10-Q 1 f10qhbi06302014.htm FORM 10-Q f10qhbi06302014.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 June 30, 2014

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

For the transition period from ____________ to _____________

Commission File Number:  0-27622

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


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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
7,684,401 shares of common stock, par value $0.625 per share,
outstanding as of August 14, 2014



 
1

 

Highlands Bankshares, Inc.

FORM 10-Q
For the Quarter Ended June 30, 2014

INDEX
   
PART I. FINANCIAL INFORMATION                                                                                                                      
PAGE
   
Item 1.  Financial Statements
 
   
Consolidated Balance Sheets
  at June 30, 2014 (Unaudited) and December 31, 2013
 
3
 
 
Consolidated Statements of Income (Unaudited)
  for the Three Months and Six Months Ended June 30, 2014 and 2013
4
   
 
Consolidated Statements of Comprehensive Income (Unaudited)
  for the Three Months and Six Months Ended June 30, 2014 and 2013
5
 
Consolidated Statements of Cash Flows (Unaudited)
  for the Six Months Ended June 30, 2014 and 2013
6
   
Consolidated Statements of Changes in
  Stockholders’ Equity (Unaudited) for the Three Months and Six Months
  Ended June 30, 2014 and 2013
7-8
   
Notes to Consolidated Financial Statements (Unaudited)
9-37
   
Item 2.  Management’s Discussion and Analysis of
              Financial Condition and Results of Operations
38-45
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk
45
   
Item 4.  Controls and Procedures
45
 
 
PART II.  OTHER INFORMATION
 
   
Item 1.  Legal Proceedings
45
   
Item 1A.  Risk Factors
46
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
46
   
Item 3.  Defaults Upon Senior Securities
46
   
Item 4.  Mine Safety Disclosures
46
   
Item 5.  Other Information
46
   
Item 6.  Exhibits
46
   
SIGNATURES AND CERTIFICATIONS
47


 
2

 

PART I.
FINANCIAL INFORMATION
ITEM 1.  Financial Statements

Consolidated Balance Sheets
(Amounts in thousands)
   
(Unaudited)
 June 30, 2014
   
(Note 1)
December 31, 2013
 
                                              ASSETS
           
Cash and due from banks
  $ 15,997     $ 16,965  
Federal funds sold
    67,375       67,030  
                 
   Total Cash and Cash Equivalents
    83,372       83,995  
                 
Investment securities available for sale (amortized cost $55,887 at June 30, 2014, $56,582 at December 31, 2013)
    55,640       55,318  
Other investments, at cost
    6,530       4,710  
Loans, net of allowance for loan losses of $5,673 at June 30, 2014, $6,825 at December 31, 2013
    399,917       396,961  
Premises and equipment, net
    20,025       20,188  
Deferred tax assets
    11,129       10,444  
Interest receivable
    2,275       2,171  
Bank owned life Insurance
    14,345       14,132  
Other real estate owned
    8,706       7,834  
Other assets
    3,825       2,559  
                 
    Total Assets
  $ 605,764     $ 598,312  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
LIABILITIES
               
                 
Deposits:
               
  Non-interest bearing
  $ 108,395     $ 107,328  
  Interest bearing
    372,050       380,946  
                 
    Total Deposits
    480,445       488,274  
                 
Interest, taxes and other liabilities
    2,749       2,595  
Other short-term borrowings
    20,050       23,500  
Long-term debt
    47,776       47,802  
Capital securities
    3,150       3,150  
                 
    Total Other Liabilities
    73,725       77,047  
                 
    Total Liabilities
    554,170       565,321  
                 
STOCKHOLDERS’ EQUITY
               
                 
Common stock (7,684 at June 30, 2014 and 5,011 at December 31, 2013 shares issued and outstanding)
    4,803       3,132  
 Preferred stock (2,048 shares issued and outstanding)
    4,096       -  
Additional paid-in capital
     18,541       7,783  
Retained earnings
    24,317       22,910  
Accumulated other comprehensive loss
    (163 )     (834 )
                 
