10-Q 1 a2017q310-q.htm 10-Q Document


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, 2017

[   ] 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, smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  ☐
Accelerated filer  ☐
Non-accelerated filer  ☐ (Do not check if a smaller reporting company)
Smaller reporting company  ☑
Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 8,199,228 shares of common stock, par value $0.625 per share, outstanding as of November 13, 2017.





Highlands Bankshares, Inc.
Form 10-Q
For the Quarter Ended September 30, 2017

INDEX
PAGE
 
 

2



PART I.
FINANCIAL INFORMATION
ITEM 1.  Financial Statements
Consolidated Balance Sheets
(Amounts in thousands) 
 
 
(Unaudited)
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
 
Cash and due from banks
 
$
17,567

 
$
27,391

Federal funds sold
 
9,449

 
22,994

Total cash and cash equivalents
 
27,016

 
50,385

Investment securities available for sale (amortized cost $83,564 at September 30, 2017, $96,930 at December 31, 2016)
 
82,442

 
95,073

Other investments, at cost
 
3,719

 
6,637

Loans held for sale
 
4,285

 
1,255

Loans
 
432,472

 
409,667

Allowance for loan losses
 
(4,693
)
 
(4,829
)
Net loans
 
427,779

 
404,838

Premises and equipment, net
 
18,522

 
17,814

Real estate held for sale
 
1,430

 
1,680

Deferred tax assets
 
11,426

 
12,989

Interest receivable
 
2,110

 
2,047

Bank-owned life insurance
 
14,591

 
14,314

Other real estate owned
 
2,350

 
2,768

Other assets
 
3,418

 
2,878

Total assets
 
$
599,088

 
$
612,678

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
LIABILITIES
 
 
 
 
Deposits:
 
 
 
 
Non-interest bearing
 
$
148,778

 
$
134,488

Interest bearing
 
351,313

 
355,381

Total deposits
 
500,091

 
489,869

Interest, taxes and other liabilities
 
1,739

 
1,353

Short-term borrowings
 
10,000

 
27,552

Long-term debt
 
30,155

 
40,146

Total liabilities
 
541,985

 
558,920

STOCKHOLDERS' EQUITY
 
 
 
 
Common stock (8,199 shares issued and outstanding for each period presented)
 
5,124

 
5,124

Preferred stock (2,092 shares issued and outstanding for each period presented)
 
4,184

 
4,184

Additional paid-in capital
 
19,057

 
18,891

Retained earnings
 
29,473

 
26,785

Accumulated other comprehensive income
 
(735
)
 
(1,226
)
Total stockholders' equity
 
57,103

 
53,758

Total liabilities and stockholders' equity
 
$
599,088

 
$
612,678

 
See accompanying Notes to Consolidated Financial Statements

3



Consolidated Statements of Income
(Amounts in thousands, except per share data)
(Unaudited)
 
 
Three months ended September 30
 
Nine months ended September 30
 
 
 
2017
 
2016
 
2017
 
2016
 
INTEREST INCOME
 
 
 
 
 
 
 
 
 
Loans receivable and fees on loans
 
$
5,207

 
$
5,224

 
$
15,258

 
$
15,978

 
Investment securities
 
521

 
538

 
1,675

 
1,452

 
Federal funds sold
 
33

 
20

 
157

 
69

 
Total interest income
 
5,761

 
5,782

 
17,090

 
17,499

 
INTEREST EXPENSE
 
 
 
 
 
 
 
 
 
Deposits
 
478

 
445

 
1,389

 
1,344

 
Other borrowed funds
 
469

 
596

 
1,655

 
1,779

 
Total interest expense
 
947

 
1,041

 
3,044

 
3,123

 
Net interest income
 
4,814

 
4,741

 
14,046

 
14,376

 
Provision for loan losses
 
19

 
173

 
71

 
1,486

 
Net interest income after provision for loan losses
 
4,795

 
4,568

 
13,975

 
12,890

 
NON-INTEREST INCOME
 
 
 
 
 
