10-Q 1 f10q093011.htm f10q093011.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, 2011

[   ] 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.
 
5,011,152 shares of common stock, par value $0.625 per share,
outstanding as of November 14, 2011
 


 
 
 

 
Highlands Bankshares, Inc.

FORM 10-Q
For the Quarter Ended September 30, 2011

INDEX
   
PART I. FINANCIAL INFORMATION                                                                                                                       
PAGE
   
Item 1.  Financial Statements
 
   
Consolidated Balance Sheets
  at September 30, 2011 (Unaudited) and December 31, 2010
 
3
 
 
Consolidated Statements of Income (Unaudited)
  for the Three Months and Nine Months Ended September 30, 2011 and 2010
4
   
Consolidated Statements of Cash Flows (Unaudited)
  for the Nine Months Ended September 30, 2011 and 2010
5
   
Consolidated Statements of Changes in
  Stockholders’ Equity (Unaudited) for the Three Months and Nine Months
  Ended September  30, 2011 and 2010
6-7
   
Notes to Consolidated Financial Statements (Unaudited)
8-36
   
Item 2. Management’s Discussion and Analysis of
              Financial Condition and Results of Operations
37-44
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
44
   
Item 4.  Controls and Procedures
44
 
 
PART II.  OTHER INFORMATION
 
   
Item 1.  Legal Proceedings
44
   
Item 1A. Risk Factors
44
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
44
   
Item 3.  Defaults Upon Senior Securities
44
   
Item 4.  Removed and Reserved
44
   
Item 5.  Other Information
44
   
Item 6.  Exhibits
44
   
SIGNATURES AND CERTIFICATIONS
45

 
2

 

PART I.
FINANCIAL INFORMATION
ITEM 1.  Financial Statements

Consolidated Balance Sheets
(Amounts in thousands)
 
ASSETS
 
September 30, 2011 
(Unaudited)
   
December 31, 2010
(Note 1)
 
             
Cash and due from banks
  $ 15,560     $ 15,693  
Federal funds sold
     73,992       66,459  
                 
   Total Cash and Cash Equivalents
    89,552       82,152  
                 
Investment securities available for sale (amortized cost $65,436 at September 30, 2011, $62,093 at December 31, 2010)
    62,092       56,096  
Other investments, at cost
    5,498       6,026  
Loans, net of allowance for loan losses of $9,938 at September 30, 2011, $10,320 at December 31, 2010
    405,720       440,274  
Premises and equipment, net
    21,994       23,509  
Deferred tax assets
    11,387       11,887  
Interest receivable
    2,556       2,544  
Bank owned life Insurance
    13,115       12,777  
Other real estate owned
    16,916       15,316  
Other assets
    5,291       4,927  
                 
    Total Assets
  $ 634,121     $ 655,508  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
LIABILITIES
               
                 
Deposits:
               
  Non-interest bearing
  $ 98,458     $ 85,923  
  Interest bearing
    426,917       450,849  
                 
    Total Deposits
    525,375       536,772  
 
Interest, taxes and other liabilities
    1,314       1,786  
Other short-term borrowings
    57,673       65,952  
Long-term debt
    14,008       14,968  
Capital securities
    3,150       3,150  
                 
    Total Other Liabilities
    76,145       85,856  
                 
    Total Liabilities
    601,520       622,628  
                 
STOCKHOLDERS’ EQUITY
               
                 
Common stock (5,011 shares issued and outstanding)
    3,132       3,132  
Additional paid-in capital
    7,783       7,783  
Retained earnings
    23,897       25,923  
Accumulated other comprehensive income (loss)
    (2,211 )     (3,958 )
                 
  Total Stockholders’ Equity
    32,601       32,880  
                 
    Total Liabilities and Stockholders’ Equity
  $ 634,121     $ 655,508  
                 

See accompanying Notes to Consolidated Financial Statements


 
 
3

 



