137       ---       1,492  

Corporate debt securities

    6,015       17       300       5,732  

Other securities

    189       ---       53       136  

Total securities available for sale

  $ 214,630     $ 1,512     $ 4,910     $ 211,232  

 

   

December 31, 2014

 
   

Amortized

Costs

   

Gross

Unrealized

Gains

   

Gross

Unrealized

Losses

   

Fair

Values

 

Available for Sale:

                               

U.S. Government agencies and corporations

  $ 197,740     $ 973     $ 4,494     $ 194,219  

States and political subdivisions

    18,529       851       ---       19,380  

Mortgage-backed securities

    1,830       184       ---       2,014  

Corporate debt securities

    6,991       140       27       7,104  

Other securities

    189       ---       62       127  

Total securities available for sale

  $ 225,279     $ 2,148     $ 4,583     $ 222,844  

 

The amortized cost and fair value of single maturity securities available for sale at September 30, 2015, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities included in these totals are categorized by final maturity.

 

   

September 30, 2015

 
   

Amortized Cost

   

Fair Value

 

Available for Sale:

               

Due in one year or less

  $ 338     $ 339  

Due after one year through five years

    37,130       37,470  

Due after give years through ten years

    27,571       27,537  

Due after ten years

    149,402       145,750  

No maturity

    189       136  

Total securities available for sale

  $ 214,630     $ 211,232  

 

The Company holds restricted stock with the Federal Home Loan Bank and the Federal Reserve. Required ownership amounts are determined by the correspondent banks and the Company purchases stock from or sells stock back to the correspondents based on their calculations. The stock is held by member institutions only and is not actively traded. The Company held restricted stock of $1,129 as of September 30, 2015 and $1,089 as of December 31, 2014.

 

 
23

 

 

The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities held to maturity by major security type are as follows.

 

   

September 30, 2015

 
   

Amortized
Costs

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair
Values

 

Held to Maturity:

                               

U.S. Government agencies and corporations

  $ 14,912     $ 343     $ 216     $ 15,039  

States and political subdivisions

    137,969       5,635       1,020       142,584  

Mortgage-backed securities

    346       40       ---       386  

Corporate debt securities

    1,417       18       1       1,434  

Total securities held to maturity

  $ 154,644     $ 6,036     $ 1,237     $ 159,443  

 

 

   

December 31, 2014

 
   

Amortized
Costs

   

Gross
Unrealized
Gains

   

Gross
Unrealized
Losses

   

Fair
Values

 

Held to Maturity:

                               

U.S. Government agencies and corporations

  $ 18,922     $ 350     $ 245     $ 19,027  

States and political subdivisions

    140,702       6,823       727       146,798  

Mortgage-backed securities

    415       51       ---       466  

Corporate debt securities

    1,413       1       2       1,412  

Total securities held to maturity

  $ 161,452     $ 7,225     $ 974     $ 167,703  

 

The amortized cost and fair value of single maturity securities held to maturity at September 30, 2015, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities included in these totals are categorized by final maturity.

 

   

September 30, 2015

 
   

Amortized Cost

   

Fair Value

 

Held to maturity:

               

Due in one year or less

  $ 901     $ 909  

Due after one year through five years

    12,890       13,781  

Due after give years through ten years

    20,165       21,185  

Due after ten years

    120,688       123,568  

Total securities held to maturity

  $ 154,644     $ 159,443  

 

Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows.

 

   

September 30, 2015

 
   

Less Than 12 Months

   

12 Months or More

 
   

Fair
Value

   

Unrealized
Loss

   

Fair
Value

   

Unrealized
Loss

 

Temporarily Impaired Securities:

                               

U.S. Government agencies and corporations

  $ 62,563     $ 1,358     $ 89,871     $ 3,415  

States and political subdivisions

    19,803       415       9,774       605  

Corporate debt securities

    4,968       300       200       1  

Other securities

    ---       ---       136       53  

Total

  $ 87,334     $ 2,073     $ 99,981     $ 4,074  

 

 
24

 

 

   

December 31, 2014

 
   

Less Than 12 Months

   

12 Months or More

 
   

Fair
Value

   

Unrealized
Loss

   

Fair
Value

   

Unrealized
Loss

 

Temporarily Impaired Securities:

                               

U.S. Government agencies and corporations

  $ 6,964     $ 30     $ 156,149     $ 4,709  

States and political subdivisions

    1,222       35       19,818       692  

Corporate debt securities

    450       2       1,948       27  

Other securities

    ---       ---       127       62  

Total

  $ 8,636     $ 67     $ 178,042     $ 5,490  

 

The Company had 210 securities with a fair value of $187,315 that were temporarily impaired at September 30, 2015.  The total unrealized loss on these securities was $6,147. Of the temporarily impaired total, 110 securities with a fair value of $99,981 and an unrealized loss of $4,074 have been in a continuous loss position for twelve months or more. The Company has determined that these securities are temporarily impaired at September 30, 2015 for the reasons set out below.

U.S. Government agencies. The unrealized losses of $4,773 on US Government agency securities stemmed from 157 securities with a fair value of $152,434. The unrealized losses were caused by interest rate and market fluctuations. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. The Company is monitoring bond market trends and developing strategies to address unrealized losses. Because the Company does not intend to sell any of the investments and it is not likely that the Company will be required to sell any of the investments before recovery of its amortized cost basis, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired.

States and political subdivisions. This category’s unrealized losses of $1,020 on 45 securities with a fair value of $29,577 are primarily the result of interest rate and market fluctuations. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and it is not likely that the Company will be required to sell any of the investments before recovery of its amortized cost basis, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired.

Corporate. The Company’s unrealized losses of $301 on 7 corporate debt securities with a fair value of $5,168 are related to interest rate and market fluctuations. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments before recovery of its amortized cost basis, which may be at maturity, the Company does not consider these investments to be other-than-temporarily impaired.

Other securities. The Company holds a small investment in community bank stock. One security with a fair value of $136 has an unrealized loss of $53. The value of this investment has been negatively affected by market conditions. Because the Company does not intend to sell this investment before recovery of its amortized cost basis, the Company does not consider this investment to be other-than-temporarily impaired.

Restricted stock. Restricted stock is reported separately from available-for-sale securities and held-to-maturity securities. As a member of the Federal Reserve and the Federal Home Loan Bank (“FHLB”) of Atlanta, NBB is required to maintain certain minimum investments in the common stock of those entities. Required levels of investment are based upon NBB’s capital and a percentage of qualifying assets. In addition, NBB is eligible to borrow from the FHLB with borrowings collateralized by qualifying assets, primarily residential mortgage loans and NBB’s capital stock investment in the FHLB. Redemption of FHLB stock is subject to certain limitations and conditions. At its discretion, the FHLB may declare dividends on the stock. Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at September 30, 2015, management did not determine any impairment.

Management regularly monitors the credit quality of the investment portfolio. Changes in ratings are noted and follow-up research on the issuer is undertaken when warranted. Management intends to carefully monitor any changes in bond quality.

 

 
25

 

 

Note 6: Recent Accounting Pronouncements

 

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period beginning after December 15, 2014; however, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The new guidance applies to reporting entities that grant employees share-based payments in which the terms of the award allow a performance target to be achieved after the requisite service period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Existing guidance in “Compensation – Stock Compensation (Topic 718),” should be applied to account for these types of awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted and reporting entities may choose to apply the amendments in the ASU either on a prospective or retrospective basis. The adoption of the new guidance did not have a material impact on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.

In November 2014, the FASB issued ASU No. 2014-16, “Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.” The amendments in ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments in this ASU also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The Company does not expect the adoption of ASU 2014-16 to have a material impact on its consolidated financial statements.

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The amendments in this ASU eliminate from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2015-01 to have a material impact on its consolidated financial statements.

 

 
26

 

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification™ and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer’s accounting for service contracts. As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments in this ASU are effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The Company is currently assessing the impact that ASU 2015-05 will have on its consolidated financial statements.

In May 2015, the FASB issued ASU No. 2015-08, “Business Combinations (Topic 805): Pushdown Accounting – Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115.” The amendments in ASU 2015-08 amend various SEC paragraphs pursuant to the issuance of Staff Accounting Bulletin No. 115, Topic 5: Miscellaneous Accounting, regarding various pushdown accounting issues, and did not have a material impact on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), and Health and Welfare Benefit Plans (Topic 965) – 1. Fully Benefit-Responsive Investment Contracts, 2. Plan Investment Disclosures, and 3. Measurement Date Practical Expedient.” The amendments within this ASU are in 3 parts. Among other things, Part 1 amendments designate contract value as the only required measure for fully benefit-responsive investment contracts; Part II amendments eliminate the requirement that plans disclose: (a) individual investments that represent 5 percent or more of net assets available for benefits; and (b) the net appreciation or depreciation for investments by general type requirements for both participant-directed investments and nonparticipant-directed investments. Part III amendments provide a practical expedient to permit plans to measure investments and investment-related accounts (e.g., a liability for a pending trade with a broker) as of a month-end date that is closest to the plan’s fiscal year-end, when the fiscal period does not coincide with month-end. The amendments in Parts 1 and 2 of this ASU are effective on a retrospective basis and Part 3 is effective on a prospective basis, for fiscal years beginning after December 15, 2015. Early adoption is permitted. The Company is currently assessing the impact that ASU 2015-12 will have on its consolidated financial statements.

In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of Effective Date.” The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. All other entities may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, including interim reporting periods within that reporting period. All other entities also may apply the guidance in ASU 2014-09 earlier as of an annual reporting period beginning after December 15, 2016, and interim reporting periods within annual reporting periods beginning one year after the annual reporting period in which the entity first applies the guidance in ASU 2014-09. The Company does not expect the adoption of ASU 2015-14 (or ASU 2014-09) to have a material impact on its consolidated financial statements.

 

 
27

 

 

In August 2015, the FASB issued ASU 2015-15, “Interest – Imputation of Interest (Subtopic 835-30) – Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting).” On April 7, 2015, the FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires entities to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability. The guidance in ASU 2015-03 (see paragraph 835-30-45-1A) does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. ASU 2015-15 adds these SEC comments to the "S" section of the Codification. The Company does not expect the adoption of ASU 2015-15 to have a material impact on its consolidated financial statements.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” The amendments in ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts, calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized as of the acquisition date. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company does not expect the adoption of ASU 2015-16 to have a material impact on its consolidated financial statements.