  Total Stockholders’ Equity
    51,594       32,991  
                 
    Total Liabilities and Stockholders’ Equity
  $ 605,764     $ 598,312  
                 
See accompanying Notes to Consolidated Financial Statements

 
3

 


 


Consolidated Statements of Income
(Amounts in thousands, except per share data)
(Unaudited)
   
Six Months Ended
June 30, 2014
   
Six Months Ended
June 30, 2013
   
Three Months
Ended June 30, 2014
   
 
Three Months
Ended June 30, 2013
 
INTEREST INCOME
                       
Loans receivable and fees on loans
  $ 10,587     $ 10,802     $ 5,195     $ 5,399  
Securities available for sale:
                               
  Taxable
    414       361       192       158  
  Exempt from taxable income
    247       280       124       139  
Other investment income
    101       91       56       61  
Federal funds sold
    78       75       40       35  
                                 
    Total Interest Income
    11,427       11,609       5,607       5,792  
                                 
INTEREST EXPENSE
                               
Deposits
    1,303       1,529       640       744  
Other borrowed funds
    1,456       1,451       715       736  
                                 
    Total Interest Expense
    2,759       2,980       1,355       1,480  
                                 
    Net Interest Income
    8,668       8,629       4,252       4,312  
                                 
Provision for Loan Losses
    896       568       631       349  
                                 
    Net Interest Income after Provision for Loan Losses
    7,772       8,061       3,621       3,963  
                                 
NON-INTEREST INCOME
                               
Securities gains, losses, net
    -       (4 )     -       -  
Service charges on deposit accounts
    946       1,012       494       513  
Other service charges, commissions and fees
    852       802       453       395  
Other operating income
    361       374       212       209  
    Total Non-Interest Income
    2,159       2,184       1,159       1,117  
                                 
NON-INTEREST EXPENSE
                               
Salaries and employee benefits
    4,973       4,742       2,506       2,339  
Occupancy expense of bank premises
    576       601       296       298  
Furniture and equipment expense
    572       615       270       305  
Other operating expense
    2,661       2,656       1,472       1,305  
Foreclosed Assets – Write-down and operating expenses
    772       749       499       531  
    Total Non-Interest Expense
    9,554       9,363       5,043       4,778  
                                 
    Income (Loss) Before Income Taxes
    377       882       (263 )     302  
                                 
 
Income Tax Expense (Benefit)
    (1,030 )     (1,862 )     (1,169 )     (1,978 )
                                 
    Net Income
  $ 1,407     $ 2,744     $ 906     $ 2,280  
                                 
Basic Earnings Per Common Share – Weighted Average
  $ 0.23     $ 0.55     $ 0.13     $ 0..46  
                                 
Earnings Per Common Share – Assuming Dilution
  $ 0.17     $ 0.55     $ 0.10     $ 0.46  

See accompanying Notes to Consolidated Financial Statements





 
4

 



Consolidated Statements of Comprehensive Income
(Amounts in thousands)
(Unaudited)
   
Six Months Ended  
June 30, 2014
   
Six Months Ended
June 30, 2013
 
             
             
Net Income
  $ 1,407     $ 2,744  
                 
     Other Comprehensive Income
               
  Unrealized gains  (losses) on securities during  the period
    1,016       (1,384 )
  Less: reclassification adjustment for losses  included in net income
    -       4  
      Other Comprehensive Income (Loss), before tax
    1,016       (1,380 )
           Income tax expense (benefit) related to other
           comprehensive income
    345       (469 )
    Other Comprehensive Income (Loss)
    671       (911 )
Comprehensive Income
  $ 2,078     $ 1.833  
                 




   
Three Months Ended  June 30, 2014
   
Three Months Ended June 30, 2013
 
             
             
