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EX-31.2 - HIGHLANDS BANKSHARES INC /VA/ex31-2.htm
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EX-32.2 - HIGHLANDS BANKSHARES INC /VA/ex32-2.htm
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EX-32.1 - HIGHLANDS BANKSHARES INC /VA/ex32-1.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549
FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2015

[   ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the transition period from ____________ to _____________

Commission File Number:  0-27622

HIGHLANDS BANKSHARES, INC.
(Exact name of registrant as specified in its charter)


Virginia
(State or other jurisdiction of
incorporation or organization)
54-1796693
(I.R.S. Employer
Identification No.)
 
P.O. Box 1128
Abingdon, Virginia
(Address of principal executive offices)
 
 
24212-1128
(Zip Code)

276-628-9181
(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company (See definition of “large accelerated filer, accelerated filer and smaller reporting company” in Rule 12b-2 of the Act). Large Accelerated Filer  [  ]   Accelerated Filer  [  ]    Non-Accelerated Filer [  ]  Smaller Reporting Company  [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
7,851,780 shares of common stock, par value $0.625 per share,
outstanding as of November 13, 2015
 


 
 
 

 

Highlands Bankshares, Inc.

FORM 10-Q
For the Quarter Ended September 30, 2015
 
 
INDEX
   
PART I. FINANCIAL INFORMATION  
PAGE
   
Item 1.  Financial Statements
 
    2
Consolidated Balance Sheets
at September 30, 2015 (Unaudited) and December 31, 2014
 
2
 
 
Consolidated Statements of Income (Unaudited)
  for the Three Months and Nine Months Ended September 30, 2015 and 2014
3
   
 
Consolidated Statements of Comprehensive Income (Unaudited)
for the Three Months and Nine Months Ended September 30, 2015 and 2014
 
4
Consolidated Statements of Cash Flows (Unaudited)
 for the Nine Months Ended September 30, 2015 and 2014
5
   
Consolidated Statements of Changes in
 Stockholders’ Equity (Unaudited) for the Three Months and Nine Months
 Ended September 30, 2015 and 2014
6-7
   
Notes to Consolidated Financial Statements (Unaudited)
8-39
   
Item 2. Management’s Discussion and Analysis of
              Financial Condition and Results of Operations
39-45
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
45
   
Item 4.  Controls and Procedures
45
 
 
PART II.  OTHER INFORMATION
 
   
Item 1.  Legal Proceedings
46
   
Item 1A. Risk Factors
46
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
46
   
Item 3.  Defaults Upon Senior Securities
46
   
Item 4.  Mine Safety Disclosures
        46
   
Item 5.  Other Information
46
   
Item 6.  Exhibits
46
   
SIGNATURES AND CERTIFICATIONS
47

 
1

 

PART I.
FINANCIAL INFORMATION
ITEM 1.  Financial Statements

Consolidated Balance Sheets
(Amounts in thousands)
   
       (Unaudited)
  September 30, 2015
 
(Note 1)
December 31, 2014
                                              ASSETS
       
Cash and due from banks
 
$     20,566
 
     $      15,018
Federal funds sold
 
      28,247
 
  40,792
         
   Total Cash and Cash Equivalents
 
 48,813
 
55,810
         
Investment securities available for sale  (amortized cost $84,267  at  September 30, 2015, $84,191 at December 31, 2014)
 
84,464
 
84,335
Other investments, at cost
 
6,599
 
6,767
Loans, net of allowance for loan losses of  $5,333 at September 30, 2015, $5,477 at December 31, 2014
 
416,813
 
401,520
Premises and equipment, net
 
20,659
 
20,236
Deferred tax assets
 
11,470
 
10,744
Interest receivable
 
2,310
 
2,235
Bank owned life Insurance
 
14,482
 
14,183
Other real estate owned
 
7,277
 
6,685
Other assets
 
       2,557
 
        2,599
         
    Total Assets
 
$   615,444
 
$    605,114
         
LIABILITIES AND STOCKHOLDERS’ EQUITY
       
         
LIABILITIES
       
         
Deposits:
       
  Non-interest bearing
 
$    118,486
 
$      118,557
  Interest bearing
 
    372,883
 
     364,940
         
    Total Deposits
 
    491,369
 
     483,497
         
Interest, taxes and other liabilities
 
1,566
 
1,014
Other short-term borrowings
 
20,051
 
20,051
Long-term debt
 
47,712
 
47,750
         
    Total Other Liabilities
 
      69,329
 
       68,815
         
    Total Liabilities
 
    560,698
 
     552,312
         
STOCKHOLDERS’ EQUITY
       
         
Common stock (7,851 shares issued and outstanding)
 