 

Note 7: Defined Benefit Plan

 

Components of Net Periodic Benefit Cost

 

   

Pension Benefits

 
   

Nine Months Ended September 30,

 
   

2015

   

2014

 

Service cost

  $ 465     $ 393  

Interest cost

    501       498  

Expected return on plan assets

    (876

)

    (834

)

Amortization of prior service cost

    (81

)

    (81

)

Recognized net actuarial loss

    312       195  

Net periodic benefit cost

  $ 321     $ 171  

 

2015 Plan Year Employer Contribution

 

For the nine months ended September 30, 2015, the Company is not required to make a minimum contribution and has elected not to make a contribution to the Plan.

 

 

Note 8: Fair Value Measurements

 

The Company records fair value adjustments to certain assets and liabilities and determines fair value disclosures utilizing a definition of fair value of assets and liabilities that states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Additional considerations come into play in determining the fair value of assets in markets that are not active.

 

 
28

 

 

The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

 

 

Level 1 – 

 

Valuation is based on quoted prices in active markets for identical assets and liabilities.

 

Level 2 –

 

Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

 

Level 3 – 

 

Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

 

The following describes the valuation techniques used by the Company to measure certain assets and liabilities recorded at fair value on a recurring basis in the financial statements.

 

Securities Available for Sale

 

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). The carrying value of restricted Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.

 

           

Fair Value Measurements at September 30, 2015 Using

 

Description

 

Balance as of
September 30, 2015

   

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

   

Significant
Other
Observable
Inputs
(Level 2)

   

Significant
Unobservable Inputs
(Level 3)

 

U.S. Government agencies and corporations

  $ 186,923     $ ---     $ 186,923     $ ---  

States and political subdivisions

    16,949       ---       16,949       ---  

Mortgage-backed securities

    1,492       ---       1,492       ---  

Corporate debt securities

    5,732       ---       5,732       ---  

Other securities

    136       ---       136       ---  

Total securities available for sale

  $ 211,232     $ ---     $ 211,232     $ ---  

 

           

Fair Value Measurements at December 31, 2014 Using

 

Description

 

Balance as of
December 31,
2014

   

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

   

Significant
Other
Observable
Inputs
(Level 2)

   

Significant
Unobservable Inputs
(Level 3)

 

U.S. Government agencies and corporations

  $ 194,219     $ ---     $ 194,219     $ ---  

States and political subdivisions

    19,380       ---       19,380       ---  

Mortgage-backed securities

    2,014       ---       2,014       ---  

Corporate debt securities

    7,104       ---       7,104       ---  

Other securities

    127       ---       127       ---  

Total securities available for sale

  $ 222,844     $ ---     $ 222,844     $ ---  

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.

 

 
29

 

 

Loans Held for Sale

 

Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets offer at the report date for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale at September 30, 2015 or December 31, 2014.

 

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. Troubled debt restructurings are impaired loans. Impaired loans are measured at fair value on a nonrecurring basis. If an individually-evaluated impaired loan’s balance exceeds fair value, the amount is allocated to the allowance for loan losses. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

The fair value of an impaired loan and measurement of associated loss is based on one of three methods: the observable market price of the loan, the present value of projected cash flows, or the fair value of the collateral. The observable market price of a loan is categorized as a Level 1 input. The present value of projected cash flows method results in a Level 3 categorization because the calculation relies on the Company’s judgment to determine projected cash flows, which are then discounted at the current rate of the loan, or the rate prior to modification if the loan is a troubled debt restructure.

Loans measured using the fair value of collateral method may be categorized in Level 2 or Level 3. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Most collateral is real estate. The Company bases collateral method fair valuation upon the “as-is” value of independent appraisals or evaluations. Valuations for impaired loans with outstanding principal balances of $250 or more are based on a current appraisal. Appraisals are also used to value impaired loans with principal balances of $100 or greater and secured by one piece of collateral. Collateral-method impaired loans with principal balances below $100, or if secured by multiple pieces of collateral, below $250, are valued using an internal evaluation.

The value of real estate collateral is determined by a current (less than 12 months of age) appraisal or internal evaluation utilizing an income or market valuation approach. Appraisals conducted by an independent, licensed appraiser outside of the Company using observable market data are categorized as Level 2. If a current appraisal cannot be obtained prior to a reporting date and an existing appraisal is discounted to obtain an estimated value, or if declines in value are identified after the date of the appraisal, or if an appraisal is discounted for estimated selling costs, the valuation of real estate collateral is categorized as Level 3. Valuations derived from internal evaluations are categorized as Level 3. The value of business equipment is based upon an outside appraisal (Level 2) if deemed significant, or the net book value on the applicable business’ financial statements (Level 3) if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3).

Impaired loans are measured quarterly for impairment. The Company employs the most applicable valuation method for each loan based on current information at the time of valuation. Valuations of loans using the collateral method may include a discount for selling costs if collection of the loan is expected to come from sale of the collateral. Fair value measurement using the collateral method for a loan that is dependent on the operation, but not the sale, of collateral for collection is not discounted for selling costs.

 

The following table summarizes the Company’s impaired loans that were measured at fair value on a nonrecurring basis at September 30, 2015 and at December 31, 2014.

 

             

Carrying Value

 

Date

Description

 

Balance

   

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

   

Significant
Other
Observable
Inputs
(Level 2)

   

Significant
Unobservable Inputs
(Level 3)

 
 

Assets:

                               

September 30, 2015

Impaired loans net of valuation allowance

  $ 2,320                     $ 2,320  

December 31, 2014

Impaired loans net of valuation allowance

    7,224       ---       ---       7,224  

 

 

 
30

 

 

The following tables present information about Level 3 Fair Value Measurements for September 30, 2015 and December 31, 2014.

 

 September 30, 2015

 

Valuation Technique

 

Unobservable Input

 

Range

(Weighted Average)

 

Impaired loans

 

Present value of cash flows

 

Market rate for borrower (discount rate)

 

5.88% - 7.25%

(6.19%)  

 

December 31, 2014

 

Valuation Technique

 

Unobservable Input

 

Range

(Weighted Average)

 

Impaired loans

 

Present value of cash flows

 

Discount rate

 

5.88% - 9.50%

(6.15%)  

Impaired loans

 

Discounted appraised value

 

Selling cost(1)

 

10%

(2)  

 

(1)

Impaired loans that are collateral-dependent are valued using the fair value of collateral. The valuation is discounted for selling costs if repayment of the loan is dependent on the sale of the collateral. If repayment will come from rental income of the property, the valuation is not discounted for selling costs.

(2)

Only one loan was valued using the collateral method as of December 31, 2014.

 

Other Real Estate Owned

 

Other real estate owned are real estate assets acquired in full or partial satisfaction of a loan. At acquisition, other real estate owned assets are measured at fair value. If the assets are marketed for sale by an outside party, the acquisition-date fair value is discounted by selling costs; if the assets are marketed for sale by the Company, no reduction to fair value for selling costs is made. Subsequent to acquisition, the assets are measured at the lower of initial measurement or current fair value, discounted for selling costs as appropriate.

The fair value of an other real estate owned asset is determined by an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). If the appraisal is discounted either for age or because management considers the real estate market to be experiencing volatility, then the fair value is considered Level 3. Discounts for selling costs also result in measurement based on Level 3 inputs. Fair value adjustments are measured on a nonrecurring basis and are recorded in the period incurred as valuation allowances to other real estate owned, and expensed through noninterest expense.

 

The following table summarizes the Company’s other real estate owned that was measured at fair value on a nonrecurring basis.

 

             

Carrying Value

 

Date

Description

 

Balance

   

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

   

Significant
Other
Observable
Inputs
(Level 2)

   

Significant
Unobservable Inputs
(Level 3)

 
 

Assets:

                               

September 30, 2015

Other real estate owned net of valuation allowance

  $ 4,194                     $ 4,194  

December 31, 2014

Other real estate owned net of valuation allowance

    4,744       ---       ---       4,744  

 

The following tables present information about Level 3 Fair Value Measurements for September 30, 2015 and December 31, 2014.

 

September 30, 2015

 

Valuation Technique

 

Unobservable Input

 

Range

(Weighted Average)

 
                 

Other real estate owned

 

Discounted appraised value

 

Selling cost

 

0%(1) – 11.11%

(6.04%)  

Other real estate owned

 

Discounted appraised value

 

Discount for lack of marketability and age of appraisal

 

0% - 49.44%

(9.51%)  

 

 
31

 

 

December 31, 2014

 

Valuation Technique

 

Unobservable Input

 

Range

(Weighted Average)

 
                 

Other real estate owned

 

Discounted appraised value

 

Selling cost

 

0%(1) - 11%

(8.60%)  

Other real estate owned

 

Discounted appraised value

 

Discount for lack of marketability and age of appraisal

 

0% - 48.77%

(20.81%)  

 

 

(1)

The Company markets other real estate owned both independently and with local realtors. Properties marketed by realtors are discounted by selling costs. Properties that the Company markets independently are not discounted by selling costs.

 

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments.

 

Cash and Due from Banks and Interest-Bearing Deposits

 

The carrying amounts approximate fair value.

 

Securities

 

The fair value of securities, excluding restricted stock, is determined by quoted market prices or dealer quotes. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments adjusted for differences between the quoted instruments and the instruments being valued. The carrying value of restricted securities approximates fair value based upon the redemption provisions of the applicable entities.

 

Loans Held for Sale

 

The fair value of loans held for sale is based on commitments on hand from investors or prevailing market prices.

 

Loans

 

Fair value for the loan portfolio is estimated on an account-level basis by discounting scheduled cash flows through the projected maturity for each loan. The calculation applies estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the Company’s historical experience with repayments for loan classification, modified by an estimate of the effect of economic conditions on lending.

Impaired loans are individually evaluated for fair value. Fair value for the Company’s impaired loans is estimated by using either discounted cash flows or the appraised value of collateral. Any amount of principal balance that exceeds fair value is accrued in the allowance for loan losses. Assumptions regarding credit risk, cash flows and discount rates are determined within management’s judgment, using available market information and specific borrower information. Discount rates for cash flow analysis are based on the loan’s interest rate, and cash flows are estimated based upon the loan’s historical payment performance and the borrower’s current financial condition. Appraisals may be discounted for age, reasonableness, and selling costs.

 

Deposits

 

The fair value of demand and savings deposits is the amount payable on demand. The fair value of fixed maturity term deposits and certificates of deposit is estimated using the rates currently offered for deposits with similar remaining maturities.

 

Accrued Interest

 

The carrying amounts of accrued interest approximate fair value.

