10-Q 1 hbi10q08122016.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, 2016

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

For the transition period from ____________ to _____________

Commission File Number:  0-27622

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


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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
8,112,562 shares of common stock, par value $0.625 per share, outstanding as of August 12, 2016
 
 
 


High/lands Bankshares, Inc.

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

 
INDEX
 
 
PART I. FINANCIAL INFORMATION
PAGE
   
Item 1.  Financial Statements
 
   
   Consolidated Balance Sheets  at June 30, 2016 (Unaudited) and December 31, 2015
3
   
   Consolidated Statements of Income (Unaudited)  for the Three Months and Six Months Ended June 30, 2016 and 2015
4
   
   Consolidated Statements of   Comprehensive Income (Unaudited) for the Three Months and Six Months Ended June 30, 2016 and 2015
5
   
   Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2016 and 2015
6
   
   Consolidated Statements of Changes in Stockholders' Equity (Unaudited) for the Three Months and Six Months Ended June 30, 2016 and 2015
7-8
   
   Notes to Consolidated Financial Statements (Unaudited)
9-39
   
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
40-45
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk
45
   
Item 4.  Controls and Procedures
45
   
PART II.  OTHER INFORMATION
 
   
Item 1.  Legal Proceedings
46
   
Item 1A. Risk Factors
46
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
46
   
Item 3.  Defaults Upon Senior Securities
46
   
Item 4.  Mine Safety Disclosures
46
   
Item 5.  Other Information
46
   
Item 6.  Exhibits
46
   
SIGNATURES AND CERTIFICATIONS
47
 
 
 
 

 
2


FINANCIAL IINFORMATION
 
ITEM 1.  Financial Statements
Consolidated Balance Sheets
(Amounts in thousands)
   
(Unaudited)
June 30, 2016
   
(Note 1)
December 31, 2015
 
ASSETS
           
Cash and due from banks
 
$
15,464
   
$
26,713
 
Federal funds sold
   
12,795
     
20,178
 
                 
   Total Cash and Cash Equivalents
   
28,259
     
46,891
 
                 
Investment securities available for sale (amortized cost $97,513 at June 30, 2016, $80,239 at December 31, 2015)
   
98,732
     
79,860
 
Other investments, at cost
   
6,611
     
6,592
 
Loans held for sale
   
1,637
     
-
 
Loans, net of allowance for loan losses of  $5,202 at June 30, 2016, $5,654 at December 31, 2015
   
411,738
     
426,429
 
Premises and equipment, net
   
20,243
     
20,612
 
Deferred tax assets
   
11,840
     
12,126
 
Interest receivable
   
1,676
     
1,761
 
Bank owned life Insurance
   
14,120
     
14,585
 
Other real estate owned
   
4,898
     
5,694
 
Other assets
   
2,588
     
2,432
 
                 
    Total Assets
 
$
602,342
   
$
616,982
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
LIABILITIES
               
                 
Deposits:
               
  Non-interest bearing
 
$
121,933
   
$
129,634
 
  Interest bearing
   
356,092
     
365,278
 
                 
    Total Deposits
   
478,025
     
494,912
 
                 
Interest, taxes and other liabilities
   
1,017
     
761
 
Other short-term borrowings
   
20,051
     
20,052
 
Long-term debt
   
47,673
     
47,698
 
Total Other Liabilities
   
68,741
     
68,511
 
                 
Total Liabilities
   
546,766
     
563,422
 
                 
STOCKHOLDERS' EQUITY
               
                 
Common stock (8,113 and 7,851) shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively)
   
5,070
     
4,907
 
Preferred Stock (2,092 shares issued and outstanding)
   
4,184
     
4,184
 
Additional paid-in capital
   
18,891
     
17,944
 
Retained earnings
   
26,626
     
26,773
 
Accumulated other comprehensive income
   
805
     
(248)
 
                 
 Total Stockholders' Equity
   
55,576
     
53,560
 
                 
 Total Liabilities and Stockholders' Equity
 
$
602,342
   
$
616,982
 
 
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, 2016
   
Six Months Ended June 30, 2015
   
Three Months
Ended June 30, 2016
   
Three Months
Ended June 30, 2015
 
INTEREST INCOME
                       
Loans receivable and fees on loans
 
$
10,754
   
$
10,574
   
$
5,276
   
$
5,276
 
Securities available for sale:
                               
