| ● | technological risks and uncertainties. These forward-looking statements include statements regarding our profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy,developments, 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,”cyber-threats, attacks 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:
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| general economic conditions,
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| the legislative/regulatory climate,
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| 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,
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| unanticipated increases in the level of unemployment in the Company’s trade area,
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| the quality or composition of the loan and/or investment portfolios,
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| demand for loan products,
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| demand for financial services in the Company’s trade area,
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| the real estate market in the Company’s trade area,
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| the Company’s technology initiatives, and
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| applicable accounting principles, policies and guidelines.events,
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| 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.●
| If the national economy or the Company’s market area experience a downturn, it is likely that unemployment will risetechnology initiatives,
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| ● | applicable accounting principles, policies and that other economic indicators will negativelyguidelines, and | | ● | business disruptions and/or 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 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. An economic downturn could have an adverse effect on all financial institutions, including the Company.Cyber Security Risksand Incidents
The Company experienced two intrusions to its digital systems, one in May 2016 and one in January 2017. Hackers and related organized criminal groups obtained unauthorized access to certain customer accounts. The attacks disabled certain systems protections, including limits on the number, amount, and frequency of ATM withdrawals. The attacks resulted in the theft of funds disbursed through ATMs. In the May 2016 attack, hackers accessed customer funds and in the January 2017 intrusion, the hackers artificially inflated account balances and did not access customer funds. The Company notified all affected customers, and restored all funds so that no customer experienced a loss.
The Company retained a nationally recognized firm to investigate and remediate the May 2016 intrusion and to provide the Company with recommendations concerning its systems and procedures, which the Company adopted and implemented. The January 2017 intrusion is still under investigation, and a separate independent nationally recognized firm has been retained to conduct this investigation.
The financial impact of the attacks include the amount of the theft, as well as costs of investigation and remediation and any associated litigation. The theft of funds totaled $570 in the May 2016 attack and $1,838 in the January 2017 attack. The Company has insurance coverage for cyber-attack incidents. The extent to which the insurance will cover the Company’s loss has not yet been determined, due to the ongoing investigation of the January intrusion and the claims process which is underway for both events. The costs of litigation for both attacks and the cost of investigation and remediation for the January 2017 attack cannot yet be reasonablycoronavirus or accurately estimated. As of December 31, 2016, the Company has appropriately accounted for the May 2016 breach.
We rely on a multi-faceted approach to limit the risk and impact of unauthorized access to customer accounts and to information relevant to customer accounts. We use digital technology safeguards, internal policies and procedures, and employee training to reduce the exposure of our systems to cyber-intrusions. However, it is not possible to fully eliminate exposure. The potential for financial and reputational losses due to cyber-breaches is increased by the possibility of human error, unknown system susceptibilities, and the rising sophistication of cyber-criminals to attack systems, disable safeguards and gain access to accounts and related information. The company has adopted new protections and invested additional resources to increase its security.
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. Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change.
Allowance for Loan Losses
The allowance for loan losses is an estimate of probable losses inherent 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 and that are not considered uncollectible, 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 and are not 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.
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. Portfolio segments are further divided into 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 by averaging loss rates over the most recent 8 quarters. The look-back period of 8pandemic diseases.
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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. Non-GAAP Financial Measures The Company prepares financial information in accordance with accounting principles generally accepted in the United States (“GAAP”), with the exception of certain financial measures which are computed under a basis other than GAAP (“non-GAAP”). These measures include the efficiency ratio, the net interest margin and the noninterest margin. Management believes such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP. The efficiency ratio is computed by dividing noninterest expense, excluding certain items management deems unusual or non-recurring, by the sum of net interest income on a tax-equivalent basis and noninterest income, excluding certain items management deems unusual or non-recurring. The tax rate used to calculate fully taxable equivalent basis is 21% in 2019 and 2018 and 35% in 2017. This is a non-GAAP financial measure that the Company believes provides investors with important information regarding operational efficiency. The components of the efficiency ratio calculation are summarized in the following table. $ in thousands | | Year ended December 31, | | | | 2019 | | 2018 | | 2017 | Noninterest expense | | $ | 25,754 | | | $ | 27,276 | | | $ | 24,229 | | Less: write-down of insurance receivable | | | --- | | | | (2,010 | ) | | | --- | | Noninterest expense for ratio calculation | | $ | 25,754 | | | $ | 25,266 | | | $ | 24,229 | | | | | | | | | | | | | | | | Taxable-equivalent net interest income | | $ | 39,056 | | | $ | 39,764 | | | $ | 40,432 | | Noninterest income | | | 8,790 | | | | 7,729 | | | | 7,636 | | Less: recovery of insurance receivable | | | (538 | ) | | | --- | | | | --- | | | Less: realized securities gains | | | (566 | ) | | | (17 | ) | | | (14 | ) | Total income for ratio calculation | | $ | 46,742 | | | $ | 47,476 | | | $ | 48,054 | | | | | | | | | | | | | | | | Efficiency ratio | | | 55.10 | % | | | 53.22 | % | | | 50.42 | % |
The net interest margin is calculated by dividing taxable equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax equivalent net interest income is considered in the calculation of this ratio. Tax equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for 2019 and 2018 is 21% and for 2017 is 35%. The reconciliation of tax equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below. $ in thousands | | Year ended December 31, | | | | 2019 | | 2018 | | 2017 | GAAP measures: | | | | | | | | | | | | | Interest and fees on loans | | $ | 33,869 | | | $ | 31,333 | | | $ | 29,932 | | Interest on interest-bearing deposits | | | 1,523 | | | | 672 | | | | 791 | | Interest and dividends on securities - taxable | | | 6,725 | | | | 6,856 | | | | 5,711 | | Interest on securities - nontaxable | | | 3,030 | | | | 4,363 | | | | 4,826 | | Total interest income | | $ | 45,147 | | | $ | 43,224 | | | $ | 41,260 | | | | | | | | | | | | | | | | Interest on deposits | | $ | 7,380 | | | $ | 4,883 | | | $ | 4,125 | | Interest on borrowings | | | --- | | | | 164 | | | | --- | | Total interest expense | | $ | 7,380 | | | $ | 5,047 | | | $ | 4,125 | | | | | | | | | | | | | | | | Net interest income | | $ | 37,767 | | | $ | 38,177 | | | $ | 37,135 | | | | | | | | | | | | | | | | Non-GAAP measures: | | | | | | | | | | | | | Tax benefit on nontaxable loan income | | $ | 465 | | | $ | 406 | | | $ | 661 | | Tax benefit on nontaxable securities income | | | 824 | | | | 1,181 | | | | 2,636 | | Total tax benefit on nontaxable interest income | | $ | 1,289 | | | $ | 1,587 | | | $ | 3,297 | | Total tax-equivalent net interest income | | $ | 39,056 | | | $ | 39,764 | | | $ | 40,432 | |
The noninterest margin is calculated by dividing noninterest expense (excluding the write-down of insurance receivable) less noninterest income (excluding realized securities gain/loss, net) by average year-to-date assets. The reconciliation of adjusted noninterest income and adjusted noninterest expense, which are not measurements under GAAP, is reflected in the table below. $ in thousands | | Year ended December 31, | | | | 2019 | | 2018 | | 2017 | Noninterest expense under GAAP | | $ | 25,754 | | | $ | 27,276 | | | $ | 24,229 | | Less: write-down of insurance receivable | | | --- | | | | (2,010 | ) | | | --- | | Noninterest expense for ratio calculation, non-GAAP | | $ | 25,754 | | | $ | 25,266 | | | $ | 24,229 | | | | | | | | | | | | | | | | Noninterest income under GAAP | | $ | 8,790 | | | $ | 7,729 | | | $ | 7,636 | | Less: recovery of insurance receivable | | | (538 | ) | | | --- | | | | --- | | Less: realized securities gains, net | | | (566 | ) | | | (17 | ) | | | (14 | ) | Noninterest income for ratio calculation, non-GAAP | | $ | 7,686 | | | $ | 7,712 | | | $ | 7,622 | | | | | | | | | | | | | | | | Net noninterest expense, non-GAAP | | $ | 18,068 | | | $ | 17,554 | | | $ | 16,607 | | | | | | | | | | | | | | | | Average assets | | $ | 1,255,934 | | | $ | 1,251,843 | | | $ | 1,235,755 | | | | | | | | | | | | | | | | Noninterest margin | | | 1.44 | % | | | 1.40 | % | | | 1.34 | % |
Critical Accounting Policies General The Company’s financial statements are prepared in accordance with GAAP. The financial information contained within our statements is, to a significant extent, financial information based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value obtained when earning income, recognizing an expense, recovering an asset or relieving a liability. Although the economics of the Company’s transactions may not change, the timing of events that would impact the transactions could change. Allowance for Loan Losses The allowance for loan losses is an estimate of probable losses inherent 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 (“TDRs”). Impaired loans that are not TDRs with an estimated impairment loss are placed on nonaccrual status. TDRs 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 imminent 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 secured by residential 1-4 family properties with outstanding principal balances greater than $250 are based on an appraisal. Appraisals are also used to value impaired loans secured by commercial real estate with outstanding principal balances greater than $500. Collateral-method impaired loans secured by residential 1-4 family property with outstanding principal balances of $250 or less, or secured by commercial real estate with outstanding principal balances of $500 or less, 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 and are prepared by an independent third-party appraiser who is certified and licensed and who is approved by the Company. Appraisals may incorporate market analysis, comparable sales analysis, cash flow analysis and market data pertinent to the property to determine market value. Internal evaluations are prepared by third party providers 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, 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 twenty-four 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. Impairment losses that are not considered uncollectible or for loans that are not collateral dependent are 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 and are not part of a larger impaired relationship are collectively evaluated. TDRs are impaired loans and are measured for impairment under the same valuation methods as other impaired loans. TDRs are maintained in nonaccrual status until the loan has demonstrated reasonable assurance of repayment with at least six months of consecutive timely payment performance. TDRs may be removed from TDR status, and therefore from individual evaluation, if the restructuring agreement specifies a contractual interest rate that is a market interest rate at the time of restructuring and the loan is in compliance with its modified terms one year after the restructure was completed. Collectively-evaluated loans Non-impaired loans and smaller homogeneous impaired loans that are not TDRs and not part of a larger impaired relationship are grouped by portfolio segments. Portfolio segments are further divided into 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 by averaging loss rates over the most recent eight quarters. The look-back period of eight quarters is 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 that indicate credit quality is “substandard”, “doubtful” or “loss”. Net charge-offs in both calculations include charge-offs and recoveries of classified and non-classified loans as well as those associated with impaired loans. Class historical loss rates are applied to collectively-evaluated non-classified loan balances, and classified historical loss rates are applied to collectively-evaluated classified loan balances. 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 allocations for criticized loans within each class and for loans designated high risk. Criticized loans include classified loans as well as loans rated “special mention”. Loans rated special mention indicate weakened credit quality but to a lesser degree than classified loans. High risk loans are defined as junior lien mortgages, loans with high loan-to-value ratios and loans with terms that require interest only 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 December 31, 2019 considered market and portfolio conditions during 2019 as well as net charge-offs in the eight quarters prior to the quarter ended December 31, 2019. If the economy experiences a downturn, the ultimate amount of loss could vary from that estimate. For additional discussion of the allowance, see Note 5 to the consolidated financial statements and “Asset Quality,” and “Provision and Allowance for Loan Losses.” Goodwill 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 using data from September 30, 2019. 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. 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 December 31, 2016 considered market and portfolio conditions during 2016 as well as the levels of delinquencies and net charge-offs in the eight quarters prior to the quarter ended December 31, 2016. If the economy experiences a downturn, 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 2016. 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.
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.
Other Real Estate Owned (“OREO”) Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at fair value of the property, less estimated disposal costs, if any. Any excess of cost over the fair value less costs to sell at the time of acquisition is charged to the allowance for loan losses. The fair value is reviewed periodically by management and any write-downs are charged against current earnings. Accounting policy and treatment is consistent with accounting for impaired loans described above. Pension Plan The Company’s actuary determines plan obligations and annual pension expense using a number of key assumptions. Key assumptions may include the discount rate, the estimated return on plan assets and the anticipated rate of compensation increases. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may impact pension assets, liabilities or expense. Other Than Temporary Impairment ("OTTI") of Securities (“OTTI”) Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery, the Company must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment.OTTI. If there is a credit loss, other-than-temporary impairmentOTTI exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income (loss). For equity securities, impairment is considered to be other-than-temporary based on the Company’s ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income. The Company regularly reviews each investment security for other-than-temporary impairmentOTTI based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the Company’s best estimate of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery. Overview National Bankshares, Inc. 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 and National Bankshares Financial Services, Inc. The National Bank of Blacksburg (“NBB”),NBB, which does business as National Bank from twenty-sixtwenty-five office locations and one loan production office, is a community bank. NBB is the source of nearly all of the Company’s revenue. National Bankshares Financial Services, Inc. (“NBFS”)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. National Bankshares, Inc. common stock is listed on the NASDAQNasdaq 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 June 29, 2009. Performance Summary The following table presents NBI’s key performance ratios for the years ending December 31, 20162019 and December 31, 2015:2018: | | | | Year Ended December 31, | | | | 12/31/16 | | | 12/31/15 | | | 2019 | | 2018 | Return on average assets | | | 1.24 | % | | | 1.37 | % | | | 1.39 | % | | | 1.29 | % | Return on average equity | | | 8.30 | % | | | 9.22 | % | | | 9.87 | % | | | 8.65 | % | Basic net earnings per common share | | $ | 2.15 | | | $ | 2.28 | | | $ | 2.65 | | | $ | 2.32 | | Fully diluted net earnings per common share | | $ | 2.15 | | | $ | 2.28 | | | $ | 2.65 | | | $ | 2.32 | | Net interest margin (1) | | | 3.51 | % | | | 3.86 | % | | | 3.29 | % | | | 3.36 | % | Noninterest margin (2) | | | 1.36 | % | | | 1.40 | % | | | 1.44 | % | | | 1.40 | % |
| | (1) | Net Interest Margin – Year-to-dateNon-GAAP measure of year-to-date tax equivalent net interest income divided by year-to-date average earninginterest-earning assets. Please see “Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to GAAP. |
| | (2) | Noninterest Margin – NoninterestNon-GAAP measure of noninterest expense (excluding the insurance receivable write-down, provision for bad debts and income taxes) less noninterest income (excluding securities gains and losses) divided by average year-to-date assets. Please see “Non-GAAP Financial Measures” for a reconciliation of non-GAAP measures to GAAP. |
The key performance ratios provide a summary of the Company’s results and allow comparison with results from prior years and with current peer results. The return on average assets for the year ended December 31, 20162019 was 1.24%1.39%, a decreasean increase from 1.37%1.29% for the year ended December 31, 2015.2018. The return on average equity decreasedincreased from 9.22%8.65% for the year ended December 31, 20152018 to 8.30%9.87% for the year ended December 31, 2016.2019. Reflecting both the effects of the low interest rate environment throughout 2016 on NBI’s yields and funding costs and the Company’s asset/liability management practices, theThe net interest margin decreased from 3.86% at year-end 2015 to 3.51% at3.36% for the year ended December 31, 2016.2018 to 3.29% for the year ended December 31, 2019. The Federal Reserve interest rates were higher for most of 2019 compared with 2018, benefitting the yield on earning assets but increasing the cost of interest-bearing liabilities.
The noninterest margin improvedincreased from 1.40% to 1.36%1.44% over the same period, while basic net earnings per common share decreasedincreased from $2.28$2.32 for the year ended December 31, 20152018 to $2.15$2.65 for the year ended December 31, 2016.2019. Growth NBI’s key growth indicators are shown in the following table: | | | 12/31/16 | | | 12/31/15 | | | $ in thousands | | | 12/31/2019 | | 12/31/2018 | Securities | | $ | 440,409 | | | $ | 389,288 | | | $ | 436,483 | | | $ | 426,230 | | Loans, net of unearned income and deferred fees and costs, and the allowance for loan losses | | | 639,452 | | | | 610,711 | | | | 726,588 | | | | 702,409 | | Deposits | | | 1,043,442 | | | | 1,018,859 | | | | 1,119,753 | | | | 1,051,942 | | Total assets | | | 1,233,942 | | | | 1,203,519 | | | | 1,321,837 | | | | 1,256,032 | |
TotalSecurities, loans and total assets experienced growth in 2016, funded by increases in customer deposits.increased when amounts at December 31, 2019 are compared with amounts at December 31, 2018. Customer deposits grew $24,583increased $67,811 or 2.41%6.45% from December 31, 2015,2018, with increases mainly from municipalinterest-bearing demand deposits and individuals seeking to safeguard principal by avoiding more volatile investments in financial markets.certificates of deposit. The liquidity provided by customerthe increase of deposits supported growth in loans of $28,741$24,179 or 4.71%. Securities increased by $51,1213.44% and growth in securities of $10,253 or 13.13%2.41%.
In both 2016 and 2015, the Company’s growth was internally generated and was not the result of acquisitions or other borrowings.
Asset Quality Key indicators of NBI’s asset quality are presented in the following table: | | | 12/31/16 | | | 12/31/15 | | | $ in thousands | | | 12/31/2019 | | 12/31/2018 | Nonperforming loans(1) | | $ | 5,855 | | | $ | 6,682 | | | $ | 3,375 | | | $ | 3,420 | | Loans past due 90 days or more and accruing | | | 63 | | | | 156 | | | | 231 | | | | 35 | | Other real estate owned | | | 3,156 | | | | 4,165 | | | | 1,612 | | | | 2,052 | | Allowance for loan losses to loans(2) | | | 1.28 | % | | | 1.34 | % | | | 0.94 | % | | | 1.04 | % | Net charge-off ratio | | | 0.26 | % | | | 0.32 | % | | | 0.09 | % | | | 0.07 | % |
| | (1) | NonperformingNonperforming loans include nonaccrual loans plus restructured loans in nonaccrual status. Accruing restructured loans are not included.
|
| | (2) | Loans are net of unearned income and deferred fees and costs. |
The Company monitors asset quality indicators in managing credit risk and in determining the allowance and provision for loan losses. At December 31, 2016,2019, nonperforming loans were $5,855$3,375 or 0.90%0.46% of loans net of unearned income and deferred fees and costs. This compares to $6,682 and 1.08%$3,420 or 0.48% at December 31, 2015.2018. Loans past due 90 days or more and still accruing at year-end 20162019 totaled $63, a decrease of $93 or 59.62%,$231, an increase from $156$35 at December 31, 2015.2018. The net charge-off ratio decreasedincreased from 0.32%0.07% for the year ended December 31, 20152018 to 0.26%0.09% for the year ended December 31, 2016,2019, while other real estate ownedOREO decreased $1,009$440 for the same period. The Company’s risk analysis determined an allowance for loan losses of $8,300$6,863 at December 31, 2016,2019, resulting in a provision for the year of $1,650.$126. This compares with an allowance for loan losses of $8,297$7,390 as of December 31, 2015,2018, and a provisionrecovery of $2,009$81 for the year ended December 31, 2015.2018. The ratio of the allowance for loan losses to loans decreased to 1.28%, from 1.34%0.94% at December 31, 2015.2019, from 1.04% at December 31, 2018. The methodology for determining the allowance for loan losses relies on historical charge-off trends, modified by trends in nonperforming loans and economic indicators. More information about the level and calculation methodology of the allowance for loan losses is provided in “Provision and Allowance for Loan Losses”, “Balance Sheet – Loans – Risk Elements,” “Balance Sheet – Loans – Troubled Debt Restructurings,” as well as Notes 1 and 5 of the Notes to the financial statements.Consolidated Financial Statements. Sufficient resources have been dedicated to working out problem assets, and exposure to loss is somewhat mitigated because most of the nonperforming loans are collateralized. More information about nonaccrual and past due loans is provided in “Balance Sheet – Loans – Risk Elements” and Note 5 of the Notes to the financial statements.Consolidated Financial Statements. The Company continues to monitor risk levels within the loan portfolio and expects that any further increase in the allowance for loan losses would be the result of the refinement of loss estimates and would not dramatically affect net income. Net Interest Income Net interest income was $37,767 for the year ended December 31, 2016 was $36,764, a decrease of $1,967, or 5.08%, when compared to the prior year. The net interest margin for 2016 was 3.51%, compared to 3.86% for 2015. Total interest income for the period ended December 31, 2016 was $40,930, a decrease of $1,984 from the period ended December 31, 2015. Interest expense declined by $17 during the same time frame, from $4,1832019, $38,177 for the year ended December 31, 2015 to $4,1662018 and $37,135 for the year ended December 31, 2016.2017. The declinenet interest margin was 3.29% for 2019, 3.36% for 2018 and 3.45% for 2017. Total interest income was $45,147 for the year ended December 31, 2019, $43,224 for the year ended December 31, 2018 and $41,260 for the year ended December 31, 2017. Interest expense was $7,380 for the year ended December 31, 2019, $5,047 for the year ended December 31, 2018 and $4,125 for the year ended December 31, 2017. The amount of net interest income earned is affected by various factors, including changes in market interest expense came aboutrates due to the Federal Reserve‘s monetary policy, U.S. fiscal policy, competitive pressure, the level and composition of the interest-earning assets and the composition of interest-bearing liabilities. The Federal Reserve increased its target federal funds rate by 25 basis points in part because higher priced certificatesMarch, June, September and December, 2018 and then decreased the rate by 25 basis points in July, September, and October 2019, ending the year at a target of deposit renewed at lower1.75%. Changes in the Federal Reserve’s target interest rates. In addition, low-raterate immediately impact the yield on the Company’s interest-bearing deposits volumein other banks, and have a slightly delayed impact on other interest-earning assets. The Federal Reserve’s target interest rate also impacts the Company’s cost of interest-bearing liabilities. The primary source of funds used to support the Company’s interest-earning assets is deposits. Deposits are obtained in the Company’s market through traditional marketing techniques. The cost of deposits is dependent on interest rate levels and competitive factors. Increases in the Federal Reserve’s target interest rate may increase competitive pressure to raise deposit offering rates, while decreases in the Federal Reserve’s target interest rate allow reduced deposit offering rates. Time deposits provide a measure of stability in the cost of funds, but partially delay the Company’s ability to respond to downward rate movements. The Company also has access to other funding sources, including the FHLB. Interest expense in 2019 was influenced by increased substantially.deposit offering rates in the latter part of 2018 that carried in to 2019 and were required to remain competitive in what was a rising interest rate environment. Interest expense in 2018 included the cost of short-term borrowings to meet loan demand while anticipating maturity of securities and an increase in deposits that is typical during the fourth quarter. Please refer to the section titled “Analysis of Changes In Interest Income and Interest Expense” for further information related to rate and volume changes. The amount of net interest income earnedmargin is affected by various factors,a non-GAAP measure that incorporates the effect of tax-advantaged instruments, including changes in market interest rates duequalifying investments and loans to the Federal Reserve Board’s monetary policy, the level and compositionmunicipalities. For purposes of the earning assets,net interest margin, interest income on tax-advantaged instruments is grossed up to reflect the value of lower tax expense. The Tax Act became effective January 1, 2018 and decreased the compositionCompany’s tax rate from a marginal 35% in 2017 to a flat 21% in 2018 and 2019. This decreased the value of interest-bearing liabilities. The Companytax-advantaged instruments when 2019 and 2018 are compared with 2017. Management has the ability to respond over time to interest rate movements, statutory tax rate changes and other influencing factors to reduce volatility in the net interest margin. However, the frequency and/or magnitude of changes in market interest rates and legislative changes are difficult to predict and may have a greater impact on net interest income than adjustments by management. The Federal Reserve increased its target federal funds rate by 25 basis points in December 2015, which positively affected the yield on the Company’s interest-bearing deposits in other banks for 2016. The yield on interest-bearing deposits increased from 0.26% for 2015 to 0.52% for 2016. The Federal Reserve increased the target fed funds rate by another 25 basis points in December 2016 and the Company expects some benefit in 2017. However, the interest rate environment during 2016 is still considered to be relatively low. In 2016 the Company experienced a large number of calls on higher-yielding securities that were replaced with securities at lower market rates.
The primary source of funds used to support the Company’s interest-earning assets is deposits. Deposits are obtained in the Company’s trade area through traditional marketing techniques. Other funding sources, such as the Federal Home Loan Bank, while available, are only used occasionally. The cost of funds is dependent on interest rate levels and competitive factors. This limits the ability of the Company to react to interest rate movements.
Federal Reserve policies and market forces influence the Company’s net interest margin. Because interest rates continue at relatively low levels, the Company expects that interest rates will likely increase in the future. The Company anticipates that any rate increases will have a positive impact on the Company’s future net interest income. Management cannot predict the timing and level of interest rate movements.
Analysis of Net Interest Earnings The following table shows the major categories of interest-earning assets and interest-bearing liabilities, the interest earned or paid, the average yield or rate on the daily average balance outstanding, net interest income and net yield on average interest-earning assets for the years indicated. | | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2014 | | | December 31, 2019 | | December 31, 2018 | | December 31, 2017 | | | |
Average
Balance
| | |
Interest
| | | Average
Yield/
Rate | | |
Average
Balance
| | |
Interest
| | | Average
Yield/
Rate | | |
Average
Balance
| | |
Interest
| | | Average
Yield/
Rate | | | $ in thousands | | |
Average
Balance
| | Interest | | Average
Yield/
Rate | | Average
Balance | | Interest | | Average
Yield/
Rate | | Average
Balance | | Interest | | Average
Yield/
Rate | Interest-earning assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans, net of unearned income and deferred fees and costs (1)(2)(3)(4) | | $ | 622,239 | | | $ | 29,993 | | | | 4.82 | % | | $ | 620,547 | | | $ | 31,122 | | | | 5.02 | % | | $ | 593,327 | | | $ | 31,592 | | | | 5.32 | % | | Loans, net of unearned income and deferred fees and costs (1)(2)(3)(4) | | | $ | 719,916 | | | $ | 34,334 | | | | 4.77 | % | | $ | 683,624 | | | $ | 31,739 | | | | 4.64 | % | | $ | 653,756 | | | $ | 30,593 | | | | 4.68 | % | Taxable securities(5) | | | 280,842 | | | | 5,910 | | | | 2.10 | % | | | 234,398 | | | | 6,776 | | | | 2.89 | % | | | 215,872 | | | | 6,798 | | | | 3.15 | % | | | 304,292 | | | | 6,725 | | | | 2.21 | % | | | 340,594 | | | | 6,856 | | | | 2.01 | % | | | 313,255 | | | | 5,711 | | | | 1.82 | % | Nontaxable securities (1)(5) | | | 139,429 | | | | 7,932 | | | | 5.69 | % | | | 147,895 | | | | 8,425 | | | | 5.70 | % | | | 157,421 | | | | 9,018 | | | | 5.73 | % | | Interest-bearing deposits | | | 102,819 | | | | 532 | | | | 0.52 | % | | | 96,677 | | | | 254 | | | | 0.26 | % | | | 103,320 | | | | 262 | | | | 0.25 | % | | Nontaxable securities (1)(5) | | | | 89,631 | | | | 3,854 | | | | 4.30 | % | | | 123,668 | | | | 5,544 | | | | 4.48 | % | | | 131,762 | | | | 7,462 | | | | 5.66 | % | Interest-bearing deposits | | | | 74,527 | | | | 1,523 | | | | 2.04 | % | | | 36,562 | | | | 672 | | | | 1.84 | % | | | 71,603 | | | | 791 | | | | 1.10 | % | Total interest-earning assets | | $ | 1,145,329 | | | $ | 44,367 | | | | 3.87 | % | | $ | 1,099,517 | | | $ | 46,577 | | | | 4.24 | % | | $ | 1,069,940 | | | $ | 47,670 | | | | 4.46 | % | | $ | 1,188,366 | | | $ | 46,436 | | | | 3.91 | % | | $ | 1,184,448 | | | $ | 44,811 | | | | 3.78 | % | | $ | 1,170,376 | | | $ | 44,557 | | | | 3.81 | % | Interest-bearing liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing demand deposits | | $ | 568,916 | | | $ | 3,144 | | | | 0.55 | % | | $ | 526,682 | | | $ | 2,916 | | | | 0.55 | % | | $ | 501,956 | | | $ | 3,385 | | | | 0.67 | % | | $ | 601,884 | | | $ | 5,126 | | | | 0.85 | % | | $ | 606,766 | | | $ | 4,121 | | | | 0.68 | % | | $ | 598,661 | | | $ | 3,344 | | | | 0.56 | % | Savings deposits | | | 94,226 | | | | 34 | | | | 0.04 | % | | | 85,940 | | | | 34 | | | | 0.04 | % | | | 78,778 | | | | 35 | | | | 0.04 | % | | | 142,985 | | | | 449 | | | | 0.31 | % | | | 140,918 | | | | 236 | | | | 0.17 | % | | | 140,997 | | | | 244 | | | | 0.17 | % | Time deposits | | | 180,301 | | | | 988 | | | | 0.55 | % | | | 204,146 | | | | 1,233 | | | | 0.60 | % | | | 230,418 | | | | 1,479 | | | | 0.64 | % | | | 116,844 | | | | 1,805 | | | | 1.54 | % | | | 105,674 | | | | 526 | | | | 0.50 | % | | | 120,220 | | | | 537 | | | | 0.45 | % | Borrowings | | | | --- | | | | --- | | | | --- | | | | 7,192 | | | | 164 | | | | 2.28 | % | | | --- | | | | --- | | | | --- | | Total interest-bearing liabilities | | $ | 843,443 | | | $ | 4,166 | | | | 0.49 | % | | $ | 816,768 | | | $ | 4,183 | | | | 0.51 | % | | $ | 811,152 | | | $ | 4,899 | | | | 0.60 | % | | $ | 861,713 | | | $ | 7,380 | | | | 0.86 | % | | $ | 860,550 | | | $ | 5,047 | | | | 0.59 | % | | $ | 859,878 | | | $ | 4,125 | | | | 0.48 | % | Net interest income(1) and interest rate spread | | | | | | $ | 40,201 | | | | 3.38 | % | | | | | | $ | 42,394 | | | | 3.73 | % | | | | | | $ | 42,771 | | | | 3.86 | % | | | | | | $ | 39,056 | | | | 3.05 | % | | | | | | $ | 39,764 | | | | 3.19 | % | | | | | | $ | 40,432 | | | | 3.33 | % | Net yield on average interest-earning assets | | | | | | | | | | | 3.51 | % | | | | | | | | | | | 3.86 | % | | | | | | | | | | | 4.00 | % | | Net yield on average interest-earning assets | | | | | | | | | | | | 3.29 | % | | | | | | | | | | | 3.36 | % | | | | | | | | | | | 3.45 | % |
| | (1) | Interest on nontaxable loans and securities is computed on a fully taxable equivalent basis using a Federal income tax rate of 0.35%21% in the three years presented.2018 and 2019 and 35% in 2017. |
| | (2) | Loan fees of $360 in 2016, $448 in 2015 and $407 in 2014 are included in total interest income.income are $99 in 2019, $115 in 2018 and $303 in 2017. |
| | (3) | Nonaccrual loans are included in average balances for yield computations. | | | (4) | Includes loans held for sale. |
| | (5)(5)
| Daily averages are shown at amortized cost. |
The following table reconciles net interest income on a fully-taxable equivalent basis to net interest income on a GAAP basis.basis for the years indicated. | | | December 31, | | | | | 2016 | | | 2015 | | | 2014 | | Net interest income, fully taxable equivalent basis | | $ | 40,201 | | | $ | 42,394 | | | $ | 42,771 | | Less: taxable equivalent adjustment | | | (3,437 | ) | | | (3,663 | ) | | | (3,726 | ) | Net interest income | | $ | 36,764 | | | $ | 38,731 | | | $ | 39,045 | |
$ in thousands | | December 31, | | | | 2019 | | 2018 | | 2017 | Net interest income, GAAP | | $ | 37,767 | | | $ | 38,177 | | | $ | 37,135 | | Taxable equivalent adjustment | | | 1,289 | | | | 1,587 | | | | 3,297 | | Net interest income, fully taxable equivalent | | $ | 39,056 | | | $ | 39,764 | | | $ | 40,432 | |
Analysis of Changes in Interest Income and Interest Expense The Company’s primary source of revenue is net interest income, which is the difference between the interest and fees earned on loans and investments and the interest paid on deposits and other funds. The Company’s net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities and by changes in yields earned on interest-earning assets and rates paid on interest-bearing liabilities. The following table sets forth, for the years indicated, a summary of the changes in interest income and interest expense resulting from changes in average asset and liability balances (volume) and changes in average interest rates (rate). | | | 2016 Over 2015 | | | 2015 Over 2014 | | | $ in thousands | | | 2019 Over 2018 | | 2018 Over 2017 | | | | Changes Due To | | | | | | | Changes Due To | | | | | | | Changes Due To | | | | | | Changes Due To | | | | | | | |
Rates(2)
| | |
Volume(2)
| | | Net Dollar
Change | | |
Rates(2)
| | |
Volume(2)
| | | Net Dollar Change | | | Rates(2) | | Volume(2) | | Net Dollar
Change | | Rates(2) | | Volume(2) | | | Net Dollar Change | Interest income: (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans | | $ | (1,214 | ) | | $ | 85 | | | $ | (1,129 | ) | | $ | (1,882 | ) | | $ | 1,412 | | | $ | (470 | ) | | $ | 880 | | | $ | 1,715 | | | $ | 2,595 | | | $ | (243 | ) | | $ | 1,389 | | | $ | 1,146 | | Taxable securities | | | (2,055 | ) | | | 1,189 | | | | (866 | ) | | | (581 | ) | | | 559 | | | | (22 | ) | | | 638 | | | | (769 | ) | | | (131 | ) | | | 623 | | | | 522 | | | | 1,145 | | Nontaxable securities | | | (11 | ) | | | (482 | ) | | | (493 | ) | | | (50 | ) | | | (543 | ) | | | (593 | ) | | | (218 | ) | | | (1,472 | ) | | | (1,690 | ) | | | (1,482 | ) | | | (436 | ) | | | (1,918 | ) | Interest-bearing deposits | | | 261 | | | | 17 | | | | 278 | | | | 9 | | | | (17 | ) | | | (8 | ) | | | 83 | | | | 768 | | | | 851 | | | | 377 | | | | (496 | ) | | | (119 | ) | Increase (decrease) in income on interest-earning assets | | $ | (3,019 | ) | | $ | 809 | | | $ | (2,210 | ) | | $ | (2,504 | ) | | $ | 1,411 | | | $ | (1,093 | ) | | $ | 1,383 | | | $ | 242 | | | $ | 1,625 | | | $ | (725 | ) | | $ | 979 | | | $ | 254 | | Interest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-bearing demand deposits | | $ | (5 | ) | | $ | 233 | | | $ | 228 | | | $ | (630 | ) | | $ | 161 | | | $ | (469 | ) | | $ | 1,038 | | | $ | (33 | ) | | $ | 1,005 | | | $ | 731 | | | $ | 46 | | | $ | 777 | | Savings deposits | | | (3 | ) | | | 3 | | | | --- | | | | (4 | ) | | | 3 | | | | (1 | ) | | | 210 | | | | 3 | | | | 213 | | | | (8 | ) | | | --- | | | | (8 | ) | Time deposits | | | (108 | ) | | | (137 | ) | | | (245 | ) | | | (84 | ) | | | (162 | ) | | | (246 | ) | | | 1,217 | | | | 62 | | | | 1,279 | | | | 58 | | | | (69 | ) | | | (11 | ) | Short-term borrowings | | | | --- | | | | (164 | ) | | | (164 | ) | | | --- | | | | 164 | | | | 164 | | Increase (decrease) in expense of interest-bearing liabilities | | $ | (116 | ) | | $ | 99 | | | $ | (17 | ) | | $ | (718 | ) | | $ | 2 | | | $ | (716 | ) | | $ | 2,465 | | | $ | (132 | ) | | $ | 2,333 | | | $ | 781 | | | $ | 141 | | | $ | 922 | | Increase (decrease) in net interest income | | $ | (2,903 | ) | | $ | 710 | | | $ | (2,193 | ) | | $ | (1,786 | ) | | $ | 1,409 | | | $ | (377 | ) | | $ | (1,082 | ) | | $ | 374 | | | $ | (708 | ) | | $ | (1,506 | ) | | $ | 838 | | | $ | (668 | ) |
| | (1) | Taxable equivalent basis using a Federal income tax rate of 21% in 2018 and 2019 and 35% in 2016, 2015 and 2014.2017. | | | (2) | Variances caused by the change in rate times the change in volume have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each. |
Total interest expense declined by $17, whileNet interest income on a taxable-equivalent basis decreased $2,210, resulting in a decrease of $2,193 in taxable-equivalent net$708 when 2019 is compared with 2018. Total interest income when 2016 and 2015 are compared. Declining rates impactedon a taxable equivalent basis increased $1,625 while total interest expense increased by $2,333. Rate changes decreased net interest income by $2,903,$1,000, partially offset by $292 from increased volume.
Compared with 2018, the interest rate environment in 2019 was elevated by Federal Reserve interest rate increases throughout 2018, partially offset by Federal Reserve rate decreases in the latter half of 2019. The higher rate environment provided an increase of $83 in interest income on interest-bearing deposits, $638 on taxable securities and $880 (taxable equivalent) on loans when 2019 is compared with 2018. Non-taxable securities generated lower taxable equivalent returns of $218 due to the loss of higher-yielding securities from sales, calls and maturities during 2019. The Federal Reserve’s rate policies also gave rise to competitive pressures to boost customer deposit offering rates, resulting in an additional $2,465 in interest expense. The average balance of loans grew $36,292 and the average balance of interest-bearing deposits grew $37,965 when 2019 is compared with 2018, providing additional interest income of $2,483. The average balance of securities declined $70,339 when 2019 is compared with 2018, reducing interest income by $2,241. During 2019, the Company implemented a plan to restructure its securities portfolio to manage interest rate risk. Timing differences in sales and purchase activity increased the average balance of interest-bearing deposits. The average balance of savings and time deposits grew by $13,237 when 2019 is compared with 2018, increasing interest expense by $65, partially offset by reduced expense of $33 associated with a lower average balance of interest-bearing demand deposits. When 2018 is compared with 2017, net interest income on a taxable-equivalent basis decreased $668. Total interest income on a taxable equivalent basis increased $254 while total interest expense increased by $922. A decline in the yield of interest-earning assets and an increase in the yield on interest-bearing liabilities decreased net interest income by $1,506, offset by increases due to favorable changes in volume of $710.$838. LowerThe Federal Reserve increased rates by 25 basis points in December 2017 and four times in 2018. The rate increases had a direct and immediate effect on the Company’s interest-bearing deposits. Interest income on interest-bearing deposits increased $377 due to rates, but declined by $496 due to reduced volume, for a net decrease of $119 when 2018 is compared with 2017. Taxable securities also benefitted from the increased interest rates ledrate environment, as matured and called securities were invested at higher rates. Interest income on taxable securities increased $1,145 when 2018 is compared with 2017, the result of an increase of $522 due to a declinevolume along with an increase of $1,214 in$623 due to rates.
Taxable equivalent interest income from loans.on loans increased $1,146 when 2018 and 2017 are compared, due to robust growth in the loan portfolio. The average balance of loans increased from $620,547$653,756 in 20152017 to $622,239$683,624 in 2016, causing an increase in2018, increasing interest income of $85. Interest income on taxable securities decreased $2,055by $1,389. The increase due to rates,volume was offset slightly by an increasea decrease of $1,189$243 due to average volume, foryield. Taxable equivalent yields on tax-advantaged loans were negatively impacted by a net decrease of $866 comparedin the Company’s statutory tax rate from 35% in 2017 to 2015. Interest21% in 2018. If the 35% rate were applicable during 2018, yields would have shown an increase.
Taxable-equivalent interest on non-taxable securities on a fully-taxable equivalent basis declined $11$1,482 due to rates and $482$436 due to volume. The continued low interest rate environment resulted in a large numberlower yields available upon reinvestment of called and matured securities negatively impacted income from securities during 2016 and reduced the opportunity to reinvest the proceeds in securities with more attractive yields. Because of low yields in the securities markets and a highly competitive loan environment, the Company priced deposits accordingly.2018. Interest on time deposits declined $245$11 from 20152017 to 2016,2018, with a increase of $58 due to rates offset by a decline of $108 due to rates and $137$69 due to decreased volume. See “Net Interest Income” for additional information related to the decline in interest expense. The low interest rate environment was also present in 2015income and 2014. As compared with 2014, there was a $246 decline in interest expense associated with time deposits in 2015. Of the total decline, $84 was due to rates, and $162 stemmed from lower deposit volume. Management focused on deposit pricing and took advantage of falling rates to lower interest expense.
From 2014 to 2015 interest on loans decreased by $470. Reduced rates contributed $1,882 to the decline, partially offset by an increase of $1,412 due to increased volume. As compared with 2014, there was a decrease of $377 in net interest income in 2015, with an increase due to volume of $1,409, offset by declines due to rate of $1,786.
Interest Rate Sensitivity The Company considers interest rate risk to be a significant risk and has systems in place to measure the exposure of net interest income and fair market values to movement in interest rates. Among the tools available to management is interest rate sensitivity analysis, which provides information related to repricing opportunities. Interest rate shock simulations indicate potential economic loss due to future interest rate changes. Shock analysis is a test that measures the effect of a hypothetical, immediate and parallel shift in interest rates. The following table shows the results of a rate shock and the effects on the return on average assets and the return on average equity projected at December 31, 20162019 and 2015.2018. For purposes of this analysis, noninterest income and expenses are assumed to be flat. Rate Shift (bp) | Return on Average Assets | | | Return on Average Equity | | Return on Average Assets | | Return on Average Equity | | | 2016 | | | 2015 | | | 2016 | | | 2015 | | 2019 | | | 2018 | | | 2019 | | | 2018 | | | 300 | 1.23 | % | | 1.57 | % | | 8.37 | % | | 10.54 | % | | 1.40 | % | | | 1.38 | % | | | 10.12 | % | | 8.84 | % | | 200 | 1.24 | % | | 1.54 | % | | 8.42 | % | | 10.37 | % | | 1.40 | % | | | 1.39 | % | | | 10.14 | % | | 8.92 | % | | 100 | 1.24 | % | | 1.51 | % | | 8.45 | % | | 10.20 | % | | 1.39 | % | | | 1.40 | % | | | 10.07 | % | | 8.95 | % | | (-)100 | 1.13 | % | | 1.36 | % | | 7.70 | % | | 9.18 | % | | 1.22 | % | | | 1.32 | % | | | 8.85 | % | | 8.46 | % | | (-)200 | 1.05 | % | | 1.32 | % | | 7.20 | % | | 8.91 | % | | 1.13 | % | | | 1.16 | % | | | 8.20 | % | | 7.47 | % | | (-)300 | 1.12 | % | | 1.34 | % | | 7.57 | % | | 9.05 | % | | 1.15 | % | | | 1.12 | % | | | 8.34 | % | | 7.32 | % |
Simulation analysis is another tool available to the Company to test asset and liability management strategies under rising and falling rate conditions. As a part of the simulation process, certain estimates and assumptions must be made. These include, but are not limited to, asset growth, the mix of assets and liabilities, rate environment and local and national economic conditions. Asset growth and the mix of assets can, to a degree, be influenced by management. Other areas, such as the rate environment and economic factors, cannot be controlled. In addition, competitive pressures can make it difficult to price deposits and loans in a manner that optimally minimizes interest rate risk. Therefore, actual results may vary materially from any particular forecast or shock analysis. This shortcoming is offset somewhat by the periodic reforecasting of the balance sheet to reflect current trends and economic conditions. Shock analysis must also be updated periodically as a part of the asset and liability management process. Noninterest Income | | | Year Ended | | | | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2014 | | Service charges on deposits | | $ | 2,458 | | | $ | 2,250 | | | $ | 2,434 | | Other service charges and fees | | | 212 | | | | 215 | | | | 187 | | Credit card fees | | | 3,798 | | | | 3,861 | | | | 3,631 | | Trust fees | | | 1,346 | | | | 1,229 | | | | 1,213 | | Bank-owned life insurance income | | | 597 | | | | 603 | | | | 616 | | Other income | | | 1,289 | | | | 1,295 | | | | 1,037 | | Realized securities gains | | | 232 | | | | 33 | | | | 2 | | Total noninterest income | | $ | 9,932 | | | $ | 9,486 | | | $ | 9,120 | |
The following table presents the Company’s noninterest income for the years indicated. $ in thousands | | Year Ended | | | | December 31, 2019 | | December 31, 2018 | | December 31, 2017 | Service charges on deposits | | $ | 2,453 | | | $ | 2,678 | | | $ | 2,776 | | Other service charges and fees | | | 198 | | | | 132 | | | | 205 | | Credit card fees | | | 1,398 | | | | 1,431 | | | | 1,205 | | Trust fees | | | 1,622 | | | | 1,565 | | | | 1,530 | | Bank-owned life insurance income | | | 910 | | | | 901 | | | | 758 | | Other income | | | 1,643 | | | | 1,005 | | | | 1,148 | | Realized securities gains | | | 566 | | | | 17 | | | | 14 | | Total noninterest income | | $ | 8,790 | | | $ | 7,729 | | | $ | 7,636 | |
Service charges on deposit accounts totaled $2,458$2,453 for the year ended December 31, 2016.2019. This is an increasea decrease of $208,$225, or 9.24%8.40%, from $2,250$2,678 for the year ended December 31, 2015.2018. Service charges on deposit accounts decreased $184,increased $98, or 7.56%3.53%, from 20142017 to 2015.2018. This income category is affected by the number of deposit accounts, the level of service charges and the number of checking account overdrafts. The 2016 increase resulted primarilydecreases in 2019 and 2018 were driven by a decrease in fees from an increasea lower volume of $224 incustomer non-sufficient funds and overdraft fees due to implementation of a new overdraft privilege program. The 2015 decline resulted primarily from a decrease of $186 non-sufficient funds and overdraft fees due to a decline in volume.activity. Other service charges and fees include charges for official checks, income from the sale of checks to customers, safe deposit box rent, fees from letters of credit and income from commissions on the sale of credit life, accident and health insurance. These fees were $212$198 for the year ended December 31, 2016, a decrease2019, an increase of $3,$66, or 1.40%50.00%, from the $215$132 for 2015.2018. The increase stemmed from higher check charges and service charges on letters of credit. The total for the year ended December 31, 20152018 was $28 above$73 below the $187$205 posted for the year ended December 31, 2014. The change from 2014 to 2015 is primarily2017, due to improvedlower service charges on letters of credit and check sales.charges. Credit card fees for the year ended December 31, 2016,2019, were $63$33 below the $3,861$1,431 reported for the year ended December 31, 2015.2018. From 20142017 to 2015,2018, credit card fees increased $230,$226, or 6.33%18.76%. Credit card fees are presented net of certain processing expenses and are dependent on the volume of transactions. Trust fees at $1,346$1,622 increased by $117$57 or 9.52%3.64% when the years ended December 31, 20162019 and 20152018 are compared. For the year ended December 31, 20152018, trust fees were $1,229,$1,565, an increase of $16,$35, or 1.32%2.29%, from 2014.2017. Trust fees are generated from a number of different types of accounts, including estates, personal trusts, employee benefit trusts, investment management accounts, attorney-in-fact accounts and guardianships. Trust income varies depending on the number and type of accounts under management and financial market conditions. The mix of account types also affected the level of trust fees in 20152018 and 2016.2019. Noninterest income from bank-owned life insurance (BOLI) decreased,(“BOLI”) increased from $603$901 for the year ended December 31, 20152018 to $597$910 for 2016. BOLI income for the year ended December 31, 2014 was $616.2019. Income from bank-owned life insuranceBOLI was affected by the performance of the variable rate policies, which has not varied significantly. BOLI income for the year ended December 31, 2017 was $758. The Company purchased an additional $10 million in BOLI in June 2017. Other income is income from smaller balance accounts that cannot be classified in another category. Some examples include gains on mortgage loans sold, net gains from the sale of fixed assets and revenue from investment and insurance sales. When 2019 is compared to 2018, other income was $1,643, an increase of $638, or 63.48%. This was largely the result of a recovery from an insurance receivable. Other income for 20162018 was $1,289,$1,005, a slight decrease of $6,$143, or 0.46%12.46%, when compared with $1,295$1,148 for the year ended December 31, 2015. The increase from 2014 to 2015 stemmed primarily from an increase in2017. In December 2017, the Company realized a gain on the sale of its Marion branch office of $134. During 2019, the Company realized net securities gains on mortgage loans sold of $114 and a vendor signing incentive of $100. Realized securities$566, including net gains forof $438 on the three years presented were associated with calledsale of securities and $128 on calls of securities. The sales of securities were pursuant to a restructuring plan to manage interest rate risk. During 2018, the $17 realized securities gain stemmed from the call of one security with a gain of $1 and the sale of another security for a gain of $16. During 2017, the Company did not sell any securitiessold a small investment in 2016, 2015 or 2014.community bank stock that resulted in a gain of $4 while all other net realized gains resulted from calls of securities.