Net Income
  $ 906     $ 2,280  
                 
     Other Comprehensive Income
               
  Unrealized gains  (losses) on securities during  the period
    495       (1,239 )
  Less: reclassification adjustment for losses  included in net income
    -       -  
          Other Comprehensive Income (Loss), before tax
    495       (1,239 )
           Income tax expense (benefit) related to other
           comprehensive income
    168       (421 )
    Other Comprehensive Income (Loss)
    327       (818 )
Comprehensive Income
  $ 1,233     $ 1,462  
                 



See accompanying Notes to Consolidated Financial Statements














 
5

 



Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
   
Six Months Ended
   
Six Months Ended
 
   
June 30, 2014
   
June 30, 2013
 
CASH FLOWS FROM OPERATING  ACTIVITIES:
           
Net income
  $ 1,407     $ 2,744  
Adjustments to reconcile net income to net cash provided by operating activities
               
Provision for loan losses
    896       568  
Depreciation and amortization
    435       457  
Net realized (gains) losses on available for sale securities
    -       4  
Net amortization on securities
    269       388  
Amortization of capital issue costs
    7       3  
               (Increase) decrease in interest receivable
    (104 )     111  
Valuation adjustment of other real estate owned
    160       260  
Valuation adjustment of deferred tax assets
    (1,000 )     (2,000 )
Increase in other assets
    (1,274 )     (189 )
Increase in interest, taxes and other liabilities
    154       196  
                 
Net cash provided by operating activities
     950        2,542  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Securities available for sale:
               
       Proceeds from sale of securities
    -       1,321  
Proceeds from maturities of debt and equity securities
    3,870       5,176  
Purchase of debt and equity securities
    (3,445 )     (7,658 )
Purchases of other investments
    (1,820 )     220  
Net increase in loans
    (6,391 )     (12,027 )
Proceeds from sales of other real estate owned
    1,236       3,364  
Premises and equipment expenditures
    (242 )     (91 )
                 
Net cash used in investing activities
    (6,792 )     (9,695 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
        Issuance of Common Stock
    9,356       -  
        Issuance of Preferred Stock
    7,168       -  
Net decrease in time deposits
    (7,111 )     (11,443 )
Net increase (decrease) in demand, savings and other deposits
    (718 )     15,976  
Decrease in short-term borrowings
    (3,450 )     3,381  
Decrease in long-term debt
    (26 )     (3,472 )
                 
Net cash  provided by  financing activities
    5,219       4,442  
                 
Net  (decrease) in cash and cash equivalents
    (623 )     (2,711 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    83,995       81,208  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 83,372     $ 78,497  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash paid during the year for:
               
Interest
  $ 2,381     $ 2,885  
                 
     SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
               
Transfer of loans to other real estate owned
  $ 2,358     $ 849  
Loans originated from sales of other real estate owned
  $ 342     $ 952  


 
 
See accompanying Notes to Consolidated Financial Statements




 
6

 



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





Three Months Ended June 30, 2014
                     
Accumulated
   
                 
Additional
     
Other
 
Total
 
    Common Stock
 
    Preferred Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Stockholders’
 
Shares
 
 Par Value
 
Shares
 
 Par Value
 
Capital
 
Earnings
 
Income
 
Equity
                               
 
Balance, March 31, 2013
5,011
 
$    3,132
         
$    7,783
 
$   21,892
 
$       (1,964)
 
$    30,843
                               
 
Net income
-
 
-
         
-
 
2,280
 
-
 
2,280
                               
Other comprehensive loss
-
 
-
         
-
 
-
 
(818)
 
    (818)
                               
                               
 
Balance, June 30, 2013
    5,011
 
$    3,132
         
$    7,783
 
$    24,172
 
$        (2,782)
 
$    32,305
                               
 
Balance, December 31, 2013
5,011
 
$    3,132
         
$    7,783
 
$    23,411
 
$       (490)
 
$    33,836
                               
                               
Net income
-
 
-
         
-
 
906
 
-
 
906
                               
Common Stock Issuance
2,673
 
1,671
         
7,685
         
9,356
                               
 
Preferred Stock Issuance
       
 
2,048
 
 
4,096
 
3,073
         
7,169
                               
                               
                               