 

Bank-Owned Life Insurance

 

Bank owned life insurance represents insurance policies on officers of the Company and certain officers who are no longer employed by the Company.  The cash values of the policies are estimates using information provided by insurance carriers. These policies are carried at their cash surrender value, which approximates the fair value.

 

 
32

 

 

Commitments to Extend Credit and Standby Letters of Credit

 

The only amounts recorded for commitments to extend credit, standby letters of credit and financial guarantees written are the deferred fees arising from these unrecognized financial instruments. These deferred fees are not deemed significant at September 30, 2015 and December 31, 2014, and, as such, the related fair values have not been estimated.

 

The estimated fair values and related carrying amounts of the Company’s financial instruments follow.

 

   

September 30, 2015

 
   

Carrying
Amount

   

Quoted Prices in Active Markets for Identical Assets

Level 1

   

Significant Other Observable Inputs

Level 2

   

Significant Unobservable Inputs

Level 3

 

Financial Assets:

                               

Cash and due from banks

  $ 12,446     $ 12,446     $ ---     $ ---  

Interest-bearing deposits

    90,295       90,295       ---       ---  

Securities

    365,876       ---       370,675       ---  

Restricted securities

    1,129       ---       1,129       ---  

Loans held for sale

    1,331       ---       1,331       ---  

Loans, net

    617,638       ---       ---       628,160  

Accrued interest receivable

    5,659       ---       5,659       ---  

Bank-owned life insurance

    22,248       ---       22,248       ---  

Financial Liabilities:

                               

Deposits

  $ 962,530     $ ---     $ 765,359     $ 196,097  

Accrued interest payable

    61       ---       61       ---  

 

 

   

December 31, 2014

 
   

Carrying
Amount

   

Quoted Prices in Active Markets for Identical Assets

Level 1

   

Significant Other Observable Inputs

Level 2

   

Significant Unobservable Inputs

Level 3

 

Financial Assets:

                               

Cash and due from banks

  $ 12,894     $ 12,894     $ ---     $ ---  

Interest-bearing deposits

    102,548       102,548       ---       ---  

Securities

    384,296       ---       390,547       ---  

Restricted securities

    1,089       ---       1,089       ---  

Loans held for sale

    291       ---       291       ---  

Loans, net

    597,203       ---       ---       633,063  

Accrued interest receivable

    5,748       ---       5,748       ---  

Bank-owned life insurance

    21,797       ---       21,797       ---  

Financial Liabilities:

                               

Deposits

  $ 982,428     $ ---     $ 765,682     $ 216,469  

Accrued interest payable

    68       ---       68       ---  

 

 
33

 

 

Note 9: Components of Accumulated Other Comprehensive Loss

 

   

Net Unrealized Gain (Loss) on Securities

   

Adjustments Related to Pension Benefits

   

Accumulated Other Comprehensive

(Loss)

 

Balance at December 31, 2013

  $ (14,011

)

  $ (2,953

)

  $ (16,964

)

Unrealized holding gains on available for sale securities net of tax of $4,264

    7,920       ---       7,920  

Reclassification adjustment for gains included in net income, net of tax of ($1)

    (3

)

    ---       (3

)

Balance at September 30, 2014

  $ (6,094

)

  $ (2,953

)

  $ (9,047

)

                         

Balance at December 31, 2014

  $ (1,582

)

  $ (4,090

)

  $ (5,672

)

Unrealized holding losses on available for sale securities net of tax of ($334)

    (624

)

    ---       (624

)

Reclassification adjustment for gains included in net income, net of tax of ($2)

    (3

)

    ---       (3

)

Balance at September 30, 2015

  $ (2,209

)

  $ (4,090

)

  $ (6,299

)

 

The following provides information regarding reclassifications out of accumulated comprehensive income (loss) for the three month and nine month periods ended September 30, 2015 and September 30, 2014.

 

   

3 Months Ended

   

9 Months Ended

 
   

September 30,

2015

   

September 30,

2014

   

September 30,

2015

   

September 30,

2014

 

Reclassifications out of unrealized gains and losses on available-for-sale securities:

                               

Realized securities gains, net

  $ 2     $ 4     $ 5     $ 4  

Income taxes

    1       1       2       1  

Realized gains on available-for-sale securities, net of tax, reclassified out of accumulated other comprehensive income

  $ 1     $ 3     $ 3     $ 3  

 

 
34

 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

$ in thousands, except per share data

 

The purpose of this discussion and analysis is to provide information about the financial condition and results of operations of National Bankshares, Inc. and its wholly-owned subsidiaries (the “Company”), which are not otherwise apparent from the consolidated financial statements and other information included in this report.  Please refer to the financial statements and other information included in this report as well as the 2014 Annual Report on Form 10-K for an understanding of the following discussion and analysis.

 

Cautionary Statement Regarding Forward-Looking Statements

 

We make forward-looking statements in this Form 10-K that are subject to significant risks and uncertainties.  These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals, and are based upon our management’s views and assumptions as of the date of this report.  The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward-looking statements.

These forward-looking statements are based upon or are affected by factors that could cause our actual results to differ materially from historical results or from any results expressed or implied by such forward-looking statements. These factors include, but are not limited to, changes in:

 

interest rates,

 

general economic conditions,

 

the legislative/regulatory climate,

 

monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury, the Office of the Comptroller of the Currency, the Federal Reserve Board and the Federal Deposit Insurance Corporation, and the impact of any policies or programs implemented pursuant to the Emergency Economic Stabilization Act of 2008 (“EESA”) the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and other financial reform legislation,

 

unanticipated increases in the level of unemployment in the Company’s trade area,

 

the quality or composition of the loan and/or investment portfolios,

 

demand for loan products,

 

deposit flows,

 

competition,

 

demand for financial services in the Company’s trade area,

 

the real estate market in the Company’s trade area,

 

the Company’s technology initiatives, and

 

applicable accounting principles, policies and guidelines.

These risks and uncertainties should be considered in evaluating the forward-looking statements contained in this report. We caution readers not to place undue reliance on those statements, which speak only as of the date of this report. This discussion and analysis should be read in conjunction with the description of our “Risk Factors” in Item 1A. of this Form 10-K.

The national economy and the Company’s market area have experienced a slow recovery since the economic recession of 2008 and 2009. Unemployment rates have slowly improved since the peak of the recession, but are still higher than pre-recession levels. If the economic recovery wavers or reverses, it is likely that unemployment will continue at higher-than-normal levels or rise and that other economic indicators will negatively impact the Company’s trade area. Because of the importance to the Company’s markets of state-funded universities, cutbacks in the funding provided by the State as a result of the recession could also negatively impact employment. This could lead to a higher rate of delinquent loans and a greater number of real estate foreclosures. Higher unemployment and the fear of layoffs causes reduced consumer demand for goods and services, which negatively impacts the Company’s business and professional customers. A slow economic recovery could have an adverse effect on all financial institutions, including the Company.

 

Critical Accounting Policies

 

General

 

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. The Company uses historical loss rates as one factor in determining the inherent loss that may be present in the loan portfolio. Actual losses could differ significantly from one previously acceptable method to another method. Although the economics of the Company’s transactions would be the same, the timing of events that would impact the transactions could change.

 

 
35

 

 

Allowance for Loan Losses

 

The allowance for loan losses is an accrual of estimated losses that have been sustained in our loan portfolio. The allowance is funded by the provision for loan losses, reduced by charge-offs of loans and increased by recoveries of previously charged-off loans. The determination of the allowance is based on two accounting principles, Accounting Standards Codification (“ASC”) Topic 450-20 (Contingencies) which requires that losses be accrued when occurrence is probable and the amount of the loss is reasonably estimable, and ASC Topic 310-10 (Receivables) which requires accrual of losses on impaired loans if the recorded investment exceeds fair value.

Probable losses are accrued through two calculations, individual evaluation of impaired loans and collective evaluation of the remainder of the portfolio. Impaired loans are larger non-homogeneous loans for which there is a probability that collection will not occur according to the loan terms, as well as loans whose terms have been modified in a troubled debt restructuring. Impaired loans that are not TDR’s with an estimated impairment loss are placed on nonaccrual status. TDR’s with an impairment loss may accrue interest if they have demonstrated six months of timely payment performance.

 

Impaired loans

Impaired loans are identified through the Company’s credit risk rating process. Estimated loss for an impaired loan is the amount of recorded investment that exceeds the loan’s fair value. Fair value of an impaired loan is measured by one of three methods: the fair value of collateral (“collateral method”), the present value of future cash flows (“cash flow method”), or observable market price. The Company applies the collateral method to collateral-dependent loans, loans for which foreclosure is eminent and to loans for which the fair value of collateral is a more reliable estimate of fair value. The cash flow method is applied to loans that are not collateral dependent and for which cash flows may be estimated.

The Company bases collateral method fair valuation upon the “as-is” value of independent appraisals or evaluations. Valuations for impaired loans with outstanding principal balances of $250 or more are based on a current appraisal. Appraisals are also used to value impaired loans with principal balances of $100 or greater and secured by one piece of collateral. Collateral-method impaired loans with principal balances below $100, or if secured by multiple pieces of collateral, below $250, are valued using an internal evaluation.

Appraisals and internal valuations provide an estimate of market value. Appraisals must conform to the Uniform Standards of Professional Appraisal Practice (“USPAP”) and are prepared by an independent third-party appraiser who is certified and licensed and who is approved by the Company. Appraisals incorporate market analysis, comparable sales analysis, cash flow analysis and market data pertinent to the property to determine market value. Internal evaluations are prepared and reviewed by employees of the Company who are independent of the loan origination, operation, management and collection functions. Evaluations provide a property’s market value based on the property’s current physical condition and characteristics and the economic market conditions that affect the collateral’s market value. Evaluations incorporate multiple sources of data to arrive at a property’s market value, including physical inspection, tax values, independent third-party automated tools, comparable sales analysis and local market information.

Updated appraisals or evaluations are ordered when the loan becomes impaired if the appraisal or evaluation on file is more than twelve months old. Appraisals and evaluations are reviewed for propriety and reasonableness and may be discounted if the Company determines that the value exceeds reasonable levels. If an updated appraisal or evaluation has been ordered but has not been received by a reporting date, the fair value may be based on the most recent available appraisal or evaluation, discounted for age.

The appraisal or evaluation value for a collateral-dependent loan for which recovery is expected solely from the sale of collateral is reduced by estimated selling costs. Estimated losses on collateral-dependent loans, as well as any other impairment loss considered uncollectible, are charged against the allowance for loan losses. For loans that are not collateral dependent, the impairment loss is accrued in the allowance. Impaired loans with partial charge-offs are maintained as impaired until the remaining balance is satisfied. Smaller homogeneous impaired loans that are not troubled debt restructurings or part of a larger impaired relationship are collectively evaluated.

