10-Q 1 f10qhbi093013.htm FORM 10-Q f10qhbi093013.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, 2013

[   ] 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 o

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 o

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  o   Accelerated Filer  o   Non-Accelerated Filer o  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). Yeso  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 4, 2013
 

 


 
 

 

Highlands Bankshares, Inc.

FORM 10-Q
For the Quarter Ended September 30, 2013

INDEX
   
PART I. FINANCIAL INFORMATION                                                                                                                      
PAGE
   
Item 1.  Financial Statements
 
   
Consolidated Balance Sheets
  at September 30, 2013 (Unaudited) and December 31, 2012
3
 
 
Consolidated Statements of Income (Unaudited)
  for the Three Months and Nine Months Ended September 30, 2013 and 2012
4
   
Consolidated Statements of Comprehensive Income (Unaudited)
  for the Three Months and Nine Months Ended September 30, 2013 and 2012
5
Consolidated Statements of Cash Flows (Unaudited)
  for the  Nine Months Ended September 30, 2013 and 2012
6
   
Consolidated Statements of Changes in
  Stockholders’ Equity (Unaudited) for the Three Months and Nine Months
  Ended September 30, 2013 and 2012
7
   
Notes to Consolidated Financial Statements (Unaudited)
8-38
   
Item 2. Management’s Discussion and Analysis of
              Financial Condition and Results of Operations
39-47
   
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

 

PART I.
FINANCIAL INFORMATION
 ITEM 1.  Financial Statements

Consolidated Balance Sheets
(Amounts in thousands)
   
(Unaudited)
September 30, 2013
   
(Note 1)
December 31, 2012
 
                                              ASSETS
           
Cash and due from banks
  $ 17,657     $ 15,220  
Federal funds sold
    58,578       65,988  
                 
   Total Cash and Cash Equivalents
    76,235       81,208  
                 
Investment securities available for sale  (amortized cost $61,722 at  Sept. 30, 2013, $60,234 at December 31, 2012)
    57,353       57,400  
Other investments, at cost
    4,710       4,930  
Loans, net of allowance for loan losses of $7,025 at Sept. 30, 2012, $7,449 at December 31, 2012
    393,126       383,049  
Premises and equipment, net
    20,254       21,176  
Land held for sale
    1,106       -  
Deferred tax assets
    11,134       8,298  
Interest receivable
    2,312       2,314  
Bank owned life Insurance
    14,024       13,689  
Other real estate owned, net
    13,051       16,639  
Other assets
    3,341       3,793  
                 
    Total Assets
  $ 596,646     $ 592,496  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
LIABILITIES
               
Deposits:
               
  Non-interest bearing
  $ 107,958     $ 105,960  
  Interest bearing
    380,208       379,380  
                 
    Total Deposits
    488,166       485,340  
                 
Interest, taxes and other liabilities
    2,446       2,066  
Other short-term borrowings
    23,525       20,170  
Long-term debt
    47,815       51,298  
Capital securities
    3,150       3,150  
                 
    Total Other Liabilities
    76,936       76,684  
                 
    Total Liabilities
    565,102       562,024  
                 
STOCKHOLDERS’ EQUITY
               
                 
Common stock (5,011 shares issued and outstanding)
    3,132       3,132  
Additional paid-in capital
    7,783       7,783  
Retained earnings
    23,514       21,428  
Accumulated other comprehensive income (loss)
    (2,885 )     (1,871 )
                 
  Total Stockholders’ Equity
    31.544       30,472  
                 
    Total Liabilities and Stockholders’ Equity
  $ 596,646     $ 592,496  
                 
See accompanying Notes to Consolidated Financial Statements

 
3

 

Consolidated Statements of Income
(Amounts in thousands, except per share data)
(Unaudited)
   
Nine Months Ended September 30, 2013
   
Nine Months Ended September 30, 2012
   
Three Months
Ended
 September 30, 2013
   
Three Months
Ended
September 30, 2012
 
INTEREST INCOME
                       
Loans receivable and fees on loans
  $ 16,186     $ 17,712     $ 5,384     $ 5,728  
Securities available for sale:
                               
  Taxable
    534       679       173       210  
  Exempt from taxable income
    418       532       138       155  
Other investment income
    122       73       31       29  
Federal funds sold
    110       109       35       33  
                                 