4,907
 
4,907
Preferred stock (2,092 shares issued and outstanding)
 
                   4,184
 
4,184
Additional paid-in capital
 
                 17,947
 
18,180
Retained earnings
 
27,579
 
25,436
Accumulated other comprehensive income
 
 129
 
                           95
  Total Stockholders’ Equity
 
      54,746
 
      52,802
         
    Total Liabilities and Stockholders’ Equity
 
$  615,444
 
$   605,114
See accompanying Notes to Consolidated Financial Statements

 
2

 

Consolidated Statements of Income
(Amounts in thousands, except per share data)
(Unaudited)
   
Nine Months Ended September 30, 2015
   
Nine Months Ended September 30, 2014
   
Three Months
Ended
September 30, 2015
   
Three Months
Ended
September 30, 2014
 
INTEREST INCOME
                       
Loans receivable and fees on loans
  $ 15,921     $ 16,045     $ 5,347     $ 5,458  
Securities available for sale:
                               
  Taxable
    873       691       281       277  
  Exempt from taxable income
    281       371       84       124  
Other investment income
    161       151       48       50  
Federal funds sold
    66       110       20       32  
                                 
    Total Interest Income
    17,302       17,368       5,780       5,941  
                                 
INTEREST EXPENSE
                               
Deposits
    1,662       1,933       545       630  
Other borrowed funds
    1,774       2,077       598       621  
                                 
    Total Interest Expense
    3,436       4,010       1,143       1,251  
                                 
    Net Interest Income
    13,866       13,358       4,637       4,690  
                                 
Provision for Loan Losses
    697       1,248       215       352  
                                 
    Net Interest Income after Provision for Loan Losses
    13,169       12,110       4,422       4,338  
                                 
NON-INTEREST INCOME
                               
Securities gains, net
    16       -       -       -  
Service charges on deposit accounts
    1,260       1,431       439       485  
Other service charges, commissions and fees
    1,220       1,248       391       396  
Other operating income
    433       564       152       203  
    Total Non-Interest Income
    2,929       3,243       982       1,084  
                                 
NON-INTEREST EXPENSE
                               
Salaries and employee benefits
    7,598       7,424       2,585       2,451  
Occupancy expense of bank premises
    865       778       271       202  
Furniture and equipment expense
    1,026       862       350       290  
Other operating expense
    4,528       4,105       1,794       1,444  
Foreclosed Assets – Write-down and operating expenses
    684       1,234       (139 )     462  
    Total Non-Interest Expense
    14,701       14,403       4,861       4,849  
                                 
    Income Before Income Taxes
    1,397       950       543       573  
                                 
 
Income Tax Expense (Benefit)
    (746 )     (983 )     114       47  
                                 
    Net Income
  $ 2,143     $ 1,933     $ 429     $ 526  
                                 
Basic Earnings Per Common Share – Weighted Average
  $ 0.27     $ 0.29     $ 0.05     $ 0.07  
                                 
Earnings Per Common Share – Assuming Dilution
  $ 0.22     $ 0.22     $ 0.04     $ 0.05  
 
See accompanying Notes to Consolidated Financial Statements

 
3

 

 


Consolidated Statements of Comprehensive Income
(Amounts in thousands)
(Unaudited)
   
Nine Months Ended 
September 30, 2015
   
Nine Months Ended  
September 30, 2014
 
             
             
Net Income
  $ 2,143     $ 1,933  
                 
     Other Comprehensive Income
               
  Unrealized gains on securities during  the period
    68       815  
  Less: reclassification adjustment for gains included in net income
    (16 )     -  
          Other Comprehensive Income, before tax
    52       815  
           Income tax expense related to other
           comprehensive income
    (18 )     (277 )
    Other Comprehensive Income
    34       538  
Comprehensive Income
  $ 2,177     $ 2,471  
                 


   
Three Months Ended
 September 30, 2015
   
Three Months Ended
 September 30, 2014
 
             
             
Net Income
  $ 429     $ 526  
                 
     Other Comprehensive Income
               
  Unrealized gains  (losses) on securities during  the period
    326       (201)    
  Less: reclassification adjustment for losses  included in net income
    -       -  
          Other Comprehensive Income (Loss), before tax
    326       (201)  
           Income tax (expense) benefit related to other
           comprehensive income
    (111)       68  
    Other Comprehensive Income (Loss)
    215       (133)  
Comprehensive Income
  $ 644     $ 393  
                 



