10-Q 1 a2018q110-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 March 31, 2018

[   ] 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  þ
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 May 14, 2018.





Highlands Bankshares, Inc.
Form 10-Q
For the Quarter Ended March 31, 2018

INDEX
PAGE
 
 

2



PART I.
FINANCIAL INFORMATION
ITEM 1.  Financial Statements
Consolidated Balance Sheets
(Amounts in thousands) 
 
 
(Unaudited)
March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
 
Cash and due from banks
 
$
22,626

 
$
15,179

Federal funds sold
 
18,276

 
15,618

Total cash and cash equivalents
 
40,902

 
30,797

Investment securities available for sale (amortized cost $76,898 at March 31, 2018, $79,990 at December 31, 2017)
 
74,140

 
78,527

Other investments, at cost
 
2,793

 
3,116

Loans held for sale
 
1,795

 
4,808

Loans
 
431,266

 
431,574

Allowance for loan losses
 
(4,000
)
 
(3,954
)
Net loans
 
427,266

 
427,620

Premises and equipment, net
 
18,138

 
18,332

Real estate held for sale
 
1,370

 
1,430

Deferred tax assets
 
7,263

 
7,161

Interest receivable
 
1,777

 
1,987

Bank-owned life insurance
 
14,768

 
14,679

Other real estate owned
 
2,169

 
2,350

Other assets
 
3,148

 
3,290

Total assets
 
$
595,529

 
$
594,097

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
LIABILITIES
 
 
 
 
Deposits:
 
 
 
 
Non-interest bearing
 
$
157,907

 
$
148,633

Interest bearing
 
352,091

 
350,150

Total deposits
 
509,998

 
498,783

Interest, taxes and other liabilities
 
1,954

 
1,364

Short-term borrowings
 

 
10,000

Long-term debt
 
30,133

 
30,146

Total liabilities
 
542,085

 
540,293

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
 
19,169

 
19,113

Retained earnings
 
27,149

 
26,539

Accumulated other comprehensive income
 
(2,182
)
 
(1,156
)
Total stockholders' equity
 
53,444

 
53,804

Total liabilities and stockholders' equity
 
$
595,529

 
$
594,097

 
See accompanying Notes to Consolidated Financial Statements

3



Consolidated Statements of Income
(Amounts in thousands, except per share data)
(Unaudited)
 
 
Three months ended March 31
 
 
 
2018
 
2017
 
INTEREST INCOME
 
 
 
 
 
Loans receivable and fees on loans
 
$
5,315

 
$
5,049

 
Investment securities
 
478

 
582

 
Federal funds sold
 
70

 
50

 
Total interest income
 
5,863

 
5,681

 
INTEREST EXPENSE
 
 
 
 
 
Deposits
 
463

 
446

 
Other borrowed funds
 
364

 
585

 
Total interest expense
 
827

 
1,031

 
Net interest income
 
5,036

 
4,650

 
Provision for loan losses
 
172

 
17

 
Net interest income after provision for loan losses
 
4,864

 
4,633

 
NON-INTEREST INCOME
 
 
 
 
 
Mortgage banking income
 
100

 
226

 
Service charges on deposit accounts
 
337

 
397

 
Other service charges, commissions and fees
 
419

 
498

 
Other operating income
 
226

 
166

 
Total non-interest income
 
1,082

 
1,287

 
NON-INTEREST EXPENSE
 
 
 
 
 
Salaries and employee benefits
 
2,403

 
2,493

 
Occupancy and equipment expense
 
731

 
669

 
Foreclosed assets – write-down and operating expenses
 
131

 
20

 
Other operating expense
 
1,901

 
1,267

 
Total non-interest expense
 
5,166

 
4,449

 
Income before income taxes
 
780

 
1,471

 
Income tax expense (benefit) (Note 5)
 
170

 
439

 
Net income
 
$
610

 
$
1,032

 
Net income per common share (Note 7)
 
 
 
 
 
Basic
 
0.07

 
0.13

 
Fully diluted
 
0.06

 
0.10

 

See accompanying Notes to Consolidated Financial Statements

4



Consolidated Statements of Comprehensive Income
(Amounts in thousands)
(Unaudited) 
 
 
Three months ended March 31
 
 
 
2018
 
2017
 
Net income
 
$
610

 
$
1,032

 
Other comprehensive (loss) income
 
 
 
 
 
Unrealized (losses) gains on securities during the period
 
(1,297
)
 
94

 
Less: reclassification adjustment
 

 

 
Other comprehensive (loss) income before tax
 
(1,297
)
 
94

 
Income tax (benefit) expense related to other comprehensive income
 
(271
)
 
32

 
Other comprehensive (loss) income
 
(1,026
)
 
62

 
Comprehensive (loss) income
 
$
(416
)
 
$
1,094

 

See accompanying Notes to Consolidated Financial Statements

5



Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited) 
 
 
Three Months Ended
March 31,
 
 
2018
 
2017
CASH FLOWS FROM OPERATING  ACTIVITIES:
 
 
 