   Taxable
   
644
     
592
     
347
     
279
 
   Exempt from taxable income
   
158
     
197
     
80
     
89
 
Other investment income
   
112
     
113
     
55
     
61
 
Federal funds sold
   
49
     
46
     
23
     
25
 
                                 
Total Interest Income
   
11,717
     
11,522
     
5,781
     
5,730
 
                                 
INTEREST EXPENSE
                               
Deposits
   
899
     
1,117
     
446
     
547
 
Other borrowed funds
   
1,183
     
1,176
     
591
     
591
 
                                 
Total Interest Expense
   
2,082
     
2,293
     
1,037
     
1,138
 
                                 
Net Interest Income
   
9,635
     
9,229
     
4,744
     
4,592
 
                                 
Provision for Loan Losses
   
1,313
     
482
     
1,089
     
382
 
                                 
Net Interest Income after Provision for Loan Losses
   
8,322
     
8,747
     
3,655
     
4,210
 
                                 
NON-INTEREST INCOME
                               
Securities gains, losses, net
   
47
     
16
     
12
     
-
 
Service charges on deposit accounts
   
866
     
821
     
468
     
430
 
Other service charges, commissions and fees
   
796
     
829
     
355
     
494
 
Other operating income
   
460
     
281
     
176
     
157
 
Total Non-Interest Income
   
2,169
     
1,947
     
1,011
     
1,081
 
                                 
NON-INTEREST EXPENSE
                               
Salaries and employee benefits
   
5,955
     
5,013
     
3,036
     
2,567
 
Occupancy expense of bank premises
   
650
     
594
     
337
     
285
 
Furniture and equipment expense
   
736
     
676
     
385
     
336
 
Other operating expense
   
2,705
     
2,732
     
1,403
     
1,415
 
Foreclosed Assets – Write-down and operating expenses
   
846
     
823
     
627
     
589
 
Total Non-Interest Expense
   
10,892
     
9,838
     
5,788
     
5,192
 
                                 
Income Before Income Taxes
   
(401)
 
   
856
     
(1,122)
 
   
99
 
                                 
 
Income Tax Benefit
   
(257)
 
   
(858)
 
   
(448)
 
   
(1,035)
 
                                 
Net Income
 
$
(144)
 
 
$
1,714
   
$
(674)
 
 
$
1,134
 
                                 
Basic Earnings Per Common Share – Weighted Average
 
$
(0.02)
 
 
$
0.22
   
$
(0.08)
 
 
$
0.14
 
                                 
Earnings Per Common Share – Assuming Dilution
 
$
(0.02)
 
 
$
0.17
   
$
(0.08)
 
 
$
0.11
 

See accompanying Notes to Consolidated Financial Statements



4

 


Consolidated Statements of Comprehensive Income
(Amounts in thousands)
(Unaudited)
   
Six Months Ended June 30, 2016
   
Six Months Ended June 30, 2015
 
             
             
Net Income (loss)
 
$
(144)
 
 
$
1,714
 
                 
 Other Comprehensive Income
               
Unrealized gains (losses) on securities during  the period
   
1,643
     
(258)
 
Less: reclassification adjustment for gains included in net income
   
(47)
 
   
(16)
 
          Other Comprehensive Income (Loss), before tax
   
1,596
     
(274
)
          Income tax (expense) benefit related to other comprehensive income
   
(543)
 
   
93
 
 Other Comprehensive Income (Loss)
   
1,053
     
(181)
 
Comprehensive Income
 
$
909
   
$
1,533
 
                 


   
Three Months Ended June 30, 2016
   
Three Months Ended June 30, 2015
 
             
             
Net Income (loss)
 
$
(674)
 
 
$
1,134
 
                 
 Other Comprehensive Income
               
Unrealized gains  (losses) on securities during  the period
   
762
     
(508)
 
Less: reclassification adjustment for losses  included in net income
   
(12)
 
   
-
 
          Other Comprehensive Income (Loss), before tax
   
750
     
(508)
 
          Income tax (expense) benefit related to other   comprehensive income
   
(255)
 
   
173
 
 Other Comprehensive Income (Loss)
   