Other comprehensive income
-
 
-
         
-
 
-
 
327
 
327
                               
Balance, June 30, 2014
7,684
 
$    4,803
 
2,048
 
$4,096
 
$    18,541
 
$    24,317
 
$        (163)
 
$    51,594




 
7

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

 
Six Months Ended June 30, 2014
                     
Accumulated
   
                 
Additional
     
Other
 
Total
 
    Common Stock
 
    Preferred Stock
 
Paid-in
 
Retained
 
Comprehensive
 
Stockholders’
 
Shares
 
 Par Value
 
Shares
 
 Par Value
 
Capital
 
Earnings
 
Income
 
Equity
                               
 
Balance, December 31, 2012
5,011
 
$    3,132
         
$    7,783
 
$   21,428
 
$       (1,871)
 
$    30,472
                               
 
Net income
-
 
-
         
-
 
2,744
 
-
 
2,2744
                               
Other comprehensive loss
-
 
-
         
-
 
-
 
(911)
 
    (911)
                               
                               
 
Balance, June 30, 2013
    5,011
 
$    3,132
         
$    7,783
 
$    24,172
 
$        (2,782)
 
$    32,305
                               
 
Balance, December 31, 2013
5,011
 
$    3,132
         
$    7,783
 
$    22,910
 
$       (834)
 
$    32,911
                               
                               
Net income
-
 
-
         
-
 
1,407
 
-
 
1,407
                               
Common Stock Issuance
2,673
 
1,671
         
7,685
         
9,356
                               
 
Preferred Stock Issuance
       
 
2,048
 
 
4,096
 
3,073
         
7,169
                               
                               
                               
Other comprehensive income
-
 
-
         
-
 
-
 
671
 
671
                               
Balance, June 30, 2014
7,684
 
$    4,803
 
2,048
 
$4,096
 
$    18,541
 
$    24,317
 
$        (163)
 
$    51,594











See accompanying Notes to Consolidated Financial Statements




 


 
8

 




 
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”) include its wholly-owned subsidiary, Highlands Union Bank (the “Bank”).  The statements also include Highlands Union Insurance Services, Inc., Highlands Union Financial Services, Inc., and Blue Ridge Hospitality, LLC, which are wholly owned subsidiaries of the Bank. Blue Ridge Hospitality, LLC, was formed in June 2014 to hold and manage certain properties acquired by the Bank through foreclosure or deed in lieu of foreclosure. 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, 2013 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, 2013 (the “2013 Form 10-K”). The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the 2013 Form 10-K. The results of operations for the three month and six month periods ended June 30, 2014 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:

   
June 30, 2014
   
December 31, 2013
 
Real Estate Secured:
           
Residential 1-4 family
  $ 182,424     $ 175,860  
Multifamily
    21,168       20,592  
Construction and Land Loans
    18,383       18,509  
Commercial Real Estate, Owner Occupied
    71,349       71,459  
Commercial Real Estate, Non-owner occupied
    33,437       37,117  
Second mortgages
    7,549       7,934  
Equity lines of credit
    7,371       7,884  
Farmland
    9,019       9,322  
      350,700       348,677  
                 
Secured (other) and unsecured
               
Personal
    20,832       20,472  
Commercial
    31,394       31,575  
Agricultural
    2,923       3,376  
      55,149       55,423  
                 
Overdrafts
    376       304  
                 
      406,225       404,404  
Less:
               
  Allowance for loan losses
    5,673       6,825  
  Net deferred fees
    635       618  
      6,308       7,443  
                 
Loans, net
  $ 399,917     $ 396,961  



 
9

 




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 June 30, 2014:
 