See accompanying Notes to Consolidated Financial Statements



 
4

 

 

Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
   
Nine Months Ended
   
Nine Months Ended
 
   
September 30, 2015
   
September 30, 2014
 
CASH FLOWS FROM OPERATING  ACTIVITIES:
           
Net income
  $ 2,143     $ 1,933  
Adjustments to reconcile net income to net cash provided by operating activities
               
Provision for loan losses
    697       1,248  
Depreciation and amortization
    749       653  
Net realized (gains) losses on available for sale securities
    (16)       -  
Net amortization on securities
    798       475  
Amortization of capital issue costs
    -       18  
            (Increase) decrease in interest receivable
    (75)       (149)  
Valuation adjustment of other real estate owned
    (155)       386  
Valuation adjustment of deferred tax assets
    (1,000)       (1,000)  
Decrease (increase) in other assets
    188       (1,270)  
Increase (decrease) in interest, taxes and other liabilities
    552       (1,210)  
                 
Net cash provided by operating activities
     3,881        1,084  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Securities available for sale:
               
       Proceeds from sale of securities
    1,025       -  
Proceeds from maturities of debt and equity securities
    13,992       6,597  
Purchase of securities
    (15,875)       (34,177)  
(Purchases) sales of other investments
    168       (2,047)  
Net increase in loans
    (19,635)       (6,185)  
Proceeds from sales of other real estate owned
    2,705       3,141  
Proceeds from Cash Surrender Value of Life Insurance
    -       360  
Premises and equipment expenditures
    (1,092)       (763)  
                 
Net cash used in investing activities
    (18,712)       (33,074)  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
      Issuance of Common Stock
    -       9,912  
      Issuance of Preferred Stock
    -       7,168  
 
Net decrease in time deposits
    (9,645)               (11,110)  
Net increase (decrease) in demand, savings and other deposits
    17,517       10,785  
Decrease in short-term borrowings
    -       (3,450)  
Decrease in long-term debt
    (38)       (38)  
Redemption of Capital Securities
    -       (3,150)  
Net cash  provided by  financing activities
    7,834       10,117  
                 
Net  decrease in cash and cash equivalents
    (6,997)       (21,783)  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    55,810       83,995  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 48,813     $ 62,122  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash paid during the period for:
               
Interest
  $ 3,458     $ 5,221  
                 
     SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
               
Transfer of loans to other real estate owned
  $ 3,645     $ 2,843  
Loans originated from sales of other real estate owned
  $ 130     $ 561  
See accompanying Notes to Consolidated Financial Statements


 
5

 

Consolidated Statements of Changes in Stockholders’ Equity
(Amounts in thousands)
(Unaudited)

Three Months Ended September 30
           
Accumulated
 
         
Additional
 
Other
Total
 
    Common Stock
 
    Preferred Stock
Paid In
Retained
Comprehensive
Stockholders’
 
Shares
 Par Value
Shares
 Par Value
Capital
Earnings
Income (Loss)
Equity
                 
 
Balance, June 30, 2014
7,684
$    4,803
 
2,048
 
$4,096
$    18,541
$    24,317
$       (163)
$    51,594
                 
 
Net income
-
-
   
-
526
-
526
                 
 
Common Stock Issuance
159
99
   
457
   
556
                 
 
Preferred Stock Issuance
   
 
-
 
-
-
   
-
                 
Other comprehensive income
-
-
   
-
-
(133)
(133)
                 
 
Balance September 30, 2014
7,843
$    4,902
 
2,048
 
$4,096
$    18,998
$    24,843
$        (296)
$    52,543
                 
 
Balance, June 30, 2015
7,851
$    4,907
 
2,092
 
$  4,184
$    17,947
$    27,150
$       (86)
$    54,102
                 
Net income
-
-
   
-
429
-
429
                 
Other comprehensive income (loss)
-
-
   
-
-
215
215
                 
 
Balance, September 30, 2015
7,851
$    4,907
 
2,092
 
$4,184
$    17,947
$    27,579
$        129
$    54,746
                 
                 



 
6

 


 
Consolidated Statements of Changes in Stockholders’ Equity
(Amounts in thousands)
(Unaudited)





Nine Months Ended September 30
           
Accumulated
 
         
Additional
 
Other
Total
 
    Common Stock
 
    Preferred Stock
Paid-in
Retained
Comprehensive
Stockholders’
 