495
     
(335)
 
Comprehensive Income (loss)
 
$
(179)
 
 
$
799
 
                 

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, 2016
   
June 30, 2015
 
CASH FLOWS FROM OPERATING  ACTIVITIES:
           
Net income (loss)
 
$
(144)
 
 
$
1,714
 
Adjustments to reconcile net income to net cash provided by                 operating activities
               
Provision for loan losses
   
1,313
     
482
 
Depreciation and amortization
   
486
     
490
 
Net realized (gains) losses on available for sale securities
   
(47)
 
   
(16)
 
Net amortization on securities
   
464
     
526
 
             (Increase) decrease in interest receivable
   
85
     
2
 
Valuation adjustment of other real estate owned
   
174
     
20
 
Origination of loans held for sale
   
(1,830)
 
       
Proceeds from sales of loans held for sale
   
193
     
-
 
Valuation adjustment of deferred tax assets
   
-
     
(1,000)
 
Increase in other assets
   
593
     
(245)
 
Increase (decrease) in interest, taxes and other liabilities
   
256
     
(4)
 
                 
Net cash provided by operating activities
   
1,543
     
1,969
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Securities available for sale:
               
       Proceeds from sale of securities
   
21,163
     
1,025
 
Proceeds from maturities of debt and equity securities
   
8,632
     
8,945
 
Purchase of debt and equity securities
   
(47,486)
 
   
(10,317)
 
(Purchases) sales of other investments
   
(19)
 
   
168
 
Net (increase) decrease in loans
   
12,275
     
(10,979)
 
Proceeds from sales of other real estate owned
   
1,248
     
1,709
 
Premises and equipment expenditures
   
(185)
 
   
(259)
 
                 
Net cash used in investing activities
   
(4,372)
 
   
(9,708)
 
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
      Issuance of Common Stock
   
1,110
     
-
 
      Issuance of Preferred Stock
   
-
     
-
 
 
Net decrease in time deposits
   
(7,506)
 
   
(7,249)
 
Net increase (decrease) in demand, savings and other deposits
   
(9,381)
 
   
10,952
 
Decrease in short-term borrowings
   
(1)
 
   
-
 
Decrease in long-term debt
   
(25)
 
   
(26)
 
                 
Net cash  provided by (used in)  financing activities
   
(15,803)
 
   
3,677
 
                 
Net  decrease in cash and cash equivalents
   
(18,632)
 
   
(4,062)
 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
   
46,891
     
55,810
 
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
 
$
28,259
   
$
51,748
 
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash paid during the year for:
               
Interest
 
$
2,093
   
$
2,302
 
                 
     SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
               
Transfer of loans to other real estate owned
 
$
1,103
   
$
3,520
 
Loans originated from sales of other real estate owned
 
$
105
   
$
130
 
 
See accompanying Notes to Consolidated Financial Statements



6

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

Three Months Ended June 30
                                     
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, 2015
   
7,851
   
$
4,907
     
2,092
   
$
4,184
   
$
17,947
   
$
26,016
   
$
249
   
$
53,303
 
                                                                 
Net income
   
-
     
-
                     
-
     
1,134
     
-
     
1,134
 
                                                                 
 
Common Stock Issuance
   
-
     
-
                     
-
                     
-
 
                                                                 
 
Preferred Stock Issuance
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
                                                                 
Other comprehensive income
   
-
     
-
                     
-
     
-
     
(335)
 
   
(335)
 
                                                                 
 
Balance, June 30, 2015
   
7,851
   
$
4,907
     
2,092
   
$
4,184
   
$
17,947
   
$
27,150
   
$
(86)
 
 
$
54,102
 
 
 
 
                                                               
 
Balance, March 31, 2016
   
8,113
   
$
5,070
     
2,092
   
$
4,184
   
$
18,891
   
$
27,300
   
$
310
   
$
55,755
 
                                                                 
 
Net income (loss)
   
-
     
-
                     
-
     
(674)
 
   
-
     
(674)
 
                                                                 
 
Common Stock Issuance
                                                               
                                                                 
 
Preferred Stock Issuance
                                                               
                                                                 
Other comprehensive income
   
-
     
-
                     
-
     
-
     
495
     
495
 
                                                                 
 