Consolidated Statements of Income
(Amounts in thousands, except per share data)
(Unaudited)
   
Nine Months Ended Sept. 30,
2011
   
Nine Months Ended Sept. 30,
2010
   
Three Months
Ended Sept. 30,
2011
   
Three Months
Ended Sept. 30,
2010
 
INTEREST INCOME
                       
Loans receivable and fees on loans
  $ 18,898     $ 21,400     $ 6,170     $ 6,958  
Securities available for sale:
                               
  Taxable
    1,005       696       349       331  
  Exempt from taxable income
    611       1,342       201       285  
Other investment income
    63       67       28       12  
Federal funds sold
    112       34       39       22  
                                 
    Total Interest Income
    20,689       23,539       6,787       7,608  
                                 
INTEREST EXPENSE
                               
Deposits
    5,027       6,828       1,589       2,247  
Federal funds purchased
    -       1       -       -  
Other borrowed funds
    2,620       2,754       855       925  
                                 
    Total Interest Expense
    7,647       9,583       2,444       3,172  
                                 
    Net Interest Income
    13,042       13,956       4,343       4,436  
                                 
Provision for Loan Losses
    4,238       2,993       449       1,102  
                                 
    Net Interest Income after Provision for Loan Losses
    8,804       10,963       3,894       3,334  
                                 
NON-INTEREST INCOME
                               
Securities gains, losses, net
    251       65       108       (106 )
Service charges on deposit accounts
    1,565       1,503       534       531  
Other service charges, commissions and fees
    1,322       1,106       427       383  
Other operating income
    745       507       400       187  
Other than temporary impairment
    (269 )     (1,199 )     -       (475 )
    Total Non-Interest Income
    3,614       1,982       1,469       520  
                                 
NON-INTEREST EXPENSE
                               
Salaries and employee benefits
    7,516       7,535       2,454       2,300  
Occupancy expense of bank premises
    820       848       300       269  
Furniture and equipment expense
    1,019       1,242       320       408  
Other operating expense
    4,275       3,337       1,412       945  
Foreclosed Assets – Loss on Sale / Write-down
    1,419       1,038       702       631  
Foreclosed Assets – Operating Expenses
    919       415       224       144  
    Total Non-Interest Expense
    15,968       14,415       5,412       4,697  
                                 
    Income (Loss) Before Income Taxes
    (3,550 )     (1,470 )     (49 )     (843 )
                                 
Income Tax Expense (Benefit)
    (1,524 )     (1,079 )     (124 )     (446 )
                                 
    Net Income (Loss)
  $ (2,026 )   $ (391 )   $ 75     $ (397 )
                                 
Basic Earnings (Loss) Per Common Share
  $ (0.41 )   $ (0.08 )   $ .01     $ (0.08 )
                                 
Earnings (Loss) Per Common Share – Assuming Dilution
  $ (0.41 )   $ (0.08 )   $ .01     $ (0.08 )

See accompanying Notes to Consolidated Financial Statements
 




 
 
4

 
 
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
 
     
Nine Months Ended
September 30, 2011
     
Nine Months Ended
September 30, 2010
 
CASH FLOWS FROM OPERATING  ACTIVITIES:
           
             
Net income (loss)
  $ (2,026 )   $ (391 )
Adjustments to reconcile net income (loss) to net cash provided by 
operating activities
               
Provision for loan losses
    4,238       2,993  
Depreciation and amortization
    847       996  
Net realized (gains) losses on available for sale securities
    (251 )     (65 )
Net amortization on securities
    353       147  
             Other than temporary impairment charge
    269       1,199  
Amortization of Capital issue costs
    4       4  
            (Increase) decrease in interest receivable
    (12 )     (274 )
Valuation adjustment of other real estate owned
    1,321       633  
(Increase) decrease in other assets
    (155 )     (1,314 )
Increase (decrease) in interest, taxes and other liabilities
     (472 )       101  
                 