Shares
 Par Value
Shares
 Par Value
Capital
Earnings
Income (Loss)
Equity
                 
 
Balance, December 31, 2013
5,011
$    3,132
 
-
 
-
$    7,783
$    22,910
$       (834)
$    32,991
                 
                 
Net income
-
-
   
-
1,933
-
1,933
                 
Common Stock Issuance
2,832
1,770
   
8,142
   
9,912
                 
 
Preferred Stock Issuance
   
 
2,048
 
4,096
3,073
   
7,169
                 
                 
                 
Other comprehensive income
-
-
   
-
-
538
538
                 
Balance, September 30, 2014
7,843
$    4,902
2,048
$4,096
$    18,998
$    24,843
$        (296)
$    52,543
                 
                 
 
Balance, December 31, 2014
7,851
$    4,907
 
2,092
 
$  4,184
$    18,180
$    25,436
$       95
$    52,802
                 
                 
Net income
-
-
   
-
2,143
-
2,143
                 
Additional Paid In Capital
       
(233)
-
-
(233)
                 
Other comprehensive income (loss)
-
-
   
-
-
34
34
                 
 
Balance, September 30, 2015
7,851
$    4,907
 
2,092
 
$4,184
$    17,947
$    27,579
$        129
$    54,746

See accompanying Notes to Consolidated Financial Statements





 
7

 

Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
 
 
Note 1  -  General

The consolidated financial statements of Highlands Bankshares, Inc. (the “Company”) conform to United States generally accepted accounting principles and to banking industry practices. The accompanying consolidated interim financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included. All such adjustments are of a normal and recurring nature. The consolidated balance sheet as of December 31, 2014 has been extracted from the audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”). The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the 2014 Form 10-K. The results of operations for the three-month and nine-month periods ended September 30, 2015 are not necessarily indicative of the results to be expected for the full year.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Note 2  -  Loans and Allowance for Loan Losses  (amounts in thousands)
 The composition of net loans is as follows:
 
September 30, 2015
 
December 31, 2014
 
Real Estate Secured:
       
Residential 1-4 family
$ 194,412
 
      $   186,829
 
Multifamily
24,000
 
 21,131
 
Construction and Land Loans
17,836
 
18,518
 
Commercial, Owner Occupied
69,390
 
70,748
 
Commercial, Non-owner occupied
33,794
 
32,173
 
Second mortgages
8,011
 
8,075
 
Equity lines of credit
                     6,103
 
6,499
 
Farmland
11,522
 
8,246
 
 
365,068
 
352,219
 
         
Secured (other) and unsecured
       
Personal
20,921
 
20,901
 
Commercial
33,834
 
31,586
 
Agricultural
2,859
 
2,683
 
 
57,614
 
55,170
 
         
Overdrafts
227
 
285
 
         
 
422,909
 
407,674
 
Less:
       
 
Allowance for loan losses
                5,333
 
                                                 5,477  
 
  Net deferred fees
                 763
 
   677  
 
 
               6,096
 
6,154
 
         
Loans, net
$    416,813
 
    $    401,520
 




 
8

 

Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)

The following table is an analysis of past due loans as of September 30, 2015:

   
30-59 Days Past Due
 
60-89 Days Past Due
 
Greater Than 90 Days
 
Total Past Due
 
Current
 
Total Financing Receivables
 
Recorded Investment > 90 Days and Accruing
                             
Real Estate Secured
                           
Residential 1-4 family
 
 $ 3,305
 
 $    1,775
 
 $  2,201
 
 $  7,281
 
 $  187,131
 
 $  194,412
 
 $         -
Equity lines of credit
 
11
 
 22
 
-
 
 33
 
 6,070
 
 6,103
 
-
Multifamily
 
 -
 
 -
 
 -
 
 -
 
 24,000
 
 24,000
 
-
Farmland
 
27
 
 642
 
 57
 
726
 
 10,796
 
 11,522
 
-
Construction, Land Development, Other Land Loans
 
39
 
 17
 
72
 
128
 
 17,708
 
 17,836
 
 -
Commercial Real Estate- Owner Occupied
 
 2,253
 
 68
 
3,683
 
6,004
 
 63,386
 
 69,390
 
 -
Commercial Real Estate- Non Owner Occupied
 
 -
 
-
 
 -
 
 -
 
 33,794
 
 33,794
 
 -
Second Mortgages
 
 46
 
 64
 
 75
 
 185
 
 7,826
 
 8,011
 
 -
Non Real Estate Secured
                           
Personal
 
 391
 
 261
 
 115
 
 767
 
 20,381
 
 21,148
 
 -
Commercial
 
 196
 
 114
 
 299
 
 609
 
 33,225
 
 33,834
 
 -
Agricultural
 
 23
 
 -
 
 -
 
 23
 
 2,836
 
 2,859
 
 -
                             
          Total
 
 $  6,291
 
 $    2,963
 
 $   6,502
 
 $  15,756
 
 $  407,153
 
 $  422,909
 
 $          -
                             

The following table is an analysis of past due loans as of December 31, 2014:
   