 
 
 
 
Mortgage banking income
 
655

 
361

 
1,607

 
361

 
Securities gains, net
 
19

 

 
19

 
47

 
Service charges on deposit accounts
 
392

 
464

 
1,184

 
1,330

 
Other service charges, commissions and fees
 
479

 
381

 
1,440

 
1,177

 
Other operating income
 
155

 
142

 
410

 
602

 
Total non-interest income
 
1,700

 
1,348

 
4,660

 
3,517

 
NON-INTEREST EXPENSE
 
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
2,623

 
2,895

 
8,044

 
8,850

 
Occupancy and equipment expense
 
641

 
770

 
2,033

 
2,156

 
Foreclosed assets – write-down and operating expenses
 
69

 
684

 
263

 
1,530

 
Other operating expense
 
1,588

 
1,639

 
4,294

 
4,344

 
Total non-interest expense
 
4,921

 
5,988

 
14,634

 
16,880

 
Income (loss) before income taxes
 
1,574

 
(72
)
 
4,001

 
(473
)
 
Income tax expense (benefit) (Note 5)
 
554

 
(73
)
 
1,313

 
(330
)
 
Net income (loss)
 
$
1,020

 
$
1

 
$
2,688

 
$
(143
)
 
Net income (loss) per common share (Note 8)
 
 
 
 
 
 
 
 
 
Basic
 
0.12

 

 
0.33

 
(0.02
)
 
Fully diluted
 
0.10

 

 
0.26

 
(0.02
)
 

See accompanying Notes to Consolidated Financial Statements

4



Consolidated Statements of Comprehensive Income
(Amounts in thousands)
(Unaudited) 
 
 
Three months ended September 30
 
Nine months ended September 30
 
 
 
2017
 
2016
 
2017
 
2016
 
Net income (loss)
 
$
1,020

 
$
1

 
$
2,688

 
$
(143
)
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
Unrealized gains on securities during the period
 
141

 
(275
)
 
767

 
1,369

 
Less: reclassification adjustment for (gains) included in net income
 
(19
)
 

 
(19
)
 
(47
)
 
Other comprehensive income before tax
 
122

 
(275
)
 
748

 
1,322

 
Income tax expense related to other comprehensive income
 
(34
)
 
94

 
(244
)
 
(450
)
 
Other comprehensive income
 
88

 
(181
)
 
504

 
872

 
Comprehensive income (loss)
 
$
1,108

 
$
(180
)
 
$
3,192

 
$
729

 

See accompanying Notes to Consolidated Financial Statements

5



Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited) 
 
 
Nine Months Ended
September 30,
 
 
2017
 
2016
CASH FLOWS FROM OPERATING  ACTIVITIES:
 
 
 
 
Net income
 
$
2,688

 
$
(143
)
Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Provision for loan losses
 
71

 
1,486

Depreciation and amortization
 
764

 
1,404

Provision for deferred tax assets
 
1,317

 

Net realized gains on available for sale securities
 
(19
)
 
(47
)
Restricted stock expense
 
166

 

Loss on sale of premises and equipment
 
34

 

Originations of loans held for sale
 
(42,104
)
 
(9,094
)
Proceeds from loans held for sale
 
40,681

 
6,334

Gain on sale of loans held for sale
 
(1,607
)
 

Decrease in interest receivable
 
(63
)
 
(184
)
Valuation adjustment of other real estate owned
 
187

 
719

(Increase) decrease in other assets
 
(1,289
)
 
911

Increase in interest, taxes and other liabilities
 
386

 
338

Net cash provided by operating activities
 
1,212

 
1,724

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Securities available for sale:
 
 

 
 

Proceeds from sale of securities
 
6,624

 
21,284

Proceeds from maturities of securities
 
14,172

 
13,842

Purchase of debt and equity securities
 
(6,938
)
 
(51,437
)
(Purchases) redemptions of other investments
 
2,918

 
(44
)
Net (increase) decrease in loans
 
(23,492
)
 