Net cash provided by operating activities
         4,116         4,029  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Securities available for sale:
               
       Proceeds from sale of securities
    13,910       22,518  
Proceeds from maturities of debt and equity securities
    3,483       5,987  
Purchase of debt and equity securities
    (21,358 )     (18,667 )
     Redemption of other investments
    528       2,192  
Net (increase) decrease in loans
    24,275       1,980  
Proceeds from sales of other real estate owned
    3,117       3,062  
Premises and equipment expenditures
      (35 )       (95 )
                 
Net cash provided by investing activities
      23,920         16,977  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net increase (decrease) in time deposits
    (27,305 )     (1,109 )
Net increase in demand, savings and other deposits
    15,908       10,165  
Decrease in short-term borrowings
    (8,279 )     (8,031 )
Increase (decrease) in long-term debt
    (960 )      4,184  
                 
Net cash provided by (used in) financing activities
     (20,636 )        5,209  
                 
Net (decrease) increase in cash and cash equivalents
    7,400       26,215  
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
      82,152         29,337  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 89,552     $   55,552  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash paid during the year for:
               
Interest
  $ 7,761     $     9,383  
Income taxes
  $    -     $        -  
                 
     SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
               
Transfer of loans to other real estate owned
  $  6,041     $  10,449  

See accompanying Notes to Consolidated Financial Statements



 
 
5

 


Consolidated Statements of Changes in Stockholders’ Equity
(Amounts in thousands)
(Unaudited)
                           
Accumulated
       
               
Additional
         
Other
   
Total
 
   
Common Stock
   
Paid-in
   
Retained
   
Comprehensive
   
Stockholders’
 
   
Shares
   
Par Value
   
Capital
   
Earnings
   
Income
   
Equity
 
                                     
Balance, June 30, 2010
    5,011     $ 3,132     $ 7,783     $ 28,069     $ (2,971 )   $ 36,013  
                                                 
Comprehensive income:
                                               
Net income /(loss)
    -       -       -       (397 )     -       (397 )
Change in unrealized loss on securities available for sale, net of deferred income tax expense of $263
    -       -       -       -       512       512  
Less: reclassification adjustment net of deferred tax of $35
    -       -       -       -       71       71  
    Total comprehensive income
    -       -       -       -       -       186  
                                                 
                                                 
Balance, September 30, 2010
    5,011     $ 3,132     $ 7,783     $ 27,672     $ (2,388 )   $ 36,199  
                                                 
                                                 
Balance, June 30, 2011
    5,011     $ 3,132     $ 7,783     $ 23,822     $ (3,090 )   $ 31,647  
                                                 
Comprehensive income:
                                               
Net income
    -       -       -       75       -       75  
Change in unrealized loss on securities available for sale, net of deferred income tax expense of $491
    -       -       -       -       950       950  
Less: reclassification adjustment
  net of deferred tax expense of $37
    -       -       -       -       (71 )     (71 )
    Total comprehensive income
    -       -       -       -       -       954  
                                                 
                                                 
Balance, September 30, 2011
    5,011     $ 3,132     $ 7,783     $ 23,897     $ (2,211 )   $ 32,601  
                                                 
                                                 

See accompanying Notes to Consolidated Financial Statements



 
 
6

 


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

 
                 
Additional
         
Accumulated
Other
     Total  
    Common Stock      Paid-in    
Retained
     Comprehensive      Stockholders'  
    Shares      Par Value      Capital      Earnings      Income      Equity  
                                     
Balance, December 31, 2009
    5,011     $ 3,132     $ 7,783     $ 28,063     $ (3,550 )   $ 35,428  
                                                 
Comprehensive income:
                                               
Net income
    -       -       -       (391 )     -       (391 )
Change in unrealized (loss) on securities available for sale, net of deferred income tax expense of $620
    -       -       -       -       1,204       1,204  
Less: reclassification adjustment
  net of deferred tax expense of $23
    -       -       -       -       (42 )     (42 )
    Total comprehensive income
    -       -       -       -       -       771  
                                                 