   
30-59 Days Past Due
   
60-89 Days Past Due
   
Greater Than 90 Days
   
Total Past Due
   
Current
   
Total Financing Receivables
   
Recorded Investment
 > 90 Days and Accruing
 
                                           
Real Estate Secured
                                         
Residential 1-4 family
  $ 3,673     $ 1,817     $ 2,461     $ 7,951     $ 174,473     $ 182,424     $ -  
Equity lines of credit
    140       33       352       525       6,846       7,371       -  
Multifamily
    1,254       -       -       1,254       19,914       21,168       -  
Farmland
    -       277       129       406       8,613       9,019       -  
Construction, Land Development, Other Land Loans
    138       86       1,.601       1,824       16,559       18,383       -  
Commercial Real Estate- Owner Occupied
    1,736       1,272       1,394       4,402       66,947       71,349       -  
Commercial Real Estate- Non Owner Occupied
    -       1,547       337       1,884       31,553       33,437       -  
Second Mortgages
    198       54       95       347       7,202       7,549       -  
Non Real Estate Secured
                                                       
Personal
    453       132       248       833       20,375       21,208       11  
Commercial
    362       168       219       749       30,645       31,394       -  
Agricultural
    -       -       554       555       2,368       2,923       -  
                                                         
          Total
  $ 7,954     $ 5,386     $ 7,390     $ 20,730     $ 385,495     $ 406,225     $ 11  
                                                         


The following table is an analysis of past due loans as of December 31, 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
 
 $    3,219
 
 $    1,805
 
 $    2,699
 
 $    7,723
 
 $  168,137
 
 $  175,860
 
 $          -
Equity lines of credit
 
 -
 
 -
 
 318
 
 318
 
 7,566
 
 7,884
 
-
Multifamily
 
 -
 
97
 
 -
 
 97
 
 20,495
 
 20,592
 
-
Farmland
 
 38
 
 -
 
 129
 
 167
 
 9,155
 
 9,322
 
-
Construction,  Land Development, Other Land Loans
 
 303
 
 117
 
 1,615
 
 2,035
 
 16,474
 
 18,509
 
 -
Commercial Real Estate- Owner Occupied
 
 665
 
 26
 
 1,610
 
 2,301
 
 69,158
 
 71,459
 
 -
Commercial Real Estate- Non Owner Occupied
 
 234
 
 2,257
 
 637
 
 3,128
 
 33,989
 
 37,117
 
 -
Second Mortgages
 
 341
 
 3
 
 56
 
 400
 
 7,534
 
 7,934
 
 -
Non Real Estate Secured
                           
Personal
 
 357
 
 177
 
146
 
 680
 
 20,096
 
 20,776
 
 2
Commercial
 
 1,344
 
 121
 
 266
 
 1,731
 
 29,844
 
 31,575
 
 -
Agricultural
 
 29
 
 -
 
 -
 
 29
 
 3,347
 
 3,376
 
 -
                             
          Total
 
 $    6,530
 
 $    4,603
 
 $   7,476
 
 $   18,609
 
 $  385,795
 
 $  404,404
 
 $          2
                             
 
 
 
10

 

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 June 30, 2014 and December 31, 2013:
   
June 30, 2014
   
December 31, 2013
 
Real Estate Secured
           
Residential 1-4 Family
  $ 3,114     $ 2,890  
Multifamily
    -       -  
Construction and Land Loans
    1,655       1,694  
Commercial-Owner Occupied
    2,789       3,005  
Commercial- Non Owner Occupied
    337       2,429  
Second Mortgages
    95       92  
Equity Lines of Credit
    352       318  
Farmland
    129       146  
Secured (other) and Unsecured
               
Personal
    237       144  
Commercial
    219       266  
Agricultural
    555       -  
                 
Total
  $ 9,482     $ 10,984  







 





























 
11

 



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 June 30, 2014 and December 31, 2013.  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 June 30, 2014
Grade (1)
 
Residential 1-4 Family
   
Multifamily
   
Farmland
   
Construction, Land Loans
   
Commercial Real Estate- Owner Occupied
   
Commercial Real Estate Non-Owner Occupied
 
                                     
Quality
    31,431       -       500       3,233       4,669       1,428  
Satisfactory
    96,706       16,255       2,728       7,577       31,053       14,023  
Acceptable
    41,242       2,814       4,397       4,602       19,050       13,381  
Special Mention
    4,853       2,099       928       1,311       5,991       2,347  
Substandard
    8,192       -       466       1,660       10,586       2,258  
Doubtful
    -       -       -       -       -       -  
                                                 