18,336

Proceeds from sales of other real estate owned
 
712

 
2,666

Proceeds from sale of real estate held for sale
 
250

 

Premises and equipment expenditures
 
(1,680
)
 
(282
)
Disposition of premises and equipment
 
174

 

Net cash (used in) provided by investing activities
 
(7,260
)
 
4,365

CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net decrease in time deposits
 
(5,180
)
 
(10,056
)
Net increase in demand, savings and other deposits
 
15,402

 
3,208

Decrease in short-term borrowings
 
(27,543
)
 
7,499

Decrease in long-term debt
 

 
(7,538
)
Issuance of common stock
 

 
1,110

Net cash used in financing activities
 
(17,321
)
 
(5,777
)
Net change in cash and cash equivalents
 
(23,369
)
 
312

Cash and cash equivalents at beginning of period
 
50,385

 
46,891

Cash and cash equivalents at end of period
 
$
27,016

 
$
47,203

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 

 
 

Cash payments during the period for interest
 
$
2,981

 
$
3,128

Cash payments during the period for income taxes
 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
 
 

 
 

Transfer of loans to other real estate owned
 
481

 
1,519

Loans originated from sales of other real estate owned
 

 
105

See accompanying Notes to Consolidated Financial Statements

6



Consolidated Statements of Changes in Stockholders' Equity
(Amounts in thousands)
(Unaudited)
 
 
Common stock shares
 
Common stock par value
 
Preferred stock shares
 
Preferred stock par value
 
Additional paid-in-capital
 
Retained earnings
 
Accumulated
other
comprehensive
income (loss)
 
Stockholders'
equity
Balance December 31, 2015
 
7,851

 
$
4,907

 
2,092

 
$
4,184

 
$
17,944

 
$
26,770

 
$
(248
)
 
$
53,557

Net income
 
 

 
 

 
 

 
 

 
 

 
(143
)
 
 

 
(143
)
Other comprehensive income
 
 

 
 

 
 

 
 

 
 

 
 

 
872

 
872

Grant of restricted stock
 
86

 
54

 
 
 
 
 
(54
)
 
 
 
 
 

Common stock issued
 
262

 
163

 
 

 
 

 
947

 
 

 
 

 
1,110

Balance September 30, 2016
 
8,113

 
$
5,124

 
2,092

 
$
4,184

 
$
18,837

 
$
26,627

 
$
624

 
$
55,396

Balance December 31, 2016
 
8,199

 
$
5,124

 
2,092

 
$
4,184

 
$
18,891

 
$
26,785

 
$
(1,226
)
 
$
53,758

Net income
 
 

 
 

 
 

 
 

 
 

 
2,688

 
 

 
2,688

Other comprehensive income
 
 

 
 

 
 

 
 

 
 

 
 

 
491

 
491

Stock-based compensation
 
 

 
 

 
 

 
 

 
166

 
 

 
 

 
166

Balance September 30, 2017
 
8,199

 
$
5,124

 
2,092

 
$
4,184

 
$
19,057

 
$
29,473

 
$
(735
)
 
$
57,103

 
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, 2016 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, 2016 (the "2016 Form 10-K"). The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the 2016 Form 10-K. The results of operations for the nine-month period ended September 30, 2017, 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 – Summary of Significant Accounting Policy Update For Certain Required Disclosures

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 was effective for annual reporting periods, and interim periods within that period, beginning after December 15, 2016. ASU No. 2015-14 issued in August 2015 deferred the effective date of this Update to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.  The adoption of ASU 2014-09 is not expected to have a material effect on the Company's current financial position or results of operations; however, it may impact the reporting of future financial statement disclosures.

In January 2016, ASU No. 2016-01 Financial Instruments--Overall (ASU 2016-01) was issued by the FASB.  ASU 2016-01 addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect ASU 2016-01 to have a material effect on its financial statements.

In June 2016, ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments was issued by the FASB. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren't measured at fair value through net income. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company's financial position, results of operations or cash flows.