Troubled debt restructurings are impaired loans and are measured for impairment under the same valuation methods as other impaired loans. Troubled debt restructurings are maintained in nonaccrual status until the loan has demonstrated reasonable assurance of repayment with at least six months of consecutive timely payment performance, unless the impairment measurement indicates a loss.

 

 
36

 

 

Collectively-evaluated loans

Non-impaired loans and smaller homogeneous impaired loans that are not troubled debt restructurings and not part of a larger impaired relationship are grouped by portfolio segments that are made up of smaller loan classes. Loans within a segment or class have similar risk characteristics.

Probable loss is determined by applying historical net charge-off rates as well as additional percentages for trends and current levels of quantitative and qualitative factors. Loss rates are calculated for and applied to individual classes. Beginning with the first quarter of 2014, the Company began calculating the applicable loss rates by averaging loss rates over the most recent 8 quarters. Prior to 2014, the Company annualized the current year-to-date loss rate and averaged it with the loss rate of the previous year. The two methods yield similar results, and at the end of the year will yield the same average loss rate. The Company transitioned to using 8 quarters in order to provide ease of calculation on an ongoing basis. The look-back periods of 8 quarters beginning in 2014 and two years for periods ended December 31, 2013 and prior are applied consistently among all classes.

Two loss rates for each class are calculated: total net charge-offs for the class as a percentage of average class loan balance (“class loss rate”), and total net charge-offs for the class as a percentage of average classified loans in the class (“classified loss rate”). Classified loans are those with risk ratings of “substandard” or higher. Net charge-offs in both calculations include charge-offs and recoveries of classified and non-classified loans as well as those associated with impaired loans. Class historical loss rates are applied to non-classified loan balances at the reporting date, and classified historical loss rates are applied to classified balances at the reporting date.

Trends and current levels of qualitative factors are evaluated and allocations are applied to each class. Qualitative factors include delinquency rates, loan quality and concentrations, loan officers’ experience, changes in lending policies and changes in the loan review process. Economic factors such as unemployment rates, bankruptcy rates and others are also evaluated, with standard allocations applied consistently to relevant classes.

The Company accrues additional estimated loss for criticized loans within each class and for loans designated high risk. High risk loans are defined as junior lien mortgages, loans with high loan-to-value ratios and loans with terms that require only interest payments. Both criticized loans and high risk loans are included in the base risk analysis for each class and are allocated additional reserves.

 

Estimation of the allowance for loan losses

The estimation of the allowance involves analysis of internal and external variables, methodologies, assumptions and our judgment and experience. Key judgments used in determining the allowance for loan losses include internal risk rating determinations, market and collateral values, discount rates, loss rates, and our view of current economic conditions. These judgments are inherently subjective and our actual losses could be greater or less than the estimate. Future estimates of the allowance could increase or decrease based on changes in the financial condition of individual borrowers, concentrations of various types of loans, economic conditions or the markets in which collateral may be sold. The estimate of the allowance accrual determines the amount of provision expense and directly affects our financial results.

The estimate of the allowance for September 30, 2015 considered market and portfolio conditions during the first nine months of 2015 as well as the levels of delinquencies and net charge-offs in the eight quarters prior to the quarter ended September 30, 2015. Given the continued economic difficulties, the ultimate amount of loss could vary from that estimate. For additional discussion of the allowance, see Note 4 to the consolidated financial statements and “Asset Quality,” and “Provision and Allowance for Loan Losses.”

 

Goodwill and Core Deposit Intangibles

 

Goodwill is subject to at least an annual assessment for impairment by applying a fair value based test. The Company performs impairment testing in the fourth quarter of each year. The Company’s most recent impairment test was performed in the fourth quarter of 2014. Accounting guidance provides the option of performing preliminary assessment of qualitative factors before performing more substantial testing for impairment. The Company opted not to perform the preliminary assessment. The Company’s goodwill impairment analysis considered three valuation techniques appropriate to the measurement. The first technique uses the Company’s market capitalization as an estimate of fair value; the second technique estimates fair value using current market pricing multiples for companies comparable to the Company; while the third technique uses current market pricing multiples for change-of-control transactions involving companies comparable to the Company. Each measure indicated that the Company’s fair value exceeded its book value, validating that goodwill is not impaired.

Certain key judgments were used in the valuation measurement. Goodwill is held by the Company’s bank subsidiary. The bank subsidiary is 100% owned by the Company, and no market capitalization is available. Because most of the Company’s assets are comprised of the subsidiary bank’s equity, the Company’s market capitalization was used to estimate the Bank’s market capitalization. Other judgments include the assumption that the companies and transactions used as comparables for the second and third technique were appropriate to the estimate of the Company’s fair value, and that the comparable multiples are appropriate indicators of fair value, and compliant with accounting guidance.

 

 
37

 

 

Acquired intangible assets (such as core deposit intangibles) are recognized separately from goodwill if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over its useful life. The Company amortizes intangible assets arising from branch transactions over their useful life. Core deposit intangibles are subject to a recoverability test based on undiscounted cash flows, and to the impairment recognition and measurement provisions required for other long-lived assets held and used. The impairment testing showed that the expected cash flows of the intangible assets exceeded the carrying value.

 

Overview

 

National Bankshares, Inc. (“NBI”) is a financial holding company incorporated under the laws of Virginia. Located in southwest Virginia, NBI has two wholly-owned subsidiaries, the National Bank of Blacksburg (“NBB” or “the Bank”) and National Bankshares Financial Services, Inc. (“NBFS”). NBB, which does business as National Bank from twenty-six office locations, is a community bank. NBB is the source of nearly all of the Company’s revenue. NBFS does business as National Bankshares Investment Services and National Bankshares Insurance Services. Income from NBFS is not significant at this time, nor is it expected to be so in the near future.

NBI common stock is listed on the NASDAQ Capital Market and is traded under the symbol “NKSH.” National Bankshares, Inc. has been included in the Russell Investments Russell 3000 and Russell 2000 Indexes since September 29, 2009.

 

Lending

 

NBB is community-oriented and offers a full range of retail and commercial banking services to individuals, small and mid-sized businesses, non-profits and local governments. Loan types include commercial and agricultural, commercial real estate, construction for commercial and residential properties, residential real estate, home equity and various consumer loan products. Of primary consideration in the Bank’s decision to extend credit is the repayment ability of the borrowers and (if secured) the collateral value in relation to the principal balance. Collateral value lowers risk and may be used as a secondary source of repayment. The credit decision is supported by documentation appropriate to the type of loan, including current financial information, income verification or cash flow analysis, tax returns, credit reports, collateral information, guarantor verification, title reports, appraisals (where appropriate), and other documents. A discussion of underwriting policies and procedures specific to the major loan products follows.

Commercial and agricultural loans primarily finance equipment acquisition, expansion, working capital, and other general business purposes. Because these loans have a higher degree of risk, the Bank generally obtains collateral such as inventories, accounts receivable or equipment, and personal guarantees from the borrowing entity’s principal owners. The Bank’s policy limits lending to 60% of the appraised value for inventory and equipment and up to 70% for accounts receivables less than 90 days old. Credit decisions are based upon an assessment of the financial capacity of the applicant, including the primary borrower’s ability to repay within proposed terms, a risk assessment, financial strength of guarantors and adequacy of collateral. Credit agency reports of individual owners’ credit history supplement the analysis.

Commercial mortgages and construction loans are offered to investors, developers and builders, primarily within the Bank’s market area in southwest Virginia. These loans are secured by first mortgages on real estate. The loan amount is generally limited to 80% of the collateral value, and is individually determined based on the property type, quality, location and sponsorship. Commercial properties include retail centers, apartments, and industrial properties.

Underwriting decisions are based upon an analysis of the economic viability of the collateral and creditworthiness of the borrower. The Bank obtains appraisals from qualified certified independent appraisers to establish the value of collateral properties. The property’s projected net cash flows compared to the debt service requirement (the “debt service coverage ratio” or “DSC” ratio) is required to be 110% or greater, and is computed after deduction for a vacancy factor and property expenses, as appropriate. Borrower cash flow may be supplemented by a personal guarantee from the principal(s) of the borrower, and guarantees from other parties. The Bank requires title insurance, fire, and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect the security interest in the underlying property. In addition, the Bank may employ stress testing techniques to determine repayment ability in a changing rate environment before granting loan approval.

Construction loans are underwritten against projected cash flows from rental income, business and/or personal income from an owner-occupant or the sale of the property to an end-user. Associated risks may be mitigated by requiring fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements.

The Bank offers a variety of first mortgage and junior lien loans secured by 1-4 family residences to individuals within our markets. Credit decisions are primarily based on loan-to-value (“LTV”) ratios, debt-to-income (“DTI”) ratios, liquidity, net worth, and DSC ratios. Income and financial information is obtained from personal tax returns, personal financial statements, credit reports and employment documentation. A maximum LTV ratio of 80% is generally required, although higher levels are permitted. The debt-to-income ratio is limited to 43% of gross income.

Consumer real estate mortgages may have fixed interest rates for the entire term of the loan or variable interest rates subject to change after the first, third, or fifth year. Variable rates are based on the weekly average yield of United States Treasury Securities and are underwritten at fully-indexed rates. We do not offer consumer real estate interest-only loans, sub-prime loans, or any variation on sub-prime lending including hybrid loans and payment option ARMs, or any product with negative amortization. Sub-prime loans involve extending credit to borrowers who exhibit characteristics indicating a significantly higher risk of default than traditional bank lending customers. Hybrid loans are loans that start out as a fixed rate mortgage but after a set number of years automatically adjust to an adjustable rate mortgage. Payment option ARMs usually have adjustable rates, for which borrowers choose their monthly payment of either a full payment, interest only, or a minimum payment which may be lower than the payment required to reduce the balance of the loan in accordance with the originally underwritten amortization.

 

 
38

 

 

Home equity loans are secured primarily by second mortgages on residential property. The underwriting policy for home equity loans generally permits aggregate (the total of all liens secured by the collateral property) borrowing availability up to 80% of the appraised value of the collateral. We offer variable rate home equity loans, with variable rate loans underwritten at fully-indexed rates. Decisions are primarily based on LTV ratios, DTI ratios and liquidity. We do not offer home equity loan products with reduced documentation.