    Total Interest Income
    17,370       19,105       5,761       6,155  
                                 
INTEREST EXPENSE
                               
Deposits
    2,255       3,360       726       967  
Other borrowed funds
    2,178       2,529       727       824  
                                 
    Total Interest Expense
    4,433       5,889       1,453       1,791  
                                 
    Net Interest Income
    12,937       13,216       4,308       4,364  
                                 
Provision for Loan Losses
    1,120       857       552       236  
                                 
    Net Interest Income after Provision for Loan Losses
    11,817       12,359       3,756       4,128  
                                 
NON-INTEREST INCOME
                               
Securities gains, losses, net
    (4 )     663       -       458  
Service charges on deposit accounts
    1,545       1,516       533       516  
Other service charges, commissions and fees
    1,248       1,357       446       382  
Other operating income
    533       643       159       233  
Other than temporary impairment
    -       (167 )     --       --  
    Total Non-Interest Income
    3,322       4,012       1,138       1,589  
                                 
NON-INTEREST EXPENSE
                               
Salaries and employee benefits
    7,140       7,025       2,398       2,358  
Occupancy expense of bank premises
    902       896       301       300  
Furniture and equipment expense
    910       936       295       292  
Other operating expense
    4,034       4,106       1,378       1,303  
Foreclosed Assets – Loss on Sale / Write-down /Expenses
    2,381       1,039       1,632       410  
    Total Non-Interest Expense
    15,367       14,002       6,004       4,663  
                                 
    Income (Loss) Before Income Taxes
    (228 )     2,369       (1,110 )     1,054  
                                 
Income Tax Expense (Benefit)
    (2,314 )     519       (452 )     272  
                                 
    Net Income (Loss)
  $ 2,086     $ 1,850     $ (658 )   $ 782  
                                 
Basic Earnings  (Loss) Per Common Share – Weighted Average
  $ 0.42     $ 0.37     $ (0.13 )   $ 0.16  
                                 
Earnings (Loss)  Per Common Share – Assuming Dilution
  $ 0.42     $ 0.37     $ (0.13 )   $ 0.16  

See accompanying Notes to Consolidated Financial Statements


 
4

 

Consolidated Statements of Comprehensive Income
(Amounts in thousands)
(Unaudited)

   
Nine Months Ended 
September 30, 2013
   
Nine Months Ended
September 30, 2012
 
             
             
Net Income
  $ 2,086     $ 1,850  
                 
     Other Comprehensive Income
               
  Unrealized gains (losses) on securities during  the period
    (1,537 )     1,148  
  Less: reclassification adjustment for (gains) and losses included in net income
    4       (663 )
          Other Comprehensive Income (Loss), before tax
    (1,533 )     485  
           Income tax expense (benefit) related to other
           comprehensive income
    (519 )     165  
    Other Comprehensive Income (Loss)
    (1,014 )     320  
Comprehensive Income
  $ 1.072     $ 2,170  
                 




   
Three Months Ended 
September 30, 2013
   
Three Months Ended
September 30, 2012
 
             
             
Net Income (Loss)
  $ (658 )   $ 782  
                 
     Other Comprehensive Income
               
  Unrealized gains (losses) on securities during  the period
    (156 )     205  
  Less: reclassification adjustment for  (gains) included in net income
    -       (458 )
          Other Comprehensive Income (Loss), before tax
    (156 )     (253 )
           Income tax expense (benefit) related to other
           comprehensive income
    (53 )     (86 )
    Other Comprehensive Income (Loss)
    (103 )     (167 )
Comprehensive Income
  $ (761 )   $ 615  
                 

See accompanying Notes to Consolidated Financial Statements



 
5

 
 
Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
   
Nine Months Ended
   
Nine Months Ended
 
   
September 30, 2013
   
September 30, 2012
 
CASH FLOWS FROM OPERATING  ACTIVITIES:
           
Net income
  $ 2,086     $ 1,850  
Adjustments to reconcile net income to net cash provided by operating activities
               