8



Note 3 - Investment Securities Available For Sale

The amortized cost and market value of securities available for sale are as follows:
 
 
September 30, 2017
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
State and political subdivisions
 
$
13,526

 
$
31

 
$
338

 
$
13,219

Mortgage backed securities
 
62,708

 
26

 
732

 
62,002

SBA Pools
 
7,330

 
3

 
112

 
7,221

 
 
$
83,564

 
$
60

 
$
1,182

 
$
82,442


 
 
December 31, 2016
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
State and political subdivisions
 
$
13,013

 
$
41

 
$
603

 
$
12,451

Mortgage backed securities
 
75,384

 
93

 
1,189

 
74,288

SBA Pools
 
8,533

 
6

 
205

 
8,334

 
 
$
96,930

 
$
140

 
$
1,997

 
$
95,073


Investment securities available for sale with a fair value of $31,111 and $32,698 at September 30, 2017 and December 31, 2016, respectively, were pledged as collateral on public deposits, FHLB advances and for other purposes as required or permitted by law.
The following table presents the age of gross unrealized losses and fair value by investment category:
 
 
September 30, 2017
 
 
Less Than 12 months
 
12 Months or More
 
Total
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
State and political subdivisions
 
$
8,881

 
$
271

 
$
1,257

 
$
67

 
$
10,138

 
$
338

Mortgage-backed securities
 
51,279

 
614

 
6,634

 
118

 
57,913

 
732

SBA Pools
 
5,496

 
85

 
1,218

 
27

 
6,714

 
112

Total
 
$
65,656

 
$
970

 
$
9,109

 
$
212

 
$
74,765

 
$
1,182


 
 
December 31, 2016
 
 
Less Than 12 months
 
12 Months or More
 
Total
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
State and political subdivisions
 
$
9,191

 
$
603

 

 

 
$
9,191

 
$
603

Mortgage-backed securities
 
66,878

 
1,189

 

 

 
66,878

 
1,189

SBA Pools
 
7,587

 
205

 

 

 
7,587

 
205

Total
 
$
83,656

 
$
1,997

 

 

 
$
83,656

 
$
1,997


The Company assesses its securities for OTTI quarterly by reviewing credit ratings, financial and regulatory reports as well as other pertinent published financial data. As of September 30, 2017 and December 31, 2016, the Company's assessment revealed no impairment other than that deemed temporary on those securities.

The amortized cost and estimated fair value of securities available for sale at September 30, 2017 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

9




 
 
 
Amortized Cost
 
Fair Value
 
 
Investment securities with scheduled maturities:
 
 
 
 
 
Due in one year or less
 
$
125

 
$
125

 
Due after one year through five years
 
1,032

 
1,045

 
Due after five years through ten years
 
7,036

 
6,913

 
Due after ten years
 
12,663

 
12,357

 
Total investment securities with scheduled maturities
 
20,856

 
20,440

 
Mortgage-backed securities
 
62,708

 
62,002

 
Total investment securities available for sale
 
$
83,564

 
$
82,442


The following table summarizes the securities gains (losses) recognized for the period presented:
 
 
Three months ended
 
Nine months ended
 
 
September 30, 2017

 
September 30, 2016

 
September 30, 2017

 
September 30, 2016

Gross gains
 
$
32

 
$

 
$
32

 
$
65

Gross losses
 
(13
)
 

 
(13
)
 
(18
)
Securities gains, net
 
$
19

 
$

 
$
19

 
$
47




Note 4  -  Loans and Allowance for Loan Losses
 The composition of net loans is as follows:
 
 
September 30, 2017
 
December 31, 2016
Real estate secured:
 
 
 
 
Residential 1-4 family
 
$
180,469

 
$
186,695

Multifamily
 
26,183

 
22,630

Construction and land loans
 
14,639

 
15,978

Commercial, owner occupied
 
74,233

 
72,383

Commercial, non-owner occupied
 
33,468

 
28,818

Second mortgages
 
5,298

 
6,934

Equity lines of credit
 
31,307

 
13,395

Farmland
 
13,421

 
12,194

Total real estate secured
 
379,018

 
359,027

Non-real estate secured
 
 
 