Automobile loans include loans secured by new or used automobiles. Automobile loans are originated either on a direct basis or on an indirect basis through selected dealerships. We require borrowers to maintain collision insurance on automobiles securing consumer loans. Our procedures for underwriting automobile loans include an assessment of an applicant’s overall financial capacity, including credit history and the ability to meet existing obligations and payments on the proposed loan. Although an applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount.

 

Performance Summary

 

The following table presents the Company’s key performance ratios for the three and nine months ended September 30, 2015 and the year ended December 31, 2014. The measures for September 30, 2015 are annualized, except for basic earnings per share and fully diluted earnings per share.

 

   

Three Months Ended

 
   

September 30,

2015

   

September,
2014

 

Return on average assets

    1.46

%

    1.51

%

Return on average equity

    9.70

%

    10.55

%

Basic earnings per share

  $ 0.60     $ 0.61  

Fully diluted earnings per share

  $ 0.60     $ 0.61  

Net interest margin (1)

    3.89

%

    3.98

%

Noninterest margin (2)

    1.40

%

    1.37

%

 

 

(1)

Net interest margin: Year-to-date tax-equivalent net interest income divided by year-to-date average earning assets.

 

(2)

Noninterest margin: Noninterest expense (excluding the provision for bad debts and income taxes) less noninterest income (excluding securities gains and losses) divided by average year-to-date assets.

 

The annualized return on average assets declined 5 basis points for the three months ended September 30, 2015, compared with the three months ended September 30, 2014. The annualized return on average equity decreased 85 basis points for the same period.

The annualized net interest margin was 3.89% for the three months ended September 30, 2015, down 9 basis points from the 3.98% reported for the three months ended September 30, 2014. The primary factor driving the decrease in the net interest margin was the declining yield on earning assets offset by a smaller decline in the cost to fund earning assets.

The annualized noninterest margin increased 3 basis points from the three months ended September 30, 2014. Please refer to the discussion under noninterest expense for further information.

 

 
39

 
 
   

Nine Months Ended September 30,

2015

   

Twelve Months Ended

December 31,
2014

 

Return on average assets

    1.43

%

    1.51

%

Return on average equity

    9.60

%

    10.72

%

Basic earnings per share

  $ 1.77     $ 2.43  

Fully diluted earnings per share

  $ 1.76     $ 2.43  

Net interest margin (1)

    3.90

%

    4.01

%

Noninterest margin (2)

    1.44

%

    1.38

%

 

 

(1)

Net interest margin: Year-to-date tax-equivalent net interest income divided by year-to-date average earning assets.

 

(2)

Noninterest margin: Noninterest expense (excluding the provision for bad debts and income taxes) less noninterest income (excluding securities gains and losses) divided by average year-to-date assets.

 

The annualized return on average assets declined 8 basis points for the nine months ended September 30, 2015, compared with the year ended December 31, 2014. The annualized return on average equity decreased 112 basis points for the same period.

The annualized net interest margin was 3.90% for the nine months ended September 30, 2015, down 11 basis points from the 4.01% reported for the year ended December 31, 2014. As with the three-month periods ended September 30, 2015 and September 30, 2014, the primary factor driving the decrease in the net interest margin was the declining yield on earning assets offset by a smaller decline in the cost to fund earning assets.

The annualized noninterest margin increased 6 basis points from the year ended December 31, 2014. Please refer to the discussion under noninterest expense for further information.

 

Growth

 

NBI’s key growth indicators are shown in the following table.

 

   

September 30,

2015

   

December 31,

2014

   

Percent

Change

 

Interest-bearing deposits

  $ 90,295     $ 102,548       (11.95

)%

Securities, at carrying value

    367,005       385,385       (4.77

)%

Loans, net

    617,638       597,203       3.42

%

Deposits

    962,530       982,428       (2.03

)%

Total assets

    1,144,125       1,154,731       (0.92

)%

 

 

Asset Quality

 

Key indicators of the Company’s asset quality are presented in the following table.

 

   

September 30,

2015

   

September 30,

2014

   

December 31,

2014

 

Nonperforming loans

  $ 8,988     $ 7,726     $ 9,287  

Loans past due 90 days or more, and still accruing

    47       485       207  

Other real estate owned

    4,194       5,145       4,744  

Allowance for loan losses to loans

    1.30

%

    1.35

%

    1.36

%

Net charge-off ratio

    0.19

%

    0.31

%

    0.27

%

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

    2.09

%

    2.14

%

    2.30

%

Ratio of allowance for loan losses to nonperforming loans

    90.31

%

    103.95

%

    88.97

%

 

 
40

 

 

The Company’s risk analysis determined an allowance for loan losses of $8,117 at September 30, 2015, a decrease from $8,263 at December 31, 2014 and an increase from $8,031 at September 30, 2014. The provision for the nine months ended September 30, 2015 was $734, a decline from $1,160 for the same period in 2014. The ratio of allowance for loan losses to loans is 1.30% as of September 30, 2015, compared with 1.36% December 31, 2014 and 1.35% at September 30, 2014. The decline in the ratio of the allowance for loan losses to loans was primarily driven by improvements in the net charge-off ratio, loans past due 90 days or more and still accruing, nonaccrual loans and criticized loans, as well as improvements in certain economic factors. The improvements resulted in a positive effect on the ratio of the allowance for loan losses to total loans, partially offset by an increase in loans past due 30-89 days and a decline in certain economic factors.

Asset quality indicators that improved from December 31, 2014 include the net charge-off ratio, the percentage of loans 90 days past due, the percentage of nonaccrual loans and the level of criticized loans. The net charge-off percentage improved from 0.27% for the year ended December 31, 2014 to 0.19% for September 30, 2015. The percentage of loans 90 days past due improved from 0.03% at December 31, 2014 and 0.08% at September 30, 2014 to 0.01% at September 30, 2015. Nonaccrual loans as a percentage of total loans improved from 1.53% at December 31, 2014 to 1.44% at September 30, 2015. Criticized loans as a percentage of total loans decreased to 4.49% at September 30, 2015, compared with 5.01% at December 31, 2014. These improvements were slightly offset by a small increase in the level of loans past due 30-89 days, from 0.40% of loans at December 31, 2014 to 0.42% of loans at September 30, 2015.

Economic factors were analyzed to determine their impact on the credit risk of the loan portfolio. Within the Company’s market area, inventory of new and existing homes and the unemployment rate indicated a slight improvement, while personal and business bankruptcy rates worsened. Other factors including competition, legal and regulatory environments, residential vacancy rate and the interest rate environment remained at similar levels to the previous quarter.

Asset quality indicators, loss rates and economic factors impact the estimate of the allowance for collectively evaluated loans. Specific allocations for individually-evaluated impaired loans are determined through detailed analysis of cash flow and collateral valuations estimates. The allowance appears to be at a reasonable level based on the credit quality and economic indicators that impact credit risk. The Company continues to monitor risk within the loan portfolio.

 

The following table discloses the other real estate owned in physical possession and in process at reporting date:

 

Other Real Estate Owned(1)

 

September 30,

2015

   

September 30,

2014

   

December 31,

2014

 

Real estate construction

  $ 3,205     $ 3,662     $ 3,599  

Consumer real estate

    357       ---       67  

Commercial real estate

    632       1,483       1,078  

Total other real estate owned

  $ 4,194     $ 5,145     $ 4,744  

Other real estate owned in process

  $ 151     $ 933     $ 1,260  

 

 

(1)

Net of valuation allowance.

 

Other real estate owned decreased $550 from December 31, 2014 and $951 from September 30, 2014. As of September 30, 2015, total residential properties approximating $151 are in various stages of foreclosure and may impact other real estate owned in future quarters. It is not possible to accurately predict the future total of other real estate owned because property sold at foreclosure may be acquired by third parties and NBB’s other real estate owned properties are regularly marketed and sold.

The recent economic recession and slow recovery have contributed to levels of asset quality measures that are higher than normal for the Company. The Company continues to monitor risk levels within the loan portfolio. Please refer to Note 4: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans for further information on collectively-evaluated loans, individually-evaluated impaired loans and the unallocated portion of the allowance for loan losses.

 

Modifications and Troubled Debt Restructurings (“TDRs”)

 

In the ordinary course of business, the Company modifies loan terms on a case-by-case basis, including both consumer and commercial loans, for a variety of reasons. Modifications to consumer loans generally involve short-term deferrals to accommodate specific, temporary circumstances. The Company may grant extensions to borrowers who have demonstrated a willingness and ability to repay their loan but who are dealing with the consequences of a specific unforeseen temporary hardship.

An extension defers monthly payments and requires a balloon payment at the original contractual maturity. Where the temporary event is not expected to impact a borrower’s ability to repay the debt, and where the Company expects to collect all amounts due including interest accrued at the contractual interest rate for the period of delay at contractual maturity, the modification is not designated a TDR.

 

 
41

 

 

Modifications to commercial loans may include, but are not limited to, changes in interest rate, maturity, amortization and financial covenants. In the original underwriting, loan terms are established that represent the then-current and projected financial condition of the borrower. If the modified terms are consistent with competitive market conditions and are representative of terms the borrower could otherwise obtain in the open market, the modified loan is not categorized as a TDR.     

The Company tracks modifications to assist in identifying troubled debt restructurings. The majority of modifications granted during the first nine months of 2015 and 2014 were granted for competitive reasons and did not constitute troubled debt restructurings. A description of modifications that did not result in troubled debt restructurings for the first nine months of 2015 and 2014 follows:

 

Nine Months Ended September 30, 2015

 

Modifications To Borrowers Not Experiencing Financial Difficulty

 

Number of Loans Modified

   

Total Amount Modified

(in thousands)

 

Rate reductions for competitive purposes

    87     $ 53,694  

Payment extensions for less than 3 months

    94       2,888  

Maturity date extensions of more than 3 months and up to 6 months

    231       26,262  

Maturity date extensions of more than 6 months and up to 12 months

    264       12,684  

Maturity date extensions of more than 12 months

    3       285  

Advances on non-revolving loans or capitalization

    2       1,076  

Change in amortization term or method

    11       2,290  

Renewal of expired Home Equity Line of Credit loans for additional 10 years

    31       745  

Renewal of single-payment notes

    228       4,393  

Total modifications that do not constitute TDRs

    951     $ 104,317  

 

 

Nine Months Ended September 30, 2014

 

Modifications To Borrowers Not Experiencing Financial Difficulty

 

Number of Loans Modified

   

Total Amount Modified

(in thousands)

 

Rate reductions for competitive purposes

    57     $ 22,206  

Payment extensions for less than 3 months

    166       4,546  

Maturity date extensions of more than 3 months and up to 6 months

    246       69,849  

Maturity date extensions of more than 6 months and up to 12 months

    293       12,369  

Maturity date extensions of more than 12 months

    17       4,716  

Change in amortization term or method

    39       7,866  

Renewal of expired Home Equity Line of Credit loans for additional 10 years

    36       495  

Renewal of single-payment notes

    291       5,923  

Total modifications that do not constitute TDRs

    1,145     $ 127,970  

 

Modifications in which the borrower is experiencing financial difficulty and in which the Company makes a concession to the original contractual loan terms are designated troubled debt restructurings.