                                                 
 
Balance, September 30, 2010
    5,011     $ 3,132     $ 7,783     $ 27,672     $ (2,388 )   $ 36,199  
                                                 
                                                 
Balance, December 31, 2010
    5,011     $ 3,132     $ 7,783     $ 25,923     $ (3,958 )   $ 32,880  
                                                 
Comprehensive income:
                                               
Net income (loss)
    -       -       -       (2,026 )     -       (2,026 )
Change in unrealized (loss) on securities available for sale, net of deferred income tax expense of $985
    -       -       -       -       1,913       1,913  
Less: reclassification adjustment
  net of deferred tax expense of $85
    -       -       -       -       (166 )     (166 )
    Total comprehensive income (loss)
    -       -       -       -       -       (279 )
                                                 
                                                 
Balance, September 30, 2011
    5,011     $ 3,132     $ 7,783     $ 23,897     $ (2,211 )   $ 32,601  


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.  The consolidated balance sheet as of December 31, 2010 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, 2010 (the “2010 Form 10-K”). The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the 2010 Form 10-K. The results of operations for the three-month and nine month periods ended September 30, 2011 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.
 
 
 
 
 
 
 
 
 



 
 
8

 


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

Note 2 -  Loans and Allowance for Loan Losses  (amounts in thousands)


A summary of transactions in the consolidated allowance for loan losses for the nine months ended September 30 is as follows:


   
 
2011
   
2010
 
Allowance for loan losses at  beginning of year
  $ 10,320     $ 11,681  
 
Loans charged off:
               
  Residential 1-4 Family
    445       610  
  Multifamily
    203       240  
  Construction and Land Loans
    1,729       1,667  
  Commercial, Owner Occupied
    276       547  
  Commercial, Non-owner occupied
    89       46  
  Second Mortgages
    351       425  
  Equity Lines of Credit
    26       81  
  Farmland
    272       131  
                 
  Secured (other ) and unsecured
               
   Personal
    304       455  
  Commercial
    844       772  
  Agricultural
    98       27  
 
  Overdrafts
    138       173  
          Total
    4,775       5,174  
 
Recoveries of loans previously
  charged off:
               
                 
  Residential 1-4 Family
    6       -  
  Multifamily
    -       -  
  Construction and Land Loans
    53       -  
  Commercial, Owner Occupied
    -       -  
  Commercial, Non-owner occupied
    -       -  
  Second Mortgages
    10       1  
  Equity Lines of Credit
    -       -  
  Farmland
    20       -  
                 
  Secured (other ) and unsecured
               
  Personal
    53       45  
 Commercial
    12       12  
 Agricultural
    1       1  
 Overdrafts
    -       3  
                 
            Total
    155       62  
 
               
Net loans charged off
    4,620       5,112  
Provision for loan losses
    4,238       2,993  
 
Allowance for loan losses end of period
  $ 9,938     $ 9,562  


 
 
9

 



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

The composition of net loans is as follows:

   
September 30,
2011
   
December 31, 2010
 
Real Estate Secured:
           
Residential 1-4 family
  $ 171,919     $ 175,522  
Multifamily
    14,235       15,593  
Construction and Land Loans
    23,280       30,901  
Commercial, Owner Occupied
    74,970       78,279  
Commercial, Non-owner occupied
    36,405       43,652  
Second mortgages
    13,418       14,132  
Equity lines of credit
    9,511       10,016  
Farmland
    11,705       12,790  
      355,443       380,885  
                 
Secured (other) and unsecured
               
Personal
    24,056       26,773  
Commercial
    33,779       40,471  
Agricultural
    2,732       2,848  
      60,567       70,092  
                 
Overdrafts
    205       214  
                 
      416,215       451,191  
Less:
               