Noninterest Expense | | | Year Ended | | | | | December 31, 2016 | | | December 31, 2015 | | | December 31, 2014 | | Salaries and employee benefits | | $ | 12,792 | | | $ | 12,522 | | | $ | 11,606 | | Occupancy, furniture and fixtures | | | 1,849 | | | | 1,743 | | | | 1,703 | | Data processing and ATM | | | 2,186 | | | | 1,657 | | | | 1,650 | | FDIC assessment | | | 476 | | | | 546 | | | | 533 | | Credit card processing | | | 2,782 | | | | 2,692 | | | | 2,593 | | Intangibles amortization | | | 257 | | | | 999 | | | | 1,075 | | Net costs of other real estate owned | | | 472 | | | | 608 | | | | 369 | | Franchise taxes | | | 1,296 | | | | 1,288 | | | | 1,182 | | Other operating expenses | | | 4,042 | | | | 3,580 | | | | 3,721 | | Total noninterest expense | | $ | 26,152 | | | $ | 25,635 | | | $ | 24,432 | |
The following table presents the Company’s noninterest expense for the years indicated. $ in thousands | | Year Ended | | | | December 31, 2019 | | December 31, 2018 | | December 31, 2017 | Salaries and employee benefits | | $ | 15,298 | | | $ | 14,506 | | | $ | 13,670 | | Occupancy, furniture and fixtures | | | 1,866 | | | | 1,845 | | | | 1,820 | | Data processing and ATM | | | 3,171 | | | | 2,784 | | | | 2,280 | | FDIC assessment | | | 167 | | | | 359 | | | | 364 | | Intangibles amortization | | | --- | | | | 50 | | | | 68 | | Net costs of other real estate owned | | | 47 | | | | 553 | | | | 205 | | Franchise taxes | | | 1,333 | | | | 1,278 | | | | 1,315 | | Write-down of insurance receivable | | | --- | | | | 2,010 | | | | --- | | Other operating expenses | | | 3,872 | | | | 3,891 | | | | 4,507 | | Total noninterest expense | | $ | 25,754 | | | $ | 27,276 | | | $ | 24,229 | |
SalarySalaries and employee benefits expense includes salaries, payroll taxes, health insurance, contributions to the employee stock ownership plan and employee 401(k), pension expense, incentives and salary continuation. When 2019 is compared with 2018, salary and employee benefits expense increased $270,$792, or 2.16%5.46%, from $12,522$14,506 for the year ended December 31, 20152018 to $12,792$15,298 for 2016. Salary and benefits expense2019. The increase was favorably affected by a $680 reduction in fringe benefits, including a $363 reduction in expense associated with the health insurance reserve. The Company participates in a “self-funded” insurance plan and reserves amounts based on employee health insurance usage and calculated projections. Salary and benefits expense was also favorably affected by a reduction of $171 in BOLI and salary continuation expenses. The reductions were offset by an increase of $695 or 7.70% in employee salaries, which were the result of normal staffing and compensation decisions, and an increase in pension expense of $424. decisions.
Salary and benefits expense increased $916,$836, or 7.89%6.12%, from $11,606$13,670 for the year ended December 31, 20142017 to $12,522$14,506 for 2015. From 20142018. When compared to 2015, employee salaries2017, the expense in 2018 was increased $230 or 2.62%, which wereby health insurance reserve requirements, higher contribution for the result of normal staffing and compensation decisions. The remaining portion of the increase from 2014 to 2015 stemmed primarily from fringe benefits and other compensation expense. Fringe benefits expense increased $168 from 2014 to 2015. Other compensation expenses, including pension expense, employee stock ownership plan and greater pension expense. In 2017, health insurance expense and salary continuationwas reduced by a one-time $175 refund, while in 2018 the expense increased $449 from 2014$240 for reserve requirements based on claims history. The contribution to 2015.the employee stock ownership plan is determined by management based on overall Company performance, while the pension expense is determined by the Company’s actuarial calculations. Occupancy, furniture and fixtures expense was $1,849$1,866 for the year ended December 31, 2016,2019, an increase of $106,$21, or 6.08%1.14%, from the prior year. The increase stemmed from upgrades in security equipment, higher leaseWhen 2018 is compared with 2017, the expense and building maintenance. The 2015 total was $1,743, an increase of $40,increased $25 or 2.35%, from the $1,703 reported at year-end 2014. The small increases in 2016 and 2015 are reflective of the Company’s emphasis on containing controllable expenses.1.37%. Data processing and ATM expense was $2,186$3,171 in 2016, $1,6572019, $2,784 in 20152018 and $1,650$2,280 in 2014.2017. The increase of $529$387 or 31.93%13.90% from 20152018 to 20162019 and $504 or 22.11% from 2017 to 2018 was due to increased maintenance expense associated with infrastructure upgrades. Data processing and ATM expenseThe Company is committed to maintaining up-to-date technology in 2014 benefitted from infrastructure upgrades performed in 2014.a cost-effective manner. When the years ended December 31, 20162019 and December 31, 20152018 are compared, the Federal Deposit Insurance CorporationFDIC assessment expense decreased $70$192 or 12.82%53.48%. The total expense for 20162019 was $476,$167, which compares with $546$359 for 2015.2018. The FDIC assessment is accrued based on a method provided by the FDIC. During the third quarter of 2019, the FDIC notified the Bank that it was eligible to use small bank assessment credits. The credits were applied to the Bank’s September 30, 2019 and December 31, 2019 assessments. If the FDIC’s Deposit Insurance Fund reserveReserve Ratio maintains a certain ratio, reached a target threshold during the second quarter of 2016, resulting in lower FDIC insurance expenseBank may be able to use additional credits for many federally insured institutions.future assessments. The FDIC assessment expense for the year ended December 31, 2015 increased $132018 decreased $5 from $533$364 for 2014.2017. Credit card processing expenseCore deposit intangibles are the result of prior merger and acquisition activity and are amortized over a period of years. Amortization of the Company’s intangible assets was $2,782completed in 2018. This accounted for the period ended December 31, 2016, an increasedecline in intangibles amortization expense of $90, or 3.34% from 2015’s total of $2,692. Credit card processing expense in 2015 increased $99, or 3.82% from 2014. This expense is driven by the volume of credit card, debit card$50 when 2019 and merchant account transactions and by the level of merchant discount fees. It is subject to a degree of variability.
2018 are compared. The expense for intangibles amortization is relateddecreased $18 from 2017 to acquisitions. There were no acquisitions in the last year, and the expense for 2016 decreased from 2015 by $742 or 74.27%. The decrease in core deposit intangibles amortization is2018, due to certain core deposit intangibles becoming fully amortized in late 2015 and the first half of 2016. The expense for intangibles amortization decreased $76 from 2014 to 2015.amortized. Net costs of other real estate ownedOREO decreased from $608$553 for the period ended December 31, 20152018 to $472$47 for the year ended December 31, 2016.2019. From 20142017 to 2015,2018, net costs of other real estate ownedOREO increased $239$348 from $369.$205. This expense category varies with the number of foreclosed properties owned by NBB and with the expense associated with each. It includes write-downs on other real estate ownedOREO plus other costs associated with carrying these properties, as well as net gains or losses on the sale of other real estate. In 2016,There were no write-downs on other real estate were $268.OREO in 2019. This compares with $440$476 in 20152018 and $84$113 in 2014.2017. Other real estate is initially accounted for at fair value less estimated costs to sell using current valuations, which include appraisals, real estate evaluations and realtor market opinions. If new valuation information indicates a decline from the initial basis, the Company records a write-down. Other costs for these properties in 20162019 were $118,$42, compared with $181$64 in 2015.2018 and $80 in 2017. The Company recorded a loss of $86$5 on the sale of OREO in 20162019, a loss of $13 for 2018 and a gainloss of $14$12 for 2015.2017. The Company’s market area is showingshows positive economic signs, and the national economy appears to show mixed economic signs, with some favorable indicators and some unfavorable indicators, and we anticipate that there willsignals. There may be additional foreclosures in the near future. The Company currently has loans totaling $321of $509 in process of foreclosure. While some of the loans may be resolved in a manner other than foreclosure, it is likely that some loans will be foreclosed and may result in an associated increase in the costs of other real estate owned. Franchise taxes were $1,296 for the period ended December 31, 2016 and $1,288 for 2015, an increase of $8 or 0.62%. Franchise tax expense increased $106 in 2015 from $1,182 in 2014. State bank franchise taxes are based upon NBB’s total equity which increasedat the prior year-end, adjusted for real estate taxes and certain other items. Franchise taxes were $1,333 for the period ended December 31, 2019 and $1,278 for 2018, an increase of $55 or 4.30%. Franchise tax expense decreased $37 in both 20152018 from $1,315 in 2017. The write-down of insurance receivables totaled $2,010 for the year ended December 31, 2018. The write-down is associated with the two cybersecurity breaches. Please see additional information under the heading “Cybersecurity Risks and 2016.Incidents”. The category of other operating expenses includes noninterest expense items such as professional services, stationery and supplies, telephone costs and charitable donations. For the year ended December 31, 2016,2019, other operating expenses were $4,042.$3,872. This compares with $3,580$3,891 for 20152018 and $3,721$4,507 for 2014.2017. The $462 increase$616 decrease from 20152017 to 20162018 was primarily due to recognitiona loss of $189 resulting from a wire fraud in 2017 and a decrease in expenses associated with consulting services related to the cybersecurity breaches and the non-servicing component of pension expense. Cybersecurity Risks and Incidents The Company treats cybersecurity risk seriously. The Company has a program to identify, mitigate and manage its cybersecurity risks. The program includes penetration testing and vulnerability assessment, technological defenses such as antivirus software, patch management, firewall management, email and web protections, an intrusion prevention system, a cybersecurity insurance policy which covers some but not all losses arising from cybersecurity breaches, as well as ongoing employee training. The costs of these measures were $365 for the twelve months ended December 31, 2019, $345 for the twelve months ended December 31, 2018 and $277 for the twelve months ended December 31, 2017. These costs are included in various categories of noninterest expense. The Company experienced two intrusions to its digital systems, one in May 2016 and one in January 2017. Hackers and related organized criminal groups obtained unauthorized access to certain customer accounts. The attacks disabled certain systems protections, including limits on the number, amount, and frequency of ATM withdrawals. The attacks resulted in the theft of funds disbursed through ATMs. In the May 2016 attack, hackers accessed customer funds and in the January 2017 intrusion, the hackers artificially inflated account balances and did not access customer funds. The Company notified all affected customers, and restored all funds so that no customer experienced a loss. The Company retained a nationally recognized firm to investigate and remediate the May 2016 intrusion and a separate nationally recognized firm to investigate and remediate the January 2017 intrusion. The Company adopted and implemented all of the recommendations provided through the investigations. The financial impact of the attacks include the amount of the theft, as well as costs of investigation and remediation. The theft of funds totaled $570 in the May 2016 attack and $1,838 in the January 2017 attack. The Company recognized an estimated loss of $347 in bankcard losses.2016, and $2,010 in 2018, with a remaining insurance receivable of $50 at December 31, 2018. Costs for investigation, remediation, and legal consultation totaled $157 in 2019, $224 in 2018 and $407 in 2017. The $141 decrease from 2014Company’s litigation against the insurance carrier was settled during the first quarter of 2019, subject to 2015a non-disclosure agreement. There has been no litigation against the Company to date associated with the breaches. We have deployed a multi-faceted approach to limit the risk and impact of unauthorized access to customer accounts and to information relevant to customer accounts. We use digital technology safeguards, internal policies and procedures, and employee training to reduce the exposure of our systems to cyber-intrusions. However, it is not possible to fully eliminate exposure. The potential for financial and reputational losses due to cyber-breaches is increased by the resultpossibility of changes in several categorieshuman error, unknown system susceptibilities, and the rising sophistication of expense, with no one item makingcyber-criminals to attack systems, disable safeguards and gain access to accounts and related information. The Company maintains insurance which provides a significant contributiondegree of coverage depending on the nature and circumstances of any cyber penetration but cannot be relied upon to reimburse fully the total.Company for all losses that may arise. The Company has adopted new protections and invested additional resources to increase its security. Income Taxes Income tax expense for 20162019 was $3,952$3,211 compared to $4,740$2,560 in 20152018 and $5,178$6,293 in 2014.2017. During 2019 and 2018, the Company’s statutory tax rate was 21%; during 2017, the Company’s marginal tax rate was 35%. The decrease in the tax rate was due to the enactment on December 22, 2017 of the Tax exempt income is the primary difference between expected and actual income tax expense. Act, which became effective January 1, 2018. The Company’s effective tax rates for 2016, 20152019, 2018 and 20142017 were 20.92%15.53%, 23.04%13.68% and 23.44%30.87%, respectively. The expected income tax expense based on the Company’s statutory tax rate differs from the actual income tax expense due to tax exempt income on municipal securities and loans, and in 2017, the re-valuation of deferred tax assets from 35% to 21%. GAAP requires deferred tax assets to be valued at the tax rate at which the Company is subjectexpects to realize them. As a result of the 35% marginalchange in the Company’s tax rate.rate, the Company recognized a revaluation adjustment of $1,560 in 2017, with a corresponding charge to income tax expense. See Note 109 of the Notes to Consolidated Financial Statements for addition information relating to income taxes. Effects of Inflation The Company’s consolidated statements of income generally reflect the effects of inflation. Since interest rates, loan demand and deposit levels are related to inflation, the resulting changes are included in net income. The most significant item which does not reflect the effects of inflation is depreciation expense. Historical dollar values used to determine depreciation expense do not reflect the effects of inflation on the market value of depreciable assets after their acquisition. Provision and Allowance for Loan Losses The Company’s risk analysis at December 31, 2019 determined an allowance for loan losses of $8,300$6,863 or 1.28%0.94% of loans net of unearned income and deferred fees and costs, a decrease from $7,390 or 1.04% at December 31, 2016, an increase from $8,297 or 1.34% of loans net of unearned income and deferred fees and costs at December 31, 2015.2018. The determination of the appropriate level for the allowance for loan losses resulted in a provision for loan loss of $1,650$126 for the twelve months ended December 31, 2016,2019, compared with $2,009a recovery for the twelve monthsmonth period ended December 31, 2015.2018 of $81. To determine the appropriate level of the allowance for loan losses, the Company considers credit risk for certain loans designated as impaired and for non-impaired (“collectively evaluated”)evaluated loans. Individually evaluated impaired loans totaled $9,173$5,289 on a gross basis and net of unearned income and deferred fees and costs, with specific allocations to the allowance for loan losses totaling $25$110 at December 31, 2016, compared with individually2019. Individually evaluated impaired loans at December 31, 2018 were $6,820 on a gross basis as well as net of $15,346unearned income and deferred fees and costs, with specific allocations totaling $45 at December 31, 2015.to the allowance for loan losses of $139. The specific allocation is determined based on criteria particular to each impaired loan. Collectively evaluated loans totaled $728,738 on a gross basis and $728,162 net of unearned income and deferred fees and costs, with an allowance of $6,753 or 0.93% at December 31, 2019. At December 31, 2018, collectively evaluated loans totaled $703,577 on a gross basis and $702,979 net of unearned income and deferred fees and costs, with an allowance of $7,251 or 1.03%. For collectively evaluated loans, the Company applies to each loan class a historical net charge-off rate, averaged over the most recent 8 quarters, and adjusted for qualitative factors that influence credit risk. CollectivelyQualitative factors evaluated loans totaled $639,373 on a gross basisfor impact to credit risk include economic measures, asset quality indicators, loan characteristics, and $638,584changes to internal Bank policies and management. Net charge-off rates for each class are averaged over eight quarters (two years) to determine the historical net charge off rate applied to each class of unearned income and deferred fees and costs, with an allowance of $8,275 or 1.30% at December 31, 2016. At December 31, 2015, collectively evaluated loans totaled $604,538 on a gross basis and $603,680 net of unearned income and deferred fees and costs, with an allowance of $8,252 or 1.37% of the collectively-evaluated portfolio. loans. Net charge-offs for the twelve months ended December 31, 20162019 were $1,647$653 or 0.26%0.09% of average loans, an improvementincrease from $1,975$454 or 0.32%0.07% for the twelve months ended December 31, 2015.2018. The eight-quarter average historical loss rate applied to the calculation was 0.08% for the period ended December 31, 2019 and 0.07% for the period ended December 31, 2018. Increases in the net charge-off rate increase the required allowance for collectively-evaluatedcollectively evaluated loans, while decreases in the net charge-off rate decrease the required allowance for collectively-evaluatedcollectively evaluated loans. Economic factors influence credit risk and impact the allowance for loan loss. The Company'sCompany considers economic indicators within its market area, experienced some favorable economic signsincluding: unemployment, personal bankruptcy filings, business bankruptcy filings, the interest rate environment, residential vacancy rates, housing inventory for sale, and some weakening indicators when data at December 31, 2016 are compared with data at December 31, 2015. Personalthe competitive environment. Lower unemployment lowers credit risk and business bankruptcies decreased resulting in a lower requirement for the allowance for loan losses.losses, while higher unemployment increases credit risk. Higher bankruptcy filings indicate heightened credit risk and increase the allowance for loan losses, while lower bankruptcy filings have a beneficial impact on credit risk. The interest rate environment impacts variable rate loans. As interest rates increase, the payment on variable rate loans increases, which may increase credit risk. However the effect of gradual, measured interest rate changes does not affect credit risk as much as a volatile interest rate environment. Residential vacancy rates and housing inventory for sale impact the Company’s residential construction customers and the consumer real estate market. Higher levels increase credit risk. Higher competition for loans increases credit risk, while lower competition decreases credit risk. Within the Company’s market area, the number of personal bankruptcies increased from levels at December 31, 2018, indicating increased credit risk. The competitive, legal and regulatory environments and the inventory of new and existing homes decreased substantially. Lower housing inventory is beneficial for the Company’s residential construction customers and reduces credit risk, resulting in a lower requirement for the allowance for loan losses. The competitive, legal and regulatory environments remained at similar levels to thoseDecember 31, 2018. Business bankruptcies, interest rates, residential vacancy rates and the unemployment rate decreased when compared with levels at December 31, 2015 with2018. The Company assessed the same allocation requirement. decreases as positive indicators for credit risk, and reduced the risk allocation. The Federal Reserve’s increaseCompany considers other factors that impact credit risk, including the risk from changes in the legal and regulatory environments, changes to lending policies and loan review, and changes in management’s experience. The legal and regulatory environment, lending policies, and management’s experience remained at similar levels to December 31, 2018. Slight changes to the federal funds rate is assessedloan review system to slightlyalign with regulatory guidance resulted in a slight increase credit risk, with a corresponding increase toin the requirement for the allowance for loan losses. The unemployment rate and residential vacancy rate worsened slightly when data at December 31, 2016 are compared with December 31, 2015, resulting in increased allocations to the allowance at December 31, 2016.allocation. Asset quality indicators affect the level of the allowance for loan losses. Accruing loans past due 30-89 days decreased to 0.39%were 0.15% of total loans, net of unearned income and deferred fees and costs at December 31, 2016,2019, a decrease from 0.48%0.23% at December 31, 2015.2018. Accruing loans past due 90 days or more as a percentagewere 0.03% of total loans, was 0.01%net of unearned income and deferred fees and costs at December 31, 2016, a decrease from 0.03%2019, and 0.00% at December 31, 2015.2018. Nonaccrual loans decreased to 0.90% of total loans at December 31, 2016,2019 were 0.46% of total loans, net of unearned income and deferred fees and costs, a decrease from 1.08%0.48% at December 31, 2015. The decreases2018. Decreases in past due and nonaccrual loans reducedreduce the required level of the allowance for loan losses. Loans rated “special mention”losses, while increases in past due and “classified” (together, “criticized assets”) indicate heightened credit risk. Higher levels of criticized assetsnonaccrual loans increase the required level of the allowance for collectively-evaluated loans, while lower levels of criticized assets reduce the required level of the allowance for collectively-evaluated loans. Loans rated special mention receive a 50% greater allocation for qualitative risk factors, and loans rated classified receive a 100% greater allocation for qualitative risk factors. A classified loss rate is also applied to classified loans, calculated as net charge offs divided by classified loans.
Collectively evaluated loans rated “special mention” were $13,519 at December 31, 2016, an increase from $6,144 at December 31, 2015. Collectively evaluated loans rated classified were $3,052 at December 31, 2016, a decrease from $6,071 at December 31, 2015.loan losses.
Levels of high risk loans are considered in the determination of the level of the allowance for loan loss. High risk loans are defined by the Company as loans secured by junior liens, interest-only loans and loans with a high loan-to-value ratio. A decrease in the level of high risk loans within a class decreases the required allocation for the loan class, and an increase in the level of high risk loans within a class increases the required allocation for the loan class. Total high risk loans decreased by 9.76%$28,386 or 18.07% from the level at December 31, 2015, however2018, resulting in a decreased allocation. Loans rated “special mention” and “classified” (together, “criticized assets”) indicate heightened credit risk. Higher levels of criticized assets increase the increase inrequired level of the allowance for collectively evaluated loans, while lower levels of criticized assets reduce the required level of the allowance for collectively evaluated loans. Loans rated special mention receive a 50% greater allocation for one loan class that experienced an increase in highqualitative risk factors, and loans resulted inrated classified receive a small net increase when the100% greater allocation for highqualitative risk factors. A classified loss rate is also applied to classified loans, calculated as net charge offs divided by classified loans. During the third quarter of 2019, the Bank slightly revised the loan risk rating system to align with regulatory guidance. After the revision, the “special mention” rating is no longer applied to consumer loans. The allowance for loan losses includes a two basis point adjustment to account for the change. Collectively evaluated loans rated “special mention” were $135 at December 31, 2016 is compared with the allocation for high risk loans for2019 and $1,455 at December 31, 2015.2018. Collectively evaluated loans rated classified were $961 at December 31, 2019 and $735 at December 31, 2018. The calculation of the appropriate level for the allowance for loan losses incorporates analysis of multiple factors and requires management’s prudent and informed judgment. The ratio of the allowance for loan losses to total loans, net of unearned income and deferred fees and costs at December 31, 2019 was 0.94%, a decrease from 1.04% at December 31, 2018. The ratio of the totalallowance for collectively evaluated loan portfolio declined six basis pointslosses to collectively evaluated loans, net of unearned income and deferred fees and costs was 0.93%, compared with 1.03% at December 31, 2018. Improvements that decreased the required level of the allowance for loan losses from December 31, 2015.2018 included loans past due 30-89 days, loans rated special mention and classified, loans considered high risk, the interest rate environment, business bankruptcies, residential vacancy rate, the unemployment rate and nonaccrual loans. Other indicators slightly offset the improvements, including a slight worsening in personal bankruptcy and loans past due 90 days. Based on analysis of historical indicators, asset quality and economic factors, management believes the level of allowance for loan losses is reasonable for the credit risk in the loan portfolio. Quarterly Results of Operations The following is a summary of the unaudited quarterly results of operations for the years ended December 31, 2016, 20152019, 2018 and 2014:2017: | | | 2016 | | | | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | Income Statement Data: | | | | | | | | | | | | | | | | | Interest income | | $ | 10,484 | | | $ | 10,292 | | | $ | 10,157 | | | $ | 9,997 | | Interest expense | | | 1,068 | | | | 1,063 | | | | 1,019 | | | | 1,016 | | Net interest income | | | 9,416 | | | | 9,229 | | | | 9,138 | | | | 8,981 | | Provision for loan losses | | | 203 | | | | 654 | | | | 291 | | | | 502 | | Noninterest income | | | 2,341 | | | | 2,618 | | | | 2,481 | | | | 2,492 | | Noninterest expense | | | 6,684 | | | | 6,238 | | | | 6,620 | | | | 6,610 | | Income taxes | | | 1,091 | | | | 1,090 | | | | 880 | | | | 891 | | Net income | | $ | 3,779 | | | $ | 3,865 | | | $ | 3,828 | | | $ | 3,470 | | Per Share Data: | | | | | | | | | | | | | | | | | Basic net income per common share | | $ | 0.54 | | | $ | 0.56 | | | $ | 0.55 | | | $ | 0.51 | | Fully diluted net income per common share | | | 0.54 | | | | 0.56 | | | | 0.55 | | | | 0.51 | | Cash dividends per common share | | | --- | | | | 0.55 | | | | --- | | | | 0.61 | | Book value per common share | | | 25.76 | | | | 25.86 | | | | 26.47 | | | | 25.62 | |
| | | 2015 | | | | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | Income Statement Data: | | | | | | | | | | | | | | | | | Interest income | | $ | 10,794 | | | $ | 10,724 | | | $ | 10,760 | | | $ | 10,636 | | Interest expense | | | 1,087 | | | | 1,051 | | | | 1,009 | | | | 1,036 | | Net interest income | | | 9,707 | | | | 9,673 | | | | 9,751 | | | | 9,600 | | Provision for loan losses | | | 201 | | | | 355 | | | | 178 | | | | 1,275 | | Noninterest income | | | 2,258 | | | | 2,471 | | | | 2,289 | | | | 2,468 | | Noninterest expense | | | 6,687 | | | | 6,369 | | | | 6,322 | | | | 6,257 | | Income taxes | | | 1,111 | | | | 1,310 | | | | 1,341 | | | | 978 | | Net income | | $ | 3,966 | | | $ | 4,110 | | | $ | 4,199 | | | $ | 3,558 | | Per Share Data: | | | | | | | | | | | | | | | | | Basic net income per common share | | $ | 0.57 | | | $ | 0.59 | | | $ | 0.60 | | | $ | 0.52 | | Fully diluted net income per common share | | | 0.57 | | | | 0.59 | | | | 0.60 | | | | 0.52 | | Cash dividends per common share | | | --- | | | | 0.53 | | | | --- | | | | 0.61 | | Book value per common share | | | 24.85 | | | | 24.10 | | | | 25.07 | | | | 25.62 | |
$ in thousands, except per share data | | 2019 | | | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | Income Statement Data: | | | | | | | | | | | | | | | | | Interest income | | $ | 11,138 | | | $ | 11,293 | | | $ | 11,288 | | | $ | 11,428 | | Interest expense | | | 1,793 | | | | 1,914 | | | | 1,865 | | | | 1,808 | | Net interest income | | | 9,345 | | | | 9,379 | | | | 9,423 | | | | 9,620 | | Provision for (recovery of) loan losses | | | 200 | | | | 55 | | | | 95 | | | | (224 | ) | Noninterest income | | | 2,489 | | | | 1,856 | | | | 2,098 | | | | 2,347 | | Noninterest expense | | | 6,465 | | | | 6,453 | | | | 6,386 | | | | 6,450 | | Income taxes | | | 726 | | | | 733 | | | | 788 | | | | 964 | | Net income | | $ | 4,443 | | | $ | 3,994 | | | $ | 4,252 | | | $ | 4,777 | | Per Share Data: | | | | | | | | | | | | | | | | | Basic net income per common share | | $ | 0.65 | | | $ | 0.61 | | | $ | 0.65 | | | $ | 0.74 | | Fully diluted net income per common share | | | 0.65 | | | | 0.61 | | | | 0.65 | | | | 0.74 | | Cash dividends per common share | | | --- | | | | 0.67 | | | | --- | | | | 0.72 | | Book value per common share | | | 27.86 | | | | 28.26 | | | | 28.97 | | | | 28.31 | |
| | | 2014 | | | $ in thousands, except per share data | | | 2018 | | | | First
Quarter | | | Second
Quarter | | | Third
Quarter | | | Fourth
Quarter | | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | Income Statement Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest income | | $ | 11,111 | | | $ | 11,019 | | | $ | 10,947 | | | $ | 10,867 | | | $ | 10,484 | | | $ | 10,726 | | | $ | 10,945 | | | $ | 11,069 | | Interest expense | | | 1,315 | | | | 1,295 | | | | 1,147 | | | | 1,142 | | | | 1,081 | | | | 1,145 | | | | 1,245 | | | | 1,576 | | Net interest income | | | 9,796 | | | | 9,724 | | | | 9,800 | | | | 9,725 | | | | 9,403 | | | | 9,581 | | | | 9,700 | | | | 9,493 | | Provision for loan losses | | | 103 | | | | 701 | | | | 356 | | | | 481 | | | Provision for (recovery of) loan losses | | | | (472 | ) | | | 342 | | | | 223 | | | | (174 | ) | Noninterest income | | | 2,221 | | | | 2,358 | | | | 2,258 | | | | 2,283 | | | | 2,023 | | | | 1,868 | | | | 1,914 | | | | 1,924 | | Noninterest expense | | | 6,161 | | | | 6,039 | | | | 6,115 | | | | 6,117 | | | | 8,164 | | | | 6,424 | | | | 6,463 | | | | 6,225 | | Income taxes | | | 1,349 | | | | 1,233 | | | | 1,324 | | | | 1,272 | | | | 438 | | | | 642 | | | | 677 | | | | 803 | | Net income | | $ | 4,404 | | | $ | 4,109 | | | $ | 4,263 | | | $ | 4,138 | | | $ | 3,296 | | | $ | 4,041 | | | $ | 4,251 | | | $ | 4,563 | | Per Share Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic net income per common share | | $ | 0.63 | | | $ | 0.59 | | | $ | 0.61 | | | $ | 0.60 | | | $ | 0.47 | | | $ | 0.58 | | | $ | 0.61 | | | $ | 0.66 | | Fully diluted net income per common share | | | 0.63 | | | | 0.59 | | | | 0.61 | | | | 0.60 | | | | 0.47 | | | | 0.58 | | | | 0.61 | | | | 0.66 | | Cash dividends per common share | | | --- | | | | 0.55 | | | | --- | | | | 0.58 | | | | --- | | | | 0.58 | | | | --- | | | | 0.63 | | Book value per common share | | | 22.08 | | | | 22.57 | | | | 23.43 | | | | 23.93 | | | | 26.67 | | | | 26.71 | | | | 27.04 | | | | 27.34 | |
$ in thousands, except per share data | | 2017 | | | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter | Income Statement Data: | | | | | | | | | | | | | | | | | Interest income | | $ | 10,238 | | | $ | 10,295 | | | $ | 10,301 | | | $ | 10,426 | | Interest expense | | | 1,028 | | | | 1,048 | | | | 1,021 | | | | 1,028 | | Net interest income | | | 9,210 | | | | 9,247 | | | | 9,280 | | | | 9,398 | | Provision for (recovery of) loan losses | | | 59 | | | | 464 | | | | 201 | | | | (567 | ) | Noninterest income | | | 1,850 | | | | 1,731 | | | | 1,884 | | | | 2,171 | | Noninterest expense | | | 6,283 | | | | 5,974 | | | | 6,031 | | | | 5,941 | | Income taxes | | | 1,069 | | | | 970 | | | | 1,147 | | | | 3,107 | | Net income | | $ | 3,649 | | | $ | 3,570 | | | $ | 3,785 | | | $ | 3,088 | | Per Share Data: | | | | | | | | | | | | | | | | | Basic net income per common share | | $ | 0.52 | | | $ | 0.51 | | | $ | 0.54 | | | $ | 0.46 | | Fully diluted net income per common share | | | 0.52 | | | | 0.51 | | | | 0.54 | | | | 0.46 | | Cash dividends per common share | | | --- | | | | 0.56 | | | | --- | | | | 0.61 | | Book value per common share | | | 26.30 | | | | 26.49 | | | | 26.97 | | | | 26.57 | |
Balance Sheet On December 31, 2016,2019, the Company had total assets of $1,233,942,$1,321,837, an increase of $30,423$65,805 or 2.53%5.24%, over the total assets of $1,203,519$1,256,032 on December 31, 2015. For 2016, the growth in assets was entirely internally generated and was not the result of acquisitions.2018. Total assets at December 31, 20152018 were updown by $45,008,$725, or 3.90%0.06%, over the totalfrom $1,256,757 at December 31, 2014.2017. Loans The Company’s loan categorization reflects its approach to loan portfolio management and includes six groups. Real estate construction loans include construction loans for residential and commercial properties, as well as land. Consumer real estate loans include conventional and junior lien mortgages, equity lines and investor-owned residential real estate. Commercial real estate loans are comprised of owner-occupied and leased nonfarm, nonresidential properties, multi-family residence loans and farmland. Commercial non realnon-real estate loans include farmagricultural loans, operating capital lines and loans secured by capital assets. Public sector and IDAindustrial development authority (“IDA”) loans are extended to municipalities. Consumer non realnon-real estate loans include automobile loans, personal loans, credit cards and consumer overdrafts. | | | December 31, | | | $ in thousands | | | December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | Real estate construction | | $ | 36,345 | | | $ | 48,251 | | | $ | 45,562 | | | $ | 45,925 | | | $ | 50,313 | | | $ | 42,303 | | | $ | 37,845 | | | $ | 34,694 | | | $ | 36,345 | | | $ | 48,251 | | Consumer real estate | | | 157,718 | | | | 143,504 | | | | 147,039 | | | | 145,499 | | | | 143,262 | | | | 181,472 | | | | 175,456 | | | | 166,965 | | | | 157,718 | | | | 143,504 | | Commercial real estate | | | 336,457 | | | | 309,378 | | | | 310,762 | | | | 311,266 | | | | 304,308 | | | | 365,373 | | | | 353,546 | | | | 340,414 | | | | 336,457 | | | | 309,378 | | Commercial non real estate | | | 39,024 | | | | 37,571 | | | | 33,413 | | | | 31,262 | | | | 37,349 | | | Commercial non-real estate | | | | 46,576 | | | | 46,535 | | | | 40,518 | | | | 39,204 | | | | 37,571 | | Public sector and IDA | | | 45,474 | | | | 51,335 | | | | 41,361 | | | | 34,220 | | | | 26,169 | | | | 63,764 | | | | 60,777 | | | | 51,443 | | | | 45,474 | | | | 51,335 | | Consumer non real estate | | | 33,528 | | | | 29,845 | | | | 28,182 | | | | 28,423 | | | | 31,714 | | | Consumer non-real estate | | | | 34,539 | | | | 36,238 | | | | 34,648 | | | | 33,528 | | | | 29,845 | | Total loans | | $ | 648,546 | | | $ | 619,884 | | | $ | 606,319 | | | $ | 596,595 | | | $ | 593,115 | | | $ | 734,027 | | | $ | 710,397 | | | $ | 668,682 | | | $ | 648,546 | | | $ | 619,884 | | Less unearned income and deferred fees | | | (794 | ) | | | (876 | ) | | | (853 | ) | | | (905 | ) | | | (953 | ) | | | (576 | ) | | | (598 | ) | | | (613 | ) | | | (794 | ) | | | (876 | ) | Total loans, net of unearned income and deferred fees and costs | | $ | 647,752 | | | $ | 619,008 | | | $ | 605,466 | | | $ | 595,690 | | | $ | 592,162 | | | $ | 733,451 | | | $ | 709,799 | | | $ | 668,069 | | | $ | 647,752 | | | $ | 619,008 | | Less allowance for loans losses | | | (8,300 | ) | | | (8,297 | ) | | | (8,263 | ) | | | (8,227 | ) | | | (8,349 | ) | | | (6,863 | ) | | | (7,390 | ) | | | (7,925 | ) | | | (8,300 | ) | | | (8,297 | ) | Total loans, net | | $ | 639,452 | | | $ | 610,711 | | | $ | 597,203 | | | $ | 587,463 | | | $ | 583,813 | | | $ | 726,588 | | | $ | 702,409 | | | $ | 660,144 | | | $ | 639,452 | | | $ | 610,711 | |
B. | B. Maturities and Interest Rate Sensitivities
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The following table presents maturities and interest rate sensitivities for commercial non real estate, commercial real estate and real estate construction loans. | | | December 31, 2016 | | | $ in thousands | | | December 31, 2019 | | | | < 1 Year | | | 1 – 5 Years | | | After 5 Years | | | Total | | | < 1 Year | | 1 – 5 Years | | After 5 Years | | Total | Commercial non real estate | | $ | 26,530 | | | $ | 11,843 | | | $ | 651 | | | $ | 39,024 | | | $ | 30,742 | | | $ | 15,171 | | | $ | 663 | | | $ | 46,576 | | Commercial real estate | | | 72,623 | | | | 212,094 | | | | 51,740 | | | | 336,457 | | | Commercial real estate | | | | 71,810 | | | | 241,968 | | | | 51,595 | | | | 365,373 | | Real estate construction | | | 28,960 | | | | 7,385 | | | | --- | | | | 36,345 | | | | 13,994 | | | | 10,879 | | | | 17,430 | | | | 42,303 | | Total | | | 128,113 | | | | 231,322 | | | | 52,391 | | | | 411,826 | | | | 116,546 | | | | 268,018 | | | | 69,688 | | | | 454,252 | | Less loans with predetermined interest rates | | | (24,488 | ) | | | (18,196 | ) | | | (10,492 | ) | | | (53,176 | ) | | | (12,471 | ) | | | (29,300 | ) | | | (8,505 | ) | | | (50,276 | ) | Loans with adjustable rates | | $ | 103,625 | | | $ | 213,126 | | | $ | 41,899 | | | $ | 358,650 | | | $ | 104,075 | | | $ | 238,718 | | | $ | 61,183 | | | $ | 403,976 | |
The following table presents aggregate amounts for nonaccrual loans, restructured loans in nonaccrual, other real estate owned net, and accruing loans which are contractually past due ninety days or more as to interest or principal payments, and accruing restructured loans. $ in thousands | | | December 31, | | | | December 31, | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | Nonaccrual loans: | | | | | | | | | | | | | | | | | | | | | | Nonaccrual loans | | | | | | | | | | | | | | | | | | | | | | Real estate construction | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 3,109 | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | Consumer real estate | | | 253 | | | | 14 | | | | 164 | | | | 198 | | | | 612 | | | Consumer real estate | | | | 24 | | | | 119 | | | | 6 | | | | 256 | | | | 14 | | Commercial real estate | | | 698 | | | | 1,146 | | | | 3,087 | | | | 5,383 | | | | 7,018 | | | | --- | | | | 192 | | | | --- | | | | 698 | | | | 1,146 | | Commercial non real estate | | | 217 | | | | 883 | | | | 748 | | | | 128 | | | | 82 | | | | 136 | | | | --- | | | | --- | | | | 217 | | | | 883 | | Public sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Consumer non real estate | | | --- | | | | --- | | | | --- | | | | 23 | | | | 49 | | | | 4 | | | | --- | | | | --- | | | | --- | | | | --- | | Total nonaccrual loans | | $ | 1,168 | | | $ | 2,043 | | | $ | 3,999 | | | $ | 5,732 | | | $ | 10,870 | | | Total nonaccrual loans | | | $ | 164 | | | $ | 311 | | | $ | 6 | | | $ | 1,168 | | | $ | 2,043 | | Restructured loans (TDR Loans) in nonaccrual | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate construction | | $ | 270 | | | $ | 718 | | | $ | --- | | | $ | --- | | | $ | 123 | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 270 | | | $ | 718 | | Consumer real estate | | | --- | | | | --- | | | | --- | | | | 201 | | | | 407 | | | Consumer real estate | | | | 262 | | | | 610 | | | | 145 | | | | --- | | | | --- | | Commercial real estate | | | 4,390 | | | | 3,921 | | | | 5,288 | | | | 651 | | | | 1,142 | | | | 2,949 | | | | 2,494 | | | | 2,602 | | | | 4,390 | | | | 3,921 | | Commercial non real estate | | | 24 | | | | --- | | | | --- | | | | --- | | | | 479 | | | | --- | | | | 5 | | | | 15 | | | | 24 | | | | --- | | Public sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Consumer non real estate | | | 3 | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | 1 | | | | 3 | | | | --- | | Total restructured loans in nonaccrual | | $ | 4,687 | | | $ | 4,639 | | | $ | 5,288 | | | $ | 852 | | | $ | 2,151 | | | $ | 3,211 | | | $ | 3,109 | | | $ | 2,763 | | | $ | 4,687 | | | $ | 4,639 | | Total nonperforming loans | | $ | 5,855 | | | $ | 6,682 | | | $ | 9,287 | | | $ | 6,584 | | | $ | 13,021 | | | $ | 3,375 | | | $ | 3,420 | | | $ | 2,769 | | | $ | 5,855 | | | $ | 6,682 | | Other real estate owned, net | | | 3,156 | | | | 4,165 | | | | 4,744 | | | | 4,712 | | | | 1,435 | | | | 1,612 | | | | 2,052 | | | | 2,817 | | | | 3,156 | | | | 4,165 | | Total nonperforming assets | | $ | 9,011 | | | $ | 10,847 | | | $ | 14,031 | | | $ | 11,296 | | | $ | 14,456 | | | $ | 4,987 | | | $ | 5,472 | | | $ | 5,586 | | | $ | 9,011 | | | $ | 10,847 | | Accruing loans past due 90 days or more: | | | | | | | | | | | | | | | | | | | | | | Accruing loans past due 90 days or more | | | | | | | | | | | | | | | | | | | | | | Real estate construction | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | Consumer real estate | | | 42 | | | | 145 | | | | 82 | | | | 128 | | | | 156 | | | Consumer real estate | | | | 188 | | | | --- | | | | 11 | | | | 42 | | | | 145 | | Commercial real estate | | | --- | | | | --- | | | | 102 | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Commercial non real estate | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | 17 | | | | 2 | | | | --- | | | | --- | | | | --- | | Public sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Consumer non real estate | | | 21 | | | | 11 | | | | 23 | | | | 62 | | | | 14 | | | | 26 | | | | 33 | | | | 40 | | | | 21 | | | | 11 | | Total accruing loans past due 90 days or more | | $ | 63 | | | $ | 156 | | | $ | 207 | | | $ | 190 | | | $ | 170 | | | $ | 231 | | | $ | 35 | | | $ | 51 | | | $ | 63 | | | $ | 156 | | Accruing restructured loans: | | | | | | | | | | | | | | | | | | | | | | Real estate construction | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | Consumer real estate | | | 877 | | | | 962 | | | | 819 | | | | 579 | | | | 80 | | | Commercial real estate | | | 2,892 | | | | 7,645 | | | | 5,192 | | | | 5,552 | | | | 1,886 | | | Commercial non real estate | | | --- | | | | 207 | | | | 29 | | | | 60 | | | | 39 | | | Public sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | Consumer non real estate | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | Total accruing restructured loans | | $ | 3,769 | | | $ | 8,814 | | | $ | 6,040 | | | $ | 6,191 | | | $ | 2,005 | | | | | | | | | | | | | | | | | | | | | | | (continued) | |
Accruing restructured loans | | | | | | | | | | | | | | | | | | | | | Real estate construction | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | Consumer real estate | | | 426 | | | | 417 | | | | 947 | | | | 877 | | | | 962 | | Commercial real estate | | | 382 | | | | 1,112 | | | | 2,948 | | | | 2,892 | | | | 7,645 | | Commercial non real estate | | | 916 | | | | 1,010 | | | | 1,214 | | | | --- | | | | 207 | | Public sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Consumer non real estate | | | 5 | | | | 13 | | | | 25 | | | | --- | | | | --- | | Total accruing restructured loans | | $ | 1,729 | | | $ | 2,552 | | | $ | 5,134 | | | $ | 3,769 | | | $ | 8,814 | |