30-59 Days Past Due
 
60-89 Days Past Due
 
Greater Than 90 Days
 
Total Past Due
 
Current
 
Total Financing Receivables
 
Recorded Investment > 90 Days and Accruing
                             
Real Estate Secured
                           
Residential 1-4 family
 
 $    4,521
 
 $    3,001
 
 $    2,884
 
 $   10,406
 
 $  176,423
 
 $  186,829
 
 $          -
Equity lines of credit
 
 45
 
 -
 
 -
 
 45
 
 6,454
 
 6,499
 
-
Multifamily
 
 1,252
 
-
 
 -
 
 1,252
 
 19,879
 
 21,131
 
-
Farmland
 
 208
 
 -
 
 477
 
 685
 
 7,561
 
 8,246
 
-
Construction,  Land Development, Other Land Loans
 
 417
 
 31
 
 168
 
 616
 
 17,902
 
 18,518
 
 -
Commercial Real Estate- Owner Occupied
 
 2,193
 
 790
 
 2,344
 
 5,327
 
 65,421
 
 70,748
 
 -
Commercial Real Estate- Non Owner Occupied
 
 225
 
 85
 
 1,547
 
 1,857
 
 30,316
 
 32,173
 
 -
Second Mortgages
 
 107
 
 51
 
 134
 
 292
 
 7,783
 
 8,075
 
 -
Non Real Estate Secured
                           
Personal
 
 404
 
 105
 
233
 
 742
 
 20,444
 
 21,186
 
22
Commercial
 
 720
 
 49
 
 447
 
 1,216
 
 30,370
 
 31,586
 
 -
Agricultural
 
 3
 
 -
 
 -
 
 3
 
 2,680
 
 2,683
 
 -
                             
          Total
 
 $    10,095
 
 $    4,112
 
 $   8,234
 
 $   22,441
 
 $  385,233
 
 $  407,674
 
 $          22


 
9

 
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)

Loans are considered delinquent when payments have not been made according to the terms of the contract. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection.  Credit card loans and other personal loans are typically charged off no later than 180 days past due.   In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

The following is a summary of non-accrual loans at September 30, 2015 and December 31, 2014
:

 
September 30, 2015
 
December 31, 2014
 
Real Estate Secured
       
Residential 1-4 Family
                                                       $           2,201
 
 $       3,401
 
Multifamily
-
 
-
 
Construction and Land Loans
72
 
168
 
Commercial-Owner Occupied
3,683
 
5,259
 
Commercial- Non Owner Occupied
-
 
1,547
 
Second Mortgages
75
 
134
 
Equity Lines of Credit
-
 
-
 
Farmland
57
 
477
 
Secured (other) and Unsecured
       
Personal
115
 
211
 
Commercial
299
 
447
 
Agricultural
            -
 
             -
 
         
Total
$             6,502
 
$     11,644
 

 
The following is a summary of residential real estate currently in the process of foreclosure as well as foreclosed residential real estate as of September 30, 2015.

 
Number
 
Balance
 
 
Residential real estate in the process of foreclosure
 
3
 
 
                 $        257
 
 
Foreclosed residential real estate
 
10
 
 
       $     1,370
 




 
10

 

Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)

The following tables represent a summary of credit quality indicators of the Company’s loan portfolio at September 30, 2015 and December 31, 2014.  The grades are assigned and/or modified by the Company’s credit review and credit analysis departments based on the creditworthiness of the borrower and the overall strength of the loan.