Balance, June 30, 2016
   
8,113
   
$
5,070
     
2,092
   
$
4,184
   
$
18,891
   
$
26,626
   
$
805
   
$
55,576
 
                                                                 
                                                                 




7



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





Six Months Ended June 30
                                     
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, 2014
   
7,851
   
$
4,907
     
2,092
   
$
4,184
   
$
18,180
   
$
25,436
   
$
95
   
$
52,802
 
                                                                 
                                                                 
Net income
   
-
     
-
                     
-
     
1,714
     
-
     
1,714
 
                                                                 
Additional Paid In Capital
                                   
(233)
 
                   
(233)
 
                                                                 
                                                                 
                                                                 
Other comprehensive income
   
-
     
-
                     
-
     
-
     
(181)
 
   
(181)
 
                                                                 
 
Balance, June 30, 2015
   
7,851
   
$
4,907
     
2,092
   
$
4,184
   
$
17,947
   
$
27,150
   
$
(86)
 
 
$
54,102
 
                                                                 
                                                                 
 
Balance, December 31, 2015
   
7,851
   
$
4,907
     
2,092
   
$
4,184
   
$
17,944
   
$
26,770
   
$
(248)
 
 
$
53,557
 
                                                                 
                                                                 
Net income
   
-
     
-
                     
-
     
(144
)
   
-
     
(144)
 
                                                                 
Common Stock Issuance
   
262
     
163
     
-
     
-
     
947
     
-
     
-
     
1,110
 
                                                                 
Preferred Stock Issuance
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
                                                                 
Other comprehensive income
   
-
     
-
                     
-
     
-
     
1,053
     
1,053
 
                                                                 
 
Balance, June 30, 2016
   
8,113
   
$
5,070
     
2,092
   
$
4,184
   
$
18,891
   
$
26,626
   
$
805
   
$
55,576
 

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") conform to United States generally accepted accounting principles and to banking industry practices. The accompanying consolidated interim financial statements are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial statements have been included. All such adjustments are of a normal and recurring nature. The consolidated balance sheet as of December 31, 2015 has been extracted from the audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (the "2015 Form 10-K"). The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the 2015 Form 10-K. The results of operations for the three-month and six-month periods ended June 30, 2016, are not necessarily indicative of the results to be expected for the full year.

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

Note 2  -  Loans and Allowance for Loan Losses  (amounts in thousands)
 The composition of net loans is as follows:

   
June 30,
2016
   
December 31, 2015
 
  Real Estate Secured:
           
Residential 1-4 family
 
$
193,582
   
$
194,287
 
Multifamily
   
22,826
     
23,895
 
Construction and Land Loans
   
17,338
     
19,163
 
Commercial, Owner Occupied
   
68,806
     
73,031
 
Commercial, Non-owner occupied
   
33,168
     
38,025
 
Second mortgages
   
8,011
     
8,169
 
Equity lines of credit
   
5,795
     
6,000
 
Farmland
   
11,910
     
11,283
 
     
361,436
     
373,853
 
                 
Secured (other) and unsecured
               
Personal
   
19,880
     
20,775
 
Commercial
   
32,895
     
35,144
 
Agricultural
   
3,297
     
2,959
 
     
56,072
     
58,878
 
                 
Overdrafts
   
197
     
139
 
                 
     
417,705
     
432,870
 
Less:
               