Loan loss and other indicators related to asset quality are presented in the Loan Loss Data table. Loan Loss Data Table | | | 2016 | | | 2015 | | | 2014 | | | Provision for loan losses | | $ | 1,650 | | | $ | 2,009 | | | $ | 1,641 | | | $ in thousands | | | 2019 | | 2018 | | 2017 | Provision for (recovery of) loan losses | | | $ | 126 | | | $ | (81 | ) | | $ | 157 | | Net charge-offs to average net loans | | | 0.26 | % | | | 0.32 | % | | | 0.27 | % | | | 0.09 | % | | | 0.07 | % | | | 0.08 | % | Allowance for loan losses to loans, net of unearned income and deferred fees | | | 1.28 | % | | | 1.34 | % | | | 1.36 | % | | | 0.94 | % | | | 1.04 | % | | | 1.19 | % | Allowance for loan losses to nonperforming loans | | | 141.76 | % | | | 124.17 | % | | | 88.97 | % | | | 203.35 | % | | | 216.08 | % | | | 286.20 | % | Allowance for loan losses to nonperforming assets | | | 92.11 | % | | | 76.49 | % | | | 58.89 | % | | | 137.62 | % | | | 135.05 | % | | | 141.87 | % | Nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned | | | 1.38 | % | | | 1.74 | % | | | 2.30 | % | | | 0.68 | % | | | 0.77 | % | | | 0.83 | % | Nonaccrual loans | | $ | 1,168 | | | $ | 2,043 | | | $ | 3,999 | | | $ | 164 | | | $ | 311 | | | $ | 6 | | Restructured loans in nonaccrual status | | | 4,687 | | | | 4,639 | | | | 5,288 | | | | 3,211 | | | | 3,109 | | | | 2,763 | | Other real estate owned, net | | | 3,156 | | | | 4,165 | | | | 4,744 | | | | 1,612 | | | | 2,052 | | | | 2,817 | | Total nonperforming assets | | $ | 9,011 | | | $ | 10,847 | | | $ | 14,031 | | | $ | 4,987 | | | $ | 5,472 | | | $ | 5,586 | | Accruing loans past due 90 days or more | | $ | 63 | | | $ | 156 | | | $ | 207 | | | $ | 231 | | | $ | 35 | | | $ | 51 | |
Nonperforming loans include nonaccrual loans and restructured loans (“troubled debt restructurings” or “TDR loans”)TDRs in nonaccrual status, but do not include accruing loans 90 days or more past due or accruing restructured loans. Troubled debt restructuringsTDRs are discussed in detail under the section titled “D.“C. Modifications and Troubled Debt Restructurings (TDR Loans)”Restructurings” below. Impaired loans, or loans for which management does not expect to collect at the original loan terms, but which may or may not be nonperforming, are presented in Note 5 of Notes to Consolidated Financial Statements. Total impaired loans at December 31, 20162019 were $9,173,$5,289, of which $5,404$3,211 were in nonaccrual status. Impaired loans at December 31, 20152018 and 20142017 were $15,346$6,820 and $15,121,$11,924, of which $6,532$3,420 and $8,794$2,763 were in nonaccrual status, respectively. The ratio of the allowance for loan losses to total nonperforming loans improveddecreased from 124.17%216.08% in 20152018 to 141.76%203.35% in 2016.2019. The Company believes the allowance for loan losses is adequate for the credit risk inherent in the loan portfolio. D. Modifications and Troubled Debt Restructurings (“TDRs”)
C. | Modifications and Troubled Debt Restructurings |
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 experiencing consequences of a specific unforeseen temporary hardship. An extension defers monthly payments and requires a balloon payment at the original contractual maturity. WhereIf the temporary event is not expected to impact a borrower’s ability to repay the debt, and whereif 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. 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 representative of terms the borrower could otherwise obtain in the open market, the modified loan is not categorized as a TDR. The Company codes modifications to assist in identifying troubled debt restructurings.TDRs. The majority of modifications were granted for competitive reasons and did not constitute troubled debt restructurings.TDRs. A description of modifications that did not result in troubled debt restructuringsTDRs follows: Modifications Made During the 12 Months Ended December 31, 2016 to Borrowers Not Experiencing Financial Difficulty | | Modification | | Number of Loans Modified | | | Total Amount Modified | | Rate reductions for competitive purposes | | | 73 | | | $ | 34,080 | | Payment extensions for less than 3 months | | | 142 | | | | 2,475 | | Maturity date extensions of more than 3 months and up to 6 months | | | 219 | | | | 20,781 | | Maturity date extensions of more than 6 months and up to 12 months | | | 274 | | | | 13,277 | | Maturity date extensions of more than 12 months | | | 17 | | | | 3,073 | | Advances on non-revolving loans or recapitalization | | | 2 | | | | 177 | | Change in amortization term or method | | | 26 | | | | 2,292 | | Renewal of expired Home Equity Line of Credit loans to additional 10 years | | | 19 | | | | 678 | | Renewal of single-payment notes | | | 244 | | | | 4,722 | | Total modifications that do not constitute TDRs | | | 1,016 | | | $ | 81,555 | |
Modifications Made During the 12 Months Ended December 31, 2015 to Borrowers Not Experiencing Financial Difficulty | | Modification | | Number of Loans Modified | | | Total Amount Modified | | Rate reductions for competitive purposes | | | 70 | | | $ | 38,417 | | Payment extensions for less than 3 months | | | 115 | | | | 2,486 | | Maturity date extensions of more than 3 months and up to 6 months | | | 260 | | | | 30,257 | | Maturity date extensions of more than 6 months and up to 12 months | | | 260 | | | | 15,613 | | Maturity date extensions of more than 12 months | | | 6 | | | | 330 | | Advances on non-revolving loans or recapitalization | | | 2 | | | | 566 | | Change in amortization term or method | | | 20 | | | | 2,580 | | Renewal of expired Home Equity Line of Credit loans to additional 10 years | | | 25 | | | | 597 | | Renewal of single-payment notes | | | 235 | | | | 4,144 | | Total modifications that do not constitute TDRs | | | 993 | | | $ | 94,990 | |
Modifications Made During the 12 Months Ended December 31, 2019 to Borrowers Not Experiencing Financial Difficulty | Modification | | Number of Loans Modified | | | Total Amount Modified | Rate reductions for competitive purposes | | 10 | | | $ | 21,717 | | Payment extensions for less than 3 months | | 72 | | | | 1,302 | | Maturity date extensions of more than 3 months and up to 6 months | | 143 | | | | 20,287 | | Maturity date extensions of more than 6 months and up to 12 months | | 234 | | | | 14,475 | | Maturity date extensions of more than 12 months | | 74 | | | | 8,811 | | Advances on non-revolving loans or recapitalization | | 4 | | | | 1,019 | | Change in amortization term or method | | 11 | | | | 4,374 | | Change or release of collateral | | 26 | | | | 532 | | Renewal of expired Home Equity Line of Credit loans to additional 10 years | | 34 | | | | 1,330 | | Renewal of single-payment notes | | 124 | | | | 3,254 | | Total modifications that do not constitute TDRs | | 732 | | | $ | 77,101 | |
Modifications Made During the 12 Months Ended December 31, 2014 to Borrowers Not Experiencing Financial Difficulty | | Modification | | Number of Loans Modified | | | Total Amount Modified | | Rate reductions for competitive purposes | | | 54 | | | $ | 22,057 | | Payment extensions for less than 3 months | | | 206 | | | | 18,121 | | Maturity date extensions of more than 3 months and up to 6 months | | | 211 | | | | 39,411 | | Maturity date extensions of more than 6 months and up to 12 months | | | 326 | | | | 12,682 | | Maturity date extensions of more than 12 months | | | 16 | | | | 4,796 | | Advances on non-revolving loans or recapitalization | | | 2 | | | | 39 | | Change in amortization term or method | | | 37 | | | | 16,592 | | Renewal of expired Home Equity Line of Credit loans to additional 10 years | | | 37 | | | | 628 | | Renewal of single-payment notes | | | 305 | | | | 6,837 | | Total modifications that do not constitute TDRs | | | 1,194 | | | $ | 121,163 | |
Modifications Made During the 12 Months Ended December 31, 2018 to Borrowers Not Experiencing Financial Difficulty | Modification | | Number of Loans Modified | | | Total Amount Modified | Rate reductions for competitive purposes | | 18 | | | $ | 8,384 | | Payment extensions for less than 3 months | | 61 | | | | 646 | | Maturity date extensions of more than 3 months and up to 6 months | | 134 | | | | 22,663 | | Maturity date extensions of more than 6 months and up to 12 months | | 308 | | | | 11,777 | | Maturity date extensions of more than 12 months | | 17 | | | | 2,304 | | Advances on non-revolving loans or recapitalization | | 8 | | | | 2,076 | | Change in amortization term or method | | 11 | | | | 1,542 | | Change or release of collateral | | 43 | | | | 783 | | Renewal of expired Home Equity Line of Credit loans to additional 10 years | | 20 | | | | 300 | | Renewal of single-payment notes | | 138 | | | | 2,862 | | Total modifications that do not constitute TDRs | | 758 | | | $ | 53,337 | |
Modifications Made During the 12 Months Ended December 31, 2017 to Borrowers Not Experiencing Financial Difficulty | Modification | | Number of Loans Modified | | | Total Amount Modified | Rate reductions for competitive purposes | | 29 | | | $ | 11,783 | | Payment extensions for less than 3 months | | 126 | | | | 2,693 | | Maturity date extensions of more than 3 months and up to 6 months | | 182 | | | | 29,253 | | Maturity date extensions of more than 6 months and up to 12 months | | 316 | | | | 14,675 | | Maturity date extensions of more than 12 months | | 7 | | | | 3,474 | | Advances on non-revolving loans or recapitalization | | 12 | | | | 4,603 | | Change in amortization term or method | | 42 | | | | 4,884 | | Renewal of expired Home Equity Line of Credit loans to additional 10 years | | 19 | | | | 448 | | Renewal of single-payment notes | | 240 | | | | 5,044 | | Total modifications that do not constitute TDRs | | 973 | | | $ | 76,857 | |
Modifications in which the borrower is experiencing financial difficulty and for which the Company makes a concession to the original contractual loan terms are designated troubled debt restructurings. TDRs. 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. Assuming all other TDR criteria are met, the Company considers one or a combination of the following concessions to the loan terms to indicate TDR status: a reduction of the stated interest rate, an extension of the maturity date at an interest rate lower than the current market rate for a new loan with a similar term and similar risk, or forgiveness of principal or accrued interest. The Company recognizes that in the current economy 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 with an impairment loss orat least six months of timely repayment history may accrue interest. TDR loans that do not demonstrate current payments for at leasthave six months of timely repayment performance are maintained on nonaccrual until the borrower demonstrates sustained repayment history under the restructured terms and continued repayment is not in doubt. Otherwise,TDR loans may be removed from TDR status, and placed in the appropriate collectively evaluated pool, if the restructuring agreement specified a market interest incomerate at the time of restructuring and the loan is recognized usingin compliance with modified terms for a cost recovery method.period of at least one year after the restructuring was executed. The Company had $8,456 inCompany’s TDRs amounted to $4,940 as of December 31, 20162019 and $13,453$5,661 as of December 31, 2015.2018. Accruing TDR loans amounted to $3,769$1,729 at December 31, 20162019 compared to $8,814$2,552 at December 31, 2015.2018. Restructuring generally results in loans with either lower payments or an extended maturity beyond that originally required, and are expected to have a lower risk of loss due to nonperformance than loans classified as nonperforming. In 2016,2019, the Company modified loansone loan in troubled debt restructuringsa TDR that, directly prior to restructuring, totaled $3,042$100, and that have total principal balancescurrently has a balance of $2,761 as of$100 at December 31, 2016. Some of2019. Of the Company’s restructured loans defaulted during the twelve months endedTDRs at December 31, 2016.2019, seven loans, all part of one relationship defaulted within 12 months of being modified. The Company defines default as a delay in one payment of more than 90 days or foreclosure after the date of restructuring. All of the restructured loans that defaulted had been modified more than twelve months prior to default. In 2015,2018, the Company modified loans in troubled debt restructuringsa TDR that, directly prior to restructuring, totaled $3,628$4,213 and that had total principal balances of $3,504$3,800 as of December 31, 2015. All2018. None of the Company’s restructured loans that defaulted in 2015 had been modified more thanduring the twelve months prior to default. ended December 31, 2018. Please refer to Note 5 for information on the effect of default on the allowance for loan losses. The following tables present the delinquency status of TDR loans. | | | TDR Delinquency Status as of December 31, 2016 | | | | | | | | | Accruing | | | | | | | | | Total TDR Loans | | | Current | | | 30-89 Days Past Due | | | 90+ Days Past Due | | | Nonaccrual | | Real estate construction | | $ | 270 | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 270 | | Consumer real estate | | | 877 | | | | 717 | | | | 160 | | | | --- | | | | --- | | Commercial real estate | | | 7,282 | | | | 2,892 | | | | --- | | | | --- | | | | 4,390 | | Commercial non real estate | | | 24 | | | | --- | | | | --- | | | | --- | | | | 24 | | Public sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Consumer non real estate | | | 3 | | | | --- | | | | --- | | | | --- | | | | 3 | | Total TDR Loans | | $ | 8,456 | | | $ | 3,609 | | | $ | 160 | | | $ | --- | | | $ | 4,687 | |
| | | TDR Delinquency Status as of December 31, 2015 | | | | | | | | | Accruing | | | | | | | | | Total TDR Loans | | | Current | | | 30-89 Days Past Due | | | 90+ Days Past Due | | | Nonaccrual | | Real estate construction | | $ | 718 | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 718 | | Consumer real estate | | | 962 | | | | 784 | | | | 178 | | | | --- | | | | --- | | Commercial real estate | | | 11,566 | | | | 7,645 | | | | --- | | | | --- | | | | 3,921 | | Commercial non real estate | | | 207 | | | | 207 | | | | --- | | | | --- | | | | --- | | Public sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Consumer non real estate | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Total TDR Loans | | $ | 13,453 | | | $ | 8,636 | | | $ | 178 | | | $ | --- | | | $ | 4,639 | |
| | | TDR Delinquency Status as of December 31, 2014 | | | $ in thousands | | | TDR Delinquency Status as of December 31, 2019 | | | | | | | | Accruing | | | | | | | | | | | Accruing | | | | | | | | Total TDR Loans | | | Current | | | 30-89 Days Past Due | | | 90+ Days Past Due | | | Nonaccrual | | | Total TDR Loans | | Current | | 30-89 Days Past Due | | 90+ Days Past Due | | Nonaccrual | Real estate construction | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | Consumer real estate | | | 819 | | | | 786 | | | | --- | | | | 33 | | | | --- | | | | 688 | | | | 426 | | | | --- | | | | --- | | | | 262 | | Commercial real estate | | | 10,480 | | | | 5,192 | | | | --- | | | | --- | | | | 5,288 | | | | 3,331 | | | | 382 | | | | --- | | | | --- | | | | 2,949 | | Commercial non real estate | | | 29 | | | | 29 | | | | --- | | | | --- | | | | --- | | | | 916 | | | | 916 | | | | --- | | | | --- | | | | --- | | Public sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Consumer non real estate | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | 5 | | | | 2 | | | | 3 | | | | --- | | | | --- | | Total TDR Loans | | $ | 11,328 | | | $ | 6,007 | | | $ | --- | | | $ | 33 | | | $ | 5,288 | | | $ | 4,940 | | | $ | 1,726 | | | $ | 3 | | | $ | --- | | | $ | 3,211 | |
$ in thousands | | TDR Delinquency Status as of December 31, 2018 | | | | | | | | Accruing | | | | | | | | Total TDR Loans | | Current | | 30-89 Days Past Due | | 90+ Days Past Due | | Nonaccrual | Real estate construction | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | Consumer real estate | | | 1,027 | | | | 417 | | | | --- | | | | --- | | | | 610 | | Commercial real estate | | | 3,606 | | | | 1,112 | | | | --- | | | | --- | | | | 2,494 | | Commercial non real estate | | | 1,015 | | | | 1,010 | | | | --- | | | | --- | | | | 5 | | Public sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Consumer non real estate | | | 13 | | | | 9 | | | | 4 | | | | --- | | | | --- | | Total TDR Loans | | $ | 5,661 | | | $ | 2,548 | | | $ | 4 | | | $ | --- | | | $ | 3,109 | |
$ in thousands | | TDR Delinquency Status as of December 31, 2017 | | | | | | | | Accruing | | | | | | | | Total TDR Loans | | Current | | 30-89 Days Past Due | | 90+ Days Past Due | | Nonaccrual | Real estate construction | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | Consumer real estate | | | 1,092 | | | | 773 | | | | 174 | | | | --- | | | | 145 | | Commercial real estate | | | 5,550 | | | | 2,948 | | | | --- | | | | --- | | | | 2,602 | | Commercial non real estate | | | 1,229 | | | | 1,214 | | | | --- | | | | --- | | | | 15 | | Public sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Consumer non real estate | | | 26 | | | | 25 | | | | --- | | | | --- | | | | 1 | | Total TDR Loans | | $ | 7,897 | | | $ | 4,960 | | | $ | 174 | | | $ | --- | | | $ | 2,763 | |
Summary of Loan Loss Experience A.Analysis of the Allowance for Loan Losses | Analysis of the Allowance for Loan Losses |
The following tabulationtable shows average loan balances at the end of each period; changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category; and additions to the allowance which have been charged to operating expense: | | | December 31, | | | $ in thousands | | | December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | Average loans, net of unearned income and deferred fees and costs | | $ | 621,654 | | | $ | 619,745 | | | $ | 592,944 | | | $ | 585,991 | | | $ | 588,170 | | | $ | 719,179 | | | $ | 683,310 | | | $ | 653,364 | | | $ | 621,654 | | | $ | 619,745 | | Allowance for loan losses at beginning of year | | | 8,297 | | | | 8,263 | | | | 8,227 | | | | 8,349 | | | | 8,068 | | | | 7,390 | | | | 7,925 | | | | 8,300 | | | | 8,297 | | | | 8,263 | | Charge-offs: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate construction | | | 29 | | | | --- | | | | 2 | | | | 184 | | | | 640 | | | | --- | | | | --- | | | | --- | | | | 29 | | | | --- | | Consumer real estate | | | 133 | | | | 205 | | | | 222 | | | | 256 | | | | 370 | | | | 192 | | | | 38 | | | | 146 | | | | 133 | | | | 205 | | Commercial real estate | | | 488 | | | | 1,114 | | | | 1,201 | | | | 64 | | | | 1,589 | | | | 150 | | | | --- | | | | 139 | | | | 488 | | | | 1,114 | | Commercial non real estate | | | 883 | | | | 490 | | | | 89 | | | | 968 | | | | 109 | | | | 47 | | | | 107 | | | | 82 | | | | 883 | | | | 490 | | Public Sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Consumer non real estate | | | 273 | | | | 311 | | | | 346 | | | | 348 | | | | 245 | | | | 531 | | | | 544 | | | | 452 | | | | 273 | | | | 311 | | Total loans charged off | | | 1,806 | | | | 2,120 | | | | 1,860 | | | | 1,820 | | | | 2,953 | | | | 920 | | | | 689 | | | | 819 | | | | 1,806 | | | | 2,120 | | Recoveries: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Real estate construction | | | --- | | | | --- | | | | --- | | | | 44 | | | | 13 | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Consumer real estate | | | 2 | | | | 2 | | | | --- | | | | 1 | | | | 8 | | | | --- | | | | 3 | | | | 1 | | | | 2 | | | | 2 | | Commercial real estate | | | 83 | | | | 49 | | | | 50 | | | | 25 | | | | --- | | | | 49 | | | | 49 | | | | 131 | | | | 83 | | | | 49 | | Commercial non real estate | | | 10 | | | | 1 | | | | 132 | | | | 18 | | | | 2 | | | | 1 | | | | 22 | | | | 23 | | | | 10 | | | | 1 | | Public Sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | Consumer non real estate | | | 64 | | | | 93 | | | | 73 | | | | 79 | | | | 77 | | | | 217 | | | | 161 | | | | 132 | | | | 64 | | | | 93 | | Total recoveries | | | 159 | | | | 145 | | | | 255 | | | | 167 | | | | 100 | | | | 267 | | | | 235 | | | | 287 | | | | 159 | | | | 145 | | Net loans charged off | | | 1,647 | | | | 1,975 | | | | 1,605 | | | | 1,653 | | | | 2,853 | | | | 653 | | | | 454 | | | | 532 | | | | 1,647 | | | | 1,975 | | Provision charged to operations | | | 1,650 | | | | 2,009 | | | | 1,641 | | | | 1,531 | | | | 3,134 | | | Provision for (recovery of) loan losses | | | | 126 | | | | (81 | ) | | | 157 | | | | 1,650 | | | | 2,009 | | Allowance for loan losses at end of year | | $ | 8,300 | | | $ | 8,297 | | | $ | 8,263 | | | $ | 8,227 | | | $ | 8,349 | | | $ | 6,863 | | | $ | 7,390 | | | $ | 7,925 | | | $ | 8,300 | | | $ | 8,297 | | Net charge-offs to average loans net of unearned income and deferred fees and costs | | | 0.26 | % | | | 0.32 | % | | | 0.27 | % | | | 0.28 | % | | | 0.49 | % | | | 0.09 | % | | | 0.07 | % | | | 0.08 | % | | | 0.26 | % | | | 0.32 | % |
The Company charges off commercial real estate loans at the time that a loss is confirmed. When delinquency status or other information indicates that the borrower will not repay the loan, the Company considers collateral value based upon a current appraisal or internal evaluation. Any loan amount in excess of collateral value is charged off and the collateral is taken into other real estate owned.OREO. Management analyzes many factors to determine the appropriate level for the allowance for loan losses and resultant provision expense, including the historical loss rate, the quality of the loan portfolio as determined by management, diversification as to type of loans in the portfolio, internal policies and economic factors. Management considers net charge-offs over the most recent eight quarters to determine the historical loss rate to be applied to the calculation. The historical loss rate contributes significantly to the required level for the allowance for loan losses. B. Allocation of the Allowance for Loan Losses | Allocation of the Allowance for Loan Losses |
The allowance for loan losses has been allocated according to the amount deemed necessary to provide for anticipated losses within the categories of loans for the years indicated as follows: | | | December 31, | | | $ in thousands | | | December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | | Allowance
Amount | | | Percent of
Loans in Each
Category to
Total
Loans | | | Allowance
Amount | | | Percent of
Loans in
Each
Category to
Total
Loans | | | Allowance
Amount | | | Percent of
Loans in
Each
Category to
Total Loans | | | Allowance
Amount | | | Percent of
Loans in
Each
Category to
Total
Loans | | | Allowance
Amount | | | Percent of
Loans in
Each
Category to
Total Loans | | | Allowance
Amount | | Percent of
Loans in Each
Category to
Total
Loans(1) | | Allowance
Amount | | Percent of
Loans in
Each
Category to
Total
Loans(1) | | Allowance
Amount | | Percent of
Loans in
Each
Category to
Total Loans(1) | | Allowance
Amount | | Percent of
Loans in
Each
Category to
Total
Loans(1) | | Allowance
Amount | | Percent of
Loans in
Each
Category to
Total Loans(1) | Real estate construction | | $ | 438 | | | | 5.60 | % | | $ | 576 | | | | 7.78 | % | | $ | 612 | | | | 7.52 | % | | $ | 863 | | | | 7.70 | % | | $ | 1,070 | | | | 8.48 | % | | $ | 400 | | | 5.76 | % | | $ | 398 | | | 5.33 | % | | $ | 337 | | | 5.19 | % | | $ | 438 | | | 5.60 | % | | $ | 576 | | | 7.78 | % | Consumer real estate | | | 1,830 | | | | 24.32 | % | | | 1,866 | | | | 23.15 | % | | | 1,662 | | | | 24.25 | % | | | 1,697 | | | | 24.39 | % | | | 2,263 | | | | 24.15 | % | | | 1,895 | | | 24.72 | % | | | 2,049 | | | 24.70 | % | | | 2,027 | | | 24.97 | % | | | 1,830 | | | 24.32 | % | | | 1,866 | | | 23.15 | % | Commercial real estate | | | 3,738 | | | | 51.88 | % | | | 4,109 | | | | 49.92 | % | | | 3,537 | | | | 51.25 | % | | | 3,685 | | | | 52.17 | % | | | 3,442 | | | | 51.31 | % | | | 2,559 | | | 49.77 | % | | | 2,798 | | | 49.77 | % | | | 3,044 | | | 50.91 | % | | | 3,738 | | | 51.88 | % | | | 4,109 | | | 49.92 | % | Commercial non real estate | | | 1,063 | | | | 6.02 | % | | | 655 | | | | 6.06 | % | | | 1,475 | | | | 5.51 | % | | | 989 | | | | 5.24 | % | | | 959 | | | | 6.30 | % | | | 555 | | | 6.35 | % | | | 602 | | | 6.55 | % | | | 1,072 | | | 6.06 | % | | | 1,063 | | | 6.02 | % | | | 655 | | | 6.06 | % | Public sector and IDA | | | 330 | | | | 7.01 | % | | | 436 | | | | 8.28 | % | | | 327 | | | | 6.82 | % | | | 132 | | | | 5.74 | % | | | 142 | | | | 4.41 | % | | | 478 | | | 8.69 | % | | | 583 | | | 8.55 | % | | | 419 | | | 7.69 | % | | | 330 | | | 7.01 | % | | | 436 | | | 8.28 | % | Consumer non real estate | | | 644 | | | | 5.17 | % | | | 627 | | | | 4.81 | % | | | 602 | | | | 4.65 | % | | | 576 | | | | 4.76 | % | | | 424 | | | | 5.35 | % | | | 650 | | | 4.71 | % | | | 750 | | | 5.10 | % | | | 707 | | | 5.18 | % | | | 644 | | | 5.17 | % | | | 627 | | | 4.81 | % | Unallocated | | | 257 | | | | | | | | 28 | | | | | | | | 48 | | | | | | | | 285 | | | | | | | | 49 | | | | | | | | 326 | | | | | | | 210 | | | | | | | 319 | | | | | | | 257 | | | | | | | 28 | | | | | | | | $ | 8,300 | | | | 100.00 | % | | $ | 8,297 | | | | 100.00 | % | | $ | 8,263 | | | | 100.00 | % | | $ | 8,227 | | | | 100.00 | % | | $ | 8,349 | | | | 100.00 | % | | $ | 6,863 | | | 100.00 | % | | $ | 7,390 | | | 100.00 | % | | $ | 7,925 | | | 100.00 | % | | $ | 8,300 | | | 100.00 | % | | $ | 8,297 | | | 100.00 | % |
| (1) | Loans are presented on a gross basis. |
An analysis of the allowance for loan losses by impairment basis follows: | | | December 31, | | | $ in thousands | | | December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2019 | | 2018 | | 2017 | Impaired loans | | $ | 9,173 | | | $ | 15,346 | | | $ | 15,121 | | | $ | 5,289 | | | $ | 6,820 | | | $ | 11,924 | | Allowance related to impaired loans | | | 25 | | | | 45 | | | | 282 | | | | 110 | | | | 139 | | | | 177 | | Allowance to impaired loans | | | 0.27 | % | | | 0.29 | % | | | 1.87 | % | | | 2.08 | % | | | 2.04 | % | | | 1.48 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-impaired loans | | | 639,373 | | | | 604,538 | | | | 591,198 | | | | 728,738 | | | | 703,577 | | | | 656,758 | | Allowance related to non-impaired loans | | | 8,275 | | | | 8,252 | | | | 7,981 | | | | 6,753 | | | | 7,251 | | | | 7,748 | | Allowance to non-impaired loans | | | 1.29 | % | | | 1.37 | % | | | 1.35 | % | | | 0.93 | % | | | 1.03 | % | | | 1.18 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | Total loans | | | 648,546 | | | | 619,884 | | | | 606,319 | | | Total gross loans | | | | 734,027 | | | | 710,397 | | | | 668,682 | | Less: unearned income and deferred fees and costs | | | (794 | ) | | | (876 | ) | | | (853 | ) | | | (576 | ) | | | (598 | ) | | | (613 | ) | Loans, net of unearned income and deferred fees and costs | | | 647,752 | | | | 619,008 | | | | 605,466 | | | | 733,451 | | | | 709,799 | | | | 668,069 | | Allowance for loan losses, total | | | 8,300 | | | | 8,297 | | | | 8,263 | | | Allowance for loan losses, total | | | | 6,863 | | | | 7,390 | | | | 7,925 | | Allowance as a percentage of loans, net of unearned income and deferred fees and costs | | | 1.28 | % | | | 1.34 | % | | | 1.36 | % | | | 0.94 | % | | | 1.04 | % | | | 1.19 | % |
| (1) | Loans are presented on a gross basis. |
Individually-evaluated impaired loans are valued using the appraisedfair value of the underlying collateral or the present value of cash flows for each loan. Valuation procedures for impaired loans resulted in a required reserve for impaired loans of $25$110 at December 31, 2016, $452019, $139 at December 31, 20152018 and $282$177 at December 31, 2014.2017. The amount of the individual impaired loan balance that exceeds the fair value is accrued in the allowance for loan losses. Management’s analysis of the loan portfolio and pertinent economic conditions resulted in a determination of the allowance for loan losses for collectively-evaluatedcollectively evaluated loans of $8,275$6,753 or 1.30%0.93% of such loans at December 31, 2016, $8,2522019, $7,251 or 1.37%1.03% at December 31, 2015,2018, and $7,981$7,748 or 1.35%1.18% at December 31, 2014.2017. The allowance for collectively-evaluatedcollectively evaluated loans is determined by applying historical charge-off percentages, as well as additional accruals for internal and external credit risk factors to groups of collectively-evaluatedcollectively evaluated loans. The Company applies the average of the most recent eight quarters of net charge-offs to calculate historical net charge-offs for the allowance. The ratio decreased from 20152018 to 20162019 due to improvements in economic and credit risk factors. The ratio decreased from 2017 to 2018 due to a decreased charge-off ratio, down from 0.32%0.08% for the twelve months ended December 31, 20152017 to 0.26%0.07% for the year ended December 31, 2016.2018. Also contributing to the reduced allowance requirement were improved asset quality indicators, lower levels of high risk loans and favorable economic indicators. The ratio increased from 2014 due to increases in net charge-offs, accruing loans 30-89 days past due, levels of loans rated “special mention”, levels of high-risk loans and certain economic factors, partially offset by positive changes in levels of nonaccrual loans, classified loans and certain other economic factors. The unallocated portion of the reserve was $257$326 at December 31, 2016, $282019, $210 at December 31, 20152018 and $48$319 at December 31, 2014.2017. The unallocated portion of the reserve is the amount that exceeds the calculated requirement for the allowance for loan losses. The Company’s policy permits an unallocated reserve of up to 5% in excess of the required level for the allowance for loan losses. The total calculated allowance for loan losses of $8,300$6,863 at December 31, 2016, $8,2972019, $7,390 as of December 31, 20152018 and $8,263$7,925 as of December 31, 20142017 indicated a provision charges for loan losses of $1,650$126 for the twelve months ended December 31, 2016, $2,0092019 and indicated a recovery of $81 for the twelve months ended December 31, 20152018 and $1,641a provision of $157 for the twelve months ended December 31, 2014.2017. Please refer to the discussion under “Provision and Allowance for Loan Losses” for additional information on the determination of the allowance for loan loss. Securities The fair value of securities available for sale was $304,282,$435,263, an increase of $68,151$10,253 or 28.86%2.41% from December 31, 2015. The amortized cost of securities held to maturity was $134,957 at December 31, 2016 and $152,028 at December 31, 2015, a decrease of $17,071 or 11.23%. Additional information about securities available for sale and securities held to maturity can be found in Note 3 of the Notes to Consolidated Financial Statements.2018.
The securities portfolio is subject to the volatility and risk in the financial markets. The risk in financial markets affects the Company in the same way that it affects other institutional and individual investors. The Company’s investment portfolio includes corporate bonds. If, because of economic hardship, the corporate issuers were to default, there could be a delay in the payment of interest, or there could be a loss of principal and accrued interest. To date, there have been no defaults in any of the corporate bonds held in the portfolio. The Company’s investment portfolio also contains a large percentage of municipal bonds. If economic forces reduce the ability of states and municipalities to make scheduled principal and interest payments on their outstanding indebtedness. Ifindebtedness, or if their income from taxes and other sources declines significantly, states and municipalities could default on their bond obligations. There have been no defaults among the municipal bonds in the Company’s investment portfolio. The fair value of our bond portfolio is affected by interest rates. The fair value of available for sale securities is reflected on the Company's balance sheet, while held to maturity securities are reported at amortized cost. In making investment decisions, management follows internal policy guidelines that help to limit risk by specifying parameters for both security quality and industry and geographic concentrations. Management regularly monitors the quality of the investment portfolio and tracks changes in financial markets. The value of individual securities will be written down if a decline in fair value is considered to be other than temporary, given the totality of the circumstances. Additional information about securities available for sale and securities held to maturity can be found in Note 3 of the Notes to Consolidated Financial Statements. Maturities and Associated Yields The following table presents the maturities for securities available for sale and held to maturity at their carrying values as of December 31, 20162019 and weighted average yield for each range of maturities. $ in thousands | | | Maturities and Yields | | | | Maturities and Yields | | | December 31, 2019 | $ in thousands, except percent data | | December 31, 2016 | | | | | | < 1 Year | | | 1-5 Years | | | 5-10 Years | | | > 10 Years | | | None | | | Total | | | < 1 Year | | 1-5 Years | | 5-10 Years | | > 10 Years | | None | | Total | Available for Sale: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Government agencies | | $ | 1,994 | | | $ | 192,129 | | | $ | 73,416 | | | $ | 18,059 | | | $ | --- | | | $ | 285,598 | | | | | | | 0.78 | % | | | 1.37 | % | | | 2.02 | % | | | 3.44 | % | | | --- | | | | 1.67 | % | | Mortgage-backed securities | | $ | --- | | | $ | 191 | | | $ | 223 | | | $ | 516 | | | $ | --- | | | $ | 930 | | | | | | | --- | | | | 4.97 | % | | | 5.63 | % | | | 5.40 | % | | | --- | | | | 5.38 | % | | States and political subdivision – nontaxable (1) | | $ | 1,429 | | | $ | 3,107 | | | $ | 4,362 | | | $ | 2,795 | | | $ | --- | | | $ | 11,693 | | | | | | | 5.96 | % | | | 5.79 | % | | | 5.91 | % | | | 5.51 | % | | | --- | | | | 5.79 | % | | Corporate | | $ | --- | | | $ | 1,006 | | | $ | --- | | | $ | 4,892 | | | $ | --- | | | $ | 5,898 | | | | | | | --- | | | | 2.48 | % | | | --- | | | | 4.15 | % | | | --- | | | | 3.88 | % | | Other securities | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 163 | | | $ | 163 | | | | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | | --- | | | Total | | $ | 3,423 | | | $ | 196,433 | | | $ | 78,001 | | | $ | 26,262 | | | $ | 163 | | | $ | 304,282 | | | | | | | 2.94 | % | | | 1.45 | % | | | 2.25 | % | | | 3.83 | % | | | --- | | | | 1.88 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Restricted stock: | | | | | | | | | | | | | | | | | | | | | | | | | | Restricted stock | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 1,170 | | | $ | 1,170 | | | | | | | --- | | | | --- | | | | --- | | | | --- | | | | 5.21 | % | | | 5.21 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Held to Maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Government agencies | | $ | --- | | | $ | 2,999 | | | $ | --- | | | $ | 935 | | | $ | --- | | | $ | 3,934 | | | U.S. government agencies | | | $ | 43,988 | | | $ | 991 | | | $ | 41,019 | | | $ | 35,125 | | | $ | --- | | | $ | 121,123 | | | | | | --- | | | | 3.75 | % | | | --- | | | | 3.54 | % | | | --- | | | | 3.70 | % | | | 1.62 | % | | | 2.41 | % | | | 2.57 | % | | | 3.01 | % | | | --- | | | | 2.35 | % | Mortgage-backed securities | | $ | --- | | | $ | --- | | | $ | 126 | | | $ | 139 | | | $ | --- | | | $ | 265 | | | $ | 114 | | | $ | 85 | | | $ | 83,841 | | | $ | 137,743 | | | $ | --- | | | $ | 221,783 | | | | | | --- | | | | --- | | | | 5.48 | % | | | 5.69 | % | | | --- | | | | 5.59 | % | | | 0.00 | % | | | 5.60 | % | | | 2.23 | % | | | 2.31 | % | | | --- | | | | 2.28 | % | States and political subdivision – nontaxable (1) | | $ | 3,902 | | | $ | 24,275 | | | $ | 16,489 | | | $ | 85,117 | | | $ | --- | | | $ | 129,783 | | | $ | 9,195 | | | $ | 5,429 | | | $ | 19,400 | | | $ | 54,215 | | | $ | --- | | | $ | 88,239 | | | | | | 6.01 | % | | | 6.34 | % | | | 5.43 | % | | | 5.10 | % | | | --- | | | | 5.40 | % | | | 5.01 | % | | | 4.46 | % | | | 4.27 | % | | | 3.27 | % | | | --- | | | | 3.74 | % | Corporate | | $ | --- | | | $ | 975 | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 975 | | | $ | 2,005 | | | $ | --- | | | $ | --- | | | $ | 2,113 | | | $ | --- | | | $ | 4,118 | | | | | | --- | | | | 2.40 | % | | | --- | | | | --- | | | | --- | | | | 2.40 | % | | | 2.44 | | | | --- | | | | --- | | | | 4.00 | % | | | --- | | | | 3.22 | % | Total | | $ | 3,902 | | | $ | 28,249 | | | $ | 16,615 | | | $ | 86,191 | | | $ | --- | | | $ | 134,957 | | | $ | 55,302 | | | $ | 6,505 | | | $ | 144,260 | | | $ | 229,196 | | | $ | --- | | | $ | 435,263 | | | | | | 6.01 | % | | | 5.93 | % | | | 5.43 | % | | | 5.08 | % | | | --- | | | | 5.33 | % | | | 2.21 | % | | | 4.16 | % | | | 2.60 | % | | | 2.66 | % | | | --- | | | | 2.60 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | Restricted stock: | | | | | | | | | | | | | | | | | | | | | | | | | | Restricted stock | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 1,220 | | | $ | 1,220 | | | | | | | --- | | | | --- | | | | --- | | | | --- | | | | 7.05 | % | | | 7.05 | % |
(1) Rates shown represent weighted average yield on a fully taxable basis. The majority of mortgage-backed securities and collateralized mortgage obligations held at December 31, 20162019 were backed by U.S. government agencies. Certain holdings are required to be periodically subjected to the Federal Financial Institution Examination Council’s (FFIEC) high risk mortgage security test. These tests address possible fluctuations in the average life and variances caused by the change in rate times the change in volume that have been allocated to rate and volume changes proportional to the relationship of the absolute dollar amounts of the change in each. Except for U.S. Governmentgovernment agency securities, the Company has no securities with any issuer that exceeds 10% of stockholders’ equity. Deposits Total deposits increased by $24,583$67,811 or 2.41%6.45%, from $1,018,859$1,051,942 at December 31, 20152018 to $1,043,442$1,119,753 at December 31, 2016. Total2019. While all deposit categories increased, the two greatest impacts came from growth of $26,955 in interest-bearing demand deposits grew $36,431,and growth of $26,229 in time deposits. During the fourth quarter of 2018, the Company raised its deposit offering rates in order to remain competitive during a rising rate environment. When December 31, 2018 is compared with December 31, 2017, total deposits decreased $7,792, or 3.71%0.74%, from $982,428$1,059,734 at December 31, 2014 to December 31, 2015. A portion of the increase in both 2016 and 2015 is attributable2017, primarily due to a higher level of municipaldecline in time deposits. The increases in total deposits for 2016 and 2015 were internally generated and not the result of acquisitions. A.. Average Amounts of Deposits and Average Rates Paid | Average Amounts of Deposits and Average Rates Paid |
Average amounts and average rates paid on deposit categories are presented below: | | | Year Ended December 31, | | | $ in thousands | | | Year Ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2019 | | 2018 | | 2017 | | | |
Average
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Rates
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Paid | | |
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Paid | Noninterest-bearing demand deposits | | $ | 170,344 | | | | --- | | | $ | 159,829 | | | | --- | | | $ | 146,532 | | | | --- | | | $ | 200,970 | | | | --- | | | $ | 192,440 | | | | --- | | | $ | 178,708 | | | | --- | | Interest-bearing demand deposits | | | 568,916 | | | | 0.55 | % | | | 526,682 | | | | 0.55 | % | | | 501,956 | | | | 0.67 | % | | | 601,884 | | | | 0.85 | % | | | 606,766 | | | | 0.68 | % | | | 598,661 | | | | 0.56 | % | Savings deposits | | | 94,226 | | | | 0.04 | % | | | 85,940 | | | | 0.04 | % | | | 78,778 | | | | 0.04 | % | | | 142,985 | | | | 0.31 | % | | | 140,918 | | | | 0.17 | % | | | 140,997 | | | | 0.17 | % | Time deposits | | | 180,301 | | | | 0.55 | % | | | 204,146 | | | | 0.60 | % | | | 230,418 | | | | 0.64 | % | | | 116,844 | | | | 1.54 | % | | | 105,674 | | | | 0.50 | % | | | 120,220 | | | | 0.45 | % | Average total deposits | | $ | 1,013,787 | | | | 0.41 | % | | $ | 976,597 | | | | 0.43 | % | | $ | 957,684 | | | | 0.60 | % | | $ | 1,062,683 | | | | 0.69 | % | | $ | 1,045,798 | | | | 0.47 | % | | $ | 1,038,586 | | | | 0.40 | % |
B. Time DepositsB. | Time Deposits of $250 or More |
The following table sets forth time certificates of deposit and other time deposits of $250 or more: | | | December 31, 2016 | | | | | 3 Months or Less | | Over 3 Months Through 6 Months | | Over 6 Months Through 12 Months | | Over 12 Months | | Total | | Total time deposits of $250 or more | | $ | 3,488 | | $ | 4,298 | | $ | 4,959 | | $ | 3,052 | | $ | 15,797 | |
$ in thousands | | December 31, 2019 | | | | 3 Months or Less | | Over 3 Months Through 6 Months | | Over 6 Months Through 12 Months | | Over 12 Months | | Total | Total time deposits of $250 or more | | $ | 2,763 | | | $ | 8,215 | | | $ | 11,182 | | | $ | 252 | | | $ | 22,412 | |
Derivatives and Market Risk Exposures The Company is not a party to derivative financial instruments with off-balance sheet risks such as futures, forwards, swaps, and options. The Company is a party to financial instruments with off-balance sheet risks such as commitments to extend credit, standby letters of credit, and recourse obligations in the normal course of business to meet the financing needs of its customers. See Note 14,13 of Notes to Consolidated Financial Statements for additional information relating to financial instruments with off-balance sheet risk. Management does not plan any future involvement in high risk derivative products. The Company has investments in mortgage-backed securities, principally GNMA’sthrough the Government National Mortgage Association (“GNMA”) and FNMA’s,Federal National Mortgage Association (“FNMA”), with a fair value of approximately $1,225.$221,783. See Note 3 of Notes to Consolidated Financial Statements for additional information relating to securities. The Company’s securities and loans are subject to credit and interest rate risk, and its deposits are subject to interest rate risk. Management considers credit risk when a loan is granted and monitors credit risk after the loan is granted. The Company maintains an allowance for loan losses to absorb losses in the collection of its loans. See Note 5 of Notes to Consolidated Financial Statements for information relating to the allowance for loan losses. See Note 1514 of Notes to Consolidated Financial Statements for information relating to concentrations of credit risk. The Company has an asset/liability program to manage its interest rate risk. This program provides management with information related to the rate sensitivity of certain assets and liabilities and the effect of changing rates on profitability and capital accounts. The effects of changing interest rates are primarily managed through adjustments to the loan portfolio and deposit base, to the extent competitive factors allow. The investment portfolio is generally longer term. Adjustments for asset and liability management are made when securities are called or mature and funds are subsequently reinvested. Securities may be sold for reasons related to credit quality or regulatory limitations, and in limited circumstances, securities available for sale have been disposed of for interest rate risk management. No trading activity for this purpose is planned in the foreseeable future, though it does remain an option. While the asset/liability planning program is designed to protect the Company over the long term, it does not provide near-term protection from interest rate shocks, as interest rate sensitive assets and liabilities do not by their nature move up or down in tandem in response to changes in the overall rate environment. The Company’s profitability in the near term may be temporarily negatively affected in a period of rapidly rising or rapidly falling rates, because it takes some time for the Company to change its rates to adjust to a new interest rate environment. See Note 1615 of Notes to Consolidated Financial Statements for information relating to fair value of financial instruments and comments concerning interest rate sensitivity. 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 liquidity sources, 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 BankFHLB advances. At December 31, 2016,2019, the bankBank did not have 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-saleits security portfolio for typical liquidity needs. Further, portionsneeds, within accounting, legal and strategic parameters. Prior to the second quarter of 2018, the securities portfolio was segregated into available for sale and held to maturity. During the second quarter of 2018, the Company re-classified all its held to maturity securities to available for sale. Portions of the securities portfolio are pledged to meet state requirements for public funds deposits. Discount window borrowings also require pledged securities. Increased/decreased liquidity from public funds deposits or discount window borrowings results in increased/decreased liquidity from pledging requirements. The Company monitors public funds pledging requirements and unpledged available-for-saleavailable for sale securities accessible for liquidity needs.