Credit Risk Profile by Internally Assigned Grade as of September 30, 2015
Grade (1)
 
Residential 1-4 Family
 
Multifamily
 
Farmland
 
Construction, Land Loans
 
Commercial Real Estate- Owner Occupied
 
Commercial Real Estate Non-Owner Occupied
                         
Quality
 
 27,011
 
-
 
 27
 
 2,393
 
 2,737
 
 516
Satisfactory
 
 109,220
 
 19,773
 
 6,480
 
 7,585
 
 35,269
 
 16,757
Acceptable
 
 46,093
 
 2,303
 
 3,993
 
 5,531
 
 20,601
 
 12,093
Special Mention
 
 3,094
 
801
 
 196
 
459
 
 3,111
 
 2,533
Substandard
 
 8,994
 
 1,123
 
 826
 
 1,868
 
 7,672
 
 1,895
Doubtful
 
 -
 
 -
 
 -
 
 -
 
 -
 
 -
                         
     Total
 
$   194,412
 
$     24,000
 
$     11,522
 
$        17,836
 
$     69,390
 
$     33,794


Credit Risk Profile by Internally Assigned Grade as of December 31, 2014
Grade (1)
 
Residential 1-4 Family
 
Multifamily
 
Farmland
 
Construction, Land Loans
 
Commercial Real Estate- Owner Occupied
 
Commercial Real Estate Non-Owner Occupied
                         
Quality
 
 29,494
 
6
 
 37
 
 3,278
 
 4,159
 
 874
Satisfactory
 
 100,767
 
 16,326
 
 3,090
 
 8,091
 
 31,018
 
 15,052
Acceptable
 
 44,021
 
 2,719
 
 4,080
 
 4,745
 
 20,987
 
 12,223
Special Mention
 
 2,640
 
828
 
 198
 
 2,231
 
 3,994
 
 2,108
Substandard
 
 9,907
 
 1,252
 
 841
 
 173
 
 10,590
 
 1,916
Doubtful
 
 -
 
 -
 
 -
 
 -
 
 -
 
 -
                         
     Total
 
$   186,829
 
$     21,131
 
$     8,246
 
$        18,518
 
$     70,748
 
$      32,173
 
 
 
11

 
 
(1)  Quality--This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection.  Generally, loans assigned this rating will demonstrate the following characteristics:
 
 
·  
Conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).
 
 
·  
Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.
 
 
·  
Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.
 
 
For existing loans, all of the requirements above apply plus all payments have been made as agreed, current financial information on all borrowers and guarantors has been obtained and analyzed, and overall business operating trends are either stable or improving.
 
   Satisfactory-This grade is given to performing loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this rating will demonstrate the following characteristics:
 
 
·  
General conformity to the Bank's policy requirements, product guidelines and underwriting standards.  Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors.
 
 
·  
Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.  
 

 
12

 
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
 
·  
Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor
 
 
For existing loans, all of the requirements outlined above will apply, plus all payments have been made as agreed, current financial information on all borrowers and guarantors has been obtained and analyzed, and overall business operating trends are stable with any declines considered minor and temporary.
 
 
Acceptable-This grade is given to loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss.  Loans assigned this rating may demonstrate some or all of the following characteristics:
 
 
·  
Additional exceptions to the Bank's policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank.  Although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors.
 
 
·  
Unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time.  Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance.
 
 
·  
Marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.
 
 
For existing loans, payments have generally been made as agreed with only minor and isolated delinquencies.
 
 
Special Mention -This grade is given to Watch List loans that include the following characteristics:
 
 
·  
Loans with underwriting guideline tolerances and/or exceptions with no identifiable mitigating factors.
 
 
·  
Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date. Potential weaknesses are the result of deviations from prudent lending practices.
 
 
·  
Loans where adverse economic conditions that develop subsequent to the loan origination do not jeopardize liquidation of the debt, but do substantially increase the level of risk may also warrant this rating.
 
 
  Substandard-Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
 
 
 
13

 
 The weaknesses may include, but are not limited to:
 
 
·  
High debt to worth ratios and or declining or negative earnings trends;
 
 
·  
Declining or inadequate liquidity;
 
 
·  
Improper loan structure  or questionable repayment sources;
 
 
·  
Lack of well-defined secondary repayment source; and,
 
 
·  
Unfavorable competitive comparisons.
 
 
Such loans are no longer considered to be adequately protected due to the borrower's declining net worth, lack of earnings capacity, declining collateral margins and/or unperfected collateral positions. A possibility of loss of a portion of the loan balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals.
 
 
 
14

 
 
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
 

 
Doubtful -Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual status, and no definite repayment schedule exists.
 
However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are:
 
 
·  
Injection of capital;
 
 
·  
Alternative financing; and/or,
 
 
·  
Liquidation of assets or the pledging of additional collateral.
 