Modifications of loan terms to borrowers experiencing financial difficulty are made in an attempt to protect as much of the Company’s investment in the loan as possible. The determination of whether a modification should be accounted for as a TDR requires significant judgment after consideration of all facts and circumstances surrounding the transaction.

The Company recognizes that the current economy, elevated levels of unemployment and depressed real estate values have resulted in financial difficulties for some customers. The Company has restructured loan terms for certain qualified financially distressed borrowers who have agreed to work in good faith and have demonstrated the ability to make the restructured payments in order to avoid a foreclosure. All TDR loans are individually evaluated for impairment for purposes of determining the allowance for loan losses. TDR loans that do not demonstrate current payments for at least six months are maintained as nonaccrual until the borrower demonstrates sustained repayment history under the restructured terms and continued repayment is not in doubt. Otherwise, interest income is recognized using a cost recovery method.

 

 
42

 

 

The Company’s TDRs were $11,861 at September 30, 2015, an increase from $11,328 at December 31, 2014. Accruing TDR loans amounted to $6,080 at September 30, 2015 and $6,040 at December 31, 2014. TDRs with a current payment history with at least six months may accrue interest.

 

   

TDR Status as of September 30, 2015

 
           

Accruing

         
   

Total TDR Loans

   

Current

   

30-89 Days
Past Due

   

90+ Days

Past Due

   

Nonaccrual

 

Consumer real estate

  $ 973     $ 973     $ ---     $ ---     $ ---  

Commercial real estate

    10,874       5,093       ---       ---       5,781  

Commercial non real estate

    14       14       ---       ---       ---  

Total TDR Loans

  $ 11,861     $ 6,080     $ ---     $ ---     $ 5,781  

 

   

TDR Status as of December 31, 2014

 
           

Accruing

         
   

Total TDR Loans

   

Current

   

30-89 Days
Past Due

   

90+ Days

Past Due

   

Nonaccrual

 

Consumer real estate

  $ 819     $ 786     $ ---     $ 33     $ ---  

Commercial real estate

    10,480       5,192       ---       ---       5,288  

Commercial non real estate

    29       29       ---       ---       ---  

Total TDR Loans

  $ 11,328     $ 6,007     $ ---     $ 33     $ 5,288  

 

Restructuring generally results in a loan with either lower payments or a maturity extended beyond that originally required, and is expected to result in a lower risk of loss associated with nonperformance than the pre-modified loan. During the first nine months of 2015, the Company modified in a troubled debt restructure one loan with a post-modification balance of $907. During the first nine months of 2014, the Company modified in troubled debt restructures 2 loans with post-modification balances totaling $2,693. Please refer to Note 4 for information on troubled debt restructurings.

 

 
43

 

 

 

Net Interest Income

 

The net interest income analysis for the three and nine months ended September 30, 2015 and 2014 follows:

 

   

Three Months Ended

 
   

September 30, 2015

   

September 30, 2014

 
   


Average
Balance

   



Interest

   

Average
Yield/
Rate

   


Average
Balance

   



Interest

   

Average
Yield/
Rate

 

Interest-earning assets:

                                               

Loans, net (1)(2)(3)(4)

  $ 627,734     $ 7,855       4.96

%

  $ 592,724     $ 7,861       5.26

%

Taxable securities (5)

    229,887       1,678       2.90

%

    220,090       1,718       3.10

%

Nontaxable securities (1)(5)(6)

    147,300       2,095       5.64

%

    155,420       2,223       5.67

%

Interest-bearing deposits

    84,882       54       0.25

%

    100,349       64       0.25

%

Total interest-earning assets

  $ 1,089,803     $ 11,682       4.25

%

  $ 1,068,583     $ 11,866       4.41

%

Interest-bearing liabilities:

                                               

Interest-bearing demand deposits

  $ 518,881     $ 699       0.53

%

  $ 501,995     $ 778       0.61

%

Savings deposits

    86,701       9       0.04

%

    79,001       8       0.04

%

Time deposits

    200,073       301       0.60

%

    227,079       361       0.63

%

Total interest-bearing liabilities

  $ 805,655     $ 1,009       0.50

%

  $ 808,075     $ 1,147       0.56

%

Net interest income and interest rate spread

          $ 10,673       3.75

%

          $ 10,719       3.85

%

Net yield on average interest-earning assets

                    3.89

%

                    3.98

%

 

 

(1)

Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a Federal income tax rate of 35% in the nine-month periods presented.

 

(2)

Included in interest income are loan fees of $117 and $111 for the three months ended September 30, 2015 and 2014, respectively.

 

(3)

Nonaccrual loans are included in average balances for yield computations.

 

(4)

Includes mortgage loans held for sale.

 

(5)

Daily averages are shown at amortized cost.

 

(6)

Includes restricted stock.

 

 
44

 

 

   

Nine Months Ended

 
   

September 30, 2015

   

September 30, 2014

 
   


Average
Balance

   



Interest

   

Average
Yield/
Rate

   


Average
Balance

   



Interest

   

Average
Yield/
Rate

 

Interest-earning assets:

                                               

Loans, net (1)(2)(3)(4)

  $ 619,142     $ 23,387       5.05

%

  $ 591,995     $ 23,807       5.38

%

Taxable securities (5)

    234,303       5,124       2.92

%

    213,238       5,068       3.18

%

Nontaxable securities (1)(5)(6)

    148,463       6,344       5.71

%

    158,890       6,828       5.75

%

Interest-bearing deposits

    91,791       173       0.25

%

    101,908       193       0.25

%

Total interest-earning assets

  $ 1,093,699     $ 35,028       4.28

%

  $ 1,066,031     $ 35,896       4.50

%

Interest-bearing liabilities:

                                               

Interest-bearing demand deposits

  $ 522,300     $ 2,178       0.56

%

  $ 499,064     $ 2,598       0.70

%

Savings deposits

    85,366       26       0.04

%

    78,013       26       0.04

%

Time deposits

    207,134       943       0.61

%

    233,731       1,133       0.65

%

Total interest-bearing liabilities

  $ 814,800     $ 3,147       0.52

%

  $ 810,808     $ 3,757       0.62

%

Net interest income and interest rate spread

          $ 31,881       3.76

%

          $ 32,139       3.88

%

Net yield on average interest-earning assets

                    3.90

%

                    4.03

%

 

 

(1)

Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a Federal income tax rate of 35% in the nine-month periods presented.

 

(2)

Included in interest income are loan fees of $353 and $310 for the nine months ended September 30, 2015 and 2014, respectively.

 

(3)

Nonaccrual loans are included in average balances for yield computations.

 

(4)

Includes mortgage loans held for sale.

 

(5)

Daily averages are shown at amortized cost.

 

(6)

Includes restricted stock.

 

The net interest margin decreased 9 basis points for the three-month period and 13 basis points for the nine-month period ended September 30, 2015, when compared with the three and nine month periods ended September 30, 2014, respectively. The decrease in interest rate spread was driven by a decline in the yield on earning assets of 16 basis points for the three-month period and 22 basis points for the nine-month period, offset by a decline in the cost of interest-bearing liabilities of 6 basis points for the three-month period and 10 basis points for the nine-month period.

Loans and securities experienced a decline in yields. The 30 basis point decline on loans for the three-month period and 33 basis point decline for the nine-month period stemmed from contractual repricing terms and the renegotiation of loan interest rates in response to competition. The yield on taxable securities was 20 basis points lower for the three months ended September 30, 2015 and 26 basis points lower for the nine months ended September 30, 2015, when compared with the same periods in 2014. The yield on nontaxable securities declined 3 basis points over the three-month period and 4 basis points over the 9 month period ended September 30, 2015. The market yield for securities of a comparable term has declined over the past year, causing matured and called bonds to be replaced with lower yielding investments.

For the three-month and nine-month periods ended September 30, 2015, the decline in the cost of interest-bearing liabilities came mainly from a 3 and 4 basis point, respectively, reduction in the cost of time deposits and an 8 and 14 basis point, respectively, reduction in interest-bearing demand deposits when compared with the three-month and nine-month periods ended September 30, 2014. The Company’s yield on earning assets and cost of funds are largely dependent on the interest rate environment.

 

 
45

 

 

Provision and Allowance for Loan Losses

 

The provision for loan losses for the three-month and nine- month periods ended September 30, 2015 was $178 and $734, respectively, compared with $356 and $1,160 for the three and nine months, respectively, ended September 30, 2014. The provision for loan losses is the result of a detailed analysis to estimate an adequate allowance for loan losses. The ratio of the allowance for loan losses to total loans at September 30, 2015 was 1.30%, which compares to 1.36% at December 31, 2014. The net charge-off ratio was 0.19% for the nine months ended September 30, 2015 and 0.27% for the year ended December 31, 2014. See “Asset Quality” for additional information.

 

Noninterest Income

 

   

Three Months Ended

         
   

September 30, 2015

   

September 30, 2014

   

Percent Change

 

Service charges on deposits

  $ 571     $ 634       (9.94

)%

Other service charges and fees

    45       42       7.14

%

Credit card fees

    972       929       4.63

%

Trust fees

    314       296       6.08

%

BOLI income

    151       153       (1.31

)%

Other income

    234       200       17.00

%

Realized securities gains, net

    2       4       (50.00

)%

 

   

Nine Months Ended

         
   

September 30, 2015

   

September 30, 2014

   

Percent Change

 

Service charges on deposits

  $ 1,676     $ 1,833       (8.57

)%

Other service charges and fees

    164       145       13.10

%

Credit card fees

    2,843       2,687       5.81

%

Trust fees

    902       921       (2.06

)%

BOLI income

    451       462       (2.38

)%

Other income

    977       783       24.78

%

Realized securities gains, net

    5       5       ---  

 

Service charges on deposit accounts for the three-month and nine-month periods ended September 30, 2015 decreased when compared with the same periods in 2014, while other service charges and fees increased. Other service charges and fees includes charges for official checks, income from the sale of checks to customers, safe deposit box rent, fees for letters of credit and the income earned from commissions on the sale of credit life, accident and health insurance. Service charges on deposits and other service charges and fees are subject to normal business fluctuation and are not due to changes in fee structure.