  Allowance for loan losses
    9,938       10,320  
  Net deferred fees
    557       597  
      10,495       10,917  
                 
Loans, net
  $ 405,720     $ 440,274  



 
 
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, 2011:
 
   
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
  $ 1,801     $ 860     $ 6,175     $ 8,836     $ 163,083     $ 171,919     $ 1,126  
Equity lines of credit
    -       143       -       143       9,368       9,511       -  
Multifamily
    -       -       953       953       13,282       14,235       -  
Farmland
    -       -       -       -       11,705       11,705       -  
Construction, Land Development, Other Land Loans
    280       -       2,038       2,318       20,962       23,280       194  
Commercial Real Estate- Owner Occupied
    2,313       69       6,399       8,781       66,189       74,970       -  
Commercial Real Estate- Non Owner Occupied
    -       1,746       571       2,317       34,088       36,405       119  
Second Mortgages
    513       1       74       588       12,830       13,418       49  
Non Real Estate Secured
                                                       
Personal
    283       40       147       470       23,791       24,261       81  
Business
    431       161       780       1,372       32,407       33,779       73  
Agricultural
    5       1       1       7       2,725       2,732       1  
                                                         
          Total
  $ 5,626     $ 3,021     $ 17,138     $ 25,785     $ 390,430     $ 416,215     $ 1,643  
                                                         


The following table is an analysis of past due loans as of December 31, 2010:
 
   
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
  $ 3,780     $ 1,245     $ 4,937     $ 9,962     $ 165,560     $ 175,522     $ 1,726  
Equity lines of credit
    -       99       -       99       9,917       10,016       -  
Multifamily
    -       -       40       40       15,553       15,593       -  
Farmland
    348       -       774       1,122       11,668       12,790       -  
Construction, Land Development, Other Land Loans
    825       152       3,153       4,130       26,771       30,901       53  
Commercial Real Estate- Owner Occupied
    1,612       105       6,301       8,018       70,260       78,278       1,776  
Commercial Real Estate- Non Owner Occupied
    -       165       1,520       1,685       41,967       43,652       602  
Second Mortgages
    234       -       529       763       13,369       14,132       -  
Non Real Estate Secured
                                                       
Personal
    303       101       74       478       26,510       26,988       14  
Business
    190       406       1,456       2,052       38,419       40,471       289  
Agricultural
    7       -       96       103       2,745       2,848       68  
                                                         
          Total
  $ 7,299     $ 2,273     $ 18,880     $ 28,452     $ 422,739     $ 451,191     $ 4,528  
                                                         

 
11

 

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

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 September 30, 2011 total includes approximately $4.9 million of loans that are current and paying under the terms of their existing loan agreement.


The following is a summary of non-accrual loans at September 30, 2011 and December 31, 2010:
 
 
September 30, 2011
 
December 31, 2010
Real Estate Secured
     
Residential 1-4 Family
                                                    $5,049
 
                                     $3,211
Multifamily
953
 
40
Construction and Land Loans
1,844
 
3,100
Commercial-Owner Occupied
6,399
 
4,525
Commercial- Non Owner Occupied
4,752
 
918
Second Mortgages
25
 
529
Equity Lines of Credit
-
 
-
Farmland
631
 
774
Secured (other) and Unsecured
     
Personal
66
 
60
Commercial
707
 
1,167
Agricultural
            -
 
        29
       
Total
$20,426
 
$14,353


 
 
12

 


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 Bank’s loan portfolio at September 30, 2011 and December 31, 2010: 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, 2011
Grade (1)
 