Regulatory capital levels determine the Company’s ability to use purchased deposits and the Federal Reserve discount window. At December 31, 2016,2019, the Company is considered well capitalized and does not have any restrictions on purchased deposits or borrowing ability at 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 December 31, 2016,2019, 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 and 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 December 31, 2016,2019, 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 December 31, 2016,2019, the loan to deposit ratio was 62.08%, slightly below policy levels.65.50%. The investment strategy takes into consideration the term of the investment, and securities in the available for sale portfolio are laddered based upon projected funding needs. In the normal course of business, we enter into certain contractual obligations, including obligations to make future payments on lease arrangements, contractual commitments with depositors, and service contracts. The table below presents our significant contractual obligations as of December 31, 2016,2019, except for pension and other postretirement benefit plans, which are included in Note 8, "Employee Benefit Plans," to the Consolidated Financial Statements in this Form 10-K. | | | Payments Due by Period | | | $ in thousands | | | Payments Due by Period | | | | Total | | | Less Than 1 Year | | | 1-3 Years | | | 4-5 Years | | | More Than 5 Years | | | Total | | Less Than 1 Year | | 1-3 Years | | 4-5 Years | | More Than 5 Years | Time deposits | | $ | 169,441 | | | $ | 86,765 | | | $ | 61,511 | | | $ | 20,995 | | | $ | 170 | | | $ | 128,028 | | | $ | 116,969 | | | $ | 8,384 | | | $ | 2,606 | | | $ | 69 | | Purchase obligations (1) | | | 9,530 | | | | 3,528 | | | | 4,577 | | | | 1,425 | | | | --- | | | | 10,975 | | | | 4,520 | | | | 3,747 | | | | 2,708 | | | | --- | | Operating leases | | | 1,071 | | | | 292 | | | | 575 | | | | 90 | | | | 164 | | | | 2,580 | | | | 354 | | | | 694 | | | | 684 | | | | 848 | | Total | | $ | 180,042 | | | $ | 90,585 | | | $ | 66,613 | | | $ | 22,510 | | | $ | 334 | | | $ | 141,583 | | | $ | 121,843 | | | $ | 12,825 | | | $ | 5,998 | | | $ | 917 | |
| | | | | (1) | Includes contracts with a minimum annual payment of $100$100. |
As of December 31, 2016,2019, the Company was not aware of any other known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of December 31, 2016,2019, the Company has no material commitments for long-term debt or for capital expenditures. Recent Accounting Pronouncements See Note 1 of Notes to Consolidated Financial Statements for information relating to recent accounting pronouncements. Capital Resources Total stockholders’ equity at December 31, 20162019 was $178,263, an increase$183,726, a decrease of $6,149,$6,512, or 3.57%3.42%, from the $172,114$190,238 at December 31, 2015.2018. The largest component of 20162019 stockholders’ equity was retained earnings of $178,224,$184,120, which included net income of $14,942,$17,466, offset by dividends of $8,071.$9,032 and repurchase of shares of $17,939. Total stockholders’ equity increased by $5,811$5,342 or 3.49%2.89%, from $166,303$184,896 on December 31, 20142017 to $172,114$190,238 on December 31, 2015.2018. In August 2018, the Federal Reserve updated the Small Bank Holding Company Policy Statement, in compliance with EGRRCPA. The statement, among other things, exempted bank holding companies that fall below a certain asset threshold from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements. The interim final rule expanded the exemption to bank holding companies with consolidated total assets of less than $3 billion. Prior to August 2018, the statement exempted bank holding companies with consolidated total assets of less than $1 billion. As a result of the interim final rule, the Company qualified as of August 2018 as a small bank holding company and is no longer subject to regulatory capital requirements on a consolidated basis. The Bank continues to be subject to various capital requirements administered by banking agencies. Risk based capital ratios for the Bank are shown in the following tables. | | | Ratios at December 31, 2016 | | | Regulatory Capital Minimum Ratios | | | Regulatory Capital Minimum Ratios with Capital Conservative Buffer | | | Ratios at December 31, 2019 | | Regulatory Capital Minimum Ratios | | Regulatory Capital Minimum Ratios with Capital Conservation Buffer | Common Equity Tier I Capital Ratio | | | 25.420 | % | | | 4.500 | % | | | 5.125 | % | | | 22.283 | % | | | 4.500 | % | | | 7.000 | % | Tier I Capital Ratio | | | 25.420 | % | | | 6.000 | % | | | 6.625 | % | | | 22.283 | % | | | 6.000 | % | | | 8.500 | % | Total Capital Ratio | | | 26.575 | % | | | 8.000 | % | | | 8.625 | % | | | 23.128 | % | | | 8.000 | % | | | 10.500 | % | Leverage Ratio | | | 15.121 | % | | | 4.000 | % | | | 4.000 | % | | | 14.175 | % | | | 4.000 | % | | | 4.000 | % |
| | | Ratios at December 31, 2015 | | | Regulatory Capital Minimum Ratios | | | Regulatory Capital Minimum Ratios with Capital Conservative Buffer | | | Ratios at December 31, 2018 | | Regulatory Capital Minimum Ratios | | Regulatory Capital Minimum Ratios with Capital Conservation Buffer | Common Equity Tier I Capital Ratio | | | 24.376 | % | | | 4.500 | % | | | --- | % | | | 23.856 | % | | | 4.500 | % | | | 6.375 | % | | Tier I Capital Ratio | | | 24.376 | % | | | 6.000 | % | | | --- | % | | | 23.856 | % | | | 6.000 | % | | | 7.875 | % | Total Capital Ratio | | | 25.527 | % | | | 8.000 | % | | | --- | % | | | 24.764 | % | | | 8.000 | % | | | 9.875 | % | Leverage Ratio | | | 15.088 | % | | | 4.000 | % | | | --- | % | | | 15.788 | % | | | 4.000 | % | | | 4.000 | % |
Risk-based capital ratios are calculated in compliance with Federal ReserveFDIC rules based on Basel III capital requirements.Capital Requirements. The Company’sBank’s ratios are well above the required minimums at December 31, 20162019 and December 31, 2015.2018. Beginning January 1, 2016, a capital conservation buffer of .625% became effective. The capital conservation buffer will be gradually increased through January 1, 2019Banks are subject to 2.5%. Banks will be required to maintain capital levels that meet the required minimum plus thean additional capital conservation buffer in order to make capital distributions or discretionary bonus payments. The implementation period for the capital conservation buffer began in 2016 and was fully phased in January 1, 2019, with .625% added each year and a final buffer of 2.5% in excess of regulatory capital minimum ratios.
Off-Balance Sheet Arrangements The Company’s off-balance sheet arrangements at December 31, 20162019 are detailed in the table below. | | | Payments Due by Period | | | $ in thousands | | | Payments Due by Period | | | | Total | | | Less Than 1 Year | | | 1-3 Years | | | 4-5 Years | | | More Than 5 Years | | | Total | | Less Than 1 Year | | 1-3 Years | | 4-5 Years | | More Than 5 Years | Commitments to extend credit | | $ | 130,252 | | | $ | 130,252 | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 158,859 | | | $ | 158,859 | | | $ | --- | | | $ | --- | | | $ | --- | | Standby letters of credit | | | 20,499 | | | | 20,499 | | | | --- | | | | --- | | | | --- | | | | 15,212 | | | | 15,212 | | | | --- | | | | --- | | | | --- | | Mortgage loans with potential recourse | | | 17,526 | | | | 17,526 | | | | --- | | | | --- | | | | --- | | | | 20,496 | | | | 20,496 | | | | --- | | | | --- | | | | --- | | Operating leases | | | 1,071 | | | | 292 | | | | 525 | | | | 90 | | | | 164 | | | | 2,580 | | | | 354 | | | | 694 | | | | 684 | | | | 848 | | Total | | $ | 169,348 | | | $ | 168,569 | | | $ | 525 | | | $ | 90 | | | $ | 164 | | | $ | 197,147 | | | $ | 194,921 | | | $ | 694 | | | $ | 684 | | | $ | 848 | |
In the normal course of business the Company’s banking affiliate extends lines of credit to its customers. Amounts drawn upon these lines vary at any given time depending on the business needs of the customers. Standby letters of credit are also issued to the bank’sBank’s customers. There are two types of standby letters of credit. The first is a guarantee of payment to facilitate customer purchases. The second type is a performance letter of credit that guarantees a payment if the customer fails to perform a specific obligation. Revenue from these letters was approximately $56$71 in 2016.2019. While it would be possible for customers to fully draw in full on approved lines of credit and for beneficiaries to call all letters of credit, historically this has not occurred. In the event of a sudden and substantial draw on these lines, the Company has its own lines of credit from which it can draw funds. A sale of loans or investments would also be an option.option to meet liquidity demands. The Company sells mortgages on the secondary market subject to recourse agreements. The mortgages originated must meet strict underwriting and documentation requirements for the sale to be completed. The Company estimates a potential loss reserve for recourse provisions. The amount is not material as of December 31, 2016.2019. To date, no recourse provisions have been invoked. Operating leases are for buildings used in the Company’s day-to-day operations. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Information about market risk is set forth above in the “Interest Rate Sensitivity” and “Derivatives and Market Risk Exposure” sections of the Management’s Discussion and Analysis. Item 8. Financial Statements and Supplementary Data Consolidated Balance Sheets | | December 31, | | | December 31, | $ in thousands, except share and per share data | | 2016 | | | 2015 | | | 2019 | | 2018 | Assets | | | | | | | | | | | | | | | | | Cash and due from banks | | $ | 13,974 | | | $ | 12,152 | | | $ | 10,290 | | | $ | 12,882 | | Interest-bearing deposits | | | 80,268 | | | | 130,811 | | | | 76,881 | | | | 43,491 | | Securities available for sale, at fair value | | | 304,282 | | | | 236,131 | | | | 435,263 | | | | 425,010 | | Securities held to maturity (fair value of $137,692 at December 31, 2016 and $158,032 at December 31, 2015) | | | 134,957 | | | | 152,028 | | | Restricted stock | | | 1,170 | | | | 1,129 | | | | 1,220 | | | | 1,220 | | Mortgage loans held for sale | | | 478 | | | | 634 | | | | 905 | | | | 72 | | Loans: | | | | | | | | | | | | | | | | | Real estate construction loans | | | 36,345 | | | | 48,251 | | | | 42,303 | | | | 37,845 | | Consumer real estate loans | | | 157,718 | | | | 143,504 | | | | 181,472 | | | | 175,456 | | Commercial real estate loans | | | 336,457 | | | | 309,378 | | | | 365,373 | | | | 353,546 | | Commercial non real estate loans | | | 39,024 | | | | 37,571 | | | | 46,576 | | | | 46,535 | | Public sector and IDA loans | | | 45,474 | | | | 51,335 | | | | 63,764 | | | | 60,777 | | Consumer non real estate loans | | | 33,528 | | | | 29,845 | | | | 34,539 | | | | 36,238 | | Total loans | | | 648,546 | | | | 619,884 | | | | 734,027 | | | | 710,397 | | Less unearned income and deferred fees and costs | | | (794 | ) | | | (876 | ) | | | (576 | ) | | | (598 | ) | Loans, net of unearned income and deferred fees and costs | | | 647,752 | | | | 619,008 | | | | 733,451 | | | | 709,799 | | Less allowance for loan losses | | | (8,300 | ) | | | (8,297 | ) | | | (6,863 | ) | | | (7,390 | ) | Loans, net | | | 639,452 | | | | 610,711 | | | | 726,588 | | | | 702,409 | | Premises and equipment, net | | | 8,853 | | | | 9,020 | | | | 8,919 | | | | 8,646 | | Accrued interest receivable | | | 5,260 | | | | 5,769 | | | | 4,285 | | | | 5,160 | | Other real estate owned, net | | | 3,156 | | | | 4,165 | | | | 1,612 | | | | 2,052 | | Intangible assets and goodwill | | | 5,966 | | | | 6,224 | | | Goodwill | | | | 5,848 | | | | 5,848 | | Bank-owned life insurance (BOLI) | | | 22,998 | | | | 22,401 | | | | 35,567 | | | | 34,657 | | Other assets | | | 13,128 | | | | 12,344 | | | | 14,459 | | | | 14,585 | | Total assets | | $ | 1,233,942 | | | $ | 1,203,519 | | | $ | 1,321,837 | | | $ | 1,256,032 | | Liabilities and Stockholders’ Equity | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | | | Noninterest-bearing demand deposits | | $ | 171,946 | | | $ | 166,453 | | | $ | 201,866 | | | $ | 195,441 | | Interest-bearing demand deposits | | | 605,226 | | | | 569,787 | | | | 643,482 | | | | 616,527 | | Savings deposits | | | 96,829 | | | | 90,236 | | | Savings deposits | | | | 146,377 | | | | 138,175 | | Time deposits | | | 169,441 | | | | 192,383 | | | | 128,028 | | | | 101,799 | | Total deposits | | | 1,043,442 | | | | 1,018,859 | | | | 1,119,753 | | | | 1,051,942 | | Accrued interest payable | | | 55 | | | | 56 | | | | 144 | | | | 89 | | Other liabilities | | | 12,182 | | | | 12,490 | | | | 18,214 | | | | 13,763 | | Total liabilities | | | 1,055,679 | | | | 1,031,405 | | | | 1,138,111 | | | | 1,065,794 | | Commitments and contingencies | | | | | | | | | | | | | | | | | Stockholders’ equity: | | | | | | | | | | Stockholders’ equity: | | | | | | | | | | Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding | | | --- | | | | --- | | | | --- | | | | --- | | Common stock of $1.25 par value. Authorized 10,000,000 shares; issued and outstanding, 6,957,974 shares in 2016 and 2015 | | | 8,698 | | | | 8,698 | | | Common stock, $1.25 par value. Authorized 10,000,000 shares; issued and outstanding, 6,489,574 shares in 2019 and 6,957,974 in 2018 | | | | 8,112 | | | | 8,698 | | Retained earnings | | | 178,224 | | | | 171,353 | | | | 184,120 | | | | 193,625 | | Accumulated other comprehensive loss, net | | | (8,659 | ) | | | (7,937 | ) | | | (8,506 | ) | | | (12,085 | ) | Total stockholders’ equity | | | 178,263 | | | | 172,114 | | | Total liabilities and stockholders’ equity | | $ | 1,233,942 | | | $ | 1,203,519 | | | Total stockholders’ equity | | | | 183,726 | | | | 190,238 | | Total liabilities and stockholders’ equity | | | $ | 1,321,837 | | | $ | 1,256,032 | |
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Income
| | | Years ended December 31, | | | $ in thousands, except share and per share data | | 2016 | | | 2015 | | | 2014 | | | Consolidated Statements of Income | | | Years ended December 31, | $ in thousands, except per share data | | | 2019 | | 2018 | | 2017 | Interest Income | | | | | | | | | | | | | | | | | | | | | | | | | Interest and fees on loans | | $ | 29,365 | | | $ | 30,446 | | | $ | 31,058 | | | $ | 33,869 | | | $ | 31,333 | | | $ | 29,932 | | Interest on interest-bearing deposits | | | 532 | | | | 254 | | | | 262 | | | | 1,523 | | | | 672 | | | | 791 | | Interest and dividends on securities – taxable | | | 5,910 | | | | 6,776 | | | | 6,798 | | | | 6,725 | | | | 6,856 | | | | 5,711 | | Interest on securities – nontaxable | | | 5,123 | | | | 5,438 | | | | 5,826 | | | | 3,030 | | | | 4,363 | | | | 4,826 | | Total interest income | | | 40,930 | | | | 42,914 | | | | 43,944 | | | | 45,147 | | | | 43,224 | | | | 41,260 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest Expense | | | | | | | | | | | | | | | | | | | | | | | | | Interest on deposits | | | 4,166 | | | | 4,183 | | | | 4,899 | | | | 7,380 | | | | 4,883 | | | | 4,125 | | Interest on borrowings | | | | --- | | | | 164 | | | | --- | | Total interest expense | | | 4,166 | | | | 4,183 | | | | 4,899 | | | | 7,380 | | | | 5,047 | | | | 4,125 | | Net interest income | | | 36,764 | | | | 38,731 | | | | 39,045 | | | | 37,767 | | | | 38,177 | | | | 37,135 | | Provision for loan losses | | | 1,650 | | | | 2,009 | | | | 1,641 | | | Net interest income after provision for loan losses | | | 35,114 | | | | 36,722 | | | | 37,404 | | | Provision for (recovery of) loan losses | | | | 126 | | | | (81 | ) | | | 157 | | Net interest income after provision for (recovery of) loan losses | | | | 37,641 | | | | 38,258 | | | | 36,978 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest Income | | | | | | | | | | | | | | | | | | | | | | | | | Service charges on deposit accounts | | | 2,458 | | | | 2,250 | | | | 2,434 | | | | 2,453 | | | | 2,678 | | | | 2,776 | | Other service charges and fees | | | 212 | | | | 215 | | | | 187 | | | | 198 | | | | 132 | | | | 205 | | Credit card fees | | | 3,798 | | | | 3,861 | | | | 3,631 | | | Credit and debit card fees | | | | 1,398 | | | | 1,431 | | | | 1,205 | | Trust income | | | 1,346 | | | | 1,229 | | | | 1,213 | | | | 1,622 | | | | 1,565 | | | | 1,530 | | BOLI income | | | 597 | | | | 603 | | | | 616 | | | | 910 | | | | 901 | | | | 758 | | Other income | | | 1,289 | | | | 1,295 | | | | 1,037 | | | | 1,643 | | | | 1,005 | | | | 1,148 | | Realized securities gains, net | | | 232 | | | | 33 | | | | 2 | | | Realized securities gains, net | | | | 566 | | | | 17 | | | | 14 | | Total noninterest income | | | 9,932 | | | | 9,486 | | | | 9,120 | | | | 8,790 | | | | 7,729 | | | | 7,636 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest Expense | | | | | | | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 12,792 | | | | 12,522 | | | | 11,606 | | | | 15,298 | | | | 14,506 | | | | 13,670 | | Occupancy, furniture and fixtures | | | 1,849 | | | | 1,743 | | | | 1,703 | | | Occupancy, furniture and fixtures | | | | 1,866 | | | | 1,845 | | | | 1,820 | | Data processing and ATM | | | 2,186 | | | | 1,657 | | | | 1,650 | | | | 3,171 | | | | 2,784 | | | | 2,280 | | FDIC assessment | | | 476 | | | | 546 | | | | 533 | | | | 167 | | | | 359 | | | | 364 | | Credit card processing | | | 2,782 | | | | 2,692 | | | | 2,593 | | | Intangible assets amortization | | | 257 | | | | 999 | | | | 1,075 | | | | --- | | | | 50 | | | | 68 | | Net costs of other real estate owned | | | 472 | | | | 608 | | | | 369 | | | | 47 | | | | 553 | | | | 205 | | Franchise taxes | | | 1,296 | | | | 1,288 | | | | 1,182 | | | | 1,333 | | | | 1,278 | | | | 1,315 | | Write-down of insurance receivable | | | | --- | | | | 2,010 | | | | --- | | Other operating expenses | | | 4,042 | | | | 3,580 | | | | 3,721 | | | | 3,872 | | | | 3,891 | | | | 4,507 | | Total noninterest expense | | | 26,152 | | | | 25,635 | | | | 24,432 | | | | 25,754 | | | | 27,276 | | | | 24,229 | | Income before income taxes | | | 18,894 | | | | 20,573 | | | | 22,092 | | | | 20,677 | | | | 18,711 | | | | 20,385 | | Income tax expense | | | 3,952 | | | | 4,740 | | | | 5,178 | | | | 3,211 | | | | 2,560 | | | | 6,293 | | Net income | | $ | 14,942 | | | $ | 15,833 | | | $ | 16,914 | | | $ | 17,466 | | | $ | 16,151 | | | $ | 14,092 | | | | | | | | | | | | | | | | | Basic net income per common share | | $ | 2.15 | | | $ | 2.28 | | | $ | 2.43 | | | $ | 2.65 | | | $ | 2.32 | | | $ | 2.03 | | Fully diluted net income per common share | | $ | 2.15 | | | $ | 2.28 | | | $ | 2.43 | | | $ | 2.65 | | | $ | 2.32 | | | $ | 2.03 | |
The accompanying notes are an integral part of these consolidated financial statements. | Consolidated Statements of Comprehensive Income | | Years ended December 31, | $ in thousands, except per share data | | 2019 | 2018 | 2017 | Net Income | | $ | 17,466 | | | $ | 16,151 | | | $ | 14,092 | | | | | | | | | | | | | | | | Other Comprehensive Income (Loss), Net of Tax | | | | | | | | | | | | | Unrealized holding gain (loss) on available for sale securities net of tax of $1,486 in 2019, ($595) in 2018 and $296 in 2017 | | | 5,595 | | | | (2,246 | ) | | | 546 | | Reclassification adjustment for gain included in net income, net of tax of ($119) in 2019, ($4) in 2018 and ($4) in 2017 | | | (447 | ) | | | (13 | ) | | | (6 | ) | Transfer from held to maturity to available for sale securities, net of tax of $237 in 2018 | | | --- | | | | 891 | | | | --- | | Net pension gain (loss) arising during the period, net of tax of ($394) in 2019, ($249) in 2018 and $115 in 2017 | | | (1,482 | ) | | | (936 | ) | | | 213 | | Less amortization of prior service cost included in net periodic pension cost, net of tax of ($23) in 2019, ($24) in 2018 and ($38) in 2017 | | | (87 | ) | | | (86 | ) | | | (71 | ) | Other comprehensive income (loss), net of tax of $950 in 2019, ($635) in 2018 and $369 in 2017 | | | 3,579 | | | | (2,390 | ) | | | 682 | | Total Comprehensive Income | | $ | 21,045 | | | $ | 13,761 | | | $ | 14,774 | |
The accompanying notes are an integral part of these consolidated financial statements. Consolidated Statements of Comprehensive IncomeChanges in Stockholders’ Equity | | | Years ended December 31, | | $ in thousands, except share and per share data | | 2016 | | | 2015 | | | 2014 | | Net Income | | $ | 14,942 | | | $ | 15,833 | | | $ | 16,914 | | | | | | | | | | | | | | | | Other Comprehensive Income (Loss), Net of Tax | | | | | | | | | | | | | Unrealized holding gain (loss) on available for sale securities net of tax of ($431) in 2016, ($571) in 2015 and $6,693 in 2014 | | | (800 | ) | | | (1,064 | ) | | | 12,430 | | Reclassification adjustment for gain included in net income, net of tax of ($65) in 2016, ($12) in 2015 and ($1) in 2014 | | | (121 | ) | | | (21 | ) | | | (1 | ) | Net pension gain (loss) arising during the period, net of tax of $132 in 2016, ($597) in 2015 and ($574) in 2014 | | | 271 | | | | (1,108 | ) | | | (1,066 | ) | Less amortization of prior service cost included in net periodic pension cost, net of tax of ($38) in 2016, ($38) in 2015 and ($39) in 2014 | | | (72 | ) | | | (72 | ) | | | (71 | ) | Other comprehensive income (loss), net of tax of ($402) in 2016, ($1,218) in 2015 and $6,079 in 2014 | | | (722 | ) | | | (2,265 | ) | | | 11,292 | | Total Comprehensive Income | | $ | 14,220 | | | $ | 13,568 | | | $ | 28,206 | |
See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
$ in thousands, except share and per share data | | Common Stock | | | Retained Earnings | | | Accumulated Other Comprehensive (Loss) | | | Total | | Balance at December 31, 2013 | | $ | 8,685 | | | $ | 154,171 | | | $ | (16,964 | ) | | $ | 145,892 | | Net income | | | --- | | | | 16,914 | | | | --- | | | | 16,914 | | Other comprehensive income, net of tax of $6,079 | | | --- | | | | --- | | | | 11,292 | | | | 11,292 | | Cash dividend ($1.13 per share) | | | --- | | | | (7,853 | ) | | | --- | | | | (7,853 | ) | Exercise of stock options | | | 3 | | | | 55 | | | | --- | | | | 58 | | Balance at December 31, 2014 | | $ | 8,688 | | | $ | 163,287 | | | $ | (5,672 | ) | | $ | 166,303 | | Net income | | | --- | | | | 15,833 | | | | --- | | | | 15,833 | | Other comprehensive loss, net of tax of ($1,218) | | | --- | | | | --- | | | | (2,265 | ) | | | (2,265 | ) | Cash dividend ($1.14 per share) | | | --- | | | | (7,930 | ) | | | --- | | | | (7,930 | ) | Exercise of stock options | | | 10 | | | | 163 | | | | --- | | | | 173 | | Balance at December 31, 2015 | | $ | 8,698 | | | $ | 171,353 | | | $ | (7,937 | ) | | $ | 172,114 | | Net income | | | --- | | | | 14,942 | | | | --- | | | | 14,942 | | Other comprehensive loss, net of tax of ($402) | | | --- | | | | --- | | | | (722 | ) | | | (722 | ) | Cash dividend ($1.16 per share) | | | --- | | | | (8,071 | ) | | | --- | | | | (8,071 | ) | Balance at December 31, 2016 | | $ | 8,698 | | | $ | 178,224 | | | $ | (8,659 | ) | | $ | 178,263 | |
$ in thousands, except per share data | | Common Stock | | Retained Earnings | | Accumulated Other Comprehensive (Loss) | | Total | Balance at December 31, 2016 | | $ | 8,698 | | | $ | 178,224 | | | $ | (8,659 | ) | | $ | 178,263 | | Net income | | | --- | | | | 14,092 | | | | --- | | | | 14,092 | | Other comprehensive income, net of tax of $369 | | | --- | | | | --- | | | | 682 | | | | 682 | | Cash dividend ($1.17 per share) | | | --- | | | | (8,141 | ) | | | --- | | | | (8,141 | ) | Reclassification of stranded tax effects from change in tax rate | | | --- | | | | 1,718 | | | | (1,718 | ) | | | --- | | Balance at December 31, 2017 | | $ | 8,698 | | | $ | 185,893 | | | $ | (9,695 | ) | | $ | 184,896 | | Net income | | | --- | | | | 16,151 | | | | --- | | | | 16,151 | | Other comprehensive loss, net of tax of ($635) | | | --- | | | | --- | | | | (2,390 | ) | | | (2,390 | ) | Cash dividend ($1.21 per share) | | | --- | | | | (8,419 | ) | | | --- | | | | (8,419 | ) | Balance at December 31, 2018 | | $ | 8,698 | | | $ | 193,625 | | | $ | (12,085 | ) | | $ | 190,238 | | Net income | | | --- | | | | 17,466 | | | | --- | | | | 17,466 | | Other comprehensive income, net of tax of $950 | | | --- | | | | --- | | | | 3,579 | | | | 3,579 | | Cash dividend ($1.39 per share) | | | --- | | | | (9,032 | ) | | | --- | | | | (9,032 | ) | Stock repurchase (468,400 shares) | | | (586 | ) | | | (17,939 | ) | | | | | | | (18,525 | ) | Balance at December 31, 2019 | | $ | 8,112 | | | $ | 184,120 | | | $ | (8,506 | ) | | $ | 183,726 | |
The accompanying notes are an integral part of these consolidated financial statements. | Consolidated Statements of Cash Flows | | Years ended December 31, | $ in thousands | | 2019 | | 2018 | | 2017 | Cash Flows from Operating Activities | | | | | | | | | | | | | Net income | | $ | 17,466 | | | $ | 16,151 | | | $ | 14,092 | | Adjustment to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | Provision for (recovery of) loan losses | | | 126 | | | | (81 | ) | | | 157 | | Deferred income tax expense (benefit) | | | 529 | | | | (382 | ) | | | 1,790 | | Re-valuation of deferred tax assets | | | --- | | | | --- | | | | 1,560 | | Depreciation of premises and equipment | | | 739 | | | | 766 | | | | 805 | | Amortization of intangibles | | | --- | | | | 50 | | | | 68 | | Amortization of premiums and accretion of discounts, net | | | 212 | | | | 58 | | | | 58 | | Loss (gain) on disposal of fixed assets | | | 5 | | | | --- | | | | (134 | ) | Gain on calls and sales of securities available for sale, net | | | (566 | ) | | | (17 | ) | | | (10 | ) | Gain on calls of securities held to maturity, net | | | --- | | | | --- | | | | (4 | ) | Loss and write-down on other real estate owned | | | 5 | | | | 489 | | | | 125 | | Loss (gain) on sale of repossessed assets | | | 4 | | | | 8 | | | | (1 | ) | Income on investment in BOLI | | | (910 | ) | | | (901 | ) | | | (758 | ) | Gain on sale of mortgage loans held for sale | | | (297 | ) | | | (199 | ) | | | (211 | ) | Origination of mortgage loans held for sale | | | (21,032 | ) | | | (12,626 | ) | | | (13,912 | ) | Sale of mortgage loans held for sale | | | 20,496 | | | | 13,013 | | | | 14,341 | | Contribution to defined benefit plan | | | --- | | | | --- | | | | (4,507 | ) | Net change in: | | | | | | | | | | | | | Accrued interest receivable | | | 875 | | | | 137 | | | | (37 | ) | Other assets | | | (1,340 | ) | | | 2,899 | | | | (2,537 | ) | Accrued interest payable | | | 55 | | | | 27 | | | | 7 | | Other liabilities | | | 2,465 | | | | 404 | | | | 101 | | Net cash provided by operating activities | | | 18,832 | | | | 19,796 | | | | 10,993 | | | | | | | | | | | | | | | | Cash Flows from Investing Activities | | | | | | | | | | | | | Net change in interest-bearing deposits | | | (33,390 | ) | | | 7,742 | | | | 29,035 | | Proceeds from repayments of mortgage-backed securities | | | 1,089 | | | | 224 | | | | 298 | | Proceeds from calls, sales and maturities of securities available for sale | | | 348,032 | | | | 50,438 | | | | 13,812 | | Proceeds from calls and maturities of securities held to maturity | | | --- | | | | 6,430 | | | | 8,975 | | Purchases of securities available for sale | | | (352,505 | ) | | | (25,323 | ) | | | (40,290 | ) | Purchases of securities held to maturity | | | --- | | | | --- | | | | (1,319 | ) | Net change in restricted stock | | | --- | | | | (20 | ) | | | (30 | ) | Purchase of BOLI | | | --- | | | | --- | | | | (10,000 | ) | Purchases of loan participations | | | (673 | ) | | | (7,853 | ) | | | (7,395 | ) | Collections of loan participations | | | 4,262 | | | | 970 | | | | 2,113 | | Loan originations and principal collections, net | | | (28,388 | ) | | | (35,591 | ) | | | (15,981 | ) | Proceeds from disposal of other real estate owned | | | 591 | | | | 276 | | | | 311 | | Proceeds from disposal of repossessed assets | | | 53 | | | | 34 | | | | 31 | | Recoveries on loans charged off | | | 267 | | | | 235 | | | | 287 | | Additions to premises and equipment | | | (1,032 | ) | | | (1,191 | ) | | | (261 | ) | Proceeds from sale of premises and equipment | | | 16 | | | | --- | | | | 222 | | Net cash used in investing activities | | | (61,678 | ) | | | (3,629 | ) | | | (20,192 | ) | | | | | | | | | | | | (continued | ) |
Consolidated Statements of Cash Flows
| | | Years Ended December 31, | | $ in thousands, except share and per share data | | 2016 | | | 2015 | | | 2014 | | Cash Flows from Operating Activities | | | | | | | | | | | | | Net income | | $ | 14,942 | | | $ | 15,833 | | | $ | 16,914 | | Adjustment to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | Provision for loan losses | | | 1,650 | | | | 2,009 | | | | 1,641 | | Deferred income tax expense | | | 18 | | | | 10 | | | | 73 | | Depreciation of premises and equipment | | | 801 | | | | 749 | | | | 732 | | Amortization of intangibles | | | 257 | | | | 999 | | | | 1,075 | | Amortization of premiums and accretion of discounts, net | | | 89 | | | | 117 | | | | 138 | | Loss on disposal of fixed assets | | | --- | | | | 15 | | | | 94 | | Gain on calls of securities available for sale, net | | | (186 | ) | | | (33 | ) | | | (2 | ) | Gain on calls of securities held to maturity, net | | | (46 | ) | | | --- | | | | --- | | Loss and writedown on other real estate owned | | | 355 | | | | 426 | | | | 129 | | Income on investment in BOLI | | | (597 | ) | | | (603 | ) | | | (616 | ) | Gain on sale of mortgage loans held for sale | | | (280 | ) | | | (273 | ) | | | (159 | ) | Origination of mortgage loans held for sale | | | (17,090 | ) | | | (17,641 | ) | | | (9,104 | ) | Sale of mortgage loans held for sale | | | 17,526 | | | | 17,571 | | | | 10,248 | | Net change in: | | | | | | | | | | | | | Accrued interest receivable | | | 509 | | | | (21 | ) | | | 201 | | Other assets | | | (373 | ) | | | 420 | | | | (574 | ) | Accrued interest payable | | | (1 | ) | | | (12 | ) | | | (24 | ) | Other liabilities | | | (41 | ) | | | 963 | | | | (428 | ) | Net cash provided by operating activities | | | 17,533 | | | | 20,529 | | | | 20,338 | | | | | | | | | | | | | | | | Cash Flows from Investing Activities | | | | | | | | | | | | | Net change in interest-bearing deposits | | | 50,543 | | | | (28,263 | ) | | | (4,482 | ) | Proceeds from repayments of mortgage-backed securities | | | 415 | | | | 717 | | | | 902 | | Proceeds from calls and maturities of securities available for sale | | | 220,581 | | | | 64,556 | | | | 11,088 | | Proceeds from calls and maturities of securities held to maturity | | | 16,945 | | | | 9,205 | | | | 8,677 | | Purchases of securities available for sale | | | (290,296 | ) | | | (80,093 | ) | | | (33,905 | ) | Purchases of securities held to maturity | | | --- | | | | --- | | | | (6,381 | ) | Net change in restricted stock | | | (41 | ) | | | (40 | ) | | | 325 | | Purchases of loan participations | | | (3,800 | ) | | | (1,001 | ) | | | (200 | ) | Collections of loan participations | | | 820 | | | | 1,978 | | | | 1,539 | | Loan originations and principal collections, net | | | (27,792 | ) | | | (17,259 | ) | | | (13,880 | ) | Proceeds from disposal of other real estate owned | | | 877 | | | | 773 | | | | 744 | | Recoveries on loans charged off | | | 159 | | | | 145 | | | | 255 | | Additions to premises and equipment | | | (634 | ) | | | (663 | ) | | | (459 | ) | Proceeds from sale of premises and equipment | | | --- | | | | --- | | | | 453 | | Net cash used in investing activities | | | (32,223 | ) | | | (49,945 | ) | | | (35,324 | ) | | | | | | | | | | | | | | | Cash Flows from Financing Activities | | | | | | | | | | | | | Net change in time deposits | | | (22,942 | ) | | | (24,363 | ) | | | (24,963 | ) | Net change in other deposits | | | 47,525 | | | | 60,794 | | | | 47,355 | | Cash dividends paid | | | (8,071 | ) | | | (7,930 | ) | | | (7,853 | ) | Stock options exercised | | | --- | | | | 173 | | | | 58 | | Net cash provided by financing activities | | | 16,512 | | | | 28,674 | | | | 14,597 | | | | | | | | | | | | | | | | Net change in cash and due from banks | | | 1,822 | | | | (742 | ) | | | (389 | ) | Cash and due from banks at beginning of year | | | 12,152 | | | | 12,894 | | | | 13,283 | | Cash and due from banks at end of year | | $ | 13,974 | | | $ | 12,152 | | | $ | 12,894 | | | | | | | | | | | | | | | | Supplemental Disclosures of Cash Flow Information | | | | | | | | | | | | | Interest paid on deposits and borrowed funds | | $ | 4,167 | | | $ | 4,195 | | | $ | 4,923 | | Income taxes paid | | | 3,940 | | | | 4,790 | | | | 5,282 | | | | | | | | | | | | | | | | Supplemental Disclosures of Noncash Activities | | | | | | | | | | | | | Loans charged against the allowance for loan losses | | $ | 1,806 | | | $ | 2,120 | | | $ | 1,860 | | Loans transferred to other real estate owned | | | 222 | | | | 620 | | | | 905 | | Unrealized gain (loss) on securities available for sale | | | (1,417 | ) | | | (1,668 | ) | | | 19,121 | | Minimum pension liability adjustment | | | 293 | | | | (1,815 | ) | | | 1,750 | |
Cash Flows from Financing Activities | | | | | | | | | | | | | Net change in time deposits | | | 26,229 | | | | (13,085 | ) | | | (15,730 | ) | Net change in other deposits | | | 41,582 | | | | 5,293 | | | | 32,022 | | Cash dividends paid | | | (9,032 | ) | | | (8,419 | ) | | | (8,141 | ) | Shares repurchased | | | (18,525 | ) | | | --- | | | | --- | | Net cash provided by (used in) financing activities | | | 40,254 | | | | (16,211 | ) | | | 8,151 | | | | | | | | | | | | | | | | Net change in cash and due from banks | | | (2,592 | ) | | | (44 | ) | | | (1,048 | ) | Cash and due from banks at beginning of year | | | 12,882 | | | | 12,926 | | | | 13,974 | | Cash and due from banks at end of year | | $ | 10,290 | | | $ | 12,882 | | | $ | 12,926 | | | | | | | | | | | | | | | | Supplemental Disclosures of Cash Flow Information | | | | | | | | | | | | | Interest paid on deposits and borrowed funds | | $ | 7,325 | | | $ | 5,020 | | | $ | 4,118 | | Income taxes paid | | | 2,544 | | | | 1,778 | | | | 4,092 | | | | | | | | | | | | | | | | Supplemental Disclosures of Noncash Activities | | | | | | | | | | | | | Loans charged against the allowance for loan losses | | $ | 920 | | | $ | 689 | | | $ | 819 | | Loans transferred to other real estate owned | | | 156 | | | | --- | | | | 97 | | Unrealized gain (loss) on securities available for sale | | | 6,515 | | | | (2,858 | ) | | | 832 | | Unrealized net gain on securities transferred from HTM to AFS | | | --- | | | | 1,128 | | | | --- | | Fair value of securities transferred from held-to-maturity to available-for-sale | | | --- | | | | 119,790 | | | | --- | | Minimum pension liability adjustment | | | (1,986 | ) | | | (1,295 | ) | | | 219 | | Increase in the lease right-of-use asset upon adoption of ASU 2016-02 | | | 684 | | | | --- | | | | --- | | Increase in the lease liability upon adoption of ASU 2016-02 | | | 684 | | | | --- | | | | --- | |
The accompanying notes are an integral part of these consolidated financial statements. Notes to Consolidated Financial Statements $ in thousands, except share data and per share data Note 1:Summary of Significant Accounting Policies The consolidated financial statements include the accounts of National Bankshares, Inc. (Bankshares) and its wholly-owned subsidiaries, the National Bank of Blacksburg, (NBB), and National Bankshares Financial Services, Inc. (NBFS), (the Company). All intercompany balances and transactions have been eliminated in consolidation. The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of AmericaGAAP and to general practices within the banking industry. The following is a summary of the more significant accounting policies. Subsequent events have been considered through the date when theof this Form 10-K was issued.10-K. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and amounts due from banks. Interest-Bearing Deposits The Company invests over-night funds in interest-bearing deposits at other banks, including the Federal Home Loan Bank,FHLB, the Federal Reserve and other entities. Interest-bearing deposits are carried at cost. Securities Certain debt securities that management has the positive intent and ability to hold to maturity aremay be classified as “held to maturity” and recorded at amortized cost. Trading securities are recorded at fair value with changes in fair value included in earnings. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The Company uses the interest method to recognize purchase premiums and discounts in interest income over the term of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. During 2018, the Company’s held to maturity securities were re-designated as available for sale. At the time of the transfer, the re-designated securities had a fair value of $119,790 and an unrealized net gain of $1,128. The unrealized gain/loss on the re-designated securities is included in accumulated other comprehensive income, net of deferred tax. The Company follows the accounting guidance related to recognition and presentation of other-than-temporary impairment.OTTI. The guidance specifies that if (a) an entity does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that the entity will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired, unless there is a credit loss. When criteria (a) and (b) are met, the entity will recognize the credit component of an other-than-temporary impairmentOTTI of a debt security in earnings and the remaining portion in other comprehensive income. For held-to-maturityheld to maturity debt securities, the amount of an other-than-temporary impairmentOTTI recorded in other comprehensive income for the noncredit portion of a previous other-than-temporary impairmentOTTI is amortized prospectively over the remaining life of the security on the basis of the timing of future estimated cash flows of the security. For equityEquity securities when the Company decides to sell an impaired available-for-sale security and the Company does not expect thewith readily-determinable fair values are measured at fair value using the “exit price notion”. Changes in fair value are recognized in net income. Equity securities without readily-determinable fair values are recorded as other assets at cost less impairment, if any, and adjusted for changes resulting from observable price changes in orderly transactions for identical or similar investment of the security to fully recover before the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. The Company recognizes an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made.same issuer.
Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value on an individual loan basis. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Loans held for sale are sold with theThe Company releases mortgage servicing rights released bywhen loans are sold on the Company.secondary market. Loans The Company, through its banking subsidiary, provides mortgage, commercial, and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans, particularly commercial mortgages. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Company’s market area. The Company’s loans are grouped into six segments: real estate construction, consumer real estate, commercial real estate, commercial non realnon-real estate, public sector and IDA, and consumer non realnon-real estate. Each segment is subject to certain risks that influence the establishment of pricing, loan structures, approval requirements, reserves, and ongoing credit management. 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. Completed properties that do not sell or become leased within originally expected timeframes may impact the borrower’s ability to service the debt. These risks are measured by market-area unemployment rates, bankruptcy rates, housing and commercial building market trends, and interest rates. Risks specific to the borrower are also evaluated, including previous repayment history, debt service ability, and current and projected loan-to value ratios for the collateral. 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, and local housing market trends and interest rates. Risks specific to a borrower are determined by previous repayment history, loan-to-value ratios and debt-to-income ratios. 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 rates and interest rate trends that would impact the businesses housed by the commercial real estate. Commercial non realnon-real estate loans are secured by collateral other than real estate, or are unsecured. Credit risk for commercial non realnon-real estate loans is subject to economic conditions, generally monitored by local business bankruptcy trends, interest rates, and borrower repayment ability and collateral value (if secured). Public sector and IDA loans are extended to municipalities and related entities. Credit risk is based upon the entity’s ability to repay through either a direct obligation or assignment of specific revenues from an enterprise or other economic activity, and interest rate trends. Consumer non realnon-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. If the loan is secured, the company analyzes loan-to-value ratios. All consumer non realnon-real estate loans are analyzed for debt-to-income ratios and previous credit history, as well as for general risks for the portfolio, including local unemployment rates, personal bankruptcy rates and interest rates. Risks from delinquency trends and characteristics such as second-lien position and interest-only status, as well as historical charge-off rates, are analyzed for all segments. Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff, generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, any purchase premium or discount, unearned income and deferred fees or costs. Interest income is accrued on the unpaid principal balance. Unearned income on dealer-originated loans and loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Purchase premium or discount is recognized as an adjustment of the related loan yield using the interest method. The Company considers multiple factors when determining whether to discontinue accrual of interest on individual loans. Generally loans are placed in nonaccrual status when collection of interest and/or full principal is considered doubtful. Interest accrual is discontinued at the time a commercial real estate loan or commercial non-real estate loan is 90 days delinquent unless the credit is well secured and in the process of collection. Loans within all loan classes that are not restructured but that are impaired and have an associated impairment loss are placed on nonaccrual unless the borrower is paying as agreed.nonaccrual. Restructured loans within all classes that allow the borrower to discontinue payments of principal or interest for more than 90 days are placed on nonaccrual unless the modification provides reasonable assurance of repayment performance and collateral value supports regular underwriting requirements. Restructured loans within all classes that maintain current status for at least a six-month period, including history prior to restructuring, may be returned to accrual status. All interest accrued but not collected for loans of all classes that are placed on nonaccrual or for loans charged off is reversed against interest income. Any interest payments received on nonaccrual loans of all classes are credited to the principal balance of the loan. Loans of all classes that have not been restructured and that have been designated nonaccrual are returned to accrual status when all the principal and interest amounts contractually due are current; future payments are reasonably assured; and for loans that financed the sale of OREO property, loan-to-value thresholds are met. Loans that have been restructured that have been designated nonaccrual may return to accrual status after six months of timely repayment performance. The Company reviews nonaccrual loans on an individual loan basis to determine whether future payments are reasonably assured. In order for this criteria to be satisfied, 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. A loan is considered past due when a payment of principal and/or interest is due but not paid. Credit card payments not received within 30 days after the statement date, real estate loan payments not received within the payment cycle;cycle and all other non-real estate secured loans for which payment is not made within the required payment cycle are considered 30 days past due. Management closely monitors past due loans in timeframes of 30-89 days past due and 90 or more days past due. Allowance for Loan Losses The allowance for loan losses represents management’s estimate of probable losses inherent in the Company’s loan portfolio. A provision for estimated losses is charged to earnings to establish and maintain the allowance for loan losses at a level reflective of the estimated credit risk. When management determines that a loan balance or portion of a loan balance is not collectible, the loss is charged against the allowance. Subsequent recoveries, if any, are credited to the allowance. Management evaluates the allowance each quarter through a methodology that estimates losses on individual impaired loans and evaluates the effect of numerous factors on the credit risk of groups of homogeneous loans. Specific allowances are established for individually-evaluated impaired loans based on the excess of the loan balance relative to the fair value of the loan. Impaired loans are designated as such when current information indicates that it is probable that the Company will be unable to collect principal or interest when due according to the contractual terms of the loan agreement. Loan relationships exceeding $250,000$250 in nonaccrual status or that are significantly past due, or for which a credit review identified weaknesses that indicate principal and interest will not be collected according to the loan terms, as well as all loans modified in a troubled debt restructuring,TDRs, are designated impaired. This policy is applicable to all loan classes. Fair value of impaired loans is estimated in one of three ways: (1) the estimated fair value (less selling costs) of the underlying collateral, (2) the present value of the loan’s expected future cash flows, or (3) the loan’s observable market value. The amount of recorded investment (unpaid principal net of any interest payments made by the borrower during the nonaccrual period and net of any partial charge-offs, accrued interest and deferred fees and costs) in ana non-collateral dependent impaired loan that exceeds the fair value is accrued as estimated loss in the allowance. Impaired loans for which collection of interest or principal is in doubt are placed in nonaccrual status. For collateral-dependent impaired loans, the amount of recorded investment that exceeds the fair value is charged off. General allowances are established for collectively-evaluatedcollectively evaluated loans. Collectively-evaluatedCollectively evaluated loans are grouped into classes based on similar characteristics. Factors considered in determining general allowances include net charge-off trends, internal risk ratings, delinquency and nonperforming rates, product mix, underwriting practices, industry trends and economic trends. The Company’s charge-off policy meets or is more stringent than the minimum standards required by regulators. When available information confirms that a specific loan or a portion thereof, within any loan class, is uncollectible the amount is charged off against the allowance for loan losses. Additionally, losses on consumer real estate and consumer non-real estate loans are typically charged off no later than when the loans are 120-180 days past due, and losses on loans secured by residential real estate or by commercial real estate are charged off by the time the loans reach 180 days past due, in compliance with regulatory guidelines. Accordingly, secured loans may be charged down to the estimated value of the collateral, with previously accrued unpaid interest reversed. Subsequent charge-offs may be required as a result of changes in the market value of collateral or other repayment prospects. Troubled Debt Restructurings (“TDRs”) In situations where, for economic or legal reasons related to a borrower’s financial condition, management grants a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR).TDR. These modified terms may include reduction of the interest rate, extension of the maturity date at an interest rate lower than the current market rate for a new loan with similar risk, forgiveness of principal or accrued interest or other actions intended to minimize the economic loss. TDR loans are individually measured for impairment. TDRs may be removed from TDR status, and therefore from individual evaluation, if the restructuring agreement specifies a contractual interest rate that is a market interest rate at the time of restructuring and the loan is in compliance with its modified terms one year after the restructure was completed. Rate Lock Commitments The Company enters into commitments to originate mortgage loans in which the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 30 to 60 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, by committing to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. As a result, the Company is not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity. The market value of rate lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments and best effort contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the changes in the value of the underlying assets while taking into consideration the probability that the rate lock commitments will close. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss occurs on the rate lock commitments. Premises and Equipment Land is carried at cost. Premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is charged to expense over the estimated useful lives of the assets on the straight-line basis. Depreciable lives include 40 years for premises, 3-10 years for furniture and equipment, and 3 years for computer software. Costs of maintenance and repairs are charged to expense as incurred and improvements are capitalized. Other Real Estate Owned Real estate acquired through or in lieu of foreclosure is held for sale and is initially recorded at fair value less estimated costs to sell at the date of foreclosure, establishing the cost basis of the asset. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other operating expenses. Intangible Assets and Goodwill
The Company records as goodwill the excess of purchase price over the fair value of the identifiable net assets acquired. Goodwill is subject to at least an annual assessment for impairment by applying a fair value based test. The Company performs its annual analysis as of September 30 of each fiscal year. Accounting guidance permits preliminary assessment of qualitative factors to determine whether more substantial impairment testing is required. The Company chose to bypass the preliminary assessment and utilized a two-step process for impairment testing of goodwill. The first step tests for impairment, while the second step, if necessary, measures the impairment. 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 NBI, while the third technique uses current market pricing multiples for change-of-control transactions involving companies comparable to NBI. 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. Each measure indicated that the Company’s fair value exceeded its book value. No indicators of impairment for goodwill were identified during the years ended December 31, 2016, 20152019, 2018 and 2014.2017. The Company’s intangible assets became fully amortized during 2018. 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 amortizesamortized on a straight-line basis intangible assets arising from branch purchase transactions over their useful lives, determined by the Company to be ten10 to twelve12 years. CorePrior to becoming fully amortized, core deposit intangibles arewere 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. Stock-Based Compensation
The Company’s 1999 Stock Option Plan terminated on March 9, 2009. Incentive stock options, all of which have been exercised or expired, were granted in the early years of the Plan. The Company recognized the cost of employment services received in exchange for awards of equity instruments based on the fair value of those awards on the date of grant. Compensation cost was recognized over the award’s required service period, which was the vesting period.
Pension Plan The Company recognizes the overfunded or underfunded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and recognizes changes in that funded status in the year in which the changes occur through comprehensive income. The funded status of a benefit plan is measured as the difference between plan assets at fair value and the projected benefit obligation. Income Taxes Income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the asset and liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. Deferred tax assets are reduced by a valuation allowance if, based on the weight of evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Tax Cuts and Jobs Act (the “Tax Act”) was enacted in December, 2017 with an effective date of January 1, 2018. Among other things, the Tax Act lowered the federal corporate income tax rate to 21% from the maximum rate prior to the passage of the Tax Act of 35%. The change to the tax rate necessitated a re-measurement of deferred tax assets and deferred tax liabilities, including those accounted for in accumulated other comprehensive income, as of the date of enactment. The re-measurement in 2017 resulted in a $1,560 reduction in the value of the Company’s net deferred tax asset and a corresponding incremental income tax expense of $1,560. In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). The Company early adopted this new standard for 2017. In compliance with ASU 2018-01, the Company reclassified from AOCI to retained earnings stranded tax effects of $1,718. The stranded tax effects were a result of recognizing in tax expense the re-measurement impact of items that are included in AOCI. The Company recognizes interest and penalties on income taxes as a component of income tax expense. Trust Assets and Income Assets (other than cash deposits) held by theNBB's Trust Department in a fiduciary or agency capacity for customers are not included in the consolidated financial statements since such items are not assets of the Company. Trust income is recognized on the accrual basis. Earnings Per Common Share Basic earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to stock options outstanding during the period and are determined using the treasury stock method. The following shows the weighted average number of shares used in computing earnings per common share andfor the effect on the weighted average number of shares of potentially dilutive common stock.years indicated. | | | 2016 | | | 2015 | | | 2014 | | Average number of common shares outstanding | | | 6,957,974 | | | | 6,953,849 | | | | 6,948,789 | | Effect of dilutive options | | | --- | | | | 3,245 | | | | 10,345 | | Average number of common shares outstanding used to calculate diluted earnings per common share | | | 6,957,974 | | | | 6,957,094 | | | | 6,959,134 | |
| | | 2019 | | 2018 | | 2017 | Average number of common shares outstanding | | | 6,580,659 | | | | 6,957,974 | | | | 6,957,974 | |
The computation of diluted net income per common share excludes shares for stock options that would be anti-dilutive. There were no anti-dilutive shares in 2016, 2015 or 2014. As of December 31, 2016,2019 and December 31, 2018, there were no potential common shares outstanding.
Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business are recorded as liabilities when the likelihood of loss is probable and reasonably estimated. Management does not believe there are such matters that will have a material effect on the financial statements. Advertising The Company charges advertising costs to expenses as incurred. In 2016,2019, the Company expensed $122,$120, and expensed $105$106 and $174$148 in 20152018 and 2014,2017, respectively. Revenue Recognition The Company accounts for revenue associated with financial instruments, including loans and securities via the accrual method. The Company recognizes noninterest income when it satisfies commitments to customers. Please refer to Note 18: Revenue Recognition. Use of Estimates In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America,GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosedother real estate owned, other-than-temporary impairments of securities, evaluation of impairment of goodwill, and other intangibles, and pension obligations. Changing economic conditions, adverse economic prospects for borrowers, as well as regulatory agency action as a result of examination, could cause NBB to recognize additions to the allowance for loan losses and may also affect the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. Certain reclassifications have been made to prior period balances to conform to the current year provisions. Prior to 2016, the Company netted the prepaid asset associated with the defined benefit plan against the net liability for the funded status of the defined benefit plan. The result was a net liability. During 2016, the Company segregated the prepaid pension asset and the net liability. In order to provide comparability
Accounting Standards Adopted in prior periods, assets and liabilities have been adjusted to reflect a separate defined benefit plan asset and liability for each year reported.2019 Recent Accounting Pronouncements
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.2016-02, “Leases (Topic 842)” 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 January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02,standard requires lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) A lease liability, which is a lessee‘s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting withFor financial reporting purposes, the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effectivestandard provides for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Subsequent to the issuance of ASU 2016-02, the FASB issued targeted updates to clarify specific implementation issues including ASU No. 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842,” ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” ASU No. 2018-20, “Leases (Topic 842): Narrow-Scope Improvements for Lessors,” and ASU No. 2019-01 “Leases (Topic 842): Codification Improvements.” One of the amendments in ASU 2018-11 provides an additional (and optional) transition method. If elected, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with previous GAAP (Topic 840, Leases). Upon adoption on January 1, 2019, the Company elected the prospective application approach provided by ASU 2018-11. There was no cumulative effect adjustment at adoption. The Company is currently assessingalso elected certain practical expedients within the impactstandard and did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases and did not reassess any initial direct costs for existing leases. The Company evaluated its existing leases as of January 1, 2019 and recognized a right-of-use asset and lease liability for leases with a remaining term greater than 12 months. The Company also recognized a right-of-use asset and lease liability for leases that commenced after January 1, 2019. ASU 2016-02 will haveNo. 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on its consolidated financial statements.Purchased Callable Debt Securities” DuringIn March 2016,2017, the FASB issued ASU No. 2016-05, “Derivatives2017‐08, “Receivables—Nonrefundable Fees and Hedging (Topic 815): Effect of Derivative Contract NovationsOther Costs (Subtopic 310‐20), Premium Amortization on Existing Hedge Accounting Relationships.Purchased Callable Debt Securities.” The amendments in this ASU clarify thatshorten the amortization period for certain callable debt securities purchased at a change inpremium. Premiums on qualifying callable debt securities will be amortized to the counterpartyearliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The ASU provided for adoption on a derivative instrument that has been designatedmodified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the hedging instrument does not, in andbeginning of itself, require de-designationthe period of that hedging relationship provided that all other hedge accounting criteria remain intact. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period.adoption. The Company doesadopted the ASU on January 1, 2019. Adoption did not expect the adoption of ASU 2016-05 to have a material impact on its consolidated financial statements.and no cumulative effect adjustment was recorded.
Recent Accounting Pronouncements In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early Adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements. During March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 will have on its consolidated financial statements.
During June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-saleavailable for sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU areFor public business entities that meet the definition of a U.S. Securities and Exchange Commission (SEC) filer, excluding smaller reporting companies, the standard is effective for SEC filersfiscal years beginning after December 15, 2019, including interim periods in those fiscal years. All other entities will be required to apply the guidance for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.2022. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.
During August 2016, Management is working to ensure readiness and compliance with the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receiptsstandard and Cash Payments”, to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for somehas implemented coding of the issues addressed byloan portfolio to enable appropriate segregation and data integrity, analyzed correlations for forecasting, determined methodologies, and selected a vendor to provide a platform. Management has prepared multiple concurrent models using the update, the amendments for those issues would be applied prospectively as of the earliest date practicable.Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its consolidated financial statements.
During January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business”. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the current implementation guidance in Topic 805, there are three elements of a business—inputs, processes,CECL methodology and outputs. While an integrated set of assets and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants can acquire the set andwill continue to produce outputs. The amendments in this ASU provide a screen to determine when a set is not a business. Ifrefine assumptions that impact the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contributecalculation prior to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The ASU provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments in this ASU should be applied prospectively on or after the effective date. No disclosures are required at transition. The Company does not expect the adoption of ASU 2017-01 to have a material impact on its consolidated financial statements.
DuringIn January 2017, the FASB issued ASU No. 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment”.Impairment.” The amendments in this ASU simplify how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. Public business entities that are U.S. Securities and Exchange Commission (SEC)SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Public business entities that are not SEC filers should adopt the amendments in this ASU for annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments modify the disclosure requirements in Topic 820 to add disclosures regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty. Certain disclosure requirements in Topic 820 are also removed or modified. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Certain of the amendments are to be applied prospectively while others are to be applied retrospectively. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-13 to have a material impact on its consolidated financial statements. In April 2019, the FASB issued ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” This ASU clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement including improvements resulting from various Transition Resource Group (TRG) Meetings. The effective date of each of the amendments depends on the adoption date of ASU 2016-1, ASU 2016-03, and ASU 2017-12. The Company is currently assessing the impact that ASU 2019-04 will have on its consolidated financial statements. In May 2019, the FASB issued ASU 2019-05, “Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.” The amendments in this ASU provide entities that have certain instruments within the scope of Subtopic 326-20 with an option to irrevocably elect the fair value option in Subtopic 825-10, applied on an instrument-by-instrument basis for eligible instruments, upon the adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently measure those instruments at fair value with changes in fair value flowing through earnings. The effective date and transition methodology for the amendments in ASU 2019-05 are the same as in ASU 2016-13. The Company is currently assessing the impact that ASU 2019-05 will have on its consolidated financial statements. In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” This ASU addresses issues raised by stakeholders during the implementation of ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” Among other narrow-scope improvements, the new ASU clarifies guidance around how to report expected recoveries. “Expected recoveries” describes a situation in which an organization recognizes a full or partial write-off of the amortized cost basis of a financial asset, but then later determines that the amount written off, or a portion of that amount, will in fact be recovered. While applying the credit losses standard, stakeholders questioned whether expected recoveries were permitted on assets that had already shown credit deterioration at the time of purchase (also known as PCD assets). In response to this question, the ASU permits organizations to record expected recoveries on PCD assets. In addition to other narrow technical improvements, the ASU also reinforces existing guidance that prohibits organizations from recording negative allowances for available-for-sale debt securities. The ASU includes effective dates and transition requirements that vary depending on whether or not an entity has already adopted ASU 2016-13. The Company is currently assessing the impact that ASU 2019-11 will have on its consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements. In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2020-01 to have a material impact on its consolidated financial statements. Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (SAB) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB ASC 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology. In August 2018, the FASB issued ASU 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans.” These amendments modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. Certain disclosure requirements have been deleted while the following disclosure requirements have been added: the weighted-average interest crediting rates for cash balance plans and other plans with promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The amendments also clarify the disclosure requirements in paragraph 715-20-50-3, which state that the following information for defined benefit pension plans should be disclosed: The projected benefit obligation (PBO) and fair value of plan assets for plans with PBOs in excess of plan assets and the accumulated benefit obligation (ABO) and fair value of plan assets for plans with ABOs in excess of plan assets. The amendments are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements. Note 2:2: Restriction on Cash The Company’s subsidiary bank is a member of the Federal Reserve System. The Federal Reserve does not require member banks to hold an average balance in order to purchase services from the Federal Reserve.
Note 3:3: Securities The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, as of the dates indicated, follows: | | | December 31, 2016 | | | December 31, 2019 | Available for sale: | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | U.S. Government agencies and corporations | | $ | 291,271 | | | $ | 492 | | | $ | 6,165 | | | $ | 285,598 | | | $ | 119,903 | | | $ | 1,995 | | | $ | 775 | | | $ | 121,123 | | States and political subdivisions | | | 11,482 | | | | 211 | | | | --- | | | | 11,693 | | | | 88,092 | | | | 791 | | | | 644 | | | | 88,239 | | Mortgage-backed securities | | | 845 | | | | 85 | | | | --- | | | | 930 | | | | 223,173 | | | | 45 | | | | 1,435 | | | | 221,783 | | Corporate debt securities | | | 6,015 | | | | 20 | | | | 137 | | | | 5,898 | | | | 3,998 | | | | 120 | | | | --- | | | | 4,118 | | Other securities | | | 189 | | | | --- | | | | 26 | | | | 163 | | | Total securities available for sale | | $ | 309,802 | | | $ | 808 | | | $ | 6,328 | | | $ | 304,282 | | | $ | 435,166 | | | $ | 2,951 | | | $ | 2,854 | | | $ | 435,263 | |
| | | December 31, 2018 | Available for sale: | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | U.S. Government agencies and corporations | | $ | 306,264 | | | $ | 449 | | | $ | 6,666 | | | $ | 300,047 | | States and political subdivisions | | | 118,564 | | | | 1,218 | | | | 1,166 | | | | 118,616 | | Mortgage-backed securities | | | 586 | | | | 42 | | | | --- | | | | 628 | | Corporate debt securities | | | 6,014 | | | | --- | | | | 295 | | | | 5,719 | | Total securities available for sale | | $ | 431,428 | | | $ | 1,709 | | | $ | 8,127 | | | $ | 425,010 | |
Prior to the second quarter of 2018, the Company designated securities in its portfolio as either available for sale or held to maturity. During the second quarter of 2018, the Company re-designated all of its held to maturity securities to available for sale. The securities were re-designated to provide opportunities to maximize asset utilization. At the time of transfer, the securities had a fair value of $119,790 and an amortized cost of $118,662, resulting in an unrealized gain of $1,128 which was added to accumulated other comprehensive income at the date of re-designation. | | | December 31, 2015 | | Available for sale: | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | U.S. Government agencies and corporations | | $ | 216,897 | | | $ | 519 | | | $ | 4,952 | | | $ | 212,464 | | States and political subdivisions | | | 15,934 | | | | 541 | | | | --- | | | | 16,475 | | Mortgage-backed securities | | | 1,199 | | | | 120 | | | | --- | | | | 1,319 | | Corporate debt securities | | | 6,015 | | | | 22 | | | | 291 | | | | 5,746 | | Other securities | | | 189 | | | | --- | | | | 62 | | | | 127 | | Total securities available for sale | | $ | 240,234 | | | $ | 1,202 | | | $ | 5,305 | | | $ | 236,131 | |
The amortized cost and fair value of single maturity securities available for sale at December 31, 2016,2019, 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 at December 31, 2016.2019. | | | December 31, 2016 | | Available for sale: | | Amortized Cost | | | Fair Value | | Due in one year or less | | $ | 3,414 | | | $ | 3,423 | | Due after one year through five years | | | 199,430 | | | | 196,433 | | Due after five years through ten years | | | 80,548 | | | | 78,001 | | Due after ten years | | | 26,221 | | | | 26,262 | | No maturity | | | 189 | | | | 163 | | | | | $ | 309,802 | | | $ | 304,282 | |
The amortized cost and fair value of securities held to maturity, with gross unrealized gains and losses, follows:
| | | December 31, 2016 | | Held to maturity: | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | U.S. Government agencies and corporations | | $ | 3,934 | | | $ | 201 | | | $ | --- | | | $ | 4,135 | | States and political subdivisions | | | 129,783 | | | | 3,579 | | | | 1,082 | | | | 132,280 | | Mortgage-backed securities | | | 265 | | | | 30 | | | | --- | | | | 295 | | Corporate debt securities | | | 975 | | | | 7 | | | | --- | | | | 982 | | Total securities held to maturity | | $ | 134,957 | | | $ | 3,817 | | | $ | 1,082 | | | $ | 137,692 | |
| | | December 31, 2015 | | Held to maturity: | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | U.S. Government agencies and corporations | | $ | 13,909 | | | $ | 288 | | | $ | 177 | | | $ | 14,020 | | States and political subdivisions | | | 136,373 | | | | 6,179 | | | | 330 | | | | 142,222 | | Mortgage-backed securities | | | 327 | | | | 36 | | | | --- | | | | 363 | | Corporate debt securities | | | 1,419 | | | | 10 | | | | 2 | | | | 1,427 | | Total securities held to maturity | | $ | 152,028 | | | $ | 6,513 | | | $ | 509 | | | $ | 158,032 | |
| | | December 31, 2019 | Available for sale: | | Amortized Cost | | Fair Value | Due in one year or less | | $ | 55,186 | | | $ | 55,302 | | Due after one year through five years | | | 6,342 | | | | 6,505 | | Due after five years through ten years | | | 145,040 | | | | 144,260 | | Due after ten years | | | 228,598 | | | | 229,196 | | Total securities available for sale | | $ | 435,166 | | | $ | 435,263 | |
The amortized cost and fair value
Table of single maturity securities held to maturity at December 31, 2016, 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 at December 31, 2016.| | | December 31, 2016 | |
Held to maturity:
| | Amortized
Cost | | | Fair
Value | | Due in one year or less | | $ | 3,902 | | | $ | 3,988 | | Due after one year through five years | | | 28,249 | | | | 29,761 | | Due after five years through ten years | | | 16,615 | | | | 17,155 | | Due after ten years | | | 86,191 | | | | 86,788 | | | | | $ | 134,957 | | | $ | 137,692 | |
Information pertaining to securities with gross unrealized losses at December 31, 20162019 and 20152018 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows: | | | December 31, 2016 | | | | | Less Than 12 Months | | | 12 Months or More | | | | | Fair
Value | | | Unrealized
Loss | | | Fair
Value | | | Unrealized
Loss | | U. S. Government agencies and corporations | | $ | 260,150 | | | $ | 6,161 | | | $ | 996 | | | $ | 4 | | State and political subdivisions | | | 31,257 | | | | 934 | | | | 1,316 | | | | 148 | | Corporate debt securities | | | 3,888 | | | | 137 | | | | --- | | | | --- | | Other securities | | | --- | | | | --- | | | | 163 | | | | 26 | | Total temporarily impaired securities | | $ | 295,295 | | | $ | 7,232 | | | $ | 2,475 | | | $ | 178 | |
| | | December 31, 2019 | | | | Less Than 12 Months | | 12 Months or More | | | | Fair
Value | | Unrealized
Loss | | Fair
Value | | Unrealized
Loss | U.S. Government agencies and corporations | | $ | 53,244 | | | $ | 738 | | | $ | 38,962 | | | $ | 37 | | State and political subdivisions | | | 35,934 | | | | 596 | | | | 591 | | | | 48 | | Mortgage-backed securities | | | 181,279 | | | | 1,435 | | | | --- | | | | --- | | Total temporarily impaired securities | | $ | 270,457 | | | $ | 2,769 | | | $ | 39,553 | | | $ | 85 | |
| | | December 31, 2015 | | | December 31, 2018 | | | | Less Than 12 Months | | | 12 Months or More | | | Less Than 12 Months | | 12 Months or More | | | | Fair
Value | | | Unrealized
Loss | | | Fair
Value | | | Unrealized
Loss | | | Fair
Value | | Unrealized
Loss | | Fair
Value | | Unrealized
Loss | U. S. Government agencies and corporations | | $ | 88,255 | | | $ | 1,800 | | | $ | 84,959 | | | $ | 3,329 | | | U.S. Government agencies and corporations | | | $ | 17,730 | | | $ | 216 | | | $ | 259,992 | | | $ | 6,450 | | State and political subdivisions | | | 3,449 | | | | 24 | | | | 10,161 | | | | 306 | | | | 16,882 | | | | 352 | | | | 20,758 | | | | 814 | | Corporate debt securities | | | 4,974 | | | | 292 | | | | 200 | | | | 1 | | | | 4,842 | | | | 194 | | | | 876 | | | | 101 | | Other securities | | | --- | | | | --- | | | | 127 | | | | 62 | | | Total temporarily impaired securities | | $ | 96,678 | | | $ | 2,116 | | | $ | 95,447 | | | $ | 3,698 | | | $ | 39,454 | | | $ | 762 | | | $ | 281,626 | | | $ | 7,365 | |
The Company had 325166 securities with a fair value of $297,770$310,010 that were temporarily impaired at December 31, 2016.2019. The total unrealized loss on these securities was $7,410.$2,854. Of the temporarily impaired total, 440 securities with a fair value of $2,475$39,553 and an unrealized loss of $178$85 have been in a continuous loss position for twelve12 months or more. The Company has determined that these securities are temporarily impaired at December 31, 20162019 for the reasons set out below. U.S. Government agencies. The unrealized losses of $4$37 on USU.S. Government agency securities stemmed from 1 security39 securities with a fair value of $996.$38,962. The unrealized loss waslosses were caused by interest rate and market fluctuations. The contractual termterms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of the investments. The Company is monitoring bond market trends to develop strategies to address unrealized losses. Because the Company does not intend to sell the investments and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be at maturity, the Company does not consider this investments to be other-than-temporarily impaired. States and political subdivisions. This category exhibits unrealized losses of $48 on 1 security with a fair value of $591. The Company reviewed financial statements and cash flows for the security and determined that the unrealized loss is primarily the result of interest rate and market fluctuations and not associated with impaired financial status. The contractual terms of the investment doesdo not permit the issuer to settle the security at a price less than the cost basis of the investment. The Company is monitoring bond market trends to develop strategies to address unrealized losses. Because the Company does not intend to sell the investment and it is not likely that the Company will be required to sell the investment before recovery of its amortized cost basis, which may be at maturity, the Company does not consider thisthe investment to be other-than-temporarily impaired. States and political subdivisions. This category exhibits unrealized losses of $148 on 2 securities with a fair value of $1,316. The Company reviewed financial statements and cash flows for the each of the securities in continuous loss position for more than 12 months. The Company’s analysis determined that the unrealized losses are primarily the result of interest rate and market fluctuations and not associated with impaired financial status. 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.
Other securities. The Company holds a small investment in community bank stock. One security with a fair value of $163 has an unrealized loss of $26. 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 stockstock.. The Company holds restricted stock of $1,170$1,220 as of December 31, 20162019 and $1,129 as of December 31, 2015.2018. 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,FHLB, 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. 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. Redemption of FHLB stock is subject to certain limitations and conditions. At its discretion, the FHLB may declare dividends on the stock. In addition to dividends, NBB also benefits from its membership with FHLB through eligibility to borrow from the FHLB, using as collateral NBB’s capital stock investment in the FHLB and qualifying NBB real estate mortgage loans totaling $493,620$533,963 at December 31, 2016.2019. Management reviews for impairment based upon the ultimate recoverability of the cost basis of the FHLB stock, and at December 31, 2016,2019, 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. Pledged Securities.Securities At December 31, 20162019 and 2015,2018, securities with a carrying value of $178,121$220,299 and $156,721,$196,062, respectively, were pledged to secure municipal deposits and for other purposes as required or permitted by law. Realized Securities Gains and Losses During 2019, the Company realized net securities gains of $566, including net gains of $438 on the sale of securities and losses.$128 on calls of securities. The sales of securities were pursuant to a restructuring plan to manage interest rate risk. During 2018, the $17 realized securities gain stemmed from the call of one security with a gain of $1 and the sale of another security for a gain of $16. During 2017, the Company did not sell any securities during 2016, 2015 or 2014.sold a small investment in community bank stock that resulted in a gain of $4. The investment was classified as available for sale and had a book value of $189. All other net realized gains and losses resulted from calls of securities. Information pertaining to realized gains and losses on sold and called securities follows: | | For the year ended December 31, 2016 | | | | Proceeds | | Book Value | | Gross Gain | | Gross Loss | | Net Gain (Loss) | | Available for sale | | $ | 220,520 | $ | 220,334 | $ | 186 | $ | --- | $ | 186 | | Held to maturity | | | 16,160 | | 16,114 | | 46 | | --- | | 46 | | | | | | | | | | | | | | | |
| | For the year ended December 31, 2015 | | | | Proceeds | | Book Value | | Gross Gain | | Gross Loss | | Net Gain (Loss) | | Available for sale | | $ | 63,775 | $ | 63,742 | $ | 34 | $ | 1 | $ | 33 | | Held to maturity | | | 7,605 | | 7,605 | | --- | | --- | | --- | |
| | | For the year ended December 31, 2019 | | | | Proceeds | | Book Value | | Gross Gain | | Gross Loss | | Net Gain | Available for sale | | $ | 348,032 | | | $ | 347,466 | | | $ | 1,157 | | | $ | 591 | | | $ | 566 | |
| | For the year ended December 31, 2014 | | | For the year ended December 31, 2018 | | | Proceeds | | Book Value | | Gross Gain | | Gross Loss | | Net Gain (Loss) | | | Proceeds | | Book Value | | Gross Gain | | Gross Loss | | Net Gain | Available for sale | | $ | 6,919 | $ | 6,917 | $ | 4 | $ | 2 | $ | 2 | | | $ | 17,287 | | | $ | 17,270 | | | $ | 17 | | | $ | --- | | | $ | 17 | | Held to maturity | | | 7,162 | | 7,162 | | 1 | | 1 | | --- | | | | 6,430 | | | | 6,430 | | | | --- | | | | --- | | | | --- | |
| | | For the year ended December 31, 2017 | | | | Proceeds | | Book Value | | Gross Gain | | Gross Loss | | Net Gain | Available for sale | | $ | 13,620 | | | $ | 13,614 | | | $ | 10 | | | $ | --- | | | $ | 10 | | Held to maturity | | | 8,975 | | | | 8,971 | | | | 4 | | | | --- | | | | 4 | |
Note 4: 4: Related Party Transactions In the ordinary course of business, the Company, through its banking subsidiary, has granted loans to related parties, including executive officers and directors of BanksharesNBI and its subsidiaries. Total funded advancescredit extended to related parties amounted to $8,754$15,098 at December 31, 20162019 and $8,819$18,700 at December 31, 2015.2018. During the year ended2019, there was a change in related party relationships that resulted in removal of loans with funded amounts at December 31, 2016,2018 of $3,382. During 2018, there was a change in related party relationships that resulted in removal of loans with funded amounts at December 31, 2017 of $782. During 2019, total principal additions were $4,966$6,152 and principal payments were $5,031.$6,372. The Company held $14,604$5,907 in deposits for related parties as of December 31, 20162019 and $11,275$6,911 as of December 31, 2015.2018. The Company leases to a director a small office space. The lease payments totaled $5 in 2019 and $5 in 2018. Note 5:5: Allowance for Loan Losses, Nonperforming Assets and Impaired Loans The allowance for loan losses methodology incorporates individual evaluation of impaired loans and collective evaluation of groups of non-impaired loans. The Company performs ongoing analysis of the loan portfolio to determine credit quality and to identify impaired loans. Credit quality is rated based on the loan’s payment history, the borrower’s current financial situation and value of the underlying collateral. Impaired Loans Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts will not be collected when due according to the contractual terms of the loan agreement. Impaired loans are those loans that have been modified in a troubled debt restructure (“TDR” or “restructure”)TDR and larger, usually non-homogeneous loans that are in nonaccrual or exhibit payment history or financial status that indicate the probability that collection probably will not occur when due according to the loan’s terms. Generally, impaired loans are given risk ratings that indicate higher risk, such as “classified” or “other assets especially mentioned.“special mention.” Impaired loans are individually evaluated to determine appropriate reserves and are measured at the lower of the invested amount or the fair value. Impaired loans that are not troubled debt restructuresTDRs and for which fair value measurement indicates an impairment loss are designated nonaccrual. A restructured loanTDR that maintains current status for at least six months may be in accrual status. Please refer to Note 1: Summary of Significant Accounting Policies for additional information on evaluation of impaired loans and associated specific reserves, and policies regarding nonaccruals, past due status and charge-offs. Troubled debt restructuringsTDRs impact the estimation of the appropriate level of the allowance for loan losses. If the restructuring included forgiveness of a portion of principal or accrued interest, the charge-off is included in the historical charge-off rates applied to the collective evaluation methodology. Further, restructuredRestructured loans are individually evaluated for impairment, with amounts belowand the amount of a TDR’s book value in excess of its fair value is accrued as a specific allocation in the allowance for loan losses. TDRs that experienceIf a TDR loan payment default areexceeds 90 days past due, it is examined to determine whether the defaultlate payment indicates collateral dependency or cash flows below those that were includedused in the fair value measurement. TDRs, as well as all impaired loans, that are determined to be collateral dependent are charged down to fair value. Deficiencies indicated by impairment measurements for TDRs that are not collateral dependent may be accrued in the allowance for loan losses or charged off if deemed uncollectible.
Collectively-Evaluated Loans The Company evaluated characteristics in the loan portfolio and determined major segments and smaller classes within each segment. These characteristics include collateral type, repayment sources, and (if applicable) the borrower’s business model. The methodology for calculating reserves for collectively-evaluated loans is applied at the class level.
