10-Q 1 hbi10q11142016.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, 2016

[   ] 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.
 
8,199,229 shares of common stock, par value $0.625 per share,outstanding as of November 14, 2016
 


 
 
 
Highlands Bankshares, Inc.

FORM 10-Q
For the Quarter Ended September 30, 2016

INDEX
     
PART I. FINANCIAL INFORMATION       
PAGE
 
     
Item 1.  Financial Statements
   
     
Consolidated Balance Sheets
  at September 30, 2016 (Unaudited) and December 31, 2015
   
3
 
     
Consolidated Statements of Income (Unaudited)
  for the Three Months and Nine Months Ended September 30, 2016 and 2015
4
 
     
 
Consolidated Statements of   Comprehensive Income (Unaudited)
for the Three Months and Nine Months Ended September 30, 2016 and 2015
5
 
Consolidated Statements of Cash Flows (Unaudited)
 for the Nine Months Ended September 30, 2016 and 2015
6
 
     
Consolidated Statements of Changes in
 Stockholders' Equity (Unaudited) for the Three Months and Nine Months
 Ended September 30, 2016 and 2015
7-9
 
     
Notes to Consolidated Financial Statements (Unaudited)
10-40
 
     
Item 2. Management's Discussion and Analysis of
              Financial Condition and Results of Operations
41-47
 
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk
47
 
     
Item 4.  Controls and Procedures
47
 
     
PART II.  OTHER INFORMATION
   
     
Item 1.  Legal Proceedings
48
 
     
Item 1A. Risk Factors
48
 
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
48
 
     
Item 3.  Defaults Upon Senior Securities
48
 
     
Item 4.  Mine Safety Disclosures
48
 
     
Item 5.  Other Information
48
 
     
Item 6.  Exhibits
48
 
     
SIGNATURES AND CERTIFICATIONS
49
 


2

  FINANCIAL INFORMATION  
 ITEM 1.  Financial Statements
Consolidated Balance Sheets
(Amounts in thousands)
   
(Unaudited)
September 30, 2016
   
(Note 1)
December 31, 2015
 
                                              ASSETS
           
Cash and due from banks
 
$
24,824
   
$
26,713
 
Federal funds sold
   
22,379
     
20,178
 
                 
   Total Cash and Cash Equivalents
   
47,203
     
46,891
 
                 
Investment securities available for sale (amortized cost $95,914 at Sept. 30, 2016, $80,239 at December 31, 2015)
   
96,860
     
79,860
 
Other investments, at cost
   
6,636
     
6,592
 
Loans held for sale
   
2,760
     
-
 
Loans, net of allowance for loan losses of  $5,004 at September 30, 2016, $5,654 at December 31, 2015
   
405,089
     
426,429
 
Premises and equipment, net
   
19,972
     
20,612
 
Deferred tax assets
   
12,006
     
12,126
 
Interest receivable
   
1,945
     
1,761
 
Bank owned life Insurance
   
14,217
     
14,585
 
Other real estate owned
   
3,288
     
5,694
 
Other assets
   
2,294
     
2,432
 
                 
    Total Assets
 
$
612,270
   
$
616,982
 
                 

3



LIABILITIES AND STOCKHOLDERS' EQUITY
           
             
LIABILITIES
           
             
Deposits:
           
  Non-interest bearing
 
$
132,005
   
$
129,634
 
  Interest bearing
   
356,058
     
365,278
 
                 
    Total Deposits
   
488,064
     
494,912
 
                 
Interest, taxes and other liabilities
   
1,099
     
761
 
Other short-term borrowings
   
27,551
     
20,052
 
Long-term debt
   
40,160
     
47,698
 
    Total Other Liabilities
   
68,810
     
68,511
 
                 
    Total Liabilities
   
556,874
     
563,422
 
                 
STOCKHOLDERS' EQUITY
               
                 
Common stock (8,199 and 7,851) shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively)
   
5,124
     
4,907
 
Preferred Stock (2,092 shares issued and outstanding)
   
4,184
     
4,184
 
Additional paid-in capital
   
18,837
     
17,944
 
Retained earnings
   
26,627
     
26,773
 
Accumulated other comprehensive income
   
624
     
(248
)
                 