Provision for loan losses
    1,120       857  
Depreciation and amortization
    676       744  
Net realized (gains) losses on available for sale securities
    4       (663 )
Net amortization on securities
    586       536  
             Other than temporary impairment charge
    -       167  
Amortization of capital issue costs
    4       4  
            (Increase) decrease in interest receivable
    2       (100 )
Valuation adjustment of other real estate owned
    1,645       243  
Valuation adjustment of deferred tax assets
    (2,000 )     -  
Increase in other assets
    (213 )     (234 )
Increase (decrease) in interest, taxes and other liabilities
    380       (357 )
                 
Net cash provided by operating activities
     4,290        3,047  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Securities available for sale:
               
       Proceeds from sale of securities
    1,321       11.557  
Proceeds from maturities of debt and equity securities
    8,366       17,737  
Purchase of debt and equity securities
    (11,765 )     (24.217 )
Redemption of other investments
    220       377  
Net (increase) decrease in loans
    (14,769 )     1,387  
Proceeds from sales of other real estate owned
    5,514       4,970  
Premises and equipment expenditures
    (848 )     (263 )
                 
Net cash provided by (used in) investing activities
    (11,961 )     11,548  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net decrease in time deposits
    (16,696 )     (43,984 )
Net increase in demand, savings and other deposits
    19,522       20,257  
Increase (decrease)  in short-term borrowings
    3,355       (37,501 )
Increase (decrease) in long-term debt
    (3,483 )     37,372  
                 
Net cash provided by (used in) financing activities
    2,698       (23,856 )
                 
Net  (decrease) in cash and cash equivalents
    (4,973 )     (9,261 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    81,208       86,075  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 76,235     $ 76,814  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash paid during the year for:
               
Interest
  $ 4,303     $ 5,807  
                 
       SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
               
Transfer of loans to other real estate owned
  $ 3,572     $ 6,501  
Loans originated from sales of other real estate owned
  $ 1,751     $ 1,338  

See accompanying Notes to Consolidated Financial Statements

 
6

 

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, 2012
    5,011     $ 3,132     $ 7,783     $ 20,474     $ (1,572 )   $ 29,817  
                                                 
Net income
    -       -       -       782       -       782  
                                                 
Other comprehensive income (loss)
    -       -       -       -       (167 )     (167 )
                                                 
Balance, September  30, 2012
    5,011     $ 3,132     $ 7,783     $ 21,256     $ (1,739 )   $ 30,432  
                                                 
Balance, June 30, 2013
    5,011     $ 3,132     $ 7,783     $ 24,172     $ (2,782 )   $ 32,305  
                                                 
Net income / (loss)
    -       -       -       (658 )     -       (658 )
                                                 
Other comprehensive income (loss)
    -       -       -       -       (103 )     (103 )
                                                 
                                                 
Balance, September  30, 2013
    5,011     $ 3,132     $ 7,783     $ 23,514     $ (2,885 )   $ 31,544  
                                                 
                                                 


                           
Accumulated
       
               
Additional
         
Other
   
Total
 
   
Common Stock
   
Paid-in
   
Retained
   
Comprehensive
   
Stockholders’
 
   
Shares
   
Par Value
   
Capital
   
Earnings
   
Income
   
Equity
 
                                     
Balance, December 31, 2011
    5,011     $ 3,132     $ 7,783     $ 19,406     $ (2,059 )   $ 28,262  
                                                 
Net income
    -       -       -       1,850       -       1,850  
                                                 
Other comprehensive income
    -       -       -       -       320       320  
                                                 
                                                 
Balance, September 30, 2012
    5,011     $ 3,132     $ 7,783     $ 21,256     $ (1,739 )   $ 30,432  
                                                 
Balance, December 31, 2012
    5,011     $ 3,132     $ 7,783     $ 21,428     $ (1,871 )   $ 30,472  
                                                 
Net income
    -       -       -       2,086       -       2,086  
                                                 
Other comprehensive income (loss)
    -       -       -       -       (1,014 )     (1,014 )
                                                 
                                                 
Balance, September 30, 2013
    5,011     $ 3,132     $ 7,783     $ 23,514     $ (2,885 )   $ 31,544  
                                                 
                                                 

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, 2012 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, 2012 (the “2012 Form 10-K”). The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the 2012 Form 10-K. The results of operations for the three month and nine month periods ended September 30, 2013 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:

   
Sept. 30, 2013
   
December 31, 2012
 
Real Estate Secured:
           