Credit card fees for the three-month and nine-month periods ended September 30, 2015 increased 4.63% and 5.81%, respectively, when compared with the same periods last year. The increase stemmed from a change in vendors that resulted in more favorable fee income, as well as a higher volume of merchant transactions and credit card fees.

Income from trust fees increased $18 or 6.08% for the three months ended September 30, 2015, compared with the three months ended September 30, 2014. For the nine-month periods ended September 30, 2015 and 2014, trust income declined $19 or 2.06%. Trust income varies depending on the total assets held in trust accounts, the type of accounts under management and financial market conditions.

BOLI income decreased slightly for both the three-month and nine-month periods ended September 30, 2015, when compared to the same periods in 2014.

Other income includes fees on the sale of secondary-market mortgages, net gains from the sales of fixed assets, revenue from investment and insurance sales and other smaller miscellaneous components. Other income for the three-month and nine-month periods ended September 30, 2015 increased $34 and $194, respectively, when compared with the same periods ended September 30, 2014. Fees on the sale of secondary-market mortgages increased from the three-month and nine-month periods ended September 30, 2014 by $45 and $80, respectively. Other income in 2015 also benefitted from a vendor signing incentive. These areas fluctuate with market conditions and because of competitive factors.

Net realized securities gains for the three and nine months ended September 30, 2015 were $2 and $5, respectively, compared with a gains of $4 and $5 for the same periods in 2014. Net realized securities gains and losses are market driven and have resulted from calls and sales of securities.

 

 
46

 

 

Noninterest Expense

 

   

Three Months Ended

         
   

September 30, 2015

   

September 30, 2014

   

Percent Change

 

Salaries and employee benefits

  $ 3,149     $ 2,927       7.58

%

Occupancy, furniture and fixtures

    436       403       8.19

%

Data processing and ATM

    384       429       (10.49

)%

FDIC assessment

    138       147       (6.12

)%

Credit card processing

    701       673       4.16

%

Intangibles amortization

    269       269       ---  

Net costs of other real estate owned

    52       98       (46.94

)%

Franchise taxes

    329       307       7.17

%

Other operating expenses

    864       862       0.23

%

 

   

Nine Months Ended

         
   

September 30, 2015

   

September 30, 2014

   

Percent Change

 

Salaries and employee benefits

  $ 9,433     $ 8,890       6.11

%

Occupancy, furniture and fixtures

    1,296       1,250       3.68

%

Data processing and ATM

    1,230       1,189       3.45

%

FDIC assessment

    408       411       (0.73

)%

Credit card processing

    1,986       1,887       5.25

%

Intangibles amortization

    807       807       ---  

Net costs of other real estate owned

    569       259       119.69

%

Franchise taxes

    959       874       9.73

%

Other operating expenses

    2,690       2,747       (2.07

)%

 

Total noninterest expense increased $207 or 3.39% when the three months ended September 30, 2015 are compared to the same period of 2014, and increased $1,064 or 5.81% when the nine month periods ended September 30, 2015 and September 30, 2014 are compared. For the three-month and nine-month periods, salaries and employee benefits accounted for the largest increase, rising $222 or 7.58% when the three-month periods are compared, and $543 or 6.11% when the nine-month periods are compared. An increase of $310 or 119.69% in net costs of other real estate owned also contributed to the rise in noninterest expense for the nine-months ended September 30, 2015, compared with the nine months ended September 30, 2014. Changing conditions in the real estate market and the resulting change in property appraisals caused the OREO write downs. The cost of other real estate owned includes maintenance costs as well as valuation write-downs and gains and losses on the sale of properties. The expense varies with the number of properties, the maintenance required and changes in the real estate market.

Noninterest expense categories that increased from 2014 include occupancy, furniture and fixtures, credit card processing, and franchise taxes. Occupancy, furniture and fixtures expense for the three and nine months ended September 30, 2015 increased $33 and $46, respectively, as the result of normal business expenditures. Credit card processing costs increased $28 and $99 for the three and nine months ended September 30, 2015 when compared with the same periods of 2014. This expense is driven by volume and other factors and is subject to a degree of variability. Franchise tax expense increased $22 for the three months ended September 30, 2015 and $85 for the nine-month period ended September 31, 2015, compared with the same periods of 2014. Franchise tax is based on capital levels of the subsidiary bank.

Data processing and ATM expense for the three-month period ended September 30, 2015 declined $45 when compared with the three months ended September 30, 2014, but increased $41 when the nine-month periods ended September 30, 2015 and 2014 are compared. The expense for intangibles amortization is related to acquisitions. There were no acquisitions in the past year, with no change in expense between the three and nine month periods ended September 30, 2015 and September 30, 2014.

FDIC assessment expense for the three months ended September 30, 2015 declined $9 when the three-months ended September 2015 are compared with the same period of 2014. When the nine month periods ended September 30, 2015 and 2014 are compared, the expense declined $3 or 0.73%. The calculation is based on total assets and incorporates risk-based factors to determine the amount of the assessment.

Other operating expense increased slightly for the three month period ended September 30, 2015, compared with the same period of 2014. For the nine months ended September 30, 2015, other operating expense decreased $57 or 2.07% when compared with the same period of 2014. The category of other operating expenses includes noninterest expense items such as professional services, stationery and supplies, telephone costs, postage, charitable donations and other expenses.

 

 
47

 

 

Balance Sheet

 

Year-to-date daily averages for the major balance sheet categories are as follows:

 

Assets

 

September 30, 2015

   

December 31, 2014

   

Percent Change

 

Interest-bearing deposits

  $ 91,791     $ 103,320       (11.16

)%

Securities available for sale and restricted stock

    223,941       198,122       13.03

%

Securities held to maturity

    156,678       162,906       (3.82

)%

Loans, net

    610,135       592,944       2.90

%

Total assets

    1,150,026       1,120,848       2.60

%

                         

Liabilities and stockholders’ equity

                       

Noninterest-bearing demand deposits

  $ 157,304     $ 146,532       7.35

%

Interest-bearing demand deposits

    522,300       501,956       4.05

%

Savings deposits

    85,366       78,778       8.36

%

Time deposits

    207,134       230,418       (10.11

)%

Stockholders’ equity

    170,883       157,832       8.27

%

 

Securities

 

Management regularly monitors the quality of the securities portfolio, and management closely follows the uncertainty in the economy and the volatility of financial markets.  The value of individual securities will be written down if the decline in fair value is considered to be other than temporary based upon the totality of circumstances. See Note 5: Securities for additional information.

 

Loans

 

   

September 30, 2015

   

December 31, 2014

   

Percent Change

 

Real estate construction loans

  $ 44,886     $ 45,562       (1.48

)%

Consumer real estate loans

    144,990       147,039       (1.39

)%

Commercial real estate loans

    315,008       310,762       1.37

%

Commercial non real estate loans

    39,255       33,413       17.48

%

Public sector and IDA

    52,330       41,361       26.52

%

Consumer non real estate

    30,140       28,182       6.95

%

Less: unearned income and deferred fees

    (854

)

    (853

)

    0.12

%

Loans, net of unearned income

  $ 625,755     $ 605,466       3.35

%

 

The Company’s loans net of unearned income increased by $20,289 or 3.35% from $605,466 at December 31, 2014 to $625,755 at September 30, 2015. Primary drivers of growth were Public Sector and IDA loans which increased $10,969, commercial real estate which increased $4,246 and commercial loans which increased $5,842.

The Company does not now, nor has it ever, offered certain types of higher-risk loans such as subprime loans, option ARM products, reverse mortgages or loans with initial teaser rates.

 

Deposits

 

   

September 30, 2015

   

December 31, 2014

   

Percent Change

 

Noninterest-bearing demand deposits

  $ 163,877     $ 150,744       8.71

%

Interest-bearing demand deposits

    514,823       533,641       (3.53

)%

Saving deposits

    86,659       81,297       6.60

%

Time deposits

    197,171       216,746       (9.03

)%

Total deposits

  $ 962,530     $ 982,428       (2.03

)%

 

 
48

 

 

Total deposits decreased $19,898 or 2.03% from $982,428 at December 31, 2014 to $962,530 at September 30, 2015. Increases in noninterest-bearing demand deposits totaled $13,133 and increases in savings deposits totaled $5,362. These increases were offset by a decline in time deposits of $19,575 and a decline in interest-bearing demand deposits of $18,818, when September 30, 2015 is compared with December 31, 2014. Historically low rates have caused a migration from time deposits to other types of deposits. As longer-term certificates of deposit mature, customers appear unwilling to commit their funds for extended periods at low interest rates. Time deposits do not include any brokered deposits.

 

Liquidity

 

Liquidity measures the Company’s ability to meet its financial commitments at a reasonable cost. Demands on the Company’s liquidity include funding additional loan demand and accepting withdrawals of existing deposits. The Company has diverse sources of liquidity, including customer and purchased deposits, customer repayments of loan principal and interest, sales, calls and maturities of securities, Federal Reserve discount window borrowing, short-term borrowing, and Federal Home Loan Bank (“FHLB”) advances. At September 30, 2015, the bank did not have purchased deposits, discount window borrowings, short-term borrowings, or FHLB advances. To assure that short-term borrowing is readily available, the Company tests accessibility annually.

Liquidity from securities is restricted by accounting and business considerations. The securities portfolio is segregated into available-for-sale and held-to-maturity. The Company considers only securities designated available-for-sale for typical liquidity needs. Further, portions of the securities portfolio are pledged to meet state requirements for public funds deposits. Discount window borrowings also require pledged securities. Increased or decreased liquidity from public funds deposits or discount window borrowings results in increased or decreased liquidity from pledging requirements. The Company monitors public funds pledging requirements and the amount of unpledged available-for-sale securities that are accessible for liquidity needs.

Regulatory capital levels determine the Company’s ability to utilize purchased deposits and the Federal Reserve discount window for liquidity needs. At September 30, 2015, the Company is considered well capitalized and does not have any restrictions on purchased deposits or the Federal Reserve discount window.

The Company monitors factors that may increase its liquidity needs. Some of these factors include deposit trends, large depositor activity, maturing deposit promotions, interest rate sensitivity, maturity and repricing timing gaps between assets and liabilities, the level of unfunded loan commitments and loan growth. At September 30, 2015, the Company’s liquidity is sufficient to meet projected trends in these areas.