  Total Stockholders' Equity
   
55,396
     
53,560
 
                 
    Total Liabilities and Stockholders' Equity
 
$
612,270
   
$
616,982
 

See accompanying Notes to Consolidated Financial Statements
4



Consolidated Statements of Income
(Amounts in thousands, except per share data)
(Unaudited)
 
   
Nine Months Ended September 30, 2016
   
Nine Months Ended September 30, 2015
   
Three Months
Ended
September 30, 2016
   
Three Months
Ended
September 30, 2015
 
INTEREST INCOME
                       
Loans receivable and fees on loans
 
$
15,978
   
$
15,921
   
$
5,224
   
$
5,347
 
Securities available for sale:
                               
  Taxable
   
1,034
     
873
     
390
     
281
 
  Exempt from taxable income
   
245
     
281
     
87
     
84
 
Other investment income
   
173
     
161
     
61
     
48
 
Federal funds sold
   
69
     
66
     
20
     
20
 
                                 
    Total Interest Income
   
17,499
     
17,302
     
5,782
     
5,780
 
                                 
INTEREST EXPENSE
                               
Deposits
   
1,344
     
1,662
     
445
     
545
 
Other borrowed funds
   
1,779
     
1,774
     
596
     
598
 
                                 
    Total Interest Expense
   
3,123
     
3,436
     
1,041
     
1,143
 
                                 
    Net Interest Income
   
14,376
     
13,866
     
4,741
     
4,637
 
                                 
Provision for Loan Losses
   
1,486
     
697
     
173
     
215
 
                                 
    Net Interest Income after Provision for Loan Losses
   
12,890
     
13,169
     
4,568
     
4,422
 
                                 
NON-INTEREST INCOME
                               
Securities gains, net
   
47
     
16
     
-
     
-
 
Mortgage Banking Income
   
361
     
-
     
361
     
-
 
Service charges on deposit accounts
   
1,330
     
1,260
     
464
     
439
 
Other service charges, commissions and fees
   
1,177
     
1,220
     
381
     
391
 
Other operating income
   
602
     
433
     
142
     
152
 
    Total Non-Interest Income
   
3,517
     
2,929
     
1,348
     
982
 
                                 
NON-INTEREST EXPENSE
                               
Salaries and employee benefits
   
8.850
     
7,598
     
2,895
     
2,585
 
Occupancy expense of bank premises
   
1,008
     
865
     
358
     
271
 
Furniture and equipment expense
   
1,148
     
1,026
     
412
     
350
 
Other operating expense
   
4,344
     
4,528
     
1,639
     
1,794
 
Foreclosed Assets – Write-down and operating expenses
   
1,530
     
684
     
684
     
(139)
 
    Total Non-Interest Expense
   
16,880
     
14,701
     
5,988
     
4,861
 
                                 
    Income Before Income Taxes
   
(473
)
   
1,397
     
(72
)
   
543
 
                                 
 
Income Tax Expense (Benefit)
   
(330
)
   
(746
)
   
(73
)
   
114
 
                                 
    Net Income
 
$
(143
)
 
$
2,143
   
$
1
   
$
429
 
                                 
Basic Earnings Per Common Share – Weighted Average
 
$
(0.02
)
 
$
0.27
   
$
0.00
   
$
0.05
 
                                 
Earnings Per Common Share – Assuming Dilution
 
$
(0.02
)
 
$
0.22
   
$
0.00
   
$
0.04
 

See accompanying Notes to Consolidated Financial Statements




5



Consolidated Statements of Comprehensive Income
(Amounts in thousands)
(Unaudited)
   
Nine Months Ended September 30, 2016
   
Nine Months Ended September 30, 2015
 
             
             
Net Income (loss)
 
$
(143)
 
 
$
2,143
 
                 
     Other Comprehensive Income
               
  Unrealized gains on securities during  the period
   
1,369
     
68
 
  Less: reclassification adjustment for gains included in net income
   
(47)
 
   
(16)
 
          Other Comprehensive Income, before tax
   
1,322
     
52
 
           Income tax expense related to other
           comprehensive income
   
(450)
 
   
(18))
 
    Other Comprehensive Income
   
872
     
34
 
Comprehensive Income
 
$
729
   
$
2,177
 
                 


   
Three Months Ended September 30, 2016
   
Three Months Ended September 30, 2015
 
             
             
Net Income
 
$
1
   
$
429
 
                 
Other Comprehensive Income
               
  Unrealized gains  (losses) on securities during  the period
   
(275)
 