Residential 1-4 family
  $ 174,971     $ 167,777  
Multifamily
    19,768       17,348  
Construction and Land Loans
    17,620       19,161  
Commercial, Owner Occupied
    67,679       64,504  
Commercial, Non-owner occupied
    37,329       35,536  
Second mortgages
    8,200       9,298  
Equity lines of credit
    8,167       8,287  
Farmland
    10,728       11,180  
      344,462       333,091  
                 
Secured (other) and unsecured
               
Personal
    21,634       22,358  
Commercial
    31,454       31,927  
Agricultural
    2,964       3,372  
      56,052       57,657  
                 
Overdrafts
    213       297  
                 
      400,727       391,045  
Less:
               
  Allowance for loan losses
    7,025       7,449  
  Net deferred fees
    576       547  
      7,601       7,996  
                 
Loans, net
  $ 393,126     $ 383,049  



 
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, 2013:
   
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
  $ 2,666     $ 470     $ 3,390     $ 6,526     $ 168,445     $ 174,971     $ -  
Equity lines of credit
    -       12       282       294       7,873       8,167       -  
Multifamily
    -       -       -       -       19,768       19,768       -  
Farmland
    102       -       130       232       10,496       10,728       -  
Construction, Land Development, Other Land Loans
    184       94       1,576       1,854       15,766       17,620       -  
Commercial Real Estate- Owner Occupied
    -       938       1,610       2,548       65,131       67,679       -  
Commercial Real Estate- Non Owner Occupied
    921       375       262       1,558       35,771       37,329       -  
Second Mortgages
    99       276       50       425       7,775       8,200       -  
Non Real Estate Secured
                                                       
Personal
    234       77       170       481       21,366       21,847       13  
Commercial
    193       175       412       780       30,674       31,454       -  
Agricultural
    -       -       -       -       2,964       2,964       -  
                                                         
          Total
  $ 4,399     $ 2,417     $ 7,882     $ 14,698     $ 386,029     $ 400,727     $ 13  
                                                         

The following table is an analysis of past due loans as of  December 31, 2012:
   
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
  $ 4,894     $ 956     $ 4,029     $ 9,879     $ 157,898     $ 167,777     $ -  
Equity lines of credit
    -       -       -       -       8,287       8,287       -  
Multifamily
    -       -       -       -       17,348       17,348       -  
Farmland
    133       28       129       290       10,890       11,180       -  
Construction,  Land Development, Other Land Loans
    209       78       1,953       2,240       16,921       19,161       -  
Commercial Real Estate- Owner Occupied
    221       21       2,888       3,130       61,374       64,504       -  
Commercial Real Estate- Non Owner Occupied
    239       2,115       290       2,644       32,892       35,536       -  
Second Mortgages
    374       9       495       878       8,420       9,298       -  
Non Real Estate Secured
                                                       
Personal
    307       155       56       518       22,137       22,655       6  
Commercial
    402       205       526       1,133       30,794       31,927       -  
Agricultural
    3       -       -       3       3,369       3,372       -  
                                                         
          Total
  $ 6,782     $ 3,567     $ 10,366     $ 20,715     $ 370,330     $ 391,045     $ 6  
                                                         


 
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, 2013 and December 31, 2012:
 
   
September 30, 2013
   
December 31, 2012
 
Real Estate Secured
           
Residential 1-4 Family
  $ 3,970     $ 4,213  
Multifamily
    -       -  
Construction and Land Loans
    1,576       1,953  
Commercial-Owner Occupied
    1,844       2,888  
Commercial- Non Owner Occupied
    1,828       290  
Second Mortgages
    86       495  
Equity Lines of Credit
    282       -  
Farmland
    152       129  
Secured (other) and Unsecured
               
Personal
    158       50  
Commercial
    412       526  
Agricultural
    -       -  
                 
Total
  $ 10,308     $ 10,544  


The September 30, 2013 total above includes approximately $2.4 million of loans that are current and paying under the terms of their existing loan agreement but included in non-accrual per regulatory guidance.
 