Residential 1-4
Family
   
Multifamily
   
Farmland
   
Construction, Land Loans
   
Commercial Real Estate- Owner Occupied
   
Commercial Real Estate Non-Owner Occupied
 
                                     
Quality
  $ 38,331     $ 1,236     $ 1,140     $ 4,098     $ 6,426     $ 1,806  
Satisfactory
    77,420       10,015       3,335       5,641       24,279       14,503  
Acceptable
    36,634       1,105       4,539       6,084       26,803       10,657  
Special Mention
    2,825       -       2,191       2,195       3,823       -  
Substandard
    16,709       1,879       500       5,262       13,639       9,439  
Doubtful
    -       -       -       -       -       -  
                                                 
     Total
  $ 171,919     $ 14,235     $ 11,705     $ 23,280     $ 74,970     $ 36,405  


Credit Risk Profile by Internally Assigned Grade as of December 31, 2010
Grade (1)
 
Residential
 1-4 Family
   
Multifamily
   
Farmland
   
Construction, Land Loans
   
Commercial Real Estate- Owner Occupied
   
Commercial Real Estate Non-Owner Occupied
 
                                     
Quality
  $ 40,371     $ 1,911     $ 977     $ 4,298     $ 7,102     $ 3,604  
Satisfactory
    80,759       9,258       4,399       7,355       26,055       16,729  
Acceptable
    36,411       1,806       4,285       5,585       27,878       13,013  
Special Mention
    4,778       946       178       2,346       5,430       304  
Substandard
    12,832       1,672       2,951       11,317       11,390       10,002  
Doubtful
    371       -       -       -       424       -  
                                                 
     Total
  $ 175,522     $ 15,593     $ 12,790     $ 30,901     $ 78,279     $ 43,652  

(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.  
 
 

 
13

 
 

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.
 
 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
 
 
·  
Liquidation of assets or the pledging of additional collateral.
 
    Credit Risk Profile based on payment activity as of  September 30, 2011:
   
Consumer - Non Real Estate
   
Equity Line of Credit / Second Mortgages
   
Commercial - Non Real Estate
   
Agricultural - Non Real Estate
 
                         
Performing
  $ 24,114     $ 22,855     $ 32,369     $ 2,731  
Nonperforming (>90 days past due)
    147       74       1,410       1  
                                 
     Total
  $ 24,261     $ 22,929     $ 33,779     $ 2,732  
                                 


Credit Risk Profile based on payment activity as of December 31, 2010:
   
Consumer - Non Real Estate
   
Equity Line of Credit / Second Mortgages
   
Commercial - Non Real Estate
   
Agricultural - Non Real Estate
 
                         
Performing
  $ 26,699     $ 23,619     $ 39,015     $ 2,751  
Nonperforming (>90 days past due)
    74       529       1,456       97  
                                 
     Total
  $ 26,773     $ 24,148     $ 40,471     $ 2,848  
                                 


The following tables reflect the Bank’s impaired loans at September 30, 2011 and December 31, 2010.

A loan is considered impaired when according to contractual terms the collection of interest and principal is in doubt. An allowance for loan loss is established on loans for which it is probable that the full collection of principal is in doubt.  The recorded investment represents the unpaid principal balance less any previously charged off amounts. The average recorded investment represents the “year to date” average recorded investment for each category listed.

 
 
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, 2011:
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With No Related Allowance
                             
Real Estate Secured
                             
Residential 1-4 family
  $ 8,671     $ 8,671     $ -     $ 8,061     $ 239  
Equity lines of credit
    -       -       -       -       -  
Multifamily
    926       926       -       483       48  
Farmland
    149       149       -       462       7  
Construction, Land Development, Other Land Loans
    2,383       2,383       -       3,118       84  
Commercial Real Estate- Owner Occupied
    9,655       10,053       -       7,577       125  
Commercial Real Estate- Non Owner Occupied
    3,501       3,501       -       3,504       172  
Second Mortgages
    507       507       -       604       19  
Non Real Estate Secured
                                       
Personal /Consumer
    27       27       -       24       2  
Business Commercial
    2,004       2,004       -       1,635       44  
Agricultural
    -       -       -       -       -  
Credit Cards
    -       -       -       -       -