   
326
 
  Less: reclassification adjustment for losses  included in net income
   
-
     
-
 
 Other Comprehensive Income (Loss), before tax
   
(275)
 
   
326
 
           Income tax (expense) benefit related to other
           comprehensive income
   
94
     
(111)
 
Other Comprehensive Income (loss)
   
(181)
 
   
215
 
Comprehensive Income (loss)
 
$
(180)
 
 
$
644
 
                 



See accompanying Notes to Consolidated Financial Statements
6



Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
   
Nine Months Ended
   
Nine Months Ended
 
   
September 30, 2016
   
September 30, 2015
 
CASH FLOWS FROM OPERATING  ACTIVITIES:
           
Net income (loss)
 
$
(143)
 
 
$
2,143
 
Adjustments to reconcile net income to net cash provided by                 operating activities
               
Provision for loan losses
   
1,486
     
697
 
Depreciation and amortization
   
721
     
749
 
Net realized (gains) losses on available for sale securities
   
(47)
 
   
(16)
 
Net amortization on securities
   
683
     
798
 
            (Increase) decrease in interest receivable
   
(184)
 
   
(75)
 
Valuation adjustment of other real estate owned
   
719
     
(155)
 
Valuation adjustment of deferred tax assets
   
-
     
(1,000)
 
Origination of loans held for sale
   
(9,094)
 
   
-
 
Proceeds from loans held for sale
   
6,334
     
-
 
Decrease (increase) in other assets
   
911
     
188
 
Increase (decrease) in interest, taxes and other liabilities
   $
338
     $
552
 
                 
Net cash provided by operating activities
   $
1,724
     $
3,881
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Securities available for sale:
               
       Proceeds from sale of securities
   $
21,284
     $
1,025
 
Proceeds from maturities of debt and equity securities
   
13,842
     
13,992
 
Purchase of securities
   
(51,437)
 
   
(15,875)
 
(Purchases) sales of other investments
   
(44)
 
   
168
 
Net (increase) decrease in loans
   
18,336
     
(19,635)
 
Proceeds from sales of other real estate owned
   
2,666
     
2,705
 
Premises and equipment expenditures
   $
(282)
 
   $
(1,092)
 
                 
Net cash provided by (used in) investing activities
   $
4,365
     $
(18,712)
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
      Issuance of Common Stock
   $
1,110
     $
-
 
      Issuance of Preferred Stock
   
-
     
-
 
 
Net decrease in time deposits
   
(10,056)
 
   
(9,645)
 
Net increase (decrease) in demand, savings and other deposits
   
3,208
     
17,517
 
Increase in short-term borrowings
   
7,499
     
-
 
Decrease in long-term debt
   
(7,538)
 
   
(38)
 
Net cash  provided by  (used in) financing activities
   $
(5,777)
 
   $
7,834
 
                 
Net  increase (decrease) in cash and cash equivalents
   
312
     
(6,997)
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
   $
46,891
     $
55,810
 
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
47,203
   
$
48,813
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash paid during the period for:
               
Interest
 
$
3,128
   
$
3,458
 
                 
     SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
               
Transfer of loans to other real estate owned
 
$
1,519
   
$
3,645
 
Loans originated from sales of other real estate owned
 
$
105
   
$
130
 
See accompanying Notes to Consolidated Financial Statements


7


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, 2015
   
7,851
   
$
4,907
     
2,092
   
$
4,184
   
$
17,947
   
$
27,150
   
$
(86)
 
 
$
54,102
 
                                                                 
 
Net income
   
-
     
-
                     
-
     
429
     
-
     
429
 
                                                                 
Other comprehensive income
   
-
     
-
                     
-
     
-
     
215
     
215
 
                                                                 
 
Balance September 30, 2015
   
7,851
   
$
4,907
     
2,092
   
$
4,184
   
$
17,947
   
$
27,579
   
$
129
   
$
54,746
 
                                                                 
 
 
Balance, June 30, 2016
   
8,113
   
$
5,070
     
2,092
   
$
4,184
   
$
18,891
   
$
26,626
   
$
805
   
$
55,576
 
                                                                 
Net income
   
-
     
-
                     
-
     
1
     
-
     
1
 
                                                                 
Grant of Restricted Stock
   
86
     
54
                     
(54)
 
                   
-
 
                                                                 
Other comprehensive income (loss)
   