     Total
  $ 182,424     $ 21,168     $ 9,019     $ 18,383     $ 71,349     $ 33,437  


Credit Risk Profile by Internally Assigned Grade as of December 31, 2013
Grade (1)
 
Residential 1-4 Family
   
Multifamily
   
Farmland
   
Construction, Land Loans
   
Commercial Real Estate- Owner Occupied
   
Commercial Real Estate Non-Owner Occupied
 
                                     
Quality
    33,137       -       823       3,425       5,831       1,495  
Satisfactory
    90,569       15,419       4,128       8,123       27,712       15,153  
Acceptable
    38,958       3,049       3,699       3,733       22,007       11,148  
Special Mention
    4,678       2,124       6       1,652       6,823       2,507  
Substandard
    8,518       -       666       1,576       8,620       6,814  
Doubtful
    -       -       -       -       466       -  
                                                 
     Total
  $ 175,860     $ 20,592     $ 9,322     $ 18,509     $ 71,459     $ 37,117  


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

 
12

 

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

 

 
13

 

Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
 
Doubtful -Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual status, and no definite repayment schedule exists.
 
However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are:
 
·  
Injection of capital;
 
·  
Alternative financing; and/or,
 
·  
Liquidation of assets or the pledging of additional collateral.
 
Credit Risk Profile based on payment activity as of  June 30, 2014
   
Consumer - Non Real Estate
 
Equity Line of Credit / Second Mortgages
 
Commercial - Non Real Estate
 
Agricultural - Non Real Estate
                 
Performing
 
$       20,960
 
$          14,473
 
$               31,175
 
$            2,368
Nonperforming (>90 days past due)
 
248
 
 447
 
219
 
555
                 
     Total
 
$       21,208
 
$        14,920
 
$              31,394
 
$           2,923


Credit Risk Profile based on payment activity as of  December 31, 2013
   
Consumer - Non Real Estate
 
Equity Line of Credit / Second Mortgages
 
Commercial - Non Real Estate
 
Agricultural - Non Real Estate
                 
Performing
 
$       20,630
 
$          15,444
 
$               31,309
 
$            3,376
Nonperforming (>90 days past due)
 
 146
 
 374
 
 266
 
 -
                 
     Total
 
$       20,776
 
$         15,818
 
$              31,575
 
$           3,376

















 
14

 













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 June 30, 2014:
 
 
June 30, 2014
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With No Related Allowance
                   
Real Estate Secured
                   
Residential 1-4 family
 
$     5,395
 
$     5,395
 
$          -
 
$     5,719
 
$       57
Equity lines of credit
 
269
 
269
 
-
 
317
 
2
Multifamily
 
-
 
-
 
-
 
-
 
-
Farmland
 
479
 
479
 
-
 
481
 
9
Construction, Land Development, Other Land Loans
 
1,678
 
1,678
 
-
 
1,686
 
3
Commercial Real Estate- Owner Occupied
 
7,834
 
7,834
 
-
 
6,614
 
173
Commercial Real Estate- Non Owner Occupied
 
262
 
262
 
-
 
3,358
 
-
Second Mortgages
 
148
 
148
 
-
 
105
 
3
Non Real Estate Secured
                   
Personal /Consumer
 
50
 
50
 
-
 
52
 
1
Commercial
 
250
 
250
 
-
 
173
 
7
Agricultural
 
-
 
-
 
-
 
-
 
-
                     
          Total
 
$    16,365
 
$    16,365
 
$          -
 
$   18,505
 
$       255



 
 
June 30, 2014
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With an Allowance Recorded
                   