Credit Risk Profile based on payment activity as of  September 30, 2015
 
   
Consumer - Non Real Estate
 
Equity Line of Credit / Second Mortgages
 
Commercial - Non Real Estate
 
Agricultural - Non Real Estate
                 
Performing
 
$       21,033
 
$        14,039
 
$           33,535
 
$            2,859
Nonperforming (>90 days past due)
 
115
 
 75
 
299
 
-
                 
     Total
 
$       21,148
 
$        14,114
 
$             33,834
 
$           2,859
                 


Credit Risk Profile based on payment activity as of  December 31, 2014
   
Consumer - Non Real Estate
 
Equity Line of Credit /Second Mortgages
 
Commercial - Non Real Estate
 
Agricultural - Non Real Estate
                 
Performing
 
$       20,953
 
$          14,440
 
$               31,139
 
$            2,683
Nonperforming (>90 days past due)
 
 233
 
 134
 
 447
 
 -
                 
     Total
 
$       21,186
 
$         14,574
 
$              31,586
 
$           2,683
                 




 
15

 

 
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)

The following tables reflect the Bank’s impaired loans at September 30, 2015:
 
 
September 30, 2015
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With No Related Allowance
                   
Real Estate Secured
                   
Residential 1-4 family
 
$     6,714
 
$     6,714
 
$          -
 
$     7,351
 
$      205
Equity lines of credit
 
50
 
50
 
-
 
37
 
2
Multifamily
 
1,123
 
1,123
 
-
 
1,188
 
46
Farmland
 
826
 
826
 
-
 
834
 
40
Construction, Land Development, Other Land Loans
 
1,556
 
1,556
 
-
 
1,647
 
68
Commercial Real Estate- Owner Occupied
 
7,672
 
7,672
 
-
 
8,430
 
121
Commercial Real Estate- Non Owner Occupied
 
-
 
-
 
-
 
-
 
-
Second Mortgages
 
217
 
217
 
-
 
418
 
8
Non Real Estate Secured
                   
Personal /Consumer
 
70
 
70
 
-
 
62
 
4
Commercial
 
353
 
353
 
-
 
357
 
7
Agricultural
 
-
 
-
 
-
 
-
 
-
                     
          Total
 
$    18,581
 
$    18,581
 
$          -
 
$   20,324
 
$       501



 
 
September 30, 2015
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With an Allowance Recorded
                   
Real Estate Secured
                   
Residential 1-4 family
 
$     2,472
 
$     2,472
 
$       405
 
$     2,810
 
$       78
Equity lines of credit
 
-
 
-
 
-
 
-
 
-
Multifamily
 
-
 
-
 
-
 
-
 
-
Farmland
 
-
 
-
 
-
 
-
 
-
Construction, Land Development, Other Land Loans
 
446
 
446
 
31
 
406
 
18
Commercial Real Estate- Owner Occupied
 
-
 
-
 
-
 
702
 
-
Commercial Real Estate- Non Owner Occupied
 
1,895
 
1,895
 
300
 
1,906
 
39
Second Mortgages
 
37
 
37
 
29
 
19
 
2
Non Real Estate Secured
                   
Personal /Consumer
 
107
 
107
 
69
 
180
 
4
Commercial
 
681
 
681
 
525
 
742
 
25
Agricultural
 
-
 
-
 
               -
 
4
 
-
                     
          Total
 
$    5,638
 
$     5,638
 
$     1,359
 
$    6,769
 
$       166




 
16

 

Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)

The following tables reflect the Bank’s impaired loans at December 31, 2014:

 
 
December 31, 2014
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With no Related Allowance
                   
Real Estate Secured
                   
Residential 1-4 family
 
$     7,988
 
$     7,988
 
$          -
 
$     7,015
 
$       256
Equity lines of credit
 
24
 
24
 
-
 
194
 
1
Multifamily
 
1,252
 
1,252
 
-
 
626
 
21
Farmland
 
842
 
842
 
-
 
663
 
32
Construction, Land Development, Other Land Loans
 
1,738
 
1,738
 
-
 
1,716
 
64
Commercial Real Estate- Owner Occupied
 
9,188
 
9,392
 
-
 
7,291
 
262
Commercial Real Estate- Non Owner Occupied
 
-
 
-
 
-
 
3,227
 
-
Second Mortgages
 
618
 
618
 
-
 
340
 
20
Non Real Estate Secured
                   
Personal
 
54
 
54
 
-
 
53
 
3
Commercial
 
361
 
361
 
-
 
229
 
20
Agricultural
 
-
 
-
 
-
 
-
 
-
                     
          Total
 
$    22,065
 
$    22,269
 
$          -
 
$   21,354
 
$       679



 
 
December 31, 2014
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With an Allowance Recorded
                   