-
     
-
                     
-
     
-
     
(181)
 
   
(181)
 
                                                                 
 
Balance, September 30, 2016
   
8,199
   
$
5,124
     
2,092
   
$
4,184
   
$
18,837
   
$
26,627
   
$
624
   
$
54,396
 
                                                                 
                                                                 



8



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, 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
   
-
     
-
                     
-
     
-
     
34
     
34
 
                                                                 
 
Balance, September 30, 2015
   
7,851
   
$
4,907
     
2,092
   
$
4,184
   
$
17,947
   
$
27,579
   
$
129
   
$
54,746
 
                                                                 
                                                                 
 
 
Balance, December 31, 2015
   
7,851
   
$
4,907
     
2,092
   
$
4,184
   
$
17,944
   
$
26,773
   
$
(248)
)
 
$
53,560
 
                                                                 
                                                                 
Net income
   
-
     
-
                     
-
     
(143)
 
   
-
     
(143)
 
                                                                 
Common Stock Issuance
   
262
     
163
     
-
     
-
     
947
     
-
     
-
     
1,110
 
                                                                 
Grant of Restricted Stock
   
86
     
54
                     
(54)
 
                   
-
 
                                                                 
Other comprehensive income (loss)
   
-
     
-
                     
-
     
-
     
872
     
872
 
                                                                 
 
Balance, September 30, 2016
   
8,199
   
$
5,124
     
2,092
   
$
4,184
   
$
18,837
   
$
26,627
   
$
624
   
$
54,396
 
                                                                 

See accompanying Notes to Consolidated Financial Statements


9

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, 2015 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, 2015 (the "2015 Form 10-K"). The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the 2015 Form 10-K. The results of operations for the three-month and nine-month periods ended September 30, 2016, 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,
2016
   
December 31, 2015
 
Real Estate Secured:
           
Residential 1-4 family
 
$
190,603
   
$
194,287
 
Multifamily
   
22,719
     
23,895
 
Construction and Land Loans
   
16,994
     
19,163
 
Commercial, Owner Occupied
   
69,407
     
73,031
 
Commercial, Non-owner occupied
   
32,078
     
38,025
 
Second mortgages
   
7,226
     
8,169
 
Equity lines of credit
   
6,795
     
6,000
 
Farmland
   
12,498
     
11,283
 
     $
358,320
     $
373,853
 
                 
Secured (other) and unsecured
               
Personal
   
18.096
     
20,775
 
Commercial
   
31,276
     
35,144
 
Agricultural
   
3,004
     
2,959
 
     $
52,376
     $
58,878
 
                 
Overdrafts
   
135
     
139
 
                 
     $
410,831
     $
432,870
 
Less:
               
  Allowance for loan losses
   
5,004
     
5,654
 
  Net deferred fees
   
738
     
787
 
     
5,742
     
6,441
 
                 
Loans, net
 
$
405,089
   
$
426,429
 


10



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, 2016

   
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
 
$
1,563
   
$
818
   
$
1,124
   
$
3,505
   
$
187,098
   
$
190,603
   
$
-
 
Equity lines of credit
   
50
     
26
     
-
     
76
     
6,719
     
6,795
     
-
 
Multifamily
   
-
     
-
     
-
     
-
     
22,719
     
22,719
     
-
 
Farmland
   
420
     
3
     
-
     
423
     
12,075
     
12,498
     
-
 
Construction, Land Development, Other Land Loans
   
22
     
-
     
-
     
22
     
16,972
     
16,994
     
-
 
Commercial Real Estate- Owner Occupied
   
151
     
-
     
3,927
     
4,078
     
65,329
     
69,407
     
-
 
Commercial Real Estate- Non Owner Occupied
   
-
     
-
     
-
     
-
     
32,078
     
32,078
     
-
 
Second Mortgages
   
1
     
-
     
30
     
31
     
7,195
     
7,226
     
-
 
Non Real Estate Secured
                                                       
Personal
   
139
     
42
     
30
     
211
     
18,020
     
18,231
     
-
 
Commercial
   
64
     
30
     
441
     
535
     
30,741
     
31,276
     
-
 
Agricultural
   
-
     
-
     
-
             
3,004
     
3,004
     
-
 
                                                         
          Total
 
$
2,410
   
$
919
   
$
5,552
   
$
8,881
   
$
401,950
   
$
410,831
   
$
-
 
                                                         