To monitor and estimate liquidity levels, the Company performs stress testing under varying assumptions on credit sensitive liabilities. It also tests the sources and amounts of balance sheet and external liquidity available to replace outflows. The Company’s Contingency Funding Plan sets forth avenues for rectifying liquidity shortfalls. At September 30, 2015, the analysis indicated adequate liquidity under the tested scenarios.

The Company utilizes several other strategies to maintain sufficient liquidity. Loan and deposit growth are managed to keep the loan to deposit ratio within the Company’s own policy range of 65% to 75%. At September 30, 2015, the loan to deposit ratio was 65.01%, within the Company’s internal target. The investment strategy takes into consideration the term of the investment, and securities in the available for sale portfolio are laddered to account for projected funding needs.

 

 
49

 

 

 

Capital Resources

 

Total stockholders’ equity at September 30, 2015 was $174,392, an increase of $8,089 or 4.86%, from the $166,303 at December 31, 2014.

Risk based capital ratios are shown in the following table.     

 

   

Ratios at

September 30, 2015

   

Regulatory Capital Minimum Ratios

 

Common Equity Tier I Capital Ratio

    24.38

%

    4.50

%

Tier I Capital Ratio

    24.38

%

    6.00

%

Total Capital Ratio

    25.50

%

    8.00

%

Leverage Ratio

    15.44

%

    4.00

%

 

Effective January 1, 2015 the risk-based capital ratios are calculated in compliance with Federal Reserve rules based on Basel III capital requirements. The Company’s ratios are well above the required minimums at September 30, 2015.

Beginning January 1, 2016, a capital conservation buffer of .625% will take effect. The capital conservation buffer will be gradually increased through January 1, 2019 to 2.5%. Banks will be required to maintain capital levels that meet the required minimum plus the capital conservation buffer in order to make distributions or discretionary bonus payments.

 

Off-Balance Sheet Arrangements

 

In the normal course of business, NBB extends lines of credit and letters of credit to its customers. Depending on their needs, customers may draw upon lines of credit at any time in any amount up to a pre-approved limit. Standby letters of credit are issued for two purposes. Financial letters of credit guarantee payments to facilitate customer purchases. Performance letters of credit guarantee payment if the customer fails to complete a specific obligation.

Historically, the full approved amount of letters and lines of credit has not been drawn at any one time. The Company has developed plans to meet a sudden and substantial funding demand. These plans include accessing a line of credit with a correspondent bank, borrowing from the FHLB, selling available for sale investments or loans and raising additional deposits.

The Company sells mortgages on the secondary market for which there are recourse agreements should the borrower default. Mortgages must meet strict underwriting and documentation requirements for the sale to be completed. The Company has determined that its risk in this area is not significant because of a low volume of secondary market mortgage loans and high underwriting standards. The Company estimates a potential loss reserve for recourse provisions that is not material as of September 30, 2015. To date, no recourse provisions have been invoked. If funds were needed, the Company would access the same sources as noted above for funding lines and letters of credit.

There were no material changes in off-balance sheet arrangements during the nine months ended September 30, 2015, except for normal seasonal fluctuations in the total of mortgage loan commitments.

 

Contractual Obligations

 

The Company had no capital lease or purchase obligations and no long-term debt at September 30, 2015. Operating lease obligations, which are for buildings used in the Company’s day-to-day operations, were not material at the end of the nine months of 2015 and have not changed materially from those which were disclosed in the Company’s 2014 Form 10-K.

 

Item 3.     Quantitative and Qualitative Disclosures About Market Risk

 

The Company considers interest rate risk to be a significant market risk and has systems in place to measure the exposure of net interest income to adverse movement in interest rates. Interest rate shock analyses provide management with an indication of potential economic loss due to future rate changes. There have not been any changes which would significantly alter the results disclosed as of December 31, 2014 in the Company’s 2014 Form 10-K.

 

 
50

 

 

Item 4.  Controls and Procedures

 

The Company’s management evaluated, with the participation of the Company’s principal executive officer and principal financial officer, the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of September 30, 2015 to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the three months ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Because of the inherent limitations in all control systems, the Company believes that no system of controls, no matter how well designed and operated, can provide absolute assurance that all control issues have been detected.

 

 

Part II

Other Information

 

Item 1.    Legal Proceedings

 

There are no pending or threatened legal proceedings to which the Company or any of its subsidiaries is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

 

Item 1A. Risk Factors

 

Please refer to the “Risk Factors” previously disclosed in Item 1A of our 2014 Annual Report on Form 10-K and the factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” in Part I. Item 2 of this Form 10-Q.

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.   Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.          

 

Item 5.   Other Information

 

None.

 

Item 6.     Exhibits

 

See Index of Exhibits.     

 

 
51

 

 

 

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

NATIONAL BANKSHARES, INC.

 

 

 

Date: November 5, 2015

/s/ James G. Rakes

 
 

James G. Rakes
Chairman, President and

Chief Executive Officer

(Principal Executive Officer)

 
     

Date: November 5, 2015

/s/ David K. Skeens

 
 

David K. Skeens
Treasurer and

Chief Financial Officer

(Principal Financial Officer)

(Principal Accounting Officer)

 

 

 
52

 

 

Index of Exhibits

 

Exhibit No.

Description

Page No. in

Sequential System

3(i)

Amended and Restated Articles of Incorporation of National Bankshares, Inc.

(incorporated herein by reference to Exhibit 3.1 of the Form 8K for filed on March 16, 2006)

3(ii)

Amended By-laws of National Bankshares, Inc.

(incorporated herein by reference to the Form 8-K filed on July 9, 2014)

4(i)

Specimen copy of certificate for National Bankshares, Inc. common stock 

(incorporated herein by reference to Exhibit 4(a) of the Annual Report on Form 10K for fiscal year ended December 31, 1993)

*10(i)

National Bankshares, Inc. 1999 Stock Option Plan

(incorporated herein by reference to Exhibit 4.3 of the Form S-8, filed as Registration No. 333-79979 with the Commission on September 4, 1999)

*10(ii)

Executive Employment Agreement dated March 11, 2015, between National Bankshares, Inc. and James G. Rakes

(incorporated herein by reference to Exhibit 10.1 of the Form 8K filed on March 11, 2015)

*10(iii)

Employee Lease Agreement dated August 14, 2002, between National Bankshares, Inc. and The National Bank of Blacksburg

(incorporated herein by reference to Exhibit 10 of Form 10Q for the period ended September 30, 2002)

*10(iv)

Executive Employment Agreement dated March 11, 2015, between National Bankshares, Inc. and F. Brad Denardo

(incorporated herein by reference to Exhibit 10.2 of the Form 8K filed on March 11, 2015)

*10(v)

Salary Continuation Agreement dated February 8, 2006, between The National Bank of Blacksburg and James G. Rakes

(incorporated herein by reference to Exhibit 99 of the Form 8K filed on February 8, 2006)

*10(vi)

Salary Continuation Agreement dated February 8, 2006, between The National Bank of Blacksburg and F. Brad Denardo

(incorporated herein by reference to Exhibit 10(iii)(A) of the Form 8K filed on February 8, 2006)

*10(vii)

Salary Continuation Agreement dated February 8, 2006, between

The National Bank of Blacksburg and David K. Skeens

(incorporated herein by reference to Exhibit 10(iii)(A) of the Form 8K filed on January 25, 2012)

*10(viii)

First Amendment, dated December 19, 2007, to The National Bank of Blacksburg Salary Continuation Agreement for James G. Rakes

(incorporated herein by reference to Exhibit 10(iii)(A) of the Form 8K filed on December 19, 2007)

*10(ix)

First Amendment, dated December 19, 2007, to The National Bank of Blacksburg Salary Continuation Agreement for F. Brad Denardo

(incorporated herein by reference to Exhibit 10(iii)(A) of the Form 8K filed on December 19, 2007)

*10(x)

First Amendment, dated December 19, 2007, to The National Bank of Blacksburg Salary Continuation Agreement for David K. Skeens

(incorporated herein by reference to Exhibit 10(iii)(A) of the Form 8K filed on January 25, 2012)

*10(xi)

Second Amendment, dated June 12, 2008, to The National Bank of Blacksburg Salary Continuation Agreement for F. Brad Denardo

(incorporated herein by reference to Exhibit 10 of the Form 8K filed on June 12, 2008)

 

 
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*10(xiii)

Second Amendment, dated June 12, 2008, to The National Bank of Blacksburg Salary Continuation Agreement for David K. Skeens

(incorporated herein by reference to Exhibit 10.2 of the Form 8K filed on January 25, 2012)

*10(xii)

Second Amendment, dated December 17, 2008, to The National Bank of Blacksburg Salary Continuation Agreement for James G. Rakes

(incorporated herein by reference to Exhibit 10(iii)(A) of the Annual Report on Form 10K for the fiscal year ended December 31, 2008)

*10(xiv)

Third Amendment, dated December 17, 2008, to The National Bank of Blacksburg Salary Continuation Agreement for F. Brad Denardo

(incorporated herein by reference to Exhibit 10(iii)(A) of the Annual Report on Form 10K for the fiscal year ended December 31, 2008)

*10(xv)

Third Amendment, dated January 20, 2012, to The National Bank of Blacksburg Salary Continuation Agreement for David K. Skeens

(incorporated herein by reference to Exhibit 10(iii)(A) of the Form 8K filed on January 25, 2012)

*10(xvi)

Salary Continuation Agreement dated January 20, 2012 between

The National Bank of Blacksburg and Bryson J. Hunter

(incorporated herein by reference to Exhibit 10(iii)(A) of the Form 8K filed on January 25, 2012)

31(i)

Section 906 Certification of Chief Executive Officer

(included herewith)

31(ii)

Section 906 Certification of Chief Financial Officer

(included herewith)

32(i)

18 U.S.C. Section 1350 Certification of Chief Executive Officer

(included herewith)

32(ii)

18 U.S.C. Section 1350 Certification of Chief Financial Officer

(included herewith)

101

The following materials from National Bankshares, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2015 are formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Consolidated Statements of Income for the three and nine month periods ended September 30, 2015 and 2014; (ii) Consolidated Statements of Comprehensive Income for the three and nine month periods ended September 30, 2015 and 2014; (iii)Consolidated Balance Sheets at September 30, 2015 and December 31, 2014; (iv) Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2015; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014; and (vi) Notes to Consolidated Financial Statements.

 

 

 

*     Indicates a management contract or compensatory plan.     

 

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