Real Estate Secured
                   
Residential 1-4 family
 
$     2,866
 
$     2,866
 
$       530
 
$     2,946
 
$       59
Equity lines of credit
 
162
 
162
 
162
 
100
 
-
Multifamily
 
-
 
-
 
-
 
-
 
-
Farmland
 
-
 
-
 
-
 
100
 
-
Construction, Land Development, Other Land Loans
 
-
 
-
 
-
 
-
 
-
Commercial Real Estate- Owner Occupied
 
2,751
 
2,851
 
308
 
3,140
 
35
Commercial Real Estate- Non Owner Occupied
 
1,995
 
2,145
 
397
 
3,288
 
35
Second Mortgages
 
-
 
-
 
-
 
28
 
-
Non Real Estate Secured
                   
Personal /Consumer
 
255
 
255
 
164
 
194
 
3
Commercial
 
578
 
578
 
363
 
751
 
13
Agricultural
 
563
 
563
 
              64
 
372
 
-
                     
          Total
 
$    9,170
 
$    9,420
 
$     1,988
 
$    10,919
 
$       145


 
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 December 31, 2013:
 
 
December 31, 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
 
$     6,042
 
$     6,042
 
$          -
 
$     6,300
 
$       198
Equity lines of credit
 
364
 
364
 
-
 
182
 
6
Multifamily
 
-
 
-
 
-
 
-
 
-
Farmland
 
483
 
483
 
-
 
391
 
11
Construction, Land Development, Other Land Loans
 
1,694
 
1,694
 
-
 
1,677
 
1
Commercial Real Estate- Owner Occupied
 
5,393
 
5,393
 
-
 
5,201
 
173
Commercial Real Estate- Non Owner Occupied
 
6,454
 
6,454
 
-
 
4,943
 
250
Second Mortgages
 
62
 
62
 
-
 
191
 
3
Non Real Estate Secured
                   
Personal
 
53
 
53
 
-
 
31
 
3
Commercial
 
96
 
96
 
-
 
82
 
5
Agricultural
 
-
 
-
 
-
 
10
 
-
                     
          Total
 
$    20,641
 
$    20,641
 
$          -
 
$   19,008
 
$       650


 
 
December 31, 2013
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With an Allowance Recorded
                   
Real Estate Secured
                   
Residential 1-4 family
 
$     3,026
 
$     3,026
 
$       394
 
$     3,756
 
$       145
Equity lines of credit
 
38
 
38
 
38
 
19
 
1
Multifamily
 
-
 
-
 
-
 
202
 
-
Farmland
 
200
 
200
 
25
 
201
 
8
Construction, Land Development, Other Land Loans
 
-
 
-
 
-
 
-
 
-
Commercial Real Estate- Owner Occupied
 
3,528
 
3,528
 
630
 
3,113
 
72
Commercial Real Estate- Non Owner Occupied
 
4,581
 
4,581
 
1,230
 
3,788
 
93
Second Mortgages
 
56
 
56
 
45
 
28
 
1
Non Real Estate Secured
                   
Personal
 
133
 
133
 
84
 
77
 
6
Commercial
 
924
 
924
 
695
 
791
 
34
Agricultural
 
181
 
181
 
56
 
448
 
4
                     
          Total
 
$    12,667
 
$    12,667
 
$     3,197
 
$    12,423
 
$       364












 
16

 

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


The following tables present the balance in the allowance for loan losses and the recorded investment in loans by loan category and is segregated by impairment
evaluation method as of June 30, 2014 and June 30, 2013.

Six  months ended June 30, 2014
 
Residential1-4 Family
   
Multifamily
   
Construction and Land Loans
   
Commercial R./E Owner Occupied
   
Commercial R/E Non-Owner Occupied
   
Second Mortgages
   
Equity Line of Credit
   
Farmland
   
Personal and Overdrafts
   
Commercial and Agricultural
   
Unallocated
   
Total
 
Allowance for Credit Losses:
                                                                       
Beginning Balance December 31,  2013
  $ 975     $ 143     $ 230     $ 1,029     $ 1,415     $ 153     $ 50     $ 65     $ 483