Portfolio Segments and Classes The segments and classes used in determining the allowance for loan losses beginning in 2013 are as follows. Real Estate Construction Construction, residential Construction, other Consumer Real Estate Equity lines Residential closed-end first liens Residential closed-end junior liens Investor-owned residential real estate Commercial Real Estate Multifamily real estate Commercial real estate, owner-occupied Commercial real estate, other | Commercial Non Real Estate Commercial and Industrial Public Sector and IDA Public sector and IDA Consumer Non Real Estate Credit cards Automobile Other consumer loans |
Historical Loss Rates The Company’s allowance methodology for collectively-evaluated loans applies historical loss rates by class to current class balances as part of the process of determining required reserves. Class loss rates are calculated as the net charge-offs for the class as a percentage of average class balance. The Company averages loss rates for the most recent 8eight quarters to determine the historical loss rate for each class. Two loss rates for each class are calculated: total net charge-offs for the class as a percentage of average class loan balance (“class loss rate”), and total net charge-offs for the class as a percentage of average classified loans in the class (“classified loss rate”). Classified loans are those with risk ratings of “substandard” or lower. Net charge-offs in both calculations include charge-offs and recoveries of classified and non-classified loans as well as those associated with impaired loans. Class historical loss rates are applied to non-classified loan balances at the reporting date, and classified historical loss rates are applied to classified balances at the reporting date. Risk Factors In addition to historical loss rates, risk factors pertinent to credit risk for each class are analyzed to estimate reserves for collectively-evaluated loans. Factors include changes in national and local economic and business conditions, the nature and volume of classes within the portfolio, loan quality, loan officers’ experience, lending policies and the Company’s loan review system. The analysis of certain factors results in standard allocations to all segments and classes. These factors include the risk from changes in lending policies, loan officers’ average years of experience, the risk from changes in loan review, unemployment levels, bankruptcy rates, interest rate environment, and competition/legal/regulatory environments. Factors analyzed for each class, with resultant allocations based upon the level of risk assessed for each class, include the risk from changes in lending policies,loan review, levels of past due loans, levels of nonaccrual loans, current class balance as a percentage of total loans, and the percentage of high risk loans within the class. Additionally, factors specific to each segment are analyzed and result in allocations to the segment. Please refer to Note 1: Summary of Significant Accounting Policies for a discussion of risk factors pertinent to each class. Real estate construction loans are subject to general risks from changing commercial building and housing market trends and economic conditions that may impact demand for completed properties and the costs of completion. These risks are measured by market-area unemployment rates, bankruptcy rates, building market trends, and interest rates. The credit quality of consumer real estate is subject to risks associated with the borrower’s repayment ability and collateral value, measured generally by analyzing local unemployment and bankruptcy trends, local housing market trends, and interest rates. The commercial real estate segment includes loans secured by multifamily residential real estate, commercial real estate occupied by the owner/borrower, and commercial real estate leased to non-owners. Loans in the commercial real estate segment are impacted by economic risks from changing commercial real estate markets, rental markets for multi-family housing and commercial buildings, business bankruptcy rates, local unemployment and interest rate trends that would impact the businesses housed by the commercial real estate. Commercial non real estate loans are secured by collateral other than real estate, or are unsecured. Credit risk for commercial non real estate loans is subject to economic conditions, generally monitored by local business bankruptcy trends, and interest rates. Public sector and IDA loans are extended to municipalities and related entities. Credit risk is based upon the entity’s ability to repay and interest rate trends. Consumer non real estate includes credit cards, automobile and other consumer loans. Credit cards and certain other consumer loans are unsecured, while collateral is obtained for automobile loans and other consumer loans. Credit risk stems primarily from the borrower’s ability to repay, measured by average unemployment, average personal bankruptcy rates and interest rates. Factor allocations applied to each class are increased for loans rated special mention and increased to a greater extent for loans rated classified. The Company allocates additional reserves for “high risk” loans. High risk loans include junior liens, interest only and high loan to value loans. A detailed analysis showing the allowance roll-forward by portfolio segment and related loan balance by segment follows: | | | Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2016 | | | | | Real Estate Construction | | | Consumer Real Estate | | | Commercial Real Estate | | | Commercial Non Real Estate | | | Public Sector and IDA | | | Consumer Non Real Estate | | | Unallocated | | | Total | | Balance, December 31, 2015 | | $ | 576 | | | $ | 1,866 | | | $ | 4,109 | | | $ | 655 | | | $ | 436 | | | $ | 627 | | | $ | 28 | | | $ | 8,297 | | Charge-offs | | | (29 | ) | | | (133 | ) | | | (488 | ) | | | (883 | ) | | | --- | | | | (273 | ) | | | --- | | | | (1,806 | ) | Recoveries | | | --- | | | | 2 | | | | 83 | | | | 10 | | | | --- | | | | 64 | | | | --- | | | | 159 | | Provision for loan losses | | | (109 | ) | | | 95 | | | | 34 | | | | 1,281 | | | | (106 | ) | | | 226 | | | | 229 | | | | 1,650 | | Balance, December 31, 2016 | | $ | 438 | | | $ | 1,830 | | | $ | 3,738 | | | $ | 1,063 | | | $ | 330 | | | $ | 644 | | | $ | 257 | | | $ | 8,300 | |
| | | Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2019 | | | | 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, 2018 | | $ | 398 | | | $ | 2,049 | | | $ | 2,798 | | | $ | 602 | | | $ | 583 | | | $ | 750 | | | $ | 210 | | | $ | 7,390 | | Charge-offs | | | --- | | | | (192 | ) | | | (150 | ) | | | (47 | ) | | | --- | | | | (531 | ) | | | --- | | | | (920 | ) | Recoveries | | | --- | | | | --- | | | | 49 | | | | 1 | | | | --- | | | | 217 | | | | --- | | | | 267 | | Provision for (recovery of) loan losses | | | 2 | | | | 38 | | | | (138 | ) | | | (1 | ) | | | (105 | ) | | | 214 | | | | 116 | | | | 126 | | Balance, December 31, 2019 | | $ | 400 | | | $ | 1,895 | | | $ | 2,559 | | | $ | 555 | | | $ | 478 | | | $ | 650 | | | $ | 326 | | | $ | 6,863 | |
| | | Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2015 | | | | | Real Estate Construction | | | Consumer Real Estate | | | Commercial Real Estate | | | Commercial Non Real Estate | | | Public Sector and IDA | | | Consumer Non Real Estate | | | Unallocated | | | Total | | Balance, December 31, 2014 | | $ | 612 | | | $ | 1,662 | | | $ | 3,537 | | | $ | 1,475 | | | $ | 327 | | | $ | 602 | | | $ | 48 | | | $ | 8,263 | | Charge-offs | | | --- | | | | (205 | ) | | | (1,114 | ) | | | (490 | ) | | | --- | | | | (311 | ) | | | --- | | | | (2,120 | ) | Recoveries | | | --- | | | | 2 | | | | 49 | | | | 1 | | | | --- | | | | 93 | | | | --- | | | | 145 | | Provision for loan losses | | | (36 | ) | | | 407 | | | | 1,637 | | | | (331 | ) | | | 109 | | | | 243 | | | | (20 | ) | | | 2,009 | | Balance, December 31, 2015 | | $ | 576 | | | $ | 1,866 | | | $ | 4,109 | | | $ | 655 | | | $ | 436 | | | $ | 627 | | | $ | 28 | | | $ | 8,297 | |
| | | Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2018 | | | | Real Estate Construction | | Consumer Real Estate | | Commercial Real Estate | | Commercial Non-Real Estate | | Public Sector and IDA | | Consumer Non-Real Estate | | Unallocated | | Total | Balance, December 31, 2017 | | $ | 337 | | | $ | 2,027 | | | $ | 3,044 | | | $ | 1,072 | | | $ | 419 | | | $ | 707 | | | $ | 319 | | | $ | 7,925 | | Charge-offs | | | --- | | | | (38 | ) | | | --- | | | | (107 | ) | | | --- | | | | (544 | ) | | | --- | | | | (689 | ) | Recoveries | | | --- | | | | 3 | | | | 49 | | | | 22 | | | | --- | | | | 161 | | | | --- | | | | 235 | | Provision for (recovery of) loan losses | | | 61 | | | | 57 | | | | (295 | ) | | | (385 | ) | | | 164 | | | | 426 | | | | (109 | ) | | | (81 | ) | Balance, December 31, 2018 | | $ | 398 | | | $ | 2,049 | | | $ | 2,798 | | | $ | 602 | | | $ | 583 | | | $ | 750 | | | $ | 210 | | | $ | 7,390 | |
| | | Activity in the Allowance for Loan Losses by Segment 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 | |
| | | Activity in the Allowance for Loan Losses by Segment for the year ended December 31, 2017 | | | | Real Estate Construction | | Consumer Real Estate | | Commercial Real Estate | | Commercial Non-Real Estate | | Public Sector and IDA | | Consumer Non-Real Estate | | Unallocated | | Total | Balance, December 31, 2016 | | $ | 438 | | | $ | 1,830 | | | $ | 3,738 | | | $ | 1,063 | | | $ | 330 | | | $ | 644 | | | $ | 257 | | | $ | 8,300 | | Charge-offs | | | --- | | | | (146 | ) | | | (139 | ) | | | (82 | ) | | | --- | | | | (452 | ) | | | --- | | | | (819 | ) | Recoveries | | | --- | | | | 1 | | | | 131 | | | | 23 | | | | --- | | | | 132 | | | | --- | | | | 287 | | Provision for (recovery of) loan losses | | | (101 | ) | | | 342 | | | | (686 | ) | | | 68 | | | | 89 | | | | 383 | | | | 62 | | | | 157 | | Balance, December 31, 2017 | | $ | 337 | | | $ | 2,027 | | | $ | 3,044 | | | $ | 1,072 | | | $ | 419 | | | $ | 707 | | | $ | 319 | | | $ | 7,925 | |
| | | Allowance for Loan Losses by Segment and Evaluation Method as of | | Allowance for Loan Losses by Segment and Evaluation Method as of | | | | December 31, 2016 | | December 31, 2019 | | | | Real Estate Construction | | | Consumer Real Estate | | | Commercial Real Estate | | | Commercial Non Real Estate | | | Public Sector and IDA | | | Consumer Non Real Estate | | | Unallocated | | | Total | | | | Real Estate Construction | | Consumer Real Estate | | Commercial Real Estate | | Commercial Non-Real Estate | | Public Sector and IDA | | Consumer Non-Real Estate | | Unallocated | | Total | Individually evaluated for impairment | | $ | --- | | | $ | 25 | | | $ | 1 | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 26 | | | | $ | --- | | | $ | 2 | | | $ | --- | | | $ | 108 | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 110 | | Collectively evaluated for impairment | | | 438 | | | | 1,805 | | | | 3,737 | | | | 1,063 | | | | 330 | | | | 644 | | | | 257 | | | | 8,274 | | | | | 400 | | | | 1,893 | | | | 2,559 | | | | 447 | | | | 478 | | | | 650 | | | | 326 | | | | 6,753 | | Total | | $ | 438 | | | $ | 1,830 | | | $ | 3,738 | | | $ | 1,063 | | | $ | 330 | | | $ | 644 | | | $ | 257 | | | $ | 8,300 | | | | $ | 400 | | | $ | 1,895 | | | $ | 2,559 | | | $ | 555 | | | $ | 478 | | | $ | 650 | | | $ | 326 | | | $ | 6,863 | |
| | | Loans by Segment and Evaluation Method as of | | | | December 31, 2019 | | | | 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 | | $ | --- | | | $ | 759 | | | $ | 3,608 | | | $ | 918 | | | $ | --- | | | $ | 4 | | | $ | --- | | | $ | 5,289 | | Collectively evaluated for impairment | | | 42,303 | | | | 180,713 | | | | 361,765 | | | | 45,658 | | | | 63,764 | | | | 34,535 | | | | --- | | | | 728,738 | | Total | | $ | 42,303 | | | $ | 181,472 | | | $ | 365,373 | | | $ | 46,576 | | | $ | 63,764 | | | $ | 34,539 | | | $ | --- | | | $ | 734,027 | |
| | | Loans by Segment and Evaluation Method as of | | | Allowance for Loan Losses by Segment and Evaluation Method as of | | | | December 31, 2016 | | | December 31, 2018 | | | | Real Estate Construction | | | Consumer Real Estate | | | Commercial Real Estate | | | Commercial Non Real Estate | | | Public Sector and IDA | | | Consumer Non Real Estate | | | Unallocated | | | Total | | | Real Estate Construction | | Consumer Real Estate | | Commercial Real Estate | | Commercial Non-Real Estate | | Public Sector and IDA | | Consumer Non-Real Estate | | Unallocated | | Total | Individually evaluated for impairment | | $ | 270 | | | $ | 877 | | | $ | 7,782 | | | $ | 241 | | | $ | --- | | | $ | 3 | | | $ | --- | | | $ | 9,173 | | | $ | --- | | | $ | 4 | | | $ | --- | | | $ | 135 | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 139 | | Collectively evaluated for impairment | | | 36,075 | | | | 156,841 | | | | 328,675 | | | | 38,783 | | | | 45,474 | | | | 33,525 | | | | --- | | | | 639,373 | | | | 398 | | | | 2,045 | | | | 2,798 | | | | 467 | | | | 583 | | | | 750 | | | | 210 | | | | 7,251 | | Total | | $ | 36,345 | | | $ | 157,718 | | | $ | 336,457 | | | $ | 39,024 | | | $ | 45,474 | | | $ | 33,528 | | | $ | --- | | | $ | 648,546 | | | $ | 398 | | | $ | 2,049 | | | $ | 2,798 | | | $ | 602 | | | $ | 583 | | | $ | 750 | | | $ | 210 | | | $ | 7,390 | |
| | | Allowance for Loan Losses by Segment and Evaluation Method as of | | | Loans by Segment and Evaluation Method as of | | | | December 31, 2015 | | | December 31, 2018 | | | | Real Estate Construction | | | Consumer Real Estate | | | Commercial Real Estate | | | Commercial Non Real Estate | | | Public Sector and IDA | | | Consumer Non Real Estate | | | Unallocated | | | Total | | | Real Estate Construction | | Consumer Real Estate | | Commercial Real Estate | | Commercial Non-Real Estate | | Public Sector and IDA | | Consumer Non-Real Estate | | Unallocated | | Total | Individually evaluated for impairment | | $ | --- | | | $ | 22 | | | $ | 23 | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 45 | | | $ | --- | | | $ | 1,452 | | | $ | 4,340 | | | $ | 1,015 | | | $ | --- | | | $ | 13 | | | $ | --- | | | $ | 6,820 | | Collectively evaluated for impairment | | | 576 | | | | 1,844 | | | | 4,086 | | | | 655 | | | | 436 | | | | 627 | | | | 28 | | | | 8,252 | | | | 37,845 | | | | 174,004 | | | | 349,206 | | | | 45,520 | | | | 60,777 | | | | 36,225 | | | | --- | | | | 703,577 | | Total | | $ | 576 | | | $ | 1,866 | | | $ | 4,109 | | | $ | 655 | | | $ | 436 | | | $ | 627 | | | $ | 28 | | | $ | 8,297 | | | $ | 37,845 | | | $ | 175,456 | | | $ | 353,546 | | | $ | 46,535 | | | $ | 60,777 | | | $ | 36,238 | | | $ | --- | | | $ | 710,397 | |
| | | Loans by Segment and Evaluation Method as of | | | | | December 31, 2015 | | | | | Real Estate Construction | | | Consumer Real Estate | | | Commercial Real Estate | | | Commercial Non Real Estate | | | Public Sector and IDA | | | Consumer Non Real Estate | | | Unallocated | | | Total | | Individually evaluated for impairment | | $ | 718 | | | $ | 962 | | | $ | 12,575 | | | $ | 1,091 | | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 15,346 | | Collectively evaluated for impairment | | | 47,533 | | | | 142,542 | | | | 296,803 | | | | 36,480 | | | | 51,335 | | | | 29,845 | | | | --- | | | | 604,538 | | Total | | $ | 48,251 | | | $ | 143,504 | | | $ | 309,378 | | | $ | 37,571 | | | $ | 51,335 | | | $ | 29,845 | | | $ | --- | | | $ | 619,884 | |
A summary of ratios for the allowance for loan losses follows: | | | December 31, | | | December 31, | | | | 2016 | | | 2015 | | | 2019 | | 2018 | Ratio of allowance for loan losses to the end of period loans, net of unearned income and deferred fees and costs | | | 1.28 | % | | | 1.34 | % | | | 0.94 | % | | | 1.04 | % | Ratio of net charge-offs to average loans, net of unearned income and deferred fees and costs | | | 0.26 | % | | | 0.32 | % | | | 0.09 | % | | | 0.07 | % |
A summary of nonperforming assets, as of the dates indicated, follows: | | | December 31, | | | December 31, | | | | 2016 | | | 2015 | | | 2019 | | 2018 | Nonperforming assets: | | | | | | | | | | | | | | | | | Nonaccrual loans | | $ | 1,168 | | | $ | 2,043 | | | $ | 164 | | | $ | 311 | | Restructured loans in nonaccrual | | | 4,687 | | | | 4,639 | | | | 3,211 | | | | 3,109 | | Total nonperforming loans | | | 5,855 | | | | 6,682 | | | | 3,375 | | | | 3,420 | | Other real estate owned, net | | | 3,156 | | | | 4,165 | | | | 1,612 | | | | 2,052 | | Total nonperforming assets | | $ | 9,011 | | | $ | 10,847 | | | $ | 4,987 | | | $ | 5,472 | | Ratio of nonperforming assets to loans, net of unearned income and deferred fees and costs, plus other real estate owned | | | 1.38 | % | | | 1.74 | % | | | 0.68 | % | | | 0.77 | % | Ratio of allowance for loan losses to nonperforming loans(1) | | | 141.76 | % | | | 124.17 | % | | Ratio of allowance for loan losses to nonperforming loans(1) | | | | 203.35 | % | | | 216.08 | % |
| | (1) | The Company defines nonperforming loans as total nonaccrual and restructured loans that are nonaccrual. Loans 90 days past due and still accruing and accruing restructured loans are excluded. |
A summary of loans past due 90 days or more and impaired loans, as of the dates indicated, follows: | | | December 31, | | December 31, | | | | 2016 | | | 2015 | | | 2019 | | 2018 | Loans past due 90 days or more and still accruing | | $ | 63 | | | $ | 156 | | | $ | 231 | | | $ | 35 | | Ratio of loans past due 90 days or more and still accruing to loans, net of unearned income and deferred fees and costs | | | 0.01 | % | | | 0.03 | % | | | 0.03 | % | | | 0.00 | % | Accruing restructured loans | | $ | 3,769 | | | $ | 8,814 | | | $ | 1,729 | | | $ | 2,552 | | Impaired loans: | | | | Impaired loans: | | | | | | | | | | Impaired loans with no valuation allowance | | $ | 8,269 | | | $ | 12,973 | | | $ | 4,174 | | | $ | 5,667 | | Impaired loans with a valuation allowance | | | 904 | | | | 2,373 | | | | 1,115 | | | | 1,153 | | Total impaired loans | | $ | 9,173 | | | $ | 15,346 | | | $ | 5,289 | | | $ | 6,820 | | Valuation allowance | | $ | (26 | ) | | $ | (45 | ) | | $ | (110 | ) | | $ | (139 | ) | Impaired loans, net of allowance | | $ | 9,147 | | | $ | 15,301 | | | $ | 5,179 | | | $ | 6,681 | | Average recorded investment in impaired loans(1) | | $ | 11,585 | | | $ | 17,297 | | | $ | 5,359 | | | $ | 9,788 | | Income recognized on impaired loans, after designation as impaired | | $ | 553 | | | $ | 769 | | | Income recognized on impaired loans, after designation as impaired | | | $ | 171 | | | $ | 250 | | 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. |
No interest income was recognized on nonaccrual loans for the years ended December 31, 2016, 20152019, 2018 or 2014.2017. Nonaccrual loans that meet the Company’s balance thresholds are designated as impaired. A detailed analysis of investment in impaired loans, associated reserves and interest income recognized, by loan class follows: | | | Impaired Loans as of December 31, 2016 | | | Impaired Loans as of December 31, 2019 | | | | 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 | | | 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 | Real Estate Construction(2) | | | | | | | | | | | | | | | | | | | | | | Construction 1-4 family residential | | $ | 280 | | | $ | 270 | | | $ | 270 | | | $ | --- | | | $ | --- | | | Consumer Real Estate(2) | | | | | | | | | | | | | | | | | | | | | | Consumer Real Estate(2) | | | | | | | | | | | | | | | | | | | | | | Residential equity lines | | | $ | 100 | | | $ | 100 | | | $ | 100 | | | $ | --- | | | $ | --- | | Residential closed-end first liens | | | 648 | | | | 609 | | | | 267 | | | | 342 | | | | 14 | | | | 221 | | | | 221 | | | | 221 | | | | --- | | | | --- | | Residential closed-end junior liens | | | 195 | | | | 195 | | | | --- | | | | 195 | | | | 7 | | | Investor-owned residential real estate | | | 73 | | | | 73 | | | | --- | | | | 73 | | | | 4 | | | | 441 | | | | 438 | | | | 241 | | | | 197 | | | | 2 | | Commercial Real Estate(2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Multifamily real estate | | | 1,364 | | | | 1,091 | | | | 1,091 | | | | --- | | | | --- | | | | 278 | | | | 278 | | | | 278 | | | | --- | | | | --- | | Commercial real estate, owner occupied | | | 4,005 | | | | 3,957 | | | | 3,663 | | | | 294 | | | | 1 | | | | 929 | | | | 895 | | | | 895 | | | | --- | | | | --- | | Commercial real estate, other | | | 2,997 | | | | 2,734 | | | | 2,734 | | | | --- | | | | --- | | | | 2,867 | | | | 2,435 | | | | 2,435 | | | | --- | | | | --- | | Commercial Non Real Estate(2) | | | | | | | | | | | | | | | | | | | | | | Commercial Non-Real Estate(2) | | | | | | | | | | | | | | | | | | | | | | Commercial and Industrial | | | 255 | | | | 241 | | | | 241 | | | | --- | | | | --- | | | | 917 | | | | 918 | | | | --- | | | | 918 | | | | 108 | | Consumer Non Real Estate(2) | | | | | | | | | | | | | | | | | | | | | | Consumer Non-Real Estate(2) | | | | | | | | | | | | | | | | | | | | | | Automobile | | | 3 | | | | 3 | | | | 3 | | | | --- | | | | --- | | | | 4 | | | | 4 | | | | 4 | | | | --- | | | | --- | | Total | | $ | 9,820 | | | $ | 9,173 | | | $ | 8,269 | | | $ | 904 | | | $ | 26 | | | $ | 5,757 | | | $ | 5,289 | | | $ | 4,174 | | | $ | 1,115 | | | $ | 110 | |
| | | Impaired Loans as of December 31, 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 | | Real Estate Construction(2) | | | | | | | | | | | | | | | | | | | | | Construction 1-4 family residential | | $ | 718 | | | $ | 718 | | | $ | 718 | | | $ | --- | | | $ | --- | | Consumer Real Estate(2) | | | | | | | | | | | | | | | | | | | | | Residential closed-end first liens | | | 713 | | | | 669 | | | | 305 | | | | 364 | | | | 13 | | Residential closed-end junior liens | | | 218 | | | | 218 | | | | --- | | | | 218 | | | | 5 | | Investor-owned residential real estate | | | 75 | | | | 75 | | | | --- | | | | 75 | | | | 4 | | Commercial Real Estate(2) | | | | | | | | | | | | | | | | | | | | | Multifamily real estate | | | 1,988 | | | | 1,728 | | | | 1,728 | | | | --- | | | | --- | | Commercial real estate, owner occupied | | | 5,068 | | | | 5,020 | | | | 3,304 | | | | 1,716 | | | | 23 | | Commercial real estate, other | | | 5,990 | | | | 5,827 | | | | 5,827 | | | | --- | | | | --- | | Commercial Non Real Estate(2) | | | | | | | | | | | | | | | | | | | | | Commercial and Industrial | | | 1,099 | | | | 1,091 | | | | 1,091 | | | | --- | | | | --- | | Total | | $ | 15,869 | | | $ | 15,346 | | | $ | 12,973 | | | $ | 2,373 | | | $ | 45 | |
| | | | | (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. |
(2) Only classes with impaired loans are shown.
| | | Average Investment and Interest Income for Impaired Loans For the Year Ended December 31, 2016 | | | | | Average Recorded Investment(1) | | | Interest Income Recognized | | Real Estate Construction(2) | | | | | | | | | Construction 1-4 family residential | | $ | 462 | | | $ | 10 | | Consumer Real Estate(2) | | | | | | | | | Residential closed-end first liens | | | 642 | | | | 38 | | Residential closed-end junior liens | | | 207 | | | | 13 | | Investor-owned residential real estate | | | 74 | | | | 4 | | Commercial Real Estate(2) | | | | | | | | | Multifamily real estate | | | 1,366 | | | | 12 | | Commercial real estate, owner occupied | | | 4,342 | | | | 206 | | Commercial real estate, other | | | 3,947 | | | | 263 | | Commercial Non Real Estate(2) | | | | | | | | | Commercial and Industrial | | | 541 | | | | 7 | | Consumer Non Real Estate(2) | | | | | | | | | Automobile | | | 4 | | | | --- | | Total | | $ | 11,585 | | | $ | 553 | |
(1) Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status.
(2) Only classes with impaired loans are shown.
| | | Average Investment and Interest Income for Impaired Loans For the Year Ended December 31, 2015 | | | Impaired Loans as of December 31, 2018 | | | | Average Recorded Investment(1) | | | Interest Income Recognized | | | 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 | Real Estate Construction(2) | | | | | | | | | | Construction 1-4 family residential | | $ | 612 | | | $ | 23 | | | Consumer Real Estate(2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential closed-end first liens | | | 681 | | | | 43 | | | $ | 728 | | | $ | 719 | | | $ | 719 | | | $ | --- | | | $ | --- | | Residential closed-end junior liens | | | 228 | | | | 15 | | | | 144 | | | | 143 | | | | --- | | | | 143 | | | | 4 | | Investor-owned residential real estate | | | 76 | | | | 5 | | | | 593 | | | | 590 | | | | 590 | | | | --- | | | | --- | | Commercial Real Estate(2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Multifamily real estate | | | 2,581 | | | | 84 | | | | 485 | | | | 483 | | | | 483 | | | | --- | | | | --- | | Commercial real estate, owner occupied | | | 6,141 | | | | 251 | | | | 1,363 | | | | 1,363 | | | | 1,363 | | | | --- | | | | --- | | Commercial real estate, other | | | 5,888 | | | | 308 | | | | 2,867 | | | | 2,494 | | | | 2,494 | | | | --- | | | | --- | | Commercial Non Real Estate(2) | | | | | | | | | | Commercial Non-Real Estate(2) | | | | | | | | | | | | | | | | | | | | | | Commercial and Industrial | | | 1,090 | | | | 40 | | | | 1,018 | | | | 1,015 | | | | 5 | | | | 1,010 | | | | 135 | | Consumer Non-Real Estate(2) | | | | | | | | | | | | | | | | | | | | | | Automobile | | | | 13 | | | | 13 | | | | 13 | | | | --- | | | | --- | | Total | | $ | 17,297 | | | $ | 769 | | | $ | 7,211 | | | $ | 6,820 | | | $ | 5,667 | | | $ | 1,153 | | | $ | 139 | |
| | (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. |
| | | Average Investment and Interest Income for Impaired Loans For the Year Ended December 31, 2019 | | | | Average Recorded Investment(1) | | Interest Income Recognized | Consumer Real Estate(2) | | | | | | | | | Residential equity lines | | $ | 98 | | | $ | 6 | | Residential closed-end first liens | | | 225 | | | | 11 | | Investor-owned residential real estate | | | 439 | | | | 17 | | Commercial Real Estate(2) | | | | | | | | | Multifamily real estate | | | 284 | | | | 12 | | Commercial real estate, owner occupied | | | 913 | | | | 41 | | Commercial real estate, other | | | 2,435 | | | | 59 | | Commercial Non-Real Estate(2) | | | | | | | | | Commercial and Industrial | | | 962 | | | | 25 | | Consumer Non-Real Estate(2) | | | | | | | | | Automobile | | | 3 | | | | --- | | Total | | $ | 5,359 | | | $ | 171 | |
| | | Average Investment and Interest Income for Impaired Loans 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)(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. |
| | | Average Investment and Interest Income for Impaired Loans For the Year Ended December 31, 2018 | | | | Average Recorded Investment(1) | | Interest Income Recognized | Consumer Real Estate(2) | | | | | | | | | Residential closed-end first liens | | $ | 1,202 | | | $ | 41 | | Residential closed-end junior liens | | | 159 | | | | 9 | | Investor-owned residential real estate | | | 808 | | | | 23 | | Commercial Real Estate(2) | | | | | | | | | Multifamily real estate | | | 491 | | | | 20 | | Commercial real estate, owner occupied | | | 3,038 | | | | 75 | | Commercial real estate, other | | | 2,744 | | | | 54 | | Commercial Non-Real Estate(2) | | | | | | | | | Commercial and Industrial | | | 1,326 | | | | 27 | | Consumer Non-Real Estate(2) | | | | | | | | | Automobile | | | 20 | | | | 1 | | Total | | $ | 9,788 | | | $ | 250 | |
| (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. |
| | | Average Investment and Interest Income for Impaired Loans For the Year Ended December 31, 2017 | | | | Average Recorded Investment(1) | | Interest Income Recognized | Real Estate Construction(2) | | | | | | | | | Construction other | | $ | 3,298 | | | $ | 177 | | Consumer Real Estate(2) | | | | | | | | | Residential closed-end first liens | | | 781 | | | | 57 | | Residential closed-end junior liens | | | 185 | | | | 11 | | Investor-owned residential real estate | | | 329 | | | | 1 | | Commercial Real Estate(2) | | | | | | | | | Multifamily real estate | | | 748 | | | | 16 | | Commercial real estate, owner occupied | | | 4,047 | | | | 200 | | Commercial real estate, other | | | 2,638 | | | | --- | | Commercial Non-Real Estate(2) | | | | | | | | | Commercial and Industrial | | | 1,282 | | | | 64 | | Consumer Non-Real Estate(2) | | | | | | | | | Automobile | | | 36 | | | | 2 | | Total | | $ | 13,344 | | | $ | 528 | |
| (1) | Recorded investment is net of charge-offs and interest paid while a loan is in nonaccrual status. |
| (2) | Only classes with impaired loans are shown. |
An analysis of past due and nonaccrual loans, as of the dates indicated, follows: December 31, 2019 | | December 31, 2019 | | | | | | | | | | | | | | | | | | | 30 – 89 Days Past Due | | | 90 or More Days Past Due | | | 90 or More Days Past Due and Still Accruing | | | Nonaccruals (Including Impaired Nonaccruals) | | | 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 | | | | | | | | | | | | | | | | | | Construction, residential | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 270 | | | Real Estate Construction(1) | | | | | | | | | | | | | | | | | | Construction, other | | | 25 | | | | --- | | | | --- | | | | --- | | | $ | 19 | | | $ | --- | | | $ | --- | | | $ | --- | | Consumer Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Equity lines | | | 10 | | | | --- | | | | --- | | | | --- | | | Residential closed-end first liens | | | 1,498 | | | | 6 | | | | 6 | | | | --- | | | | 499 | | | | 210 | | | | 188 | | | | 22 | | Residential closed-end junior liens | | | 114 | | | | 36 | | | | 36 | | | | --- | | | | 83 | | | | --- | | | | --- | | | | --- | | Investor-owned residential real estate | | | 56 | | | | 234 | | | | --- | | | | 253 | | | | --- | | | | 264 | | | | --- | | | | 264 | | Commercial Real Estate | | | | | | | | | | | | | | | | | | Commercial Real Estate(1) | | | | | | | | | | | | | | | | | | Multifamily real estate | | | 132 | | | | 1,091 | | | | --- | | | | 1,091 | | | | 94 | | | | --- | | | | --- | | | | --- | | Commercial real estate, owner occupied | | | 339 | | | | 202 | | | | --- | | | | 1,183 | | | | --- | | | | 287 | | | | --- | | | | 514 | | Commercial real estate, other | | | --- | | | | 80 | | | | --- | | | | 2,814 | | | | --- | | | | --- | | | | --- | | | | 2,435 | | Commercial Non Real Estate | | | | | | | | | | | | | | | | | | Commercial Non-Real Estate(1) | | | | | | | | | | | | | | | | | | Commercial and Industrial | | | 6 | | | | 218 | | | | --- | | | | 241 | | | | 45 | | | | 153 | | | | 17 | | | | 136 | | Public Sector and IDA | | | | | | | | | | | | | | | | | | Public sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | | Consumer Non Real Estate | | | | | | | | | | | | | | | | | | Consumer Non-Real Estate (1) | | | | | | | | | | | | | | | | | | Credit cards | | | 8 | | | | 5 | | | | 5 | | | | --- | | | | 4 | | | | --- | | | | --- | | | | --- | | Automobile | | | 234 | | | | 12 | | | | 12 | | | | 3 | | | | 256 | | | | 14 | | | | 14 | | | | 4 | | Other consumer loans | | | 131 | | | | 4 | | | | 4 | | | | --- | | | | 70 | | | | 12 | | | | 12 | | | | --- | | Total | | $ | 2,553 | | | $ | 1,888 | | | $ | 63 | | | $ | 5,855 | | | $ | 1,070 | | | $ | 940 | | | $ | 231 | | | $ | 3,375 | |
December 31, 2018 | | | | | | | | | | | | | | | | | | | 30 – 89 Days Past Due | | 90 or More Days Past Due | | 90 or More Days Past Due and Still Accruing | | Nonaccruals (Including Impaired Nonaccruals) | Consumer Real Estate(1) | | | | | | | | | | | | | | | | | Residential closed-end first liens | | $ | 647 | | | $ | 119 | | | $ | --- | | | $ | 278 | | Residential closed-end junior liens | | | 11 | | | | --- | | | | --- | | | | --- | | Investor-owned residential real estate | | | --- | | | | --- | | | | --- | | | | 451 | | Commercial Real Estate(1) | | | | | | | | | | | | | | | | | Multifamily real estate | | | 291 | | | | 192 | | | | --- | | | | 192 | | Commercial real estate, owner occupied | | | 325 | | | | --- | | | | --- | | | | --- | | Commercial real estate, other | | | --- | | | | --- | | | | --- | | | | 2,494 | | Commercial Non-Real Estate(1) | | | | | | | | | | | | | | | | | Commercial and Industrial | | | 10 | | | | 2 | | | | 2 | | | | 5 | | Consumer Non-Real Estate (1) | | | | | | | | | | | | | | | | | Credit cards | | | 5 | | | | --- | | | | --- | | | | --- | | Automobile | | | 296 | | | | 29 | | | | 29 | | | | --- | | Other consumer loans | | | 50 | | | | 4 | | | | 4 | | | | --- | | Total | | $ | 1,635 | | | $ | 346 | | | $ | 35 | | | $ | 3,420 | |
| December 31, 2015(1)
| | | | | | | | | | | | | | | | Only classes with past due or nonaccrual loans are presented |
| | | 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 | | | | | | | | | | | | | | | | | Construction, residential | | $ | --- | | | $ | --- | | | $ | --- | | | $ | 718 | | Construction, other | | | 26 | | | | --- | | | | --- | | | | --- | | Consumer Real Estate | | | | | | | | | | | | | | | | | Equity lines | | | 16 | | | | --- | | | | --- | | | | --- | | Residential closed-end first liens | | | 1,402 | | | | 106 | | | | 106 | | | | 14 | | Residential closed-end junior liens | | | 123 | | | | 39 | | | | 39 | | | | --- | | Investor-owned residential real estate | | | 248 | | | | --- | | | | --- | | | | --- | | Commercial Real Estate | | | | | | | | | | | | | | | | | Multifamily real estate | | | 684 | | | | 1,728 | | | | --- | | | | 1,728 | | Commercial real estate, owner occupied | | | --- | | | | 357 | | | | --- | | | | 494 | | Commercial real estate, other | | | --- | | | | --- | | | | --- | | | | 2,845 | | Commercial Non Real Estate | | | | | | | | | | | | | | | | | Commercial and Industrial | | | 142 | | | | 883 | | | | --- | | | | 883 | | Public Sector and IDA | | | | | | | | | | | | | | | | | Public sector and IDA | | | --- | | | | --- | | | | --- | | | | --- | | Consumer Non Real Estate | | | | | | | | | | | | | | | | | Credit cards | | | 5 | | | | 6 | | | | 6 | | | | --- | | Automobile | | | 286 | | | | 5 | | | | 5 | | | | --- | | Other consumer loans | | | 60 | | | | --- | | | | --- | | | | --- | | Total | | $ | 2,992 | | | $ | 3,124 | | | $ | 156 | | | $ | 6,682 | |
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.” During the third quarter of 2019 the Bank slightly revised the loan risk rating system to align with regulatory guidance. After the revision, the “special mention” rating is no longer applied to consumer loans. 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 December 31, 20162019 and 2015.2018. The following displays non-impaired gross loans by credit quality indicator:indicator as of the dates indicated: December 31, 20169 | | | Pass | | | Special Mention (Excluding Impaired) | | | Classified (Excluding Impaired) | | | Pass | | Special Mention (Excluding Impaired) | | Classified (Excluding Impaired) | Real Estate Construction | | | | | | | | | | | | | | | | | | | | | | | | | Construction, 1-4 family residential | | $ | 11,635 | | | $ | 3,468 | | | $ | --- | | | $ | 7,590 | | | $ | --- | | | $ | --- | | Construction, other | | | 20,972 | | | | --- | | | | --- | | | | 34,713 | | | | --- | | | | --- | | Consumer Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | Equity lines | | | 17,034 | | | | 82 | | | | --- | | | | 16,435 | | | | --- | | | | --- | | Closed-end first liens | | | 83,658 | | | | 1,267 | | | | 580 | | | | 94,814 | | | | --- | | | | 517 | | Closed-end junior liens | | | 4,861 | | | | 15 | | | | 151 | | | | 3,861 | | | | --- | | | | --- | | Investor-owned residential real estate | | | 48,277 | | | | 333 | | | | 583 | | | | 65,063 | | | | --- | | | | 23 | | Commercial Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | Multifamily residential real estate | | | 99,002 | | | | 1,733 | | | | --- | | | | 87,934 | | | | --- | | | | 94 | | Commercial real estate owner-occupied | | | 120,170 | | | | 1,188 | | | | 1,425 | | | | 127,937 | | | | --- | | | | 164 | | Commercial real estate, other | | | 103,534 | | | | 1,543 | | | | 80 | | | | 145,636 | | | | --- | | | | -- | | Commercial Non Real Estate | | | | | | | | | | | | | | Commercial Non-Real Estate | | | | | | | | | | | | | | Commercial and Industrial | | | 35,521 | | | | 3,229 | | | | 33 | | | | 45,387 | | | | 135 | | | | 136 | | Public Sector and IDA | | | | | | | | | | | | | | | | | | | | | | | | | States and political subdivisions | | | 45,474 | | | | --- | | | | --- | | | | 63,764 | | | | --- | | | | --- | | Consumer Non Real Estate | | | | | | | | | | | | | | Consumer Non-Real Estate | | | | | | | | | | | | | | Credit cards | | | 5,978 | | | | --- | | | | --- | | | | 5,703 | | | | --- | | | | --- | | Automobile | | | 14,457 | | | | 25 | | | | 192 | | | | 14,810 | | | | --- | | | | 19 | | Other consumer | | | 12,229 | | | | 636 | | | | 8 | | | | 13,995 | | | | --- | | | | 8 | | Total | | $ | 622,802 | | | $ | 13,519 | | | $ | 3,052 | | | $ | 727,642 | | | $ | 135 | | | $ | 961 | |
December 31, 20152018 | | | Pass | | Special Mention (Excluding Impaired) | | Classified (Excluding Impaired) | Real Estate Construction | | | | | | | | | | | | | Construction, 1-4 family residential | | $ | 9,264 | | | $ | --- | | | $ | --- | | Construction, other | | | 28,560 | | | | 21 | | | | --- | | Consumer Real Estate | | | | | | | | | | | | | Equity lines | | | 16,026 | | | | 38 | | | | --- | | Closed-end first liens | | | 92,253 | | | | 994 | | | | 582 | | Closed-end junior liens | | | 3,954 | | | | --- | | | | --- | | Investor-owned residential real estate | | | 60,157 | | | | --- | | | | --- | | Commercial Real Estate | | | | | | | | | | | | | Multifamily residential real estate | | | 98,582 | | | | --- | | | | --- | | Commercial real estate owner-occupied | | | 123,225 | | | | 211 | | | | 32 | | Commercial real estate, other | | | 127,156 | | | | --- | | | | --- | | Commercial Non-Real Estate | | | | | | | | | | | | | Commercial and Industrial | | | 45,420 | | | | 54 | | | | 46 | | Public Sector and IDA | | | | | | | | | | | | | States and political subdivisions | | | 60,777 | | | | --- | | | | --- | | Consumer Non-Real Estate | | | | | | | | | | | | | Credit cards | | | 5,724 | | | | --- | | | | --- | | Automobile | | | 18,598 | | | | 133 | | | | 71 | | Other consumer | | | 11,691 | | | | 4 | | | | 4 | | Total | | $ | 701,387 | | | $ | 1,455 | | | $ | 735 | |
| | | Pass | | | Special Mention (Excluding Impaired) | | | Classified (Excluding Impaired) | | Real Estate Construction | | | | | | | | | | | | | Construction, 1-4 family residential | | $ | 10,626 | | | $ | 3,694 | | | $ | --- | | Construction, other | | | 33,213 | | | | --- | | | | --- | | Consumer Real Estate | | | | | | | | | | | | | Equity lines | | | 16,236 | | | | 15 | | | | 87 | | Closed-end first liens | | | 78,614 | | | | 708 | | | | 1,370 | | Closed-end junior liens | | | 4,983 | | | | 55 | | | | 61 | | Investor-owned residential real estate | | | 39,616 | | | | 31 | | | | 766 | | Commercial Real Estate | | | | | | | | | | | | | Multifamily residential real estate | | | 77,060 | | | | --- | | | | 1,804 | | Commercial real estate owner-occupied | | | 121,741 | | | | 1,165 | | | | 1,274 | | Commercial real estate, other | | | 93,701 | | | | 58 | | | | --- | | Commercial Non Real Estate | | | | | | | | | | | | | Commercial and Industrial | | | 35,652 | | | | 285 | | | | 543 | | Public Sector and IDA | | | | | | | | | | | | | States and political subdivisions | | | 51,335 | | | | --- | | | | --- | | Consumer Non Real Estate | | | | | | | | | | | | | Credit cards | | | 5,773 | | | | --- | | | | --- | | Automobile | | | 12,414 | | | | 102 | | | | 138 | | Other consumer | | | 11,359 | | | | 31 | | | | 28 | | Total | | $ | 592,323 | | | $ | 6,144 | | | $ | 6,071 | |
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 major reclassifications from portfolio loans to held for sale. 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. Troubled Debt Restructurings From time to time the Company modifies loans in troubled debt restructurings (“TDRs”).TDRs. The following tables present restructurings by class that occurred during the years ended December 31, 2016, 20152019, 2018 and 2014.2017. Note: Only classes with restructured loans are presented. | | | Restructurings that occurred during the year ended December 31, 2016 | | | | | Number of Contracts | | | Pre- Modification Outstanding Recorded Investment | | | Post- Modification Outstanding Recorded Investment(1) | | Commercial Real Estate | | | | | | | | | | | | | Commercial real estate, other | | | 2 | | | $ | 3,008 | | | $ | 3,008 | | Commercial Non Real Estate | | | | | | | | | | | | | Commercial and industrial | | | 1 | | | | 29 | | | | 30 | | Consumer Non Real Estate | | | | | | | | | | | | | Automobile | | | 1 | | | | 5 | | | | 5 | | Total | | | 4 | | | $ | 3,042 | | | $ | 3,043 | |
| | | Restructurings that occurred during the year ended December 31, 2019 | | | | Number of Contracts | | Pre- Modification Outstanding Recorded Investment | | Post- Modification Outstanding Recorded Investment(1) | Consumer Real Estate | | | | | | | | | | | | | Equity lines | | | 1 | | | $ | 100 | | | $ | 100 | | Total | | | 1 | | | $ | 100 | | | $ | 100 | |
| | (1) | Post-modification outstanding recorded investment considers amounts immediatelyimmediately following the modification. Amounts do not reflect balances at the end of the period. |
DuringThe Company restructured 1 loan during the twelve-monthtwelve month period ended December 31, 2016, the Company identified four loans as troubled debt restructurings. Two commercial real estate loans were originally modified in troubled debt restructurings in 20142019 to provide payment relief by loweringto the interest rate and allowing interest-only payments. The restructurings completed in 2016 lowered the interest rate from the 2014 restructured terms and returned the loans to amortization with payments ofborrower without forgiving principal andor interest. The loans wereloan covenants require that the balance be paid in nonaccrual status prior to the 2016 restructuring and will remain in nonaccrual until they have met the Company's policy to return to accrual status.full for a period of 30 days each year. The Company also identified duringallowed the borrower to maintain full funding for more than a year, ended December 31, 2016 one commercial non-real estate loan and one automobile loan modified in troubled debt restructurings. The modifications provided payment relief by extendingextended the maturity date and capitalizing interest.date. The loans are in nonaccrual status. Each of the four troubled debt restructurings are collateral dependent andimpairment analysis was based upon the fair value is measured using theof collateral method. Impairment measurementand did not result in a specific allocation for any of the four restructured loans.allocation.
| | | Restructurings that occurred during the year ended December 31, 2015 | | | | | Number of Contracts | | | Pre- Modification Outstanding Recorded Investment | | | Post- Modification Outstanding Recorded Investment(1) | | Real Estate Construction | | | | | | | | | | | | | Construction, 1-4 family residential | | | 2 | | | $ | 718 | | | $ | 718 | | Commercial Real Estate | | | | | | | | | | | | | Commercial real estate owner-occupied | | | 3 | | | | 2,710 | | | | 2,623 | | Commercial Non Real Estate | | | | | | | | | | | | | Commercial and industrial | | | 1 | | | | 200 | | | | 200 | | Total | | | 6 | | | $ | 3,628 | | | $ | 3,541 | |
| | | Restructurings that occurred during the year ended December 31, 2018 | | | | Number of Contracts | | Pre- Modification Outstanding Recorded Investment | | Post- Modification Outstanding Recorded Investment(1) | Construction Real Estate | | | | | | | | | | | | | Construction, other | | | 2 | | | $ | 2,882 | | | $ | 2,882 | | Commercial Real Estate | | | | | | | | | | | | | Commercial real estate, owner occupied | | | 2 | | | | 715 | | | | 715 | | Consumer Real Estate | | | | | | | | | | | | | Closed-end first liens | | | 1 | | | | 22 | | | | 22 | | Investor-owned residential real estate | | | 8 | | | | 594 | | | | 594 | | Total | | | 13 | | | $ | 4,213 | | | $ | 4,213 | |
| | (1) | Post-modification outstanding recorded investment considers amounts immediatelyimmediately following the modification. Amounts do not reflect balances at the end of the period. |
DuringThe Company restructured 13 loans during the twelve-monthtwelve month period ended December 31, 2015,2018. Each of the Company modified sixconstruction loans were restructured to extend the maturity and interest only period for each loan. As of December 31, 2018, the loans were converted to permanent financing at market terms and were no longer considered TDR or individually evaluated for impairment.
Two commercial real estate loans were restructured to provide a 12-month interest-only period without reducing the interest rate. The impairment measurements were based upon the present value of cash flows and did not result in troubled debt restructurings in ordera specific allocation for either loan. The investor owned residential real estate loans were restructured to provide payment relief. One commercialSeven loans were restructured from amortizing to interest-only for a period of 12 months. The impairment measurements were based on the fair value of collateral and did not result in specific allocations. The other investor owned residential real estate owner-occupiedrestructure consolidated debt at a longer term, provided a rate reduction and capitalized interest. The impairment measurement was based upon the present value of cash flows and did not result in a specific allocation. The loan’s nonaccrual status requires that all payments made during the nonaccrual period are credited fully to principal, reducing the book balance below the present value of cash flows. One residential closed-end first lien loan was restructured to forgive principalprovide payment relief by restructuring from amortizing to interest-only for a period of $100, reduce12 months. The impairment measurement was based on the interest rate, capitalize interest and re-amortize payments. The fair value measurementof collateral and did not result in a specific allocation. None of the restructured loan as ofrestructures completed during the twelve months ended December 31, 2015 resulted in no specific allocation to the allowance for loan losses. Two commercial real estate owner-occupied loans were modified during the fourth quarter of 2015 to require payments of interest only. As of December 31, 2015, the impairment analysis determined a combined allocation to the allowance for loan losses of $23. Two construction loans were modified during the fourth quarter of 2015 to become non-revolving and require payments of interest only. The fair value measurement of the restructured loans as of December 31, 2015 resulted in no specific allocation to the allowance for loan losses. One commercial loan was restructured during the fourth quarter of 2015 to extend the maturity date. The fair value measurement of the restructured loan as of December 31, 2015 resulted in no specific allocation to the allowance for loan losses.2018 forgave principal or interest. | | | Restructurings that occurred during the year ended December 31, 2014 | | | Restructurings that occurred during the year ended December 31, 2017 | | | | Number of Contracts | | | Pre- Modification Outstanding Recorded Investment | | | Post- Modification Outstanding Recorded Investment(1) | | | Number of Contracts | | Pre- Modification Outstanding Recorded Investment | | Post- Modification Outstanding Recorded Investment(1) | Consumer Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | Closed-ended first liens | | | 1 | | | $ | 126 | | | $ | 143 | | | Closed-end first lien | | | | 1 | | | $ | 8 | | | $ | 8 | | Commercial Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | Multifamily residential real estate | | | 1 | | | | 2,484 | | | | 2,484 | | | Commercial real estate owner-occupied | | | 1 | | | | 184 | | | | 208 | | | Commercial real estate, other | | | 2 | | | | 2,967 | | | | 3,008 | | | | 1 | | | | 132 | | | | 132 | | Commercial Non-Real Estate | | | | | | | | | | | | | | Commercial and industrial | | | | 4 | | | | 1,221 | | | | 1,221 | | Consumer Non-Real Estate | | | | | | | | | | | | | | Automobile | | | | 4 | | | | 26 | | | | 26 | | Total | | | 5 | | | $ | 5,761 | | | $ | 5,843 | | | | 10 | | | $ | 1,387 | | | $ | 1,387 | |
| | (1) | Post-modification outstanding recorded investment considers amounts immediatelyimmediately following the modification. Amounts do not reflect balances at the end of the period. |
DuringEach of the yearrestructurings completed during the twelve months ended December 31, 2014, the Company modified five loans in troubled debt restructurings. Each restructuring2017 provided payment relief to the borrower without forgivenessborrowers. The consumer real estate loan was modified to provide payment relief by extending the term. Impairment measurement was based on the present value of principal or accrued interest. Eachcash flows and did not result in a specific allocation.
The commercial real estate loan restructuring included a reduction inreduced debt service by lowering the interest rates.rate slightly and changing the interest method from variable to fixed. Interest was capitalized at time of restructuring on the residential real estate loan, commercial real estate owner occupied loan, and the two commercial real estate non-owner occupied loans. The multifamily real estate loan commercial real estate owner occupied loan and residential real estate loan received re-amortization of paymentswas re-amortized over a longer term. TwoImpairment measurement, based on the present value of cash flows, did not result in a specific allocation. The loan’s nonaccrual status requires that all payments made during the nonaccrual period are credited fully to principal, reducing the book balance below the present value of cash flows. The four commercial non-real estate loans were restructured to reduce monthly debt service by increasing the amortization period. Three of the commercial non-real estate loans received rate reductions, and on one commercial non-real estate loan, the interest method was changed from variable to fixed. Impairment measurement, based on the present value of cash flows, indicated a specific reserve for two of the commercial non-real estate loans. The four automobile loans were restructured pursuant to Chapter 13 bankruptcy requirements, reducing the interest rate and re-amortizing over a longer term to provide monthly debt service relief. One automobile loan restructuring included forgiveness of a small amount of principal to comply with the bankruptcy plan. Impairment measurement for all the restructured automobile loans was based on the present value of cash flows method and resulted in small specific allocations for each loan which totaled $1. Of the Company's TDRs at December 31, 2019, seven consumer real estate non owner occupied loans received a changetotaling $263, all part of one relationship, defaulted within 12 months of modification. The impairment measurement is based upon the fair value of collateral, less estimated cost to sell, and resulted in payment structure from amortizing to one year of interest-only payments. Eachno allocation. All of the defaulted loans restructuredare in 2014 were designated nonaccrual status while the Company is working with the exception of the residential real estate loan which met the criteria for accrual status. The fair value measurements of the restructured loans as of December 31, 2014 resulted in specific allocationsborrowers to the allowance for loan losses totaling $206. recover its investment. Of the Company’s TDR’s that defaulted in 2016, 20152018 and 2014,2017, none 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-off or foreclosure subsequent to modification.foreclosure. Note 6: Premises and Equipment
Note 6: | Premises and Equipment |
A summary of the cost and accumulated depreciation of premises and equipment, as of the dates indicated, follows: | | | December 31, | | | | | 2016 | | | 2015 | | Premises | | $ | 12,554 | | | $ | 13,097 | | Furniture and equipment | | | 5,052 | | | | 6,600 | | Premises and equipment | | $ | 17,606 | | | $ | 19,697 | | Accumulated depreciation | | | (8,753 | ) | | | (10,677 | ) | Premises and equipment, net | | $ | 8,853 | | | $ | 9,020 | |
| | | December 31, | | | | 2019 | | 2018 | Premises | | $ | 13,331 | | | $ | 13,244 | | Furniture and equipment | | | 6,300 | | | | 5,606 | | Premises and equipment | | $ | 19,631 | | | $ | 18,850 | | Accumulated depreciation | | | (10,712 | ) | | | (10,204 | ) | Premises and equipment, net | | $ | 8,919 | | | $ | 8,646 | |
Depreciation expense for the years ended December 2016, 20152019, 2018 and 20142017 amounted to $801, $749$739, $766 and $732,$805, respectively. The In December 2017, the Company leases certainsold its Marion branch facilities under noncancellable operating leases. The future minimum lease payments under these leases (with initial or remaining lease terms in excessoffice and realized a gain on the sale of one year) asfixed assets of December 31, 2016 are as follows: $292 in 2017, $292 in 2018, $233 in 2019, $56 in 2020, $34 in 2021 and $164 thereafter.$134.