 
Personal
 
15,773

 
17,887

Commercial
 
35,516

 
29,977

Agricultural
 
2,889

 
3,490

Total non-real estate secured
 
54,178

 
51,212

Gross loans
 
433,196

 
410,381

Less:
 
 
 
 
Allowance for loan losses
 
4,693

 
4,829

Net deferred fees
 
724

 
714

Loans, net
 
$
427,779

 
$
404,838



10



The following table is an analysis of past due loans as of September 30, 2017:
 
 
Past Due
 
 
 
 
 
 
 
 
30-89 days
 
90 days and over
 
Total
 
Current
 
Total
 
> 90 Days and Accruing
Real estate secured
 
 
 
 
 
 
 
 
 
 
 
 
Residential 1-4 family
 
$
449

 
$
795

 
$
1,244

 
$
179,225

 
$
180,469

 
$
243

Equity lines of credit
 

 

 

 
31,307

 
31,307

 

Multifamily
 
961

 

 
961

 
25,222

 
26,183

 

Farmland
 

 
193

 
193

 
13,228

 
13,421

 

Construction, land development, other land loans
 
34

 

 
34

 
14,605

 
14,639

 

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied
 
29

 
1,544

 
1,573

 
72,660

 
74,233

 

Non-owner-occupied
 

 

 

 
33,468

 
33,468

 

Second mortgages
 

 

 

 
5,298

 
5,298

 

Non-real estate secured
 
 
 
 
 
 
 
 
 
 
Personal
 
99

 
5

 
104

 
15,669

 
15,773

 

Commercial
 
136

 
391

 
527

 
34,989

 
35,516

 

Agricultural
 

 

 

 
2,889

 
2,889

 

Total
 
$
1,708

 
$
2,928

 
$
4,636

 
$
428,560

 
$
433,196

 
$
243


The following table is an analysis of past due loans as of December 31, 2016:
 
 
Past Due
 
 
 
 
 
 
 
 
30-89 days
 
90 days and over
 
Total
 
Current
 
Total
 
> 90 Days and Accruing
Real estate secured
 
 
 
 
 
 
 
 
 
 
 
 
Residential 1-4 family
 
$
1,083

 
$
1,000

 
$
2,083

 
$
184,612

 
$
186,695

 
$

Equity lines of credit
 
30

 
10

 
40

 
13,355

 
13,395

 

Multifamily
 

 

 

 
22,630

 
22,630

 

Farmland
 
47

 
564

 
611

 
11,583

 
12,194

 

Construction, land development, other land loans
 
39

 

 
39

 
15,939

 
15,978

 

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied
 
14

 
3,868

 
3,882

 
68,501

 
72,383

 
2,210

Non-owner-occupied
 

 

 

 
28,818

 
28,818

 

Second mortgages
 
161

 
18

 
179

 
6,755

 
6,934

 

Non-real estate secured
 
 
 
 
 
 
 
 
 
 
Personal
 
141

 
12

 
153

 
17,734

 
17,887

 

Commercial
 
196

 
462

 
658

 
29,319

 
29,977

 

Agricultural
 
7

 

 
7

 
3,483

 
3,490

 

Total
 
$
1,718

 
$
5,934

 
$
7,652

 
$
402,729

 
$
410,381

 
$
2,210


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.

11




The following is a summary of non-accrual loans at September 30, 2017 and December 31, 2016:
 
 
 
September 30, 2017
 
December 31, 2016
Real estate secured
 
 
 
 
Residential 1-4 family
 
$
651

 
$
1,275

Commercial real estate:
 
 
 
 
Owner-occupied
 
1,544

 
1,658

Non-owner-occupied
 

 

Second mortgages
 

 
18

Equity lines of credit
 

 
10

Farmland
 
193

 
564

Non-real estate secured
 
 
 
 
Personal
 
10

 
12

Commercial
 
391

 
462

Total
 
$
2,789

 
$
3,999


The following is a summary of residential real estate currently in the process of foreclosure as well as foreclosed residential real estate as of September 30, 2017.