11



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 December 31, 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
 
$
4,193
   
$
1,580
   
$
2,545
   
$
8,318
   
$
185,969
   
$
194,287
   
$
-
 
Equity lines of credit
   
24
     
-
     
17
     
41
     
5,959
     
6,000
     
-
 
Multifamily
   
-
     
-
     
-
     
-
     
23,895
     
23,895
     
-
 
Farmland
   
56
     
7
     
303
     
366
     
10,917
     
11,283
     
-
 
Construction,  Land Development, Other Land Loans
   
49
     
61
     
37
     
147
     
19,016
     
19,163
     
-
 
Commercial Real Estate- Owner Occupied
   
514
     
485
     
5,014
     
6,013
     
67,018
     
73,031
     
-
 
Commercial Real Estate- Non Owner Occupied
   
-
     
-
     
-
     
-
     
38,025
     
38,025
     
-
 
Second Mortgages
   
88
     
37
     
5
     
130
     
8,039
     
8,169
     
-
 
Non Real Estate Secured
                                                       
Personal
   
264
     
141
     
163
     
568
     
20,346
     
20,914
     
-
 
Commercial
   
590
     
217
     
366
     
1,173
     
33,971
     
35,144
     
-
 
Agricultural
   
45
     
-
     
-
     
45
     
2,914
     
2,959
     
-
 
                                                         
          Total
 
$
5,823
   
$
2,528
   
$
8,450
   
$
16,801
   
$
416,069
   
$
432,870
   
$
-
 
                                                         


12


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.  Additionally, in certain instances, loans that have been restructured or modified may also be classified as non-accrual per regulatory guidance until a satisfactory payment history has been established. 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, 2016 and December 31, 2015:
 
   
September 30, 2016
   
December 31, 2015
 
                 Real Estate Secured
           
Residential 1-4 Family
 
$
1,124
   
$
2,675
 
Multifamily
   
-
     
-
 
Construction and Land Loans
   
-
     
71
 
Commercial-Owner Occupied
   
3,927
     
5,856
 
Commercial- Non Owner Occupied
   
-
     
-
 
Second Mortgages
   
30
     
5
 
Equity Lines of Credit
   
-
     
17
 
Farmland
   
-
     
303
 
               Secured (other) and Unsecured
               
Personal
   
30
     
163
 
Commercial
   
441
     
366
 
Agricultural
   
-
     
-
 
                 
Total
 
$
5,552
   
$
9,456
 


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, 2016.


   
Number
   
Balance
 
Residential real estate in the process of foreclosure
   
1
   
$
48
 
Foreclosed residential real estate
   
10
   
$
641
 



13


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, 2016 and December 31, 2015.  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, 2016
Grade (1)
 
Residential 1-4 Family
   
Multifamily
   
Farmland
   
Construction, Land Loans
   
Commercial Real Estate- Owner Occupied
   
Commercial Real Estate Non-Owner Occupied
 
                                     
Quality
   
27,420
     
-
     
-
     
2,813
     
2,392
     
289
 
Satisfactory
   
109,847
     
19,528
     
8,087
     
5,984
     
37,466
     
14,902
 
Acceptable
   
44,232
     
1,436
     
3,529
     
6,308
     
21,696
     
6,672
 
Special Mention
   
4,433
     
763
     
-
     
77
     
3,669
     
6,307
 
Substandard
   
4,671
     
992
     
882
     
1,812
     
4,184
     
3,908
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
 
                                                 
     Total
 
$
190,603
   
$
22,719
   
$
12,498
   
$
16,994
   
$
69,407
   
$
32,078
 

Credit Risk Profile by Internally Assigned Grade as of December 31, 2015
Grade (1)
 
Residential 1-4 Family
   
Multifamily
   
Farmland
   
Construction, Land Loans
   
Commercial Real Estate- Owner Occupied
   
Commercial Real Estate Non-Owner Occupied
 
                                     
Quality
   
25,939
     
-
     
25
     
3,036
     
2,870
     
1,481
 
Satisfactory
   
109,993
     
20,271
     
6,323
     
7,406
     
38,926
     
19,979
 
Acceptable
   
46,639
     
1,811
     
3,922
     
6,420
     
21,671
     
12,157
 
Special Mention
   
3,133
     
792
     
195
     
397
     
2,552
     
2,523
 
Substandard
   
8,583
     
1,021
     
818
     
1,904
     
7,012
     
1,885
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
 
                                                 
     Total
 
$
194,287
   
$
23,895
   
$
11,283
   
$
19,163
   
$
73,031
   
$
38,025
 


(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


14


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

·
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.  
·
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.
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.
15