Note 7: Deposits
The aggregate amounts of time deposits in denominations of $250 or more at December 31, 20162019 and 20152018 were $15,797$22,412 and $21,072,$14,277, respectively. At December 31, 20162019 the scheduled maturities of time deposits are as follows: 2017 | | | 88,623 | | | 2018 | | | 51,347 | | | 2019 | | | 7,245 | | | 2020 | | | 8,168 | | | $ | 117,100 | | 2021 | | | 12,394 | | | | 6,136 | | 2022 | | | | 2,217 | | 2023 | | | | 2,402 | | 2024 | | | | 173 | | Thereafter | | | 1,664 | | | | --- | | Total time deposits | | $ | 169,441 | | | $ | 128,028 | |
At December 31, 20162019 and 2015,2018, overdraft demand deposits reclassified to loans totaled $417$276 and $307,$240, respectively. Note 8:: Employee Benefit Plans | Employee Benefit Plans |
401(k) Plan The Company has a Retirement Accumulation Plan qualifying under IRS Code Section 401(k), in which NBI, NBB and NBFS are participating employers. Eligible participants may contribute up to 100% of their total annual compensation to the plan, subject to certain limits based on federal tax laws. Employee contributions are matched by the employer based on a percentage of an employee’s total annual compensation contributed to the plan. For the years ended December 31, 2016, 20152019, 2018 and 2014,2017, the Company contributed $315, $294$379, $364 and $273,$340, respectively, to the plan. Employee Stock Ownership Plan The Company has a nonleveragednon-leveraged Employee Stock Ownership Plan (ESOP) which enables employees of NBI and its subsidiaries who have one year of service and who have attained the age of 21 prior to the plan’s January 1 and July 1 enrollment dates to own NBI common stock. Contributions to the ESOP, which are not mandatory, are determined annually by the NBI Board of Directors. Contribution expense amounted to $150,$300, $300 and $200 and $100 in the years ended December 31, 2016, 20152019, 2018 and 2014,2017, respectively. Dividends on ESOP shares are charged to retained earnings. As of December 31, 2016,2019, the number of shares held by the ESOP was 249,256.190,343. All shares held by the ESOP are treated as outstanding in computing the Company’s basic net income per share. Upon reaching age 55 with ten10 years of plan participation, a vested participant has the right to diversify 50% of his or her allocated ESOP shares and NBI or the ESOP, with the agreement of the Trustee,trustee, is obligated to purchase those shares. The ESOP contains a put option which allows a withdrawing participant to require the Company or the ESOP, if the plan administrator agrees, to purchase his or her allocated shares if the shares are not readily tradable on an established market at the time of distribution. Salary Continuation Plan The Company has a non-qualified Salary Continuation Plan for certain key officers. The plan provides the participating officers with supplemental retirement income, payable for the greater of 15 years after retirement or the officer’s lifetime. The expense accrued for the plans in 2016, 2015,2019, 2018, and 2014,2017, based on the present value of the retirement benefits, amounted to $242, $396,$270, $255, and $246,$272, respectively. The plan is unfunded. However bank-owned life insurance has been acquired on the life of the key employees in amounts sufficient to discharge the obligations of the agreement. Defined Benefit Plan The Company’s defined benefit pension plan covers substantially all employees. The plan benefit formula is based upon the length of service of retired employees and a percentage of qualified W-2 compensation during their final years of employment. Information pertaining to activity in the plan during the years indicated is as follows: | | | December 31, | | | December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2019 | | 2018 | | 2017 | Change in benefit obligation | | | | | | | | | | | | | | | | | | | | | | | | | Projected benefit obligation at beginning of year | | $ | 20,427 | | | $ | 19,324 | | | $ | 17,185 | | | $ | 23,688 | | | $ | 23,492 | | | $ | 21,059 | | Service cost | | | 694 | | | | 620 | | | | 524 | | | | 801 | | | | 868 | | | | 692 | | Interest cost | | | 757 | | | | 669 | | | | 663 | | | | 884 | | | | 802 | | | | 743 | | Actuarial loss | | | 198 | | | | 798 | | | | 1,674 | | | Actuarial loss (gain) | | | | 5,162 | | | | (423 | ) | | | 1,417 | | Benefits paid | | | (1,017 | ) | | | (984 | ) | | | (722 | ) | | | (894 | ) | | | (1,051 | ) | | | (419 | ) | Projected benefit obligation at end of year | | $ | 21,059 | | | $ | 20,427 | | | $ | 19,324 | | | $ | 29,641 | | | $ | 23,688 | | | $ | 23,492 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in plan assets | | | | | | | | | | | | | | | | | | | | | | | | | Fair value of plan assets at beginning of year | | $ | 16,131 | | | $ | 17,130 | | | $ | 16,605 | | | $ | 21,786 | | | $ | 23,428 | | | $ | 17,038 | | Actual return on plan assets | | | 1,113 | | | | (155 | ) | | | 884 | | | | 4,115 | | | | (591 | ) | | | 2,302 | | Employer contribution | | | 811 | | | | 140 | | | | 363 | | | | --- | | | | --- | | | | 4,507 | | Benefits paid | | | (1,017 | ) | | | (984 | ) | | | (722 | ) | | | (894 | ) | | | (1,051 | ) | | | (419 | ) | Fair value of plan assets at end of year | | $ | 17,038 | | | $ | 16,131 | | | $ | 17,130 | | | $ | 25,007 | | | $ | 21,786 | | | $ | 23,428 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Funded status at the end of the year | | $ | (4,021 | ) | | $ | (4,296 | ) | | $ | (2,194 | ) | | $ | (4,634 | ) | | $ | (1,902 | ) | | $ | (64 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Amounts recognized in the Consolidated Balance Sheet | | | | | | | | | | | | | | | | | | | | | | | | | Deferred tax asset | | $ | 1,407 | | | $ | 1,504 | | | $ | 768 | | | $ | 973 | | | $ | 399 | | | $ | 13 | | Other liabilities | | | (4,021 | ) | | | (4,296 | ) | | | (2,194 | ) | | | (4,634 | ) | | | (1,902 | ) | | | (64 | ) | Total amounts recognized in the Consolidated Balance Sheet | | $ | (2,614 | ) | | $ | (2,792 | ) | | $ | (1,426 | ) | | $ | (3,661 | ) | | $ | (1,503 | ) | | $ | (51 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | Amounts recognized in accumulated other comprehensive (loss), net | | | | | | | | | | | | | | Amounts recognized in accumulated other comprehensive (loss), net | | | | | | | | | | | | | | Net loss | | $ | (8,250 | ) | | $ | (8,627 | ) | | $ | (6,922 | ) | | $ | (10,983 | ) | | $ | (9,107 | ) | | $ | (7,923 | ) | Prior service cost | | | 449 | | | | 559 | | | | 669 | | | | 120 | | | | 230 | | | | 340 | | Deferred tax asset | | | 2,730 | | | | 2,798 | | | | 2,163 | | | | 2,281 | | | | 1,864 | | | | 1,592 | | Amount recognized | | $ | (5,071 | ) | | $ | (5,270 | ) | | $ | (4,090 | ) | | $ | (8,582 | ) | | $ | (7,013 | ) | | $ | (5,991 | ) | | | | | | | | | | | | | | | | | | | | | | | | | (continued | ) | Accrued/Prepaid benefit cost, net | | | | | | | | | | | | | | Benefit obligation | | $ | (21,059 | ) | | $ | (20,427 | ) | | $ | (19,324 | ) | | Fair value of assets | | | 17,038 | | | | 16,131 | | | | 17,130 | | | Unrecognized net actuarial loss | | | 8,250 | | | | 8,627 | | | | 6,922 | | | Unrecognized prior service cost | | | (449 | ) | | | (559 | ) | | | (669 | ) | | Deferred tax liability | | | (1,323 | ) | | | (1,294 | ) | | | (1,395 | ) | | Prepaid benefit cost included in other assets | | $ | 2,457 | | | $ | 2,478 | | | $ | 2,664 | | | | | | | | | | | | | | | | | | Components of net periodic benefit cost | | | | | | | | | | | | | | Service cost | | $ | 694 | | | $ | 620 | | | $ | 524 | | | Interest cost | | | 757 | | | | 669 | | | | 663 | | | Expected return on plan assets | | | (1,110 | ) | | | (1,166 | ) | | | (1,112 | ) | | Amortization of prior service cost | | | (110 | ) | | | (110 | ) | | | (110 | ) | | Recognized net actuarial loss | | | 572 | | | | 414 | | | | 262 | | | Net periodic benefit cost | | $ | 803 | | | $ | 427 | | | $ | 227 | | | | | | | | | | | | | | | | | | Other changes in plan assets and benefit obligations recognized in other comprehensive loss | | | | | | | | | | | | | | Net (gain) loss | | $ | (377 | ) | | $ | 1,705 | | | $ | 1,640 | | | Amortization of prior service cost | | | 110 | | | | 110 | | | | 110 | | | Deferred income tax expense (benefit) | | | 93 | | | | (635 | ) | | | (612 | ) | | Total recognized | | $ | (174 | ) | | $ | 1,180 | | | $ | 1,138 | | | | | | | | | | | | | | | | | | Total recognized in net periodic benefit cost and other comprehensive loss | | $ | 536 | | | $ | 2,242 | | | $ | 1,977 | | | | | | | | | | | | | | | | | | Weighted average assumptions at end of the year | | | | | | | | | | | | | | Discount rate used for net periodic pension cost | | | 4.00 | % | | | 3.75 | % | | | 4.50 | % | | Discount rate used for disclosure | | | 4.00 | % | | | 4.00 | % | | | 3.75 | % | | Expected return on plan assets | | | 7.50 | % | | | 7.50 | % | | | 7.50 | % | | Rate of compensation increase | | | 3.00 | % | | | 3.00 | % | | | 3.00 | % | |
Accrued/Prepaid benefit cost, net | | | | | | | | | | | | | Benefit obligation | | $ | (29,641 | ) | | $ | (23,688 | ) | | $ | (23,492 | ) | Fair value of assets | | | 25,007 | | | | 21,786 | | | | 23,428 | | Unrecognized net actuarial loss | | | 10,983 | | | | 9,107 | | | | 7,923 | | Unrecognized prior service cost | | | (120 | ) | | | (230 | ) | | | (340 | ) | Deferred tax liability | | | (1,308 | ) | | | (1,465 | ) | | | (1,579 | ) | Prepaid benefit cost included in other assets | | $ | 4,921 | | | $ | 5,510 | | | $ | 5,940 | | | | | | | | | | | | | | | | Components of net periodic benefit cost | | | | | | | | | | | | | Service cost | | $ | 801 | | | $ | 868 | | | $ | 692 | | Interest cost | | | 884 | | | | 802 | | | | 743 | | Expected return on plan assets | | | (1,461 | ) | | | (1,601 | ) | | | (1,097 | ) | Amortization of prior service cost | | | (110 | ) | | | (110 | ) | | | (110 | ) | Recognized net actuarial loss | | | 632 | | | | 585 | | | | 540 | | Net periodic benefit cost | | $ | 746 | | | $ | 544 | | | $ | 768 | | | | | | | | | | | | | | | | Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) | | | | | | | | | | | | | Net (gain) loss | | $ | 1,876 | | | $ | 1,184 | | | $ | (328 | ) | Amortization of prior service cost | | | 110 | | | | 110 | | | | 110 | | Deferred income tax expense (benefit) | | | (417 | ) | | | (272 | ) | | | 46 | | Total recognized | | $ | 1,569 | | | $ | 1,022 | | | $ | (172 | ) | | | | | | | | | | | | | | | Total recognized in net periodic benefit cost and other comprehensive income (loss) | | $ | 2,732 | | | $ | 1,838 | | | $ | 550 | | | | | | | | | | | | | | | | Weighted average assumptions at end of the year | | | | | | | | | | | | | Discount rate used for net periodic pension cost | | | 4.00 | % | | | 3.50 | % | | | 4.00 | % | Discount rate used for disclosure | | | 3.00 | % | | | 4.00 | % | | | 3.50 | % | Expected return on plan assets | | | 7.50 | % | | | 7.50 | % | | | 7.50 | % | Rate of compensation increase | | | 3.00 | % | | | 3.00 | % | | | 3.00 | % |
Long Term Rate of Return The Company, as plan sponsor, selects the expected long-term rate-of-return-on-assets assumption in consultation with its investment advisors and actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience, which may not continue over the measurement period, but higher significance is placed on current forecasts of future long-term economic conditions. Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, and solely for this purpose, the plan is assumed to continue in force and not terminate during the period during which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost). The Company, as plan sponsor, has adopted a Pension Administrative Committee Policy (the Policy) for monitoring the investment management of its qualified plans. The Policy includes a statement of general investment principles and a listing of specific investment guidelines, to which the committee may make documented exceptions. The guidelines state that, unless otherwise indicated, all investments that are permitted under the Prudent Investor Ruleprudent investor rule shall be permissible investments for the defined benefit pension plan. All plan assets are to be invested in marketable securities. Certain investments are prohibited, including commodities and future contracts, private placements, repurchase agreements, options and derivatives. The Policy establishes quality standards for fixed income investments and mutual funds included in the pension plan trust. The Policy also outlines diversification standards. The preferred target allocation for the assets of the defined benefit pension plan is 65% in equity securities and 35% in fixed income securities. Equity securities include investments in large-cap and mid-cap companies primarily located in the United States, although a small number of international large-cap companies are included. There are also investments in mutual funds holding the equities of large-cap and mid-cap U.S. companies. Fixed income securities include U.S. government agency securities and corporate bonds from companies representing diversified industries. There are no investments in hedge funds, private equity funds or real estate. Fair value measurements of the pension plan’s assets at December 31, 2016 follow:2019 and December 31, 2018 are as follows: | | | Fair Value Measurements at December 31, 2016 | | | Fair Value Measurements at December 31, 2019 |
Asset Category
| | Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Cash | | $ | 207 | | | $ | 207 | | | $ | --- | | | $ | --- | | | $ | 4,350 | | | $ | 4,350 | | | $ | --- | | | $ | --- | | Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U. S. companies | | | 9,195 | | | | 9,195 | | | | --- | | | | --- | | | | 11,098 | | | | 11,098 | | | | --- | | | | --- | | International companies | | | 116 | | | | 116 | | | | --- | | | | --- | | | | 2,334 | | | | 2,334 | | | | --- | | | | --- | | Equities mutual funds (1) | | | 966 | | | | 966 | | | | --- | | | | --- | | | | 1,343 | | | | 1,343 | | | | --- | | | | --- | | U. S. government agencies and corporations | | | 53 | | | | --- | | | | 53 | | | | --- | | | State and political subdivisions | | | 230 | | | | --- | | | | 230 | | | | --- | | | | 202 | | | | --- | | | | 202 | | | | --- | | Corporate bonds – investment grade (2) | | | 6,271 | | | | --- | | | | 6,271 | | | | --- | | | | 5,680 | | | | --- | | | | 5,680 | | | | --- | | Total pension plan assets | | $ | 17,038 | | | $ | 10,484 | | | $ | 6,554 | | | $ | --- | | | $ | 25,007 | | | $ | 19,125 | | | $ | 5,882 | | | $ | --- | |
| | (1) | This category comprises actively managed equity funds invested in large-caplarge-cap and mid-cap U.S. companies. |
| | (2) | This category represents investment grade bonds of U.S. issuersissuers from diverse industries. |
| | | Fair Value Measurements at December 31, 2015 | | | Fair Value Measurements at December 31, 2018 |
Asset Category
| | Total | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | Cash | | $ | 876 | | | $ | 876 | | | $ | --- | | | $ | --- | | | $ | 1,917 | | | $ | 1,917 | | | $ | --- | | | $ | --- | | Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U. S. companies | | | 9,600 | | | | 9,600 | | | | --- | | | | --- | | | | 8,782 | | | | 8,782 | | | | --- | | | | --- | | International companies | | | 404 | | | | 404 | | | | --- | | | | --- | | | | 471 | | | | 471 | | | | --- | | | | --- | | Equities mutual funds (1) | | | 195 | | | | 195 | | | | --- | | | | --- | | | | 2,174 | | | | 2,174 | | | | --- | | | | --- | | U. S. government agencies and corporations | | | 104 | | | | --- | | | | 104 | | | | --- | | | | 50 | | | | --- | | | | 50 | | | | --- | | State and political subdivisions | | | 233 | | | | --- | | | | 233 | | | �� | --- | | | | 202 | | | | --- | | | | 202 | | | | --- | | Corporate bonds – investment grade (2) | | | 4,719 | | | | --- | | | | 4,719 | | | | --- | | | | 8,190 | | | | --- | | | | 8,190 | | | | --- | | Total pension plan assets | | $ | 16,131 | | | $ | 11,075 | | | $ | 5,056 | | | $ | --- | | | $ | 21,786 | | | $ | 13,344 | | | $ | 8,442 | | | $ | --- | |
| | (1) | This category comprises actively managed equity funds invested in large-cap and mid-cap U.S. companies. |
| | (2) | This category represents investment grade bonds of U.S. issuers from diverse industries. |
The Company’s required minimum pension contribution for 20172020 has not yet been determined. Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows: 2017 | | | $ | 5,666 | | 2018 | | | $ | 1,067 | | 2019 | | | $ | 786 | | 2020 | | | $ | 1,350 | | 2021 | | | $ | 472 | | | 2022 - 2026 | | | $ | 4,833 | |
2020 | | | $ | 5,629 | | 2021 | | | $ | 809 | | 2022 | | | $ | 1,386 | | 2023 | | | $ | 913 | | 2024 | | | $ | 1,644 | | | 2025 - 2029 | | | $ | 9,519 | |
Note 9:9: Stock Option Plan The Company’s 1999 Stock Option Plan was adopted in 1999 and 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 stock options granted under the plan have been exercised or expired.
There were no shares available for exercise during 2016. In 2015, there were 7,500 shares exercised with an intrinsic value of $54. In 2014, there were 2,500 shares exercised with an intrinsic value of $15. Intrinsic value is the difference between the price at which the shares may be exercised and the stock price as of the report date. No tax benefit was recognized on shares exercised in 2015 or 2014.
Note 10: Income Taxes
| Income Taxes |
The Company files United States federal income tax returns, and Virginia, West Virginia and North Carolina state income tax returns. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2013.2016. Allocation of income tax expense between current and deferred portions is as follows: | | | Years ended December 31, | | | Years ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2019 | | 2018 | | 2017 | Current | | $ | 3,934 | | | $ | 4,730 | | | $ | 5,105 | | | $ | 2,682 | | | $ | 2,942 | | | $ | 2,943 | | Deferred expense | | | 18 | | | | 10 | | | | 73 | | | Deferred expense (benefit) | | | | 529 | | | | (382 | ) | | | 1,790 | | Deferred tax adjustment for enacted change in tax rate | | | | --- | | | | --- | | | | 1,560 | | Total income tax expense | | $ | 3,952 | | | $ | 4,740 | | | $ | 5,178 | | | $ | 3,211 | | | $ | 2,560 | | | $ | 6,293 | |
Income tax expense for 2017 includes a downward adjustment of net deferred tax assets in the amount of $1,560, recorded as a result of the enactment of the Tax Act on December 22, 2017. The Company’s marginal tax rate prior to the enactment of the Act is 35%. Effective January 1, 2018, the Company’s tax rate is 21%. The following is a reconciliation of the “expected” income tax expense, computed by applying the U.S. Federalfederal income tax rate of 21% to 2018 and 2019 income before tax expense and 35% to 2017 income before income tax expense, with the reported income tax expense: | | | Years ended December 31, | | | Years ended December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2019 | 2018 | | 2017 | Computed “expected” income tax expense | | $ | 6,613 | | | $ | 7,201 | | | $ | 7,732 | | | $ | 4,342 | | | $ | 3,929 | | | $ | 7,135 | | Tax impact of enacted change in tax rate | | | | --- | | | | --- | | | | 1,560 | | Tax-exempt interest income | | | (2,234 | ) | | | (2,381 | ) | | | (2,422 | ) | | | (1,019 | ) | | | (1,255 | ) | | | (2,144 | ) | Nondeductible interest expense | | | 92 | | | | 101 | | | | 102 | | | | 96 | | | | 69 | | | | 89 | | Other, net | | | (519 | ) | | | (181 | ) | | | (234 | ) | | | (208 | ) | | | (183 | ) | | | (347 | ) | Reported income tax expense | | $ | 3,952 | | | $ | 4,740 | | | $ | 5,178 | | | $ | 3,211 | | | $ | 2,560 | | | $ | 6,293 | |
The components of net deferred tax assets, included in other assets, are as follows: | | | December 31, | | | December 31, | | | | 2016 | | | 2015 | | | 2019 | | 2018 | Deferred tax assets: | | | | | | | | | | | | | | | | | Allowance for loan losses and unearned fee income | | $ | 3,347 | | | $ | 3,229 | | | $ | 1,597 | | | $ | 1,683 | | Valuation allowance on other real estate owned | | | 237 | | | | 188 | | | | 186 | | | | 223 | | Defined benefit plan | | | 2,730 | | | | 2,798 | | | | 2,281 | | | | 1,864 | | Deferred compensation and other liabilities | | | 1,336 | | | | 1,334 | | | | 848 | | | | 1,308 | | Discount accretion of securities | | | 15 | | | | 19 | | | Net unrealized loss on securities available for sale | | | 1,932 | | | | 1,436 | | | | --- | | | | 1,348 | | Lease accounting | | | | 2 | | | | --- | | Total deferred tax assets | | $ | 9,597 | | | $ | 9,004 | | | $ | 4,914 | | | $ | 6,426 | | | | | | | | | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | | | | | | | Fixed assets | | $ | (620 | ) | | $ | (620 | ) | | $ | (438 | ) | | $ | (365 | ) | Deposit intangibles | | | (1,573 | ) | | | (1,432 | ) | | Goodwill and deposit intangibles | | | | (1,228 | ) | | | (1,169 | ) | Defined benefit plan, prepaid portion | | | (1,345 | ) | | | (1,303 | ) | | | (1,308 | ) | | | (1,465 | ) | Net unrealized gain on securities available for sale | | | | (20 | ) | | | --- | | Discount accretion of securities | | | | (43 | ) | | | (70 | ) | Total deferred tax liabilities | | | (3,538 | ) | | | (3,355 | ) | | | (3,037 | ) | | | (3,069 | ) | Net deferred tax assets | | $ | 6,059 | | | $ | 5,649 | | | Net deferred tax assets | | | $ | 1,877 | | | $ | 3,357 | |
The Company has determined that a valuation allowance for the gross deferred tax assets is not necessary at December 31, 20162019 and 2015 because the realization of all gross deferred tax assets can be supported by the amount of taxes paid during the carryback period available under current tax laws.2018.
Note 111:0: Restrictions on Dividends The Company’s principal source of funds for dividend payments is dividends received from its subsidiary bank. For the years ended December 31, 2016, 20152019, 2018 and 2014,2017, dividends received from the subsidiary bank were $9,071, $7,930$28,556, $9,419 and $7,853,$8,141, respectively. National Bankshares Financial Services provided $350 in dividends to Bankshares in 2016. Substantially all of Bankshares’NBI’s retained earnings are undistributed earnings of its sole banking subsidiary, which are restricted by various regulations administered by federal bank regulatory agencies. Bank regulatory agencies restrict, withoutunless prior approval is obtained, the total dividend payments of a bank in any calendar year to the bank’s retained net income of that year to date, as defined, combined with its retained net income of the preceding two years, less any required transfers to surplus. At December 31, 2016,2019, NBB’s retained net income, which was free of such restriction, amounted to approximately $23,890.$3,347. Note 121:1: Minimum Regulatory Capital Requirement ThePrior to 2018, the Company (onwas subject to regulatory capital requirements on a consolidated basis)basis. When the Federal Reserve updated the Small Bank Holding Company Policy Statement, in compliance with The Economic Growth, Regulatory Relief and its subsidiary bank areConsumer Protection Act of 2018 in August of 2018, the Company became exempt from reporting consolidated regulatory capital ratios and from minimum regulatory capital requirements.
NBB continues to be subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’sNBI’s and the bank’sNBB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the bankNBB must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. Prompt corrective action The Bank is subject to the rules implementing the Basel III capital framework and certain related provisions are not applicable to bank holding companies. of the Dodd-Frank Act (the “Basel III Capital Rules”) as applied by the Office of the Comptroller of the Currency. The Basel III Capital Rules require the Bank to comply with minimum capital ratios plus a comprehensive capital framework for U.S. banking organizations, became effective“capital conservation buffer” designed to absorb losses during periods of economic stress. The implementation period for the Companycapital conservation buffer began in 2016 and the Bankit was fully phased in on January 1, 2015 (subject to a phase-in period continuing through January 2, 2019 for certain provisions). Basel III Capital Rules established quantitative measures to ensure capital adequacy.2019. The rules set forth minimum amounts and ratios for Common Equity Tier 1CET1 capital, (“CET1”), Tier 1 capital and Totaltotal capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to adjusted quarterly average assets (as defined). The Company’s and the Bank’sNBB’s CET1 capital includeincludes common stock and related surplus and retained earnings. The Basel III Capital Rules provide an option to exclude components of accumulated other comprehensive income (loss) from CET1 capital. Once made, the election is final and cannot be changed. The Company and the BankNBB elected to exclude components of accumulated other comprehensive income from CET1 capital.
Tier 1 Capital includes CET1 capital and additional Tier 1 capital components. At December 31, 20162019 and 2015, neither the Company nor the Bank held2018, NBB did not hold any additional Tier 1 capital beyond CET1 capital. Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both the Company and the Bank includes the allowance for loan losses. Risk-weightedNBB’s risk-weighted assets were $816,962 at December 31, 2016 were $718,739 for the Company2019 and $715,294 for the Bank. Risk-weighted assets at$816,660 as of December 31, 2015 were $721,012 for the Company and $719,077 for the Bank.2018. Management believes, as of December 31, 20162019 and 2015,2018, that the Company and the BankNBB met all capital adequacy requirements to which they areit is subject.
As of December 31, 2016,2019, the most recent notifications from the Office of the Comptroller of the Currency categorized the bankNBB as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, Common Equity Tier 1CET1 risk-based and Tier 1 leverage ratios, as set forth in the following tables. There are no conditions or events since these notifications that management believes have changed the bank’sNBB’s category. The Company’s and the bank’s actual NBB’s capital amounts and ratios as of December 31, 20162019 and 20152018 are also presented in the following tables. | | | Actual | | | Minimum Capital
Requirement(1) | | | Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions | | | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | December 31, 2016 | | | | | | | | | | | | | | | | | | | | | | | | | Total capital (to risk weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | NBI consolidated | | $ | 191,006 | | | | 26.575 | % | | $ | 57,499 | | | | 8.625 | % | | | N/A | | | | N/A | | NBB | | | 188,095 | | | | 26.296 | % | | | 57,224 | | | | 8.625 | % | | $ | 71,529 | | | | 10.000 | % | Tier 1 capital (to risk weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | NBI consolidated | | $ | 182,706 | | | | 25.420 | % | | $ | 43,124 | | | | 6.625 | % | | | N/A | | | | N/A | | NBB | | | 179,795 | | | | 25.136 | % | | | 42,918 | | | | 6.625 | % | | $ | 57,224 | | | | 8.000 | % | Common Equity Tier 1 capital (to risk weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | NBI consolidated | | $ | 182,706 | | | | 25.420 | % | | $ | 32,343 | | | | 5.125 | % | | | N/A | | | | N/A | | NBB | | | 179,795 | | | | 25.136 | % | | | 32,188 | | | | 5.125 | % | | $ | 46,494 | | | | 6.500 | % | Tier 1 capital (to average assets) | | | | | | | | | | | | | | | | | | | | | | | | | NBI consolidated | | $ | 182,706 | | | | 15.121 | % | | $ | 48,333 | | | | 4.000 | % | | | N/A | | | | N/A | | NBB | | | 179,795 | | | | 14.964 | % | | | 48,060 | | | | 4.000 | % | | $ | 60,075 | | | | 5.000 | % |
| | | Actual | | Minimum Capital
Requirement(1) | | Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions | | | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | Total capital (to risk weighted assets) | | $ | 188,946 | | | | 23.128 | % | | $ | 85,781 | | | | 10.500 | % | | $ | 81,696 | | | | 10.000 | % | Tier 1 capital (to risk weighted assets) | | $ | 182,044 | | | | 22.283 | % | | $ | 69,442 | | | | 8.500 | % | | $ | 65,357 | | | | 8.000 | % | Common Equity Tier 1 capital (to risk weighted assets) | | $ | 182,044 | | | | 22.283 | % | | $ | 57,187 | | | | 7.000 | % | | $ | 53,103 | | | | 6.500 | % | Tier 1 capital (to average assets) | | $ | 182,044 | | | | 14.175 | % | | $ | 51,371 | | | | 4.000 | % | | $ | 64,213 | | | | 5.000 | % |
| | | Actual | | Minimum Capital
Requirement(1) | | Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions | | | | Amount | | Ratio | | Amount | | Ratio | | Amount | Ratio | December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | | Total capital (to risk weighted assets) | | $ | 202,238 | | | | 24.764 | % | | $ | 80,645 | | | | 9.875 | % | | $ | 81,666 | | | | 10.000 | % | Tier 1 capital (to risk weighted assets) | | $ | 194,823 | | | | 23.856 | % | | $ | 64,312 | | | | 7.875 | % | | $ | 65,333 | | | | 8.000 | % | Common Equity Tier 1 capital (to risk weighted assets) | | $ | 194,823 | | | | 23.856 | % | | $ | 52,062 | | | | 6.375 | % | | $ | 53,083 | | | | 6.500 | % | Tier 1 capital (to average assets) | | $ | 194,823 | | | | 15.788 | % | | $ | 49,359 | | | | 4.000 | % | | $ | 61,699 | | | | 5.000 | % |
| | (1) | Except with regard to the Company’s and the Bank’sNBB’s Tier 1 capital to average assets ratio, the minimum capital requirement includes the current phased-in portion of the Basel III Capital Rules, capital conservation buffer (0.625%)(2.50% for 2019 and 1.875% in 2018) which is added to the minimum capital requirements for capital adequacy purposes. The capital conservation buffer is beingwas phased in through four equal annual installments of 0.625%.0625% from 2016 to 2019, with full implementation in January 2019 (2.5%). The Company’s and the Bank’s2019. NBB’s capital conservation buffer must consistconsists of additional CET1 above regulatory minimum requirement. Failure to maintain the prescribed levels would result in limitations on capital distributions and discretionary bonuses to executives. |
| | | Actual | | | Minimum Capital
Requirement | | | Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions | | | | | Amount | | | Ratio | | | Amount | | | Ratio | | | Amount | | | Ratio | | December 31, 2015 | | | | | | | | | | | | | | | | | | | | | | | | | Total capital (to risk weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | NBI consolidated | | $ | 184,054 | | | | 25.527 | % | | $ | 57,681 | | | | 8.000 | % | | | N/A | | | | N/A | | NBB | | | 181,926 | | | | 25.300 | % | | | 57,526 | | | | 8.000 | % | | $ | 71,908 | | | | 10.000 | % | Tier 1 capital (to risk weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | NBI consolidated | | $ | 175,757 | | | | 24.376 | % | | $ | 43,261 | | | | 6.000 | % | | | N/A | | | | N/A | | NBB | | | 173,629 | | | | 24.146 | % | | | 43,145 | | | | 6.000 | % | | $ | 57,526 | | | | 8.000 | % | Common Equity Tier 1 capital (to risk weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | NBI consolidated | | $ | 175,757 | | | | 24.376 | % | | $ | 32,446 | | | | 4.500 | % | | | N/A | | | | N/A | | NBB | | | 173,629 | | | | 24.146 | % | | | 32,358 | | | | 4.500 | % | | $ | 46,740 | | | | 6.500 | % | Tier 1 capital (to average assets) | | | | | | | | | | | | | | | | | | | | | | | | | NBI consolidated | | $ | 175,757 | | | | 15.088 | % | | $ | 46,594 | | | | 4.000 | % | | | N/A | | | | N/A | | NBB | | | 173,629 | | | | 14.888 | % | | | 46,648 | | | | 4.000 | % | | $ | 58,310 | | | | 5.000 | % |
Note 132: Condensed Financial Statements of Parent Company Financial information pertaining only to NBI (Parent), as of the dates indicated, is as follows: Condensed Balance Sheets | | December 31, | | | December 31, | | | | 2016 | | | 2015 | | | 2019 | | 2018 | Assets | | | | | | | | | | | | | | | | | Cash due from subsidiaries | | $ | 74 | | | $ | 19 | | | $ | 57 | | | $ | 44 | | Interest-bearing deposits | | | 1,310 | | | | 170 | | | | 623 | | | | 357 | | Securities available for sale, at fair value | | | 163 | | | | 127 | | | Securities held to maturity (fair value approximates $449 at December 31, 2015) | | | --- | | | | 451 | | | Investments in subsidiaries, at equity | | | 177,150 | | | | 172,017 | | | Investments in subsidiaries | | | | 183,056 | | | | 189,692 | | Refundable income taxes | | | 22 | | | | --- | | | | 423 | | | | 396 | | Other assets | | | 561 | | | | 575 | | | | 880 | | | | 841 | | Total assets | | $ | 179,280 | | | $ | 173,359 | | | $ | 185,039 | | | $ | 191,330 | | | | | | | | | | | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | | | Liabilities and Stockholders’ Equity | | | | | | | | | | Other liabilities | | $ | 1,017 | | | $ | 1,245 | | | $ | 1,313 | | | $ | 1,092 | | Stockholders’ equity | | | 178,263 | | | | 172,114 | | | Total liabilities and stockholders’ equity | | $ | 179,280 | | | $ | 173,359 | | | Stockholders’ equity | | | | 183,726 | | | | 190,238 | | Total liabilities and stockholders’ equity | | | $ | 185,039 | | | $ | 191,330 | |
| Condensed Statements of Income | | Years Ended December 31, | | | | 2019 | | 2018 | | 2017 | Income | | | | | | | | | | | | | Dividends from subsidiaries | | $ | 28,556 | | | $ | 9,419 | | | $ | 8,141 | | Interest on securities – taxable | | | --- | | | | --- | | | | --- | | Realized securities gains, net | | | --- | | | | --- | | | | 4 | | Other income | | | 18 | | | | 10 | | | | 1,018 | | Total income | | | 28,574 | | | | 9,429 | | | | 9,163 | | Expenses | | | | | | | | | | | | | Other expenses | | | 1,025 | | | | 1,244 | | | | 1,986 | | Income before income tax benefit and equity in undistributed net income of subsidiaries | | | 27,549 | | | | 8,185 | | | | 7,177 | | Applicable income tax benefit | | | 266 | | | | 308 | | | | 383 | | Income before equity in undistributed net income of subsidiaries | | | 27,815 | | | | 8,493 | | | | 7,560 | | Equity (deficit) in undistributed net income of subsidiaries | | | (10,349 | ) | | | 7,658 | | | | 6,532 | | Net income | | $ | 17,466 | | | $ | 16,151 | | | $ | 14,092 | |
Condensed Statements of Income
| | | Years Ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | Income | | | | | | | | | | | | | Dividends from subsidiaries | | $ | 9,421 | | | $ | 7,930 | | | $ | 7,853 | | Interest on securities – taxable | | | 2 | | | | 3 | | | | 2 | | Interest on securities – nontaxable | | | --- | | | | --- | | | | 1 | | Other income | | | 987 | | | | 1,208 | | | | 1,250 | | Total income | | | 10,410 | | | | 9,141 | | | | 9,106 | | Expenses | | | | | | | | | | | | | Other expenses | | | 1,992 | | | | 2,051 | | | | 2,046 | | Income before income tax benefit and equity in undistributed net income of subsidiaries | | | 8,418 | | | | 7,090 | | | | 7,060 | | Applicable income tax benefit | | | 628 | | | | 210 | | | | 136 | | Income before equity in undistributed net income of subsidiaries | | | 9,046 | | | | 7,300 | | | | 7,196 | | Equity in undistributed net income of subsidiaries | | | 5,896 | | | | 8,533 | | | | 9,718 | | Net income | | $ | 14,942 | | | $ | 15,833 | | | $ | 16,914 | |
Table of Cash Flows | | | Years ended December 31, | | | | | 2016 | | | 2015 | | | 2014 | | Cash Flows from Operating Expenses | | | | | | | | | | | | | Net income | | $ | 14,942 | | | $ | 15,833 | | | $ | 16,914 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | Equity in undistributed net income of subsidiaries | | | (5,896 | ) | | | (8,533 | ) | | | (9,718 | ) | Amortization of premiums and accretion of discounts, net | | | 1 | | | | 1 | | | | 1 | | Depreciation expense | | | --- | | | | 3 | | | | 9 | | Losses on disposal of fixed assets | | | --- | | | | 2 | | | | 94 | | Net change in refundable income taxes due from subsidiaries | | | (223 | ) | | | 106 | | | | 96 | | Net change in other assets | | | 219 | | | | (81 | ) | | | (63 | ) | Net change in other liabilities | | | (227 | ) | | | 128 | | | | (33 | ) | Net cash provided by operating activities | | | 8,816 | | | | 7,459 | | | | 7,300 | | | | | | | | | | | | | | | | Cash Flows from Investing Activities | | | | | | | | | | | | | Net change in interest-bearing deposits | | | (1,140 | ) | | | 307 | | | | 213 | | Purchases of securities held to maturity | | | --- | | | | --- | | | | (453 | ) | Maturities and calls of securities available for sale | | | --- | | | | --- | | | | 455 | | Maturities and calls of securities held to maturity | | | 450 | | | | --- | | | | --- | | Proceeds from sale of premises and equipment | | | --- | | | | --- | | | | 263 | | Net cash (used in) provided by investing activities | | | (690 | ) | | | 307 | | | | 478 | | | | | | | | | | | | | | | | Cash Flows from Financing Activities | | | | | | | | | | | | | Cash dividends paid | | | (8,071 | ) | | | (7,930 | ) | | | (7,853 | ) | Exercise of stock options | | | --- | | | | 173 | | | | 58 | | Net cash used in financing activities | | | (8,071 | ) | | | (7,757 | ) | | | (7,795 | ) | Net change in cash | | | 55 | | | | 9 | | | | 17 | | Cash due from subsidiaries at beginning of year | | | 19 | | | | 10 | | | | 27 | | Cash due from subsidiaries at end of year | | $ | 74 | | | $ | 19 | | | $ | 10 | |
| Condensed Statements of Cash Flows | | Years ended December 31, | | | | 2019 | | 2018 | | 2017 | Cash Flows from Operating Expenses | | | | | | | | | | | | | Net income | | $ | 17,466 | | | $ | 16,151 | | | $ | 14,092 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | Deficit (equity) in undistributed net income of subsidiaries | | | 10,349 | | | | (7,658 | ) | | | (6,532 | ) | Gain on sale of securities | | | --- | | | | --- | | | | (4 | ) | Net change in refundable income taxes due from subsidiaries | | | (27 | ) | | | (228 | ) | | | (146 | ) | Net change in other assets | | | (173 | ) | | | (109 | ) | | | (156 | ) | Net change in other liabilities | | | 221 | | | | 115 | | | | (40 | ) | Net cash provided by operating activities | | | 27,836 | | | | 8,271 | | | | 7,214 | | | | | | | | | | | | | | | | Cash Flows from Investing Activities | | | | | | | | | | | | | Net change in interest-bearing deposits | | | (266 | ) | | | 146 | | | | 807 | | Maturities, sales and calls of securities available for sale | | | --- | | | | --- | | | | 192 | | Capital distribution to subsidiary | | | --- | | | | --- | | | | (100 | ) | Net cash (used in) provided by investing activities | | | (266 | ) | | | 146 | | | | 899 | | | | | | | | | | | | | | | | Cash Flows from Financing Activities | | | | | | | | | | | | | Cash dividends paid | | | (9,032 | ) | | | (8,419 | ) | | | (8,141 | ) | Repurchase of shares | | | (18,525 | ) | | | | | | | | | Net cash used in financing activities | | | (27,557 | ) | | | (8,419 | ) | | | (8,141 | ) | Net change in cash | | | 13 | | | | (2 | ) | | | (28 | ) | Cash due from subsidiaries at beginning of year | | | 44 | | | | 46 | | | | 74 | | Cash due from subsidiaries at end of year | | $ | 57 | | | $ | 44 | | | $ | 46 | |
NotNote 1e 143: Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and interest rate locks. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets. The Company’s exposure to credit loss, in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit, is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The Company may require collateral or other security to support the following financial instruments with credit risk. At December 31, 20162019 and 2015, the following2018, financial instruments were outstanding whose contract amounts represent credit risk:risk were: | | | December 31, | | | December 31, | | | | 2016 | | | 2015 | | | 2019 | | 2018 | Financial instruments whose contract amounts represent credit risk: | | | | | | | | | | | | | | | | | Commitments to extend credit | | $ | 130,252 | | | $ | 125,934 | | | $ | 158,859 | | | $ | 145,635 | | Standby letters of credit | | | 20,499 | | | | 15,248 | | | | 15,212 | | | | 16,092 | | Mortgage loans sold with potential recourse | | | 17,526 | | | | 17,571 | | | | 20,496 | | | | 13,013 | |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer. Unfunded commitments under commercial lines of credit, revolving credit lines, and overdraft protection agreements are commitments for possible future extensions of credit. Some of these commitments are uncollateralized and do not contain a specified maturity date and may not be drawn upon to the total extent to which the Company is committed. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. The Company originates mortgage loans for sale to secondary market investors subject to contractually specified and limited recourse provisions. In 2016,2019, the Company originated $17,090$21,032 and sold $17,526$20,496 of mortgage loans to investors, compared to $17,641$12,626 originated and $17,571$13,013 of mortgage loans sold in 2015.2018. Every contract with each investor contains certain recourse language. In general, the Company may be required to repurchase a previously sold mortgage loan if there is major noncompliance with defined loan origination or documentation standards, including fraud, negligence or material misstatement in the loan documents. Repurchase may also be required if necessary governmental loan guarantees are canceled or never issued, or if an investor is forced to buy back a loan after it has been resold as a part of a loan pool. In addition, the Company may have an obligation to repurchase a loan if the mortgagor defaults early in the loan term. This potential default period is approximately twelve months after sale of a loan to the investor. At December 31, 2016,2019, the Company had locked-rate commitments to originate mortgage loans amounting to approximately $528$817 and loans held for sale of $478.$905. Risks arise from the possible inability of counterparties to meet the terms of their contracts. The Company does not expect any counterparty to fail to meet its obligations. The Company maintains cash accounts in other commercial banks. The Company had $1$14 in deposits with correspondent institutions at December 31, 20162019 that was not insured by the Federal Deposit Insurance Corporation. Note 154: Concentrations of Credit Risk The Company does a general banking business, serving the commercial and personal banking needs of its customers. NBB’s marketprimary service area in southwest Virginia is made up ofdefined as the counties of Montgomery, Giles, Carroll, Grayson, Pulaski, Tazewell, Smyth, Wythe, SmythRoanoke and Washington. ItWashington and the cities of Galax, Radford and Roanoke in southwest Virginia, and Mercer, Monroe and McDowell counties in West Virginia. For loan purposes, the Company’s market also includes the independentVirginia cities of Roanoke, RadfordSalem and Galax,Bristol and counties of Botetourt and Craig, the southernmost tip of West Virginia adjacent to the counties of Giles, Buchanan, Russell and Bland, the North Carolina counties of Surry and Alleghany, and the portionsTennessee city of CarrollBristol and Grayson Counties that are adjacent to Galax. In addition, it serves those portionscounties of Mercer CountyWashington and McDowell County, West Virginia that are contiguous with Tazewell County.Sullivan. Substantially all of NBB’s loans are made in its primary service area. Additionally, the Company occasionally participates in loans in nearby higher growth metropolitan areas. Loans outside of the primary service area are a small percentage of the loan portfolio, are appropriately underwritten and are not considered out of market area.exceptions. The ultimate collectability of the bank’sNBB’s loan portfolio and the ability to realize the value of any underlying collateral, if needed, is influenced by the economic conditions of the market area. The Company’s operating results are therefore closely correlated with the economic trends within this area. Commercial real estate as of December 31, 20162019 and 20152018 represented approximately 52% and 50% of the loan portfolio, at $336,457$365,373 and $309,378,$353,546, respectively. Included in commercial real estate are loans for college housing and professional office buildings that comprised $236,552$181,705 and $200,521$184,203 as of December 31, 20162019 and 20152018, respectively, corresponding to approximately 36%25% of the loan portfolio at December 31, 20162019 and 32%26% of the loan portfolio at December 31, 2015.2018. Loans secured by residential real estate were $157,718,$181,472, or approximately 24%25% of the portfolio, and $143,504,$175,456, or 23%25% of the portfolio at December 31, 20162019 and 2015,2018, respectively. The Company has established operating policies relating to the credit process and collateral in loan originations. Loans to purchase real and personal property are generally collateralized by the related property and with loan amounts established based on certain percentage limitations of the property’s total stated or appraised value. Credit approval is primarily a function of cash flow, collateral and the evaluation of the creditworthiness of the individual borrower or project based on available financial information. Management considers the concentration of credit risk to be minimal. Note 165: Fair Value Measurements The fairFair value of a financial instrument is defined as the current amountexchange price that would be exchangedreceived for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between willing parties, other thanmarket participants on the measurement date. GAAP requires that valuation techniques maximize the use of the observable inputs and minimize the use of the unobservable inputs. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in a forced liquidation. its entirety is reported in one of the three levels. These levels are:
| 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. |
Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Accounting guidance for fair value excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly,Consequently, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. 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 are involved to determine the fair value of financial assets in markets that are not active.