  Allowance for loan losses
   
5,202
     
5,654
 
  Net deferred fees
   
765
     
787
 
     
5,967
     
6,441
 
                 
Loans, net
 
$
411,738
   
$
426,429
 




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, 2016

   
30-59 Days Past Due
   
60-89 Days Past Due
   
Greater Than 90 Days
   
Total Past Due
   
Current
   
Total Financing Receivables
   
Recorded Investment > 90 Days and Accruing
 
                                           
Real Estate Secured
                                         
Residential 1-4 family
 
$
2,121
   
$
1,199
   
$
1,665
   
$
4,985
   
$
188,597
   
$
193,582
   
$
-
 
Equity lines of credit
   
-
     
-
     
41
     
41
     
5,754
     
5,795
     
-
 
Multifamily
   
-
     
-
     
-
     
-
     
22,826
     
22,826
     
-
 
Farmland
   
146
     
48
     
-
     
194
     
11,716
     
11,910
     
-
 
Construction, Land Development, Other Land Loans
   
6
     
151
     
65
     
222
     
17,116
     
17,338
     
-
 
Commercial Real Estate- Owner Occupied
   
83
     
15
     
4,100
     
4,198
     
64,608
     
68,806
     
-
 
Commercial Real Estate- Non Owner Occupied
   
357
     
365
     
-
     
722
     
32,446
     
33,168
     
-
 
Second Mortgages
   
50
     
-
     
50
     
100
     
7,911
     
8,011
     
-
 
Non Real Estate Secured
                                                       
Personal
   
179
     
101
     
64
     
344
     
19,733
     
20,077
     
-
 
Commercial
   
67
     
20
     
563
     
650
     
32,245
     
32,895
     
-
 
Agricultural
   
8
     
-
     
-
     
8
     
3,289
     
3,297
     
-
 
                                                         
          Total
 
$
3,017
   
$
1,899
   
$
6,548
   
$
11,464
   
$
406,241
   
$
417,705
   
$
-
 
                                                         


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 December 31, 2015:


   
30-59 Days Past Due
   
60-89 Days Past Due
   
Greater Than 90 Days
   
Total Past Due
   
Current
   
Total Financing Receivables
   
Recorded Investment > 90 Days and Accruing
 
                                           
Real Estate Secured
                                         
Residential 1-4 family
 
$
4,193
   
$
1,580
   
$
2,545
   
$
8,318
   
$
185,969
   
$
194,287
   
$
-
 
Equity lines of credit
   
24
     
-
     
17
     
41
     
5,959
     
6,000
     
-
 
Multifamily
   
-
     
-
     
-
     
-
     
23,895
     
23,895
     
-
 
Farmland
   
56
     
7
     
303
     
366
     
10,917
     
11,283
     
-
 
Construction,  Land Development, Other Land Loans
   
49
     
61
     
37
     
147
     
19,016
     
19,163
     
-
 
Commercial Real Estate- Owner Occupied
   
514
     
485
     
5,014
     
6,013
     
67,018
     
73,031
     
-
 
Commercial Real Estate- Non Owner Occupied
   
-
     
-
     
-
     
-
     
38,025
     
38,025
     
-
 
Second Mortgages
   
88
     
37
     
5
     
130
     
8,039
     
8,169
     
-
 
Non Real Estate Secured
                                                       
Personal
   
264
     
141
     
163
     
568
     
20,346
     
20,914
     
-
 
Commercial
   
590
     
217
     
366
     
1,173
     
33,971
     
35,144
     
-
 
Agricultural
   
45
     
-
     
-
     
45
     
2,914
     
2,959
     
-
 
                                                         
          Total
 
$
5,823
   
$
2,528
   
$
8,450
   
$
16,801
   
$
416,069
   
$
432,870
   
$
-
 
                                                         



11


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

Loans are considered delinquent when payments have not been made according to the terms of the contract. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection.  Additionally, in certain instances, loans that have been restructured or modified may also be classified as non-accrual per regulatory guidance until a satisfactory payment history has been established. Credit card loans and other personal loans are typically charged off no later than 180 days past due.   In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

The following is a summary of non-accrual loans at June 30, 2016 and December 31, 2015:
   
June 30, 2016
   
December 31, 2015
 
Real Estate Secured
           
Residential 1-4 Family
 
$
1,665
   
$
2,675
 
Multifamily
   
-
     
-
 
Construction and Land Loans
   
65
     
71
 
Commercial-Owner Occupied
   
4,100
     
5,856
 
Commercial- Non Owner Occupied
   
-
     
-
 
Second Mortgages
   
50
     
5
 
Equity Lines of Credit
   
41
     
17
 
Farmland
   
-
     
303
 
Secured (other) and Unsecured
               
Personal
   
64
     
163
 
Commercial
   
563
     
366
 
Agricultural
   
-
     
-
 
                 
Total
 
$
6,548
   
$
9,456
 


The following is a summary of residential real estate currently in the process of foreclosure as well as foreclosed residential real estate as of June 30, 2016.