 
 
Number
 
Balance
Residential real estate in the process of foreclosure
 
5

 
$
392

Foreclosed residential real estate
 
3

 
228


The following tables represent a summary of credit quality indicators of the Company's loan portfolio at September 30, 2017 and December 31, 2016.  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.

The following tables provide the credit risk profile by internally assigned grade as of September 30, 2017 and December 31, 2016:
 
September 30, 2017
 
Residential 1-4 Family
 
Multifamily
 
Farmland
 
Construction, Land Loans
 
Commercial Real Estate- Owner Occupied
 
Commercial Real Estate Non-Owner Occupied
Quality
 
$
39,155

 
$

 
$
51

 
$
1,773

 
$
3,418

 
$
377

Satisfactory
 
95,237

 
10,669

 
3,888

 
5,447

 
40,687

 
14,823

Acceptable
 
40,219

 
12,693

 
7,246

 
5,697

 
24,009

 
14,000

Special Mention
 
478

 
1,845

 
1,381

 

 
3,200

 
411

Substandard
 
5,380

 
976

 
855

 
1,722

 
1,780

 
3,857

Doubtful
 

 

 

 

 
1,139

 

Total
 
$
180,469

 
$
26,183

 
$
13,421

 
$
14,639

 
$
74,233

 
$
33,468



12



December 31, 2016
 
Residential 1-4 Family
 
Multifamily
 
Farmland
 
Construction, Land Loans
 
Commercial Real Estate- Owner Occupied
 
Commercial Real Estate Non-Owner Occupied
Quality
 
$
32,054

 
$

 
$
19

 
$
1,941

 
$
3,686

 
$
387

Satisfactory
 
106,154

 
18,335

 
7,823

 
5,969

 
36,806

 
15,198

Acceptable
 
41,369

 
1,410

 
3,474

 
5,961

 
22,767

 
5,119

Special Mention
 
3,399

 
1,896

 

 

 
4,435

 
4,221

Substandard
 
3,719

 
989

 
878

 
2,107

 
4,689

 
3,893

Doubtful
 

 

 

 

 

 

Total
 
$
186,695

 
$
22,630

 
$
12,194

 
$
15,978

 
$
72,383

 
$
28,818


Explanation of credit grades:
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.  
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.

13



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.
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, 2017:

 
 
Consumer - Non Real Estate
 
Equity Line of Credit /Second Mortgages
 
Commercial - Non Real Estate
 
Agricultural - Non Real Estate
Performing
 
$
15,768

 
$
36,605

 
$
35,125

 
$
2,889

Nonperforming (>90 days past due)
 
5

 

 
391

 

Total
 
$
15,773

 
$
36,605

 
$
35,516

 
$
2,889


Credit Risk Profile based on payment activity as of December 31, 2016:

 
 
Consumer - Non Real Estate
 
Equity Line of Credit /Second Mortgages
 
Commercial - Non Real Estate
 
Agricultural - Non Real Estate
Performing
 
$
17,875

 
$
20,301

 
$
29,515

 
$
3,490

Nonperforming (>90 days past due)
 
12

 
28

 
462

 

Total
 
$
17,887

 
$
20,329

 
$
29,977

 
$
3,490


14




The following tables reflect the Bank's impaired loans at September 30, 2017:
September 30, 2017
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With no related allowance
 
 
 
 
 
 
 
 
Real estate secured
 
 
 
 
 
 
 
 
 
 
Residential 1-4 family
 
$
4,935

 
$
4,935

 

 
$
4,892

 
$
209

Equity lines of credit
 

 

 

 
13

 

Multifamily
 
1,101

 
1,101

 

 
1,045

 
45

Farmland
 
645

 
645

 

 
665

 
33

Construction, land development, other land loans
 
142

 
142

 