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 financial 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 of Richmond and Federal Home Loan BankFHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table. The following tables present the balances of financial assets measured at fair value on a recurring basis as of December 31, 20162019 and 2015:2018: | | | | | | | Fair Value Measurements at December 31, 2016 Using | | | | | | | Fair Value Measurements at December 31, 2019 Using | Description | | Balance as of
December 31,
2016 | | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | | Significant
Other
Observable
Inputs
(Level 2) | | | Significant
Unobservable Inputs
(Level 3) | | | Balance as of
December 31,
2019 | | 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 | | $ | 285,598 | | | $ | --- | | | $ | 285,598 | | | $ | --- | | | $ | 121,123 | | | $ | --- | | | $ | 121,123 | | | $ | --- | | States and political subdivisions | | | 11,693 | | | | --- | | | | 11,693 | | | | --- | | | | 88,239 | | | | --- | | | | 88,239 | | | | --- | | Mortgage-backed securities | | | 930 | | | | --- | | | | 930 | | | | --- | | | | 221,783 | | | | --- | | | | 221,783 | | | | --- | | Corporate debt securities | | | 5,898 | | | | --- | | | | 5,898 | | | | --- | | | | 4,118 | | | | --- | | | | 4,118 | | | | --- | | Other securities | | | 163 | | | | --- | | | | 163 | | | | --- | | | Total securities available for sale | | $ | 304,282 | | | $ | --- | | | $ | 304,282 | | | $ | --- | | | $ | 435,263 | | | $ | --- | | | $ | 435,263 | | | $ | --- | |
| | | | | | | Fair Value Measurements at December 31, 2018 Using | Description | | Balance as of
December 31,
2018 | | 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 | | $ | 300,047 | | | $ | --- | | | $ | 300,047 | | | $ | --- | | States and political subdivisions | | | 118,616 | | | | --- | | | | 118,616 | | | | --- | | Mortgage-backed securities | | | 628 | | | | --- | | | | 628 | | | | --- | | Corporate debt securities | | | 5,719 | | | | --- | | | | 5,719 | | | | --- | | Total securities available for sale | | $ | 425,010 | | | $ | --- | | | $ | 425,010 | | | $ | --- | |
| | | | | | | Fair Value Measurements at December 31, 2015 Using | | Description | | Balance as of
December 31,
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 | | $ | 212,464 | | | $ | --- | | | $ | 212,464 | | | $ | --- | | States and political subdivisions | | | 16,475 | | | | --- | | | | 16,475 | | | | --- | | Mortgage-backed securities | | | 1,319 | | | | --- | | | | 1,319 | | | | --- | | Corporate debt securities | | | 5,746 | | | | --- | | | | 5,746 | | | | --- | | Other securities | | | 127 | | | | --- | | | | 127 | | | | --- | | Total securities available for sale | | $ | 236,131 | | | $ | --- | | | $ | 236,131 | | | $ | --- | |
Certain financial 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 financial assets recorded at fair value on a nonrecurring basis in the financial statements: Loans Held for Sale Loans held for sale are carried at the lower of cost or marketfair 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 are currently offering 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 during the years ended December 31, 20162019 and 2015.2018. 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 according to the contractual terms of the loan agreement. Troubled debt restructuringsTDRs 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.TDR. 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 secured by residential 1-4 family properties with outstanding principal balances ofgreater than $250 or more are based on a currentan appraisal. Appraisals are also used to value impaired loans secured by commercial real estate with outstanding principal balances greater than $500. Collateral-method impaired loans secured by residential 1-4 family property with outstanding principal balances of $100$250 or greater andless, or secured by one piece of collateral. Collateral-method impaired loanscommercial real estate with outstanding principal balances below $100,of $500 or if secured by multiple pieces of collateral, below $250,less, are valued using an internal evaluation. The value of real estate collateral is determined by a current (less than 1224 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 is 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’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). As of December 31, 20162019 and December 31, 2015,2018, the fair value measurements for impaired loans with specific allocations were primarily based upon the present value of expected future cash flows. The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis duringas of the period.dates indicated. | | | | | | | | 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: | | | | | | | | | | | | | | | | | December 31, 2016 | Impaired loans net of valuation allowance | | $ | 878 | | | $ | --- | | | $ | --- | | | $ | 878 | | December 31, 2015 | Impaired loans net of valuation allowance | | | 2,328 | | | | --- | | | | --- | | | | 2,328 | |
| | | | | | | | 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: | | | | | | | | | | | | | | | | | December 31, 2019 | Impaired loans net of valuation allowance | | $ | 1,005 | | | $ | --- | | | $ | --- | | | $ | 1,005 | | December 31, 2018 | Impaired loans net of valuation allowance | | | 1,014 | | | | --- | | | | --- | | | | 1,014 | |
The following table presents information about Level 3 Fair Value Measurements for December 31, 2016.impaired loans as of the dates indicated. | | Valuation Technique | Unobservable Input | | Range (Weighted Average) | | Impaired loans | Present value of cash flows | Discount rate | | | 6.75% | - | 8.00% | (7.35%) | |
The following table presents information about Level 3 Fair Value Measurements for December 31, 2015.
| | Valuation Technique | Unobservable Input | | Range (Weighted Average) | | Impaired loans | Present value of cash flows | Discount rate | | | 6.00% | - | 7.38% | (6.56%) | |
Impaired Loans | Valuation Technique | Unobservable Input | | Range (Weighted Average) | December 31, 2019 | Present value of cash flows | Discount rate | | 5.50% | - | 6.50% | (5.77%) | | December 31, 2018 | Present value of cash flows | Discount rate | | 5.50% | - | 7.25% | (6.05%) | |
Other Real Estate Owned Certain assets such as other real estate owned (OREO)OREO are measured at fair value less cost to sell. Valuation of other real estate ownedOREO is determined using current appraisals from independent parties, a level twoLevel 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs. The following table summarizes the Company’s other real estate ownedOREO that were measured at fair value on a nonrecurring basis duringas of the period.dates indicated. | | | | | | | | 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: | | | | | | | | | | | | | | | | | December 31, 2016 | Other real estate owned net of valuation allowance | | $ | 3,156 | | | $ | --- | | | $ | --- | | | $ | 3,156 | | December 31, 2015 | Other real estate owned net of valuation allowance | | | 4,165 | | | | --- | | | | --- | | | | 4,165 | |
The following table presents information about Level 3 Fair Value Measurements for December 31, 2016.
| | Valuation Technique | Unobservable Input | | Range (Weighted Average) | | | | | | | | | | | | | Other real estate owned | Discounted appraised value | Selling cost | | | 2.91%(1) | – | 8.60% | (6.48%) | | Other real estate owned | Discounted appraised value | Discount for lack of marketability and age of appraisal | | | 0% | - | 53.46% | (13.66%) | |
| | | | | | | | 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: | | | | | | | | | | | | | | | | | December 31, 2019 | Other real estate owned net of valuation allowance | | $ | 1,612 | | | $ | --- | | | $ | --- | | | $ | 1,612 | | December 31, 2018 | Other real estate owned net of valuation allowance | | | 2,052 | | | | --- | | | | --- | | | | 2,052 | |
The following table presents information about Level 3 Fair Value Measurements for December 31, 2015.as of the dates indicated. | | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) | | | Valuation Technique | Unobservable Input | | Range (Weighted Average) | | | | | | December 31, | | | | | | | | | | | | | | 2019 | 2018 | Other real estate owned | Discounted appraised value | Selling cost | | | 0%(1) | – | 10.00% | (5.89%) | | Discounted appraised value | | Selling cost | | 0.00%(1) | - | 6.00% | (0.68%) | 0.00%(1) | - | 6.00% | (0.12%) | Other real estate owned | Discounted appraised value | Discount for lack of marketability and age of appraisal | | | 0% | - | 50.01% | (10.16%) | | Discounted appraised value | | Discount for lack of marketability and age of appraisal | | 0.00% | - | 45.17% | (1.28%) | 0.00% | - | 50.05% | (1.45%) |
| | (1) | The Company markets other real estate ownedOREO 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 bytables present the Company in estimatingcarrying amount, fair value disclosures for financial instruments:
Cash and Due from Bank, and Interest-Bearing Deposits
The carrying amounts approximate fair value.
Securities
The fair values of securities, excluding restricted stock, are determined by quoted market prices or dealer quotes. Theplacement in 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
Fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices.
Loans
Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, real estate – commercial, real estate – construction, real estate – mortgage, credit card and other consumer loans. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.
The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan, as well as estimates for prepayments. The estimate of maturity is based on the Company’s historical experience with repayments for loan classification, modified, as required, by an estimate of the effect of economic conditions on lending.
Fair value for significant nonperforming loans is based on estimated cash flows which are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows and discount rates are determined within management’s judgment, using available market information and specific borrower information.
Bank-Owned Life Insurance
Bank-owned life insurance represents insurance policies on officers of 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 fair value.
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.
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 December 31, 2016 and 2015, and, as such, the related fair values have not been estimated.
The estimated fair values, and related carrying amounts,hierarchy of the Company’s financial instruments as of December 31, 2019 and December 31, 2018. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For non-marketable equity securities such as FHLB and Federal Reserve Bank of Richmond stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government-supported institution or to another member institution. For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity. Fair values are as follows:estimated under the exit price notion.
| | | December 31, 2016 | | | | | | | | | Estimated Fair Value | | | | | Carrying
Amount | | | Level 1 | | | Level 2 | | | Level 3 | | Financial assets: | | | | | | | | | | | | | | | | | Cash and due from banks | | $ | 13,974 | | | $ | 13,974 | | | $ | --- | | | $ | --- | | Interest-bearing deposits | | | 80,268 | | | | 80,268 | | | | --- | | | | --- | | Securities | | | 439,239 | | | | --- | | | | 441,974 | | | | --- | | Restricted securities | | | 1,170 | | | | --- | | | | 1,170 | | | | --- | | Mortgage loans held for sale | | | 478 | | | | --- | | | | 478 | | | | --- | | Loans, net | | | 639,452 | | | | --- | | | | --- | | | | 658,386 | | Accrued interest receivable | | | 5,260 | | | | --- | | | | 5,260 | | | | --- | | Bank-owned life insurance | | | 22,998 | | | | --- | | | | 22,998 | | | | --- | | Financial liabilities: | | | | | | | | | | | | | | | | | Deposits | | $ | 1,043,442 | | | $ | --- | | | $ | 874,001 | | | $ | 166,946 | | Accrued interest payable | | | 55 | | | | --- | | | | 55 | | | | --- | |
| | | December 31, 2015 | | | December 31, 2019 | | | | | | | | Estimated Fair Value | | | | | | | Estimated Fair Value | | | | Carrying
Amount | | | Level 1 | | | Level 2 | | | Level 3 | | | Carrying
Amount | | Level 1 | | Level 2 | | Level 3 | Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and due from banks | | $ | 12,152 | | | $ | 12,152 | | | $ | --- | | | $ | --- | | | $ | 10,290 | | | $ | 10,290 | | | $ | --- | | | $ | --- | | Interest-bearing deposits | | | 130,811 | | | | 130,811 | | | | --- | | | | --- | | | | 76,881 | | | | 76,881 | | | | --- | | | | --- | | Securities | | | 388,159 | | | | --- | | | | 394,163 | | | | --- | | | | 435,263 | | | | --- | | | | 435,263 | | | | --- | | Restricted securities | | | 1,129 | | | | --- | | | | 1,129 | | | | --- | | | | 1,220 | | | | --- | | | | 1,220 | | | | --- | | Mortgage loans held for sale | | | 634 | | | | --- | | | | 634 | | | | --- | | | | 905 | | | | --- | | | | 905 | | | | --- | | Loans, net | | | 610,711 | | | | --- | | | | --- | | | | 621,590 | | | | 726,588 | | | | --- | | | | --- | | | | 718,299 | | Accrued interest receivable | | | 5,769 | | | | --- | | | | 5,769 | | | | --- | | | | 4,285 | | | | --- | | | | 4,285 | | | | --- | | Bank-owned life insurance | | | 22,401 | | | | --- | | | | 22,401 | | | | --- | | | | 35,567 | | | | --- | | | | 35,567 | | | | --- | | Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Deposits | | $ | 1,018,859 | | | $ | --- | | | $ | 826,476 | | | $ | 193,912 | | | $ | 1,119,753 | | | $ | --- | | | $ | 991,725 | | | $ | 128,011 | | Accrued interest payable | | | 56 | | | | --- | | | | 56 | | | | --- | | | | 144 | | | | --- | | | | 144 | | | | --- | |
| | | December 31, 2018 | | | | | | | | Estimated Fair Value | | | | Carrying
Amount | | Level 1 | | Level 2 | | Level 3 | Financial assets: | | | | | | | | | | | | | | | | | Cash and due from banks | | $ | 12,882 | | | $ | 12,882 | | | $ | --- | | | $ | --- | | Interest-bearing deposits | | | 43,491 | | | | 43,491 | | | | --- | | | | --- | | Securities | | | 425,010 | | | | --- | | | | 425,010 | | | | --- | | Restricted securities | | | 1,220 | | | | --- | | | | 1,220 | | | | --- | | Mortgage loans held for sale | | | 72 | | | | --- | | | | 72 | | | | --- | | Loans, net | | | 702,409 | | | | --- | | | | --- | | | | 684,565 | | Accrued interest receivable | | | 5,160 | | | | --- | | | | 5,160 | | | | --- | | Bank-owned life insurance | | | 34,657 | | | | --- | | | | 34,657 | | | | --- | | Financial liabilities: | | | | | | | | | | | | | | | | | Deposits | | $ | 1,051,942 | | | $ | --- | | | $ | 950,143 | | | $ | 101,749 | | Accrued interest payable | | | 89 | | | | --- | | | | 89 | | | | --- | |
Note 176: Components of Accumulated Other Comprehensive Income (Loss) The following table summarizes the activity related to each component of accumulated other comprehensive income (loss): for the years ended December 31, 2017, 2018 and 2019: | | | Net Unrealized Gain (Loss) on Securities | | | Adjustments Related to Pension Benefits | | | Accumulated Other Comprehensive Income (Loss) | | Balance at December 31, 2013 | | | (14,011 | ) | | $ | (2,953 | ) | | $ | (16,964 | ) | Unrealized holding gain on available for sale securities net of tax of $6,693 | | | 12,430 | | | | --- | | | | 12,430 | | Reclassification adjustment, net of tax of ($1) | | | (1 | ) | | | --- | | | | (1 | ) | Net pension loss arising during the period, net of tax of ($574) | | | --- | | | | (1,066 | ) | | | (1,066 | ) | Less amortization of prior service cost included in net periodic pension cost, net of tax of ($39) | | | --- | | | | (71 | ) | | | (71 | ) | Balance at December 31, 2014 | | $ | (1,582 | ) | | $ | (4,090 | ) | | $ | (5,672 | ) | Unrealized holding loss on available for sale securities net of tax of ($571) | | | (1,064 | ) | | | --- | | | | (1,064 | ) | Reclassification adjustment, net of tax of ($12) | | | (21 | ) | | | --- | | | | (21 | ) | Net pension loss arising during the period, net of tax of ($597) | | | --- | | | | (1,108 | ) | | | (1,108 | ) | Less amortization of prior service cost included in net periodic pension cost, net of tax of ($38) | | | --- | | | | (72 | ) | | | (72 | ) | Balance at December 31, 2015 | | $ | (2,667 | ) | | $ | (5,270 | ) | | $ | (7,937 | ) | Unrealized holding loss on available for sale securities net of tax of ($431) | | | (800 | ) | | | --- | | | | (800 | ) | Reclassification adjustment, net of tax of ($65) | | | (121 | ) | | | --- | | | | (121 | ) | Net pension gain arising during the period, net of tax of $132 | | | --- | | | | 271 | | | | 271 | | Less amortization of prior service cost included in net periodic pension cost, net of tax of ($38) | | | --- | | | | (72 | ) | | | (72 | ) | Balance at December 31, 2016 | | $ | (3,588 | ) | | $ | (5,071 | ) | | $ | (8,659 | ) |
| | | Net Unrealized Gain (Loss) on Securities | | Adjustments Related to Pension Benefits | | Accumulated Other Comprehensive Income (Loss) | Balance at December 31, 2016 | | $ | (3,588 | ) | | $ | (5,071 | ) | | $ | (8,659 | ) | Unrealized holding loss on available for sale securities net of tax of $296 | | | 546 | | | | --- | | | | 546 | | Reclassification adjustment, net of tax of ($4) | | | (6 | ) | | | --- | | | | (6 | ) | Net pension gain, net of tax of $115 | | | --- | | | | 213 | | | | 213 | | Less amortization of prior service cost included in net periodic pension cost, net of tax of ($38) | | | --- | | | | (71 | ) | | | (71 | ) | Reclassification of stranded tax effects from change in tax rate | | | (656 | ) | | | (1,062 | ) | | | (1,718 | ) | Balance at December 31, 2017 | | $ | (3,704 | ) | | $ | (5,991 | ) | | $ | (9,695 | ) | Unrealized holding gain on available for sale securities net of tax of ($595) | | | (2,246 | ) | | | --- | | | | (2,246 | ) | Transfer from held-to-maturity to available-for-sale securities, net of tax $237 | | | 891 | | | | --- | | | | 891 | | Reclassification adjustment, net of tax of ($4) | | | (13 | ) | | | --- | | | | (13 | ) | Net pension loss, net of tax of ($249) | | | --- | | | | (936 | ) | | | (936 | ) | Less amortization of prior service cost included in net periodic pension cost, net of tax of ($24) | | | --- | | | | (86 | ) | | | (86 | ) | Balance at December 31, 2018 | | $ | (5,072 | ) | | $ | (7,013 | ) | | $ | (12,085 | ) | Unrealized holding loss on available for sale securities net of tax of $1,486 | | | 5,595 | | | | --- | | | | 5,595 | | Reclassification adjustment, net of tax of ($119) | | | (447 | ) | | | --- | | | | (447 | ) | Net pension loss, net of tax of ($394) | | | --- | | | | (1,482 | ) | | | (1,482 | ) | Less amortization of prior service cost included in net periodic pension cost, net of tax of ($23) | | | --- | | | | (87 | ) | | | (87 | ) | Balance at December 31, 2019 | | $ | 76 | | | $ | (8,582 | ) | | $ | (8,506 | ) |
The following table provides information regarding reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2016, 20152019, 2018 and 2014:2017: | | | December 31, | | | December 31, | | | | 2016 | | | 2015 | | | 2014 | | | 2019 | | 2018 | | 2017 | Component of Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | | | | | | | | | | | | | | | Reclassification out of unrealized gains and losses on available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | | | | | Realized securities gain, net | | $ | (186 | ) | | $ | (33 | ) | | $ | (2 | ) | | $ | (566 | ) | | $ | (17 | ) | | $ | (10 | ) | Income tax benefit | | | (65 | ) | | | (12 | ) | | | (1 | ) | | | (119 | ) | | | (4 | ) | | | (4 | ) | Realized gain on available-for-sale securities, net of tax, reclassified out of accumulated other comprehensive income (loss) | | $ | (121 | ) | | $ | (21 | ) | | $ | (1 | ) | | $ | (447 | ) | | $ | (13 | ) | | $ | (6 | ) | Amortization of defined benefit pension items: | | | | | | | | | | | | | | | | | | | | | | | | | Prior service costs(1) | | $ | (110 | ) | | $ | (110 | ) | | $ | (110 | ) | | Prior service costs(1) | | | $ | (110 | ) | | $ | (110 | ) | | $ | (109 | ) | Income tax benefit | | | (38 | ) | | | (38 | ) | | | (39 | ) | | | (23 | ) | | | (24 | ) | | | (38 | ) | Amortization of defined benefit pension items, net of tax, reclassified out of accumulated other comprehensive income (loss) | | $ | (72 | ) | | $ | (72 | ) | | $ | (71 | ) | | Amortization of defined benefit pension items, net of tax, reclassified out of accumulated other comprehensive income (loss) | | | $ | (87 | ) | | $ | (86 | ) | | $ | (71 | ) |
| | (1) | This accumulated other comprehensive income (loss) component is included in the computation of net periodic benefit cost. (For additional information, see Note 8, "EmployeeEmployee Benefit Plans.") |
Note 187. Intangible Assets and Goodwill In accounting for goodwill and intangible assets, the Company conducts an impairment review at least annually and more frequently if certain impairment indicators are evident. Accounting guidance provides the option of performing a preliminary assessment of qualitative factors before performing more substantial testing for impairment. If the preliminary assessment indicates that it is more likely than not that fair value is below carrying value, a two-step test is employed to determine impairment. The Company opted not to perform the preliminary assessment and employed the two-step test to determine impairment. Based on thetesting for impairment of goodwill for 2019 and 2018 and testing for impairment of goodwill and intangible assets for 2017, there were no impairment charges for 2016, 2015 or 2014.charges. Information concerning goodwill and intangible assets for years ended December 31, 20162019 and 20152018 is presented in the following table: | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Carrying Value | | December 31, 2016 | | | | | | | | | | | | | Amortizable core deposit intangibles | | $ | 16,257 | | | $ | 16,139 | | | $ | 118 | | Unamortizable goodwill | | | 5,848 | | | | --- | | | | 5,848 | | Intangible assets and goodwill | | $ | 22,105 | | | $ | 16,139 | | | $ | 5,966 | | | | | | | | | | | | | | | | December 31, 2015 | | | | | | | | | | | | | Amortizable core deposit intangibles | | $ | 16,257 | | | $ | 15,881 | | | $ | 376 | | Unamortizable goodwill | | | 5,848 | | | | --- | | | | 5,848 | | Intangible assets and goodwill | | $ | 22,105 | | | $ | 15,881 | | | $ | 6,224 | |
As of December 31, 2016, the estimated amortization expense of core deposit intangibles are as follows:
2017 | | | 68 | | 2018 | | | 50 | | Thereafter | | | --- | | Total | | $ | 118 | |
| | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | December 31, 2019 and December 31, 2018 | | | | | | | | | | | | | Amortizable core deposit intangibles | | $ | 16,257 | | | $ | 16,257 | | | $ | --- | | Unamortizable goodwill | | | 5,848 | | | | --- | | | | 5,848 | | Intangible assets and goodwill | | $ | 22,105 | | | $ | 16,257 | | | $ | 5,848 | |
Note 18: Revenue Recognition On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. As stated in Note 1, Summary of Significant Accounting Policies, the implementation of the new standard did not have a material impact on the measurement or recognition of revenue. Results for reporting periods beginning after January 1, 2018 and comparative periods are presented in accordance with Topic 606. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as financial guarantees, derivatives, and certain credit card fees are outside the scope of the guidance. Topic 606 is applicable to noninterest revenue streams such as service charges on deposit accounts, other service charges and fees, credit and debit card fees, trust income, and annuity and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams within the scope of Topic 606 are discussed below. Service Charges on Deposit Accounts Service charges on deposit accounts consist of monthly service fees, overdraft and nonsufficient funds fees, ATM fees, wire transfer fees and other deposit account related fees. The Company’s performance obligation for monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Wire transfer fees, overdraft and nonsufficient funds fees and other deposit account related fees are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMOther Service Charges and Fees
Other service charges include safety deposit box rental fees, check ordering charges, and other service charges. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation. Check ordering charges are transactional based, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time. Credit and Debit Card Fees Credit and debit card fees are primarily comprised of interchange fee income and, prior to mid-2017, merchant services income. The Company sold servicing rights on its merchant services portfolio in mid-2017. Interchange fees are earned whenever the Company’s debit and credit cards are processed through card payment networks such as Visa. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for interchange fee income and merchant services income are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month. In compliance with Topic 606, credit and debit card fee income is presented net of associated expense. Trust Income Trust income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Estate management fees are based upon the size of the estate. A partial fee is recognized half-way through the estate administration and the remainder of the fee is recognized when remaining assets are distributed and the estate is closed. Insurance and Investment Insurance income primarily consists of commissions received on insurance product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the insurance policy. Shortly after the insurance policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. Investment income consists of recurring revenue streams such as commissions from sales of mutual funds and other investments. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the years ended December 31, 2019, 2018 and 2017. | | | December 31, | | | | 2019 | | 2018 | | 2017 | Noninterest Income | | | | | | | | | | | | | In-scope of Topic 606: | | | | | | | | | | | | | Service charges on deposit accounts | | $ | 2,453 | | | $ | 2,678 | | | $ | 2,776 | | Other service charges and fees | | | 198 | | | | 132 | | | | 205 | | Credit and debit card fees | | | 1,398 | | | | 1,431 | | | | 1,205 | | Trust income | | | 1,622 | | | | 1,565 | | | | 1,530 | | Insurance and Investment (included within Other Income on the Consolidated Statements of Income) | | | 483 | | | | 460 | | | | 398 | | Noninterest Income (in-scope of Topic 606) | | $ | 6,154 | | | $ | 6,266 | | | $ | 6,114 | | Noninterest Income (out-of-scope of Topic 606) | | | 2,636 | | | | 1,463 | | | | 1,522 | | Total noninterest income | | $ | 8,790 | | | $ | 7,729 | | | $ | 7,636 | |
Note 19: Leases On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. There was no cumulative effect adjustment at adoption. The Company also elected certain practical expedients within the standard and did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases and did not reassess any initial direct costs for existing leases. Prior to adoption, all of the Company’s leases were classified as operating leases and remain operating leases at adoption. As stated in to the Company’s 2018 Form 10-K, Note 1 Summary of Significant Accounting Policies, the implementation of the new standard resulted in recognition of a right-of-use asset and offsetting lease liability of $684 for leases existing at the date of adoption. Contracts that commence subsequent to adoption are evaluated to determine whether they are or contain a lease in accordance with Topic 842. The Company has elected the practical expedient provided by Topic 842 not to allocate consideration in a contract between lease and non-lease components. The Company also elected, as provided by the standard, not to recognize right-of-use assets and lease liabilities for short-term leases, defined by the standard as leases with terms of 12 months or less. Since adoption, the Company entered into new operating leases and recognized right-of-use assets and lease liabilities. Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor. Lease payments Lease payments for short-term leases are recognized as lease expense on a straight-line basis over the lease term, or for variable lease payments, in the period in which the obligation was incurred. Payments for leases with terms longer than 12 months are included in the determination of the lease liability. Payments may be fixed for the term of the lease or variable. If the lease agreement provides a known escalator, such as a specified percentage increase per year or a stated increase at a specified time, the variable payment is included in the cash flows used to determine the lease liability. If the variable payment is based upon an unknown escalator, such as the consumer price index at a future date, the increase is not included in the cash flows used to determine the lease liability. Two of the Company’s leases provide known escalators that are included in the determination of the lease liability. The remaining leases do not have variable payments during the term of the lease. Options to Extend, Residual Value Guarantees, and Restrictions and Covenants Of the Company’s six leases, three leases offer the option to extend the lease term. Each of the three leases provides two options of five years each. For one of the leases, the Company is reasonably certain it will exercise one option of five years and has included the additional time and lease payments in the calculation of the lease liability. The lease agreement provides that the lease payment will increase at the exercise date based on the consumer price index-urban (“CPI-U”). Because the CPI-U at the exercise date is unknown, the increase is not included in the cash flows determining the lease liability. None of the Company’s leases provide for residual value guarantees and none provide restrictions or covenants that would impact dividends or require incurring additional financial obligations. The Company’s lease right of use asset is included in other assets and the lease liability is included in other liabilities. The following tables present information about leases : | | | As of December 31, 2019 | Lease liability | | $ | 2,286 | | Right-of-use asset | | $ | 2,277 | | Weighted average remaining lease term (in years) | | | 6.90 | | Weighted average discount rate | | | 3.02 | % |
| | | For the Years Ended December 31, | | | | 2019 | | 2018 | Lease Expense | | | | | | | | | Operating lease expense | | $ | 310 | | | NR | | Short-term lease expense | | | 114 | | | NR | | Total lease expense | | $ | 424 | | | $ | 298 | | | | | | | | | | | | Cash paid for amounts included in lease liabilities | | $ | 414 | | | NR | | Right-of-use assets obtained in exchange for operating lease liabilities commencing during the period | | $ | 1,837 | | | NR | |
The following table presents a maturity schedule of undiscounted cash flows that contribute to the lease liability: Undiscounted Cash Flow for the | | As of December 31, 2019 | Twelve months ending December 31, 2020 | | $ | 354 | | Twelve months ending December 31, 2021 | | | 345 | | Twelve months ending December 31, 2022 | | | 349 | | Twelve months ending December 31, 2023 | | | 351 | | Twelve months ending December 31, 2024 | | | 333 | | Thereafter | | | 848 | | Total undiscounted cash flows | | $ | 2,580 | | Less: discount | | | (294 | ) | Lease liability | | $ | 2,286 | |
The contracts in which the Company is lessee are with parties external to the company and not related parties. The Company has a small lease relationship with a director in which the Company is lessor. 
Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors and Stockholders National Bankshares, Inc. Blacksburg, Virginia Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of National Bankshares, Inc. and subsidiaries (the Company) as of December 31, 20162019 and 2015, and2018, the related consolidated statements of income, comprehensive income, changes in stockholders'stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2016. These2019, and the related notes to the consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether(collectively, the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
statements). In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Bankshares, Inc. and subsidiariesthe Company as of DecemberDecember 31, 20162019 and 2015,2018, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2016,2019, in conformity with U.S.accounting principles generally accepted accounting principles.in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), National Bankshares, Inc. and subsidiaries'the Company’s internal control over financial reporting as of December 31, 2016,2019, based on criteria established in Internal Control -— Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 8, 201711, 2020 expressed an unqualified opinion on the effectiveness of National Bankshares, Inc. and subsidiaries'the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Yount, HydeYOUNT, HYDE & Barbour,BARBOUR, P.C. We have served as the Company’s auditor since 2000. Winchester, Virginia March 8, 201711, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors and Stockholders National Bankshares, Inc. Blacksburg, Virginia Opinion on the Internal Control over Financial Reporting We have audited National Bankshares, Inc. and subsidiaries®€™subsidiaries' (the Company) internal control over financial reporting as of December 31, 2016,2019, based on criteria established in Internal Control -— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. National Bankshares, Inc.In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2019 and subsidiaries'2018, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the consolidated financial statements of the Company, and our report dated March 11, 2020 expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management'sManagement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company'sCompany’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regardingregarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (a)(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (b)(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (c)(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internalinternal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, National Bankshares, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2016 of National Bankshares, Inc. and subsidiaries and our report dated March 8, 2017 expressed an unqualified opinion.
/s/ Yount, HydeYOUNT, HYDE & Barbour,BARBOUR, P.C. Winchester, Virginia March 8, 201711, 2020 Item 9Item 9. . Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None Item 9A. Controls and Procedures Disclosure 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 SecuritiesSecurities 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 December 31, 20162019 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 by 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 financialfinancial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the year ended December 31, 20162019 that have materially affected, or are reasonably likely to materially affect, the Corporation'sCompany'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. Internal Control Over Financial ReportingReporting Management's Report on Internal Control Over Financial Reporting To the Stockholders of National Bankshares, Inc.: Management is responsible for the preparation and fair presentation of the financial statements included in this annual report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management's judgments and estimates concerning effects of events and transactions that are accounted for or disclosed. Management is also responsible for establishing and maintaining adequate internal control over financial reporting. The Company's internal control over financial reporting includes those policies and procedures that pertain to the Company's abilityability to record, process, summarize and report reliable financial data. Management recognizes that there are inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. In order to ensure that the Company's internal control over financial reporting is effective, management regularly assesses such controls and did so most recently for its financial reportingreporting as of December 31, 2016.2019. This assessment was based on criteria for effective internal control over financial reporting described in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO, 2013) of the Treadway Commission. Based on this assessment, management believes the Company maintained effective internal control over financial reporting as of December 31, 2016.2019. The Board of Directors, acting through its Audit Committee, is responsible for the oversight of the Company's accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The Audit Committee is responsible for the appointment and compensation of the independent registered public accounting firm and approves decisions regarding the appointment or removal of the Company Auditor.Company's internal auditors. It meets periodically with management, the independent registered public accounting firm and the internal auditors to ensure that they are carrying out their responsibilities. The Audit Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting and auditing procedures of the Company in addition to reviewing the Company's financial reports. The independent registered public accounting firm and the internal auditors have full and unlimited access to the Audit Committee, with or without management, to discuss the adequacy of internal control over financial reporting, and any other matter which they believe should be brought to the attention of the Audit Committee. The Company's independent registered public accounting firm has also issued an attestation report on the effectiveness of internal control over financial reporting. Item 9B. Other Information None. PartPart III
Item 10Item 10. . Directors Executive, Executive Officers and Corporate Governance InformationThe information required by Item 10 with respect to the directors of Banksharesthe Company and the Company’s audit committee and the audit committee financial expert is set out underincorporated herein by reference to the caption “Election of Directors” of Bankshares'Company’s definitive Proxy Statement for the 20172020 Annual Meeting of Stockholders to be held on May 9, 2017 ("12, 2020 (“Proxy Statement"Statement”) which information is incorporated herein by reference.
The Board of Directors of Bankshares has a standing audit committee made up entirely of independent directors, as that term is defined in the NASDAQ Stock Market Listing Rules. In 2016, Dr. Lewis chaired the Audit Committee and its members were Mr. Ball, Dr. Dooley, Mr. Rakes (ex-officio) and Mr. Reynolds. Each member of the Audit Committee has extensive business experience; however, the Committee has identified Dr. Lewis as its financial expert, since he has a professional background which involves financial oversight responsibilities. Dr. Lewis oversaw the preparation of financial statements in his past role as President of New River Community College. He previously served as the College's Chief Financial Officer. The Audit Committee's Charter is available on the Company's web site at www.nationalbankshares.com.
Certain information required by Item 10 is incorporated herein by reference to the Company's Proxy under the headings "Election“Proposal 1 - Election of Directors", "Stock OwnershipFour Class 3 Directors,” “Directors Continuing in Office” and “Corporate Governance Matters”. Information about the Company’s executive officers required by this item is included in Part I, Item I of Directorsthis Form 10-K under the heading “Executive Officers of the Company”.
Based on the written representations of the Company’s directors and Executive Officers", "Sectionexecutive officers, during the year ended December 31, 2019, all directors and executive officers complied with all applicable filing requirements under Section 16(a) Beneficial Ownership Reporting Compliance", "Corporate Governance Matters" and "Code of Ethics". the Exchange Act. The Company and each of its subsidiaries have adopted codes of ethics for directors, officers and employees, specifically including the Chief Executive Officer and Chief Financial Officer of Bankshares. These Codes of Ethics are available on the Company'sCompany’s web site at www.nationalbankshares.com. Item 11. Executive Compensation The information required by Item 11 is incorporated herein by reference to the information that appears under the headings "Compensation“Compensation Discussion and Analysis." "CompensationAnalysis,” “Executive Compensation,” “Corporate Governance Matters – Board Compensation,” “Compensation Committee Interlocks and Insider Participation,"” and "Compensation“Compensation Committee Report"Report” in the Company'sCompany’s Proxy Statement for the Annual Meeting of Shareholders.Statement. Item 12. Security Ownership of Certain BeneficialBeneficial Owners and Management and Related Stockholder Matters The information required by Item 12 is incorporated herein by reference to the information that appears under the heading "Stockheadings “Stock Ownership of Certain Beneficial Owners” and “Stock Ownership of Directors and Executive Officers"Officers” in the Company'sCompany’s Proxy Statement forStatement. As of December 31, 2019, there were no equity awards outstanding, and the Annual Meeting of Shareholders. The information required by Item 201(d) of Regulation S-K is disclosed herein. See Item 5, "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Company does not have any equity compensation plans in effect. Item 13. Certain Relationships and Related Transactions,Transactions, and Director Independence The information required by Item 13 is incorporated herein by reference to the information that appears under the headings "Directors“Corporate Governance Matters,” “Directors Independence and Certain Transactions with Officers and Directors"Directors” and "Election of Directors - “Director Independence"“Directors Continuing in Office” in the Company'sCompany’s Proxy Statement for the Annual Meeting of Shareholders. As of December 31, 2016 there were no shares available for issuance or exercise, and there are no equity compensation plans in effect.Statement. ItemItem 14. Principal Accounting Fees and Services
The information required by Item 14 is incorporated herein by reference to the information that appears under the heading "Independent Public Accountants"“Principal Accounting Fees and Services” in the Company'sCompany’s Proxy Statement for the Annual Meeting of Shareholders.Statement.
Part IV Item 15Item 15. . Exhibits, Financial Statement Schedules (a) (1) Financial Statements The following consolidated financial statements of National Bankshares, Inc. are included in Item 8: Reports of Independent Registered Public Accounting Firm Consolidated Balance Sheets – As of December 31, 20162019 and 20152018 Consolidated Statements of Income – Years ended December 31, 2016, 20152019, 2018 and 20142017 Consolidated Statements of Comprehensive Income – Years ended December 31, 2016, 20152019, 2018 and 20142017 Consolidated Statements of Changes in Stockholders'Stockholders’ Equity – Years ended December 31, 2016, 20152019, 2018 and 20142017 Consolidated Statements of Cash Flows – Years ended December 31, 2016, 20152019, 2018 and 20142017 Notes to Consolidated Financial Statements (a) (2) Financial Statement Schedules Certain schedules to the consolidated financial statements have been omitted if they were not required by Article 9 of Regulation S-X or if, under the related instructions, they were inapplicable, or if the information is contained elsewhere in this Annual Report on Form 10-K. (a) (3) Exhibits A list of the exhibits filed or incorporatedincorporated in this Annual ReportForm 10-K by reference is as follows: 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 for8-K filed on March 16, 2006) | 3(ii) | Amended By-laws of National Bankshares, Inc. | | (incorporated herein by reference to Exhibit 3(ii) of the Form 8K8-K filed on July 9, 2014) | 4 | Specimen copy of certificatecertificate for National Bankshares, Inc. common stock | | (incorporated herein by reference to Exhibit 4(a) of the Annual Report on Form 10K10-K 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 June 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 ExhibitExhibit 10 of Form 10Q10-Q for the period ended September 30, 2002) | *10(iv)10(ii) | 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 8K8-K filed on March 11, 2015) | *10(v)10(iii) | 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 99 of the Form 8K8-K filed on February 8, 2006) | *10(vii)10(iv) | Salary Continuation Agreement dateddated February 8, 2006, between The National Bank of Blacksburg and David K. Skeens | | (incorporated herein by reference to Exhibit 10.2 of the Form 8K8-K filed on January 25, 2012) | *10(viii)10(v) | First Amendment,, dated December 19, 2007, to The National Bank of Blacksburg Salary Continuation Agreement for James G. RakesF. Brad Denardo | | (incorporated herein by reference to Exhibit 10 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 of the Form 8K8-K filed on December 19, 2007)
| *10(x)10(vi) | First Amendment, dated December 19, 2007, to The National Bank of BlacksburgBlacksburg Salary Continuation Agreement for David K. Skeens | | (incorporated herein by reference to Exhibit 10.2 of the Form 8K8-K filed on January 25, 2012) | *10(xi)10(vii) | 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 8K8-K filed on June 12, 2008) | *10(xii)10(viii) | 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) of the Annual Report on Form 10K for fiscal year ended December 31, 2008)
| *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 8K8-K filed on January 25, 2012) |
*10(xiv)10(ix) | Third Amendment, dated December 17, 2008, to The National Bank of Blacksburg Salary Continuation Agreement for F. Brad Denardo | | (incorporated herein by referencereference to Exhibit 10(iii) of the Annual Report on Form 10K10-K for fiscal year ended December 31, 2008) | *10(xv)10(x) | Third Amendment, dated January 20, 2012, to The National Bank of Blacksburg Salary Continuation Agreement for David K. Skeens | | (incorporated herein byby reference to Exhibit 10.2 of the Form 8K8-K filed on January 25, 2012) | *10(xvi)10(xi) | Salary Continuation Agreement dated January 20, 2012May 24, 2013 between The National Bank of Blacksburg and Bryson J. HunterPaul A. Mylum | | (incorporated herein by reference to Exhibit 10.1 of the Form 8K8-K filed on January 25, 2012)March 8, 2018) | *10(xvii)10(xii) | Second Salary Continuation Agreement dated July 1,June 26, 2016 between The National Bank of Blacksburg and F. Brad Denardo | | (incorporated herein by reference to Exhibit 10.1 of the Form 8K8-K filed on July 20, 2016) | *10(xviii)10(xiii) | Salary Continuation Agreement dated February 6,8, 2006 between The National Bankshares, Inc. and Lara E. Ramsey | | (incorporated herein by reference to Exhibit 10.1 of the Form 8K8-K filed on March 6, 2017) | *10(xix)10(xiv) | First Amendment, dated December 19, 2007, to National Bankshares, Inc. Salary Continuation Agreement for Lara E. Ramsey | | (incorporated herein by reference to Exhibit 10.1 of the Form 8K8-K filed on March 6, 2017) | *10(xx)10(xv) | Second Amendment, dated June 12,December 17, 2008, to National Bankshares, Inc. Salary Continuation Agreement for Lara E. Ramsey | | (incorporated herein by reference to Exhibit 10.1 of the Form 8K8-K filed on March 6, 2017) | *10(xxi)10(xvi) | Third Amendment, dated June 22, 2016, to National Bankshares, Inc. Salary Continuation AgreeemntAgreement for Lara E. Ramsey | | (incorporated herein by reference to Exhibit 10.1 of the Form 8K8-K filed on March 6, 2017) | +21 | Subsidiaries of the Registrant | Included herein
| +23
| Consent of Yount, Hyde & Barbour, P.C. to incorporation by reference of independent auditor's report included in this Form 10-K, into registrant's registration statement on Form S-8
| (incorporated herein by reference to Exhibit 23 of the Annual Report on Form 10K for fiscal year ended December 31, 2016)
Filed herewith | +31(i) | Section 906 Certification of Chief Executive Officer | | Page 93Filed herewith
| +31(ii) | Section 906 Certification of Chief Financial Officer | | Page 94Filed herewith
| +32(i) | 18 U.S.C.U.S.C. Section 1350 Certification of Chief Executive Officer | | Page 95Filed herewith
| +32(ii) | 18 U.S.C. Section 1350 Certification of Chief Financial Officer | | Page 96Filed herewith
| +101 | The following materials from National Bankshares, Inc.'s’s Annual Report on Form 10-K for the year ended December 31, 2016,2019, formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Changes in Shareholders'Shareholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) Notes to Consolidated Financial Statements. | Included herein
| Filed herewith |
*Indicates a management contract or compensatory plan required to be filed herein.or arrangement. +Filed with this AnnualAnnual Report on Form 10-K. Item 16.Item 16. 10-K Summary Information Not applicable.
SignaturesSignatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, National Bankshares, Inc.the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | NATIONAL BANKSHARES, INC. | | | | | /s/ F. BRAD DENARDO | | /s/ JAMES G. RAKES
| | | James G. RakesBy: F. Brad Denardo
Chairman, President and Chief Executive Officer
(Principal Executive Officer) | | | | | | | /s/ DAVID K. SKEENS
| | | David K. Skeens
Treasurer and Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
| | | | | | Date: March 8, 201711, 2020 | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. | | Date | Title | /s/ L. LAWRENCE J. BALL | 03/8/201711/2020 | Director | L.Lawrence J. Ball
| | | | | | | /s/ J. E. DOOLEYF. BRAD DENARDO | 03/8/201711/2020 | President and CEO, National Bankshares, Inc. | F. Brad Denardo | | (Principal Executive Officer) | | | Director | /s/ JOHN E. DOOLEY | 03/11/2020 | Director | J.John E. Dooley
| | | | | | | /s/ C.MICHAEL E. GREEN, III DYE | 03/8/201711/2020 | Director | C.Michael E. Dye
| | | | | | /s/ NORMAN V. FITZWATER, III | 03/11/2020 | Director | Norman V. Fitzwater, III | | | | | | /s/ CHARLES E. GREEN, III | 03/11/2020 | Director | Charles E. Green, III | | | | | | | /s/ J. M. LEWISMILDRED R. JOHNSON | 03/8/201711/2020 | Director | J. M. LewisMildred R. Johnson
| | | | | | | /s/ M.MARY G. MILLER | 03/8/201711/2020 | Director | M.Mary G. Miller
| | | | | | | /s/ W.WILLIAM A. PEERY | 03/8/201711/2020 | Director | W.William A. Peery
| | | | | | (continued) |
| /s/ DAVID K. SKEENS | 03/11/2020 | Treasurer and CFO, National Bankshares, Inc. | /s/ J. G. RAKES
| 03/8/2017
| Chairman of the Board
| J. G. Rakes
David K. Skeens | | President and Chief Executive Officer –
National Bankshares, Inc.
Director
(Principal Financial Officer) | | | | (Principal Accounting Officer) | /s/ G.GLENN P. REYNOLDS | 03/8/201711/2020 | Director | G.Glenn P. Reynolds
| | | | | | | /s/ J. M. SHULERJAMES C. THOMPSON | 03/8/201711/2020 | Director | James C. Thompson | | | | | | /s/ J. LEWIS WEBB, JR. | 03/11/2020 | Director | J. M. ShulerLewis Webb, Jr. | | |
100 Index of Exhibits
The following exhibits are filed with this Annual Report on Form 10-K.
Exhibit No.
| Title
| Page Number
| 21
| Subsidiaries of the Registrant
| Page 91
| 23
| Consent of Yount, Hyde & Barbour, P.C.
| Page 92
| 31(i)
| Section 906 Certification of Chief Executive Officer
| Page 93
| 31(ii)
| Section 906 Certification of Chief Financial Officer
| Page 94
| 32(i)
| 18 U.S.C. Section 1350 Certification of Chief Executive Officer
| Page 95
| 32(ii)
| 18 U.S.C. Section 1350 Certification of Chief Financial Officer
| Page 96
|
90
|