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

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
·
Liquidation of assets or the pledging of additional collateral.
The following categories of loans are primarily evaluated according to whether or not they are performing or non-performing. Management considers loans 90 days or more past due to be non-performing.
Credit Risk Profile based on payment activity as of September 30, 2016
   
Consumer - Non Real Estate
   
Equity Line of Credit / Second Mortgages
   
Commercial - Non Real Estate
   
Agricultural - Non Real Estate
 
                         
Performing
 
$
18,201
   
$
13,884
   
$
30,300
   
$
3,004
 
Nonperforming (>90 days past due)
   
30
     
30
     
441
     
-
 
                                 
     Total
 
$
18,231
   
$
13,914
   
$
30,741
   
$
3,004
 
                                 


Credit Risk Profile based on payment activity as of December 31, 2015
   
Consumer - Non Real Estate
   
Equity Line of Credit /Jr. liens
   
Commercial - Non Real Estate
   
Agricultural - Non Real Estate
 
                         
Performing
 
$
20,751
   
$
14,147
   
$
34,778
   
$
2,959
 
Nonperforming (>90 days past due)
   
163
     
22
     
366
     
-
 
                                 
     Total
 
$
20,914
   
$
14,169
   
$
35,144
   
$
2,959
 
                                 


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 September 30, 2016:
 
 
September 30, 2016
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With No Related Allowance
                             
Real Estate Secured
                             
Residential 1-4 family
 
$
4,674
   
$
4,674
   
$
-
   
$
5,876
   
$
155
 
Equity lines of credit
   
15
     
15
     
-
     
33
     
1
 
Multifamily
   
992
     
992
     
-
     
1,007
     
39
 
Farmland
   
690
     
690
     
-
     
753
     
25
 
Construction, Land Development, Other Land Loans
   
1,447
     
1,447
     
-
     
1,497
     
66
 
Commercial Real Estate- Owner Occupied
   
3,708
     
3,708
     
-
     
4,639
     
169
 
Commercial Real Estate- Non Owner Occupied
   
1,887
     
1,887
     
-
     
944
     
12
 
Second Mortgages
   
89
     
89
     
-
     
244
     
4
 
Non Real Estate Secured
                                       
Personal /Consumer
   
30
     
30
     
-
     
49
     
1
 
Commercial
   
114
     
114
     
-
     
215
     
3
 
Agricultural
   
-
     
-
     
-
     
-
     
-
 
                                         
          Total
 
$
13,646
   
$
13,646
   
$
-
   
$
15,257
   
$
475
 



 
 
September 30, 2016
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With an Allowance Recorded
                             
Real Estate Secured
                             
Residential 1-4 family
 
$
600
   
$
600
   
$
176
   
$
1,223
   
$
19
 
Equity lines of credit
   
-
     
-
     
-
     
-
     
-
 
Multifamily
   
-
     
-
     
-
     
-
     
-
 
 
Farmland
   
193
     
193
     
17
     
97
     
8
 
Construction, Land Development, Other Land Loans
   
366
     
366
     
19
     
406
     
17
 
Commercial Real Estate- Owner Occupied
   
1,139
     
2,139
     
558
     
1,629
     
-
 
Commercial Real Estate- Non Owner Occupied
   
2,020
     
2,020
     
324
     
1,953
     
22
 
Second Mortgages
   
212
     
212
     
55
     
115
     
7
 
Non Real Estate Secured
                                       
Personal /Consumer
   
59
     
59
     
33
     
87
     
2
 
Commercial
   
618
     
618
     
377
     
644
     
8
 
Agricultural
   
-
     
-
     
-
     
-
     
-
 
                                         
          Total
 
$
5,207
   
$
6,207
   
$
1,559
   
$
6,154
   
$
83
 


17


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, 2015:


 
 
December 31, 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
 
$
7,078
   
$
7,078
   
$
-
   
$
7,533
   
$
247
 
Equity lines of credit
   
51
     
51
     
-
     
38
     
2
 
Multifamily