 
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, 2013 and December 31, 2012. 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, 2013
Grade (1)
 
Residential 1-4 Family
   
Multifamily
   
Farmland
   
Construction, Land Loans
   
Commercial Real Estate- Owner Occupied
   
Commercial Real Estate Non-Owner Occupied
 
                                     
Quality
    33,415       -       762       3,313       4,736       1,580  
Satisfactory
    85,275       15,453       4,233       8,212       26,197       15,006  
Acceptable
    41,751       3,048       3,487       2,828       20,995       10,985  
Special Mention
    5,666       1,267       1,813       1,611       6,664       3,899  
Substandard
    8,864       -       433       1,656       9,087       5,859  
Doubtful
    -       -       -       -       -       -  
                                                 
     Total
  $ 174,971     $ 19,768     $ 10,728     $ 17,620     $ 67,679     $ 37,329  

Credit Risk Profile by Internally Assigned Grade as of December 31, 2012
Grade (1)
 
Residential 1-4 Family
   
Multifamily
   
Farmland
   
Construction, Land Loans
   
Commercial Real Estate- Owner Occupied
   
Commercial Real Estate Non-Owner Occupied
 
                                     
Quality
    34,201       994       1,001       3,768       5,016       1,168  
Satisfactory
    81,500       12,328       3,589       5,765       25,485       14,539  
Acceptable
    35,202       2,731       6,078       6,059       19,683       11,048  
Special Mention
    4,481       890       9       1,698       5,686       2,353  
Substandard
    12,393       405       503       1,871       8,634       6,428  
Doubtful
    -       -       -       -       -       -  
                                                 
     Total
  $ 167,777     $ 17,348     $ 11,180     $ 19,161     $ 64,504     $ 35,536  

 
(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.
 

 
11

 

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

 
12

 

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.
 
Credit Risk Profile based on payment activity as of  September 30, 2013:
   
Consumer - Non Real Estate
   
Equity Line of Credit / Second Mortgages
   
Commercial - Non Real Estate
   
Agricultural - Non Real Estate
 
                         
Performing
  $ 21,676     $ 15,999     $ 31,043     $ 2,964  
Nonperforming (>90 days past due)
    171       368       411       -  
                                 
     Total
  $ 21,847     $ 16,367     $ 31,454     $ 2,964  
                                 

Credit Risk Profile based on payment activity as of December 31, 2012:
   
Consumer - Non Real Estate
   
Equity Line of Credit /Jr. liens
   
Commercial - Non Real Estate
   
Agricultural - Non Real Estate
 
                         
Performing
  $ 22,599     $ 17,090     $ 31,401     $ 3,372  
Nonperforming (>90 days past due)
    56       495       526       -  
                                 
     Total
  $ 22,655     $ 17,585     $ 31,927     $ 3,372  
                                 

 
13

 


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, 2013:
   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With No Related Allowance
                             
Real Estate Secured
                             
Residential 1-4 family
  $ 6,805     $ 6,805     $ -     $ 6,682     $ 138  
Equity lines of credit
    221       221       -       110       5  
Multifamily
    -       -       -       -       -  
Farmland
    231       231       -       265       4  
Construction, Land Development, Other Land Loans
    1,625       1,625       -       1,642       3  
Commercial Real Estate- Owner Occupied
    6,067       6,067       -       5,538       194  
Commercial Real Estate- Non Owner Occupied
    7,894       7,894       -       5,663       199  
Second Mortgages
    212       212       -       266       2  
Non Real Estate Secured
                                       
Personal /Consumer
    66       66       -       37       3  
Business Commercial
    409       409       -       238       21  
Agricultural
    600       600       -       310       3  
                                         
          Total
  $ 24,130     $ 24,130     $ -     $ 20,751     $ 572  

 
 
 
14

 

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

   
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With an Allowance Recorded
                             
Real Estate Secured
                             
Residential 1-4 family
  $ 3,552     $ 3,552     $ 615     $ 4,019     $ 113  
Equity lines of credit
    13       13       13       7       -  
Multifamily
    -       -       -       203       -  
Farmland
    201       201       9       202       5  
Construction, Land Development, Other Land Loans
    -       -       -       -       -  
Commercial Real Estate- Owner Occupied
    2,854       2,854       339       2,776       100  
Commercial Real Estate- Non Owner Occupied
    4,220       4,220       1,185       3,607       44  
Second Mortgages
    49       49       38       27       -  
Non Real Estate Secured
                                       
Personal /Consumer
    173       173       116       97       7  
Business Commercial
    1,006       1,006       637       832       17  
 
Agricultural
    -       -       -       358       -