                        
      Number        Balance   
Residential real estate in the process of foreclosure
   
3
   
$
147
 
Foreclosed residential real estate
   
7
   
$
676
 



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 Company's loan portfolio at June 30, 2016 and December 31, 2015.  The grades are assigned and/or modified by the Company's credit review and credit analysis departments based on the creditworthiness of the borrower and the overall strength of the loan.

Credit Risk Profile by Internally Assigned Grade as of June 30, 2016
Grade (1)
 
Residential 1-4 Family
   
Multifamily
   
Farmland
   
Construction, Land Loans
   
Commercial Real Estate- Owner Occupied
   
Commercial Real Estate Non-Owner Occupied
 
                                     
Quality
   
25,475
     
-
     
22
     
2,939
     
2,456
     
478
 
Satisfactory
   
112,161
     
19,601
     
7,306
     
5,720
     
36,173
     
15,222
 
Acceptable
   
45,546
     
1,455
     
3,695
     
6,198
     
20,774
     
6,429
 
Special Mention
   
5,302
     
772
     
-
     
537
     
5,044
     
7,120
 
Substandard
   
5,098
     
999
     
887
     
1,944
     
4,359
     
3,919
 
Doubtful
   
-
     
-
     
-
     
-
     
-
     
-
 
                                                 
     Total
 
$
193,582
   
$
22,826
   
$
11,910
   
$
17,338
   
$
68,806
   
$
33,168
 

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


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

 
13

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

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

14

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 June 30, 2016
   
Consumer - Non Real Estate
   
Equity Line of Credit / Second Mortgages
   
Commercial - Non Real Estate
   
Agricultural - Non Real Estate
 
                         
Performing
 
$
20,013
   
$
13,756
   
$
32,332
   
$
3,297
 
Nonperforming (>90 days past due)
   
64
     
50
     
563
     
-
 
                                 
     Total
 
$
20,077
   
$
13,806
   
$
32,895
   
$
3,297
 
                                 


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



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 June 30, 2016:
 
 
June 30, 2016
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With No Related Allowance
                             
Real Estate Secured
                             
Residential 1-4 family
 
$
4,740
   
$
4,740
   
$
-
   
$
5,909
   
$
102
 
Equity lines of credit
   
57
     
57
     
-
     
54
     
1
 
Multifamily
   
999
     
999
     
-
     
1,011
     
26
 
Farmland
   
694
     
694
     
-
     
755
     
22
 
Construction, Land Development, Other Land Loans
   
1,517
     
1,517
     
-
     
1,532
     
43
 
Commercial Real Estate- Owner Occupied
   
3,887
     
3,887
     
-
     
4,728
     
12
 
Commercial Real Estate- Non Owner Occupied
   
1,893
     
1,893
     
-
     
947
     
82
 
Second Mortgages
   
195
     
195
     
-
     
297
     
4
 
Non Real Estate Secured
                                       
Personal /Consumer
   
70
     
70
     
-
     
69
     
1
 
Commercial
   
57
     
57
     
-
     
186
     
2
 
Agricultural
   
8
     
8
     
-
     
4
     
-
 
                                         
          Total
 
$
14,117
   
$
14,117
   
$
-
   
$
15,492
   
$
295
 



 
 
June 30, 2016
 
Recorded Investment
   
Unpaid Principal Balance
   
Related Allowance
   
Average Recorded Investment
   
Interest Income Recognized
 
With an Allowance Recorded
                             
Real Estate Secured
                             
Residential 1-4 family
 
$
1,074
   
$
1,074
   
$
217
   
$
1,460
   
$
29
 
Equity lines of credit
   
-
     
-
     
-
     
-
     
-
 
Multifamily
   
-
     
-
     
-
     
-
     
-
 
Farmland
   
193
     
193
     
18
     
97
     
5
 
Construction, Land Development, Other Land Loans
   
445
     
445
     
31
     
445
     
14
 
Commercial Real Estate- Owner Occupied
   
1,139
     
2,139
     
558
     
1,629
     
-
 
Commercial Real Estate- Non Owner Occupied
   
2,026
     
2,026
     
330
     
1,956
     
18
 
Second Mortgages
   
214
     
214
     
57
     
116
     
5
 
Non Real Estate Secured
                                       
Personal /Consumer
   
66
     
66
     
51
     
90
     
1
 
Commercial
   
741
     
741
     
528
     
706