Real Estate Secured
                   
Residential 1-4 family
 
$     3,148
 
$     3,148
 
$       586
 
$     3,087
 
$       125
Equity lines of credit
 
-
 
-
 
-
 
19
 
-
Multifamily
 
-
 
-
 
-
 
-
 
-
Farmland
 
-
 
-
 
-
 
100
 
-
Construction, Land Development, Other Land Loans
 
366
 
366
 
20
 
183
 
13
Commercial Real Estate- Owner Occupied
 
1,403
 
1,403
 
143
 
2,466
 
56
Commercial Real Estate- Non Owner Occupied
 
1,916
 
1,916
 
322
 
3,249
 
31
Second Mortgages
 
-
 
-
 
-
 
28
 
-
Non Real Estate Secured
                   
Personal
 
253
 
253
 
188
 
193
 
7
Commercial
 
802
 
802
 
540
 
863
 
28
Agricultural
 
7
 
7
 
7
 
94
 
1
                     
          Total
 
$    7,895
 
$    7,895
 
$     1,806
 
$    10,282
 
$       261




 
17

 


Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)


The following tables present the balance in the allowance for loan losses and the recorded investment in loans by loan category and is segregated by impairment
evaluation method as of September 30, 2015 and September 30, 2014.



Nine  months ended September 30, 2015
 
Residential
1-4 Family
   
Multi-
family
   
Construction and Land Loans
   
Commercial 
R./E Owner Occupied
   
Commercial R/E Non-Owner Occupied
   
Second Mortgages
   
Equity Line of Credit
   
Farmland
   
Personal & Overdrafts
   
Commercial & Agricultural
   
Un-
allocated
   
Total
 
Allowance for Credit Losses:
                                                                       
Beginning Balance December 31,  2014
  $ 995     $ 20     $ 87     $ 409     $ 1,063     $ 67     $ 74     $ 12     $ 665     $ 982     $ 1,103     $ 5,477  
Provision for Credit Losses
    (159 )     (20 )     (70 )     (164 )     (259 )     9       (90 )     (4 )     649       130       675       697  
Charge-offs
    105       -       -       12       407       3       -       -       634       205       -       1,366  
Recoveries
    (1 )     -       (34 )     (6 )     (376 )     -       (41 )     (2 )     (59       (7 )     -       (526 )
Net Charge-offs
    104       -       (34 )     6       31       3       (41 )     (2 )     575       198       -       841  
Ending Balance
September 30, 2015
    732       -       51       239       773       73       25       10       739       914       1,777       5,333  
Ending Balance: Individually evaluated for impairment
    405       -       31       -       300       29       -       -       69       525       -       1,359  
Ending Balance:  Collectively Evaluated for Impairment
    327       -       20       239       473       44       25       10       670       389       1,777       3,974  
Loans:
                                                                                               
Ending Balance: Individually Evaluated for Impairment
    9,186       1,123       2,002       7,672       1,895       254       50       826       177       1,034       -       24,219  
Ending Balance: Collectively Evaluated for Impairment
    185,226       22,877       15,834       61,718       31,899       7,757       6,053       10,696       20,971       35,659       -       398,690  
Ending Balance: September 30, 2015
  $ 194,412     $ 24,000     $ 17,836     $ 69,390     $ 33,794     $ 8,011     $ 6,103     $ 11,522     $ 21,148     $ 36,693       -     $ 422,909  

 
 
18

 
 
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)



 
Nine  months ended Sept. 30, 2014
 
Residential
1-4 Family
   
Multi-
family
   
Construction and Land Loans
   
Commercial R./E Owner Occupied
   
Commercial R/E Non-Owner Occupied
   
Second Mortgages
   
Equity Line of Credit
   
Farmland
   
Personal and 
Overdrafts
   
Commercial and Agricultural
   
Un-
allocated
   
Total
 
Allowance for Credit Losses:
                                                                       
Beginning Balance December 31,  2013
  $ 975     $ 143     $ 230     $ 1,029     $ 1,415     $ 153     $ 50     $ 65     $ 483     $ 1,264     $ 1,018     $ 6,825  
Provision for Credit Losses
    353       (102 )     (103 )     (218 )     982       (52 )     125       (51 )     599       23       (308 )     1,248  
Charge-offs
    188       -       18       345       1,239       25       100       -       471       387       -       2,773  
Recoveries
    (1 )     -       (6 )     (132 )     -       -       -       -       (54 )     (36 )     -       (229 )
Net Charge-offs
    187       -       12       213       1,239       25       100       -       417