 
942

 
50

Commercial real estate- owner occupied
 
566

 
566

 

 
3,184

 
17

Commercial real estate- non owner occupied
 

 

 

 
942

 
14

Second mortgages
 

 

 

 
93

 
2

Non-real estate secured
 
 

 
 
 
 
 
 
 
 
Personal
 

 

 

 
7

 

Commercial and agricultural
 
62

 
62

 

 
53

 

Total
 
$
7,451

 
$
7,451

 

 
$
11,836

 
$
370


September 30, 2017
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With an allowance recorded
 
 
 
 
 
 
 
 
Real estate secured
 
 
 
 
 
 
 
 
 
 
Residential 1-4 family
 
$
515

 
$
515

 
$
28

 
$
488

 
$
21

Equity lines of credit
 

 

 

 

 

Multifamily
 

 

 

 

 

Farmland
 
190

 
190

 
57

 
191

 
10

Construction, land development, other land loans
 

 

 

 
183

 
18

Commercial real estate- owner occupied
 
5,453

 
5,453

 
1,698

 
3,296

 
170

Commercial real estate- non owner occupied
 
3,510

 
3,510

 
1,014

 
2,760

 
106

Second mortgages
 

 

 

 
9

 

Non-real estate secured
 
 
 
 
 
 
 
 
 
 
Personal
 

 

 

 

 

Commercial and agricultural
 
417

 
417

 
409

 
551

 
3

Total
 
$
10,085

 
$
10,085

 
$
3,206

 
$
7,478

 
$
328



15




The following tables reflect the Bank's impaired loans at December 31, 2016:
December 31, 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
 
$
4,848

 
$
4,848

 

 
$
5,963

 
$
200

Equity lines of credit
 
25

 
25

 

 
38

 
1

Multifamily
 
989

 
989

 

 
1,005

 
1

Farmland
 
685

 
685

 

 
750

 
24

Construction, land development, other land loans
 
1,741

 
1,741

 

 
1,643

 
114

Commercial real estate- owner occupied
 
5,802

 
5,802

 

 
5,685

 
390

Commercial real estate- non owner occupied
 
1,883

 
1,883

 

 
941

 
39

Second mortgages
 
186

 
186

 

 
292

 
8

Non real estate secured
 
 
 
 
 
 
 
 
 
 
Personal
 
14

 
14

 

 
41

 
1

Commercial and agricultural
 
43

 
43

 

 
179

 
3

Total
 
$
16,216

 
$
16,216

 

 
$
16,537

 
$
781


December 31, 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
 
$
460

 
$
460

 
$
36

 
$
1,153

 
$
14

Equity lines of credit
 

 

 

 

 

Multifamily
 

 

 

 

 

Farmland
 
192

 
192

 
16

 
96

 
11

Construction, land development, other land loans
 
366

 
366

 
20

 
406

 
22

Commercial real estate- owner occupied
 
1,139

 
2,139

 
558

 
1,629

 

Commercial real estate- non owner occupied
 
2,009

 
2,009

 
314

 
1,947

 
41

Second mortgages
 
18

 
18

 
9

 
18

 

Non real estate secured
 
 
 
 
 
 
 
 
 
 
Personal
 
51

 
51

 
29

 
82

 
3

Commercial and agricultural
 
634

 
634

 
365

 
652

 
16

Total
 
$
4,869

 
$
5,869

 
$
1,347

 
$
5,983

 
$
107




16



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 and for the three and nine month periods ended September 30, 2017 and September 30, 2016.

Nine months ended September 30, 2017
 
Residential
1-4 Family
 
Multifamily
 
Construction and Land Loans
 
Commercial Owner Occupied
 
Commercial Non-Owner Occupied
 
Second Mortgages
 
Equity Line of Credit
 
Farmland
 
Personal and  Overdrafts
 
Commercial and Agricultural
 
Unallocated
 
Total
Allowance for Loan Losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31,  2016
 
$
371

 

 
$
21

 
$
1,339

 
$
445

 
$
15

 
$
27