 
Net income
 
$
610

 
$
1,032

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Provision for loan losses
 
172

 
17

Depreciation and amortization
 
401

 
404

Provision for deferred tax assets
 
170

 

Restricted stock expense
 
56

 
55

Originations of loans held for sale
 
(7,651
)
 
(7,386
)
Proceeds from loans held for sale
 
10,664

 
5,578

Decrease in interest receivable
 
210

 
202

Valuation adjustment of real estate held for sale
 
60

 

Valuation adjustment of other real estate owned
 
90

 

Decrease in other assets
 
52

 
1,266

Increase in interest, taxes and other liabilities
 
590

 
124

Net cash provided by operating activities
 
5,424

 
1,292

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Securities available for sale:
 
 

 
 

Proceeds from maturities of securities
 
2,965

 
3,910

Purchase of debt and equity securities
 

 
(5,293
)
Redemptions of other investments
 
323

 
252

Net decrease in loans
 
117

 
212

Proceeds from sales of other real estate owned
 
156

 
255

Premises and equipment expenditures
 
(82
)
 
(410
)
Net cash (used in) provided by investing activities
 
3,479

 
(1,074
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Net decrease in time deposits
 
(13,922
)
 
(1,966
)
Net increase in demand, savings and other deposits
 
25,137

 
7,564

Decrease in short-term borrowings
 
(10,000
)
 

Decrease in long-term debt
 
(13
)
 
(13
)
Net cash provided by financing activities
 
1,202

 
5,585

Net change in cash and cash equivalents
 
10,105

 
5,803

Cash and cash equivalents at beginning of period
 
30,797

 
50,385

Cash and cash equivalents at end of period
 
$
40,902

 
$
56,188

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
 
 

 
 

Cash payments during the period for interest
 
$
860

 
$
1,047

Cash payments during the period for income taxes
 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
 
 

 
 

Transfer of loans to other real estate owned
 
65

 
228

Loans originated from sales of other real estate owned
 

 

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, 2016
 
8,199

 
$
5,124

 
2,092

 
$
4,184

 
$
18,891

 
$
26,785

 
$
(1,226
)
 
$
53,758

Net income
 
 

 
 

 
 

 
 

 
 

 
1,032

 
 

 
1,032

Other comprehensive income
 
 

 
 

 
 

 
 

 
 

 
 

 
62

 
62

Stock-based compensation
 

 

 
 
 
 
 
55

 
 
 
 
 
55

Balance March 31, 2017
 
8,199

 
$
5,124

 
2,092

 
$
4,184

 
$
18,946

 
$
27,817

 
$
(1,164
)
 
$
54,907

Balance December 31, 2017
 
8,199

 
$
5,124

 
2,092

 
$
4,184

 
$
19,113

 
$
26,539

 
$
(1,156
)
 
$
53,804

Net income
 
 

 
 

 
 

 
 

 
 

 
610

 
 

 
610

Other comprehensive loss
 
 

 
 

 
 

 
 

 
 

 
 

 
(1,026
)
 
(1,026
)
Stock-based compensation
 
 

 
 

 
 

 
 

 
56

 
 

 
 

 
56

Balance March 31, 2018
 
8,199

 
$
5,124

 
2,092

 
$
4,184

 
$
19,169

 
$
27,149

 
$
(2,182
)
 
$
53,444

 
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, 2017 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, 2017 (the "2017 Form 10-K"). The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the 2017 Form 10-K. The results of operations for the three-month period ended March 31, 2018, 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, as subsequently amended by ASU No. 2015-14 issued in August 2015, required adoption in annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application was permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company adopted ASU 2014-09 effective January 1, 2018.

Application of ASU 2014-09 requires identification of customer contracts, identification of the performance obligations within those contracts, identification of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue once the performance obligation is satisfied. ASU 2014-09 requires disclosure regarding 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.
 
The Company’s primary source of revenue is interest income, which is excluded from the scope of this guidance; however, the Company evaluated the impact on noninterest income, which includes fees for services, commissions on sales, and various deposit service charges. The Company concluded that no cumulative-effect adjustment to retained earnings was necessary. The adoption of the standard did not have a material effect on the Company’s financial position or results of operations.

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. The Company adopted ASU 2016-01 on January 1, 2018. The adoption of ASU 2016-01 did not have a material effect on the Company's consolidated 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 continues to evaluate 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:
 
 
March 31, 2018
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
State and political subdivisions
 
$
12,459

 
$
8

 
$
615

 
$
11,852

Mortgage backed securities
 
57,925

 
8

 
1,967

 
55,966

SBA Pools
 
6,514

 

 
192

 
6,322

 
 
$
76,898

 
$
16

 
$
2,774

 
$
74,140


 
 
December 31, 2017
 
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
State and political subdivisions
 
$
12,766

 
$
44

 
$
299

 
$
12,511

Mortgage backed securities
 
60,383

 
12

 
1,088

 
59,307

SBA Pools
 
6,841

 
1

 
133

 
6,709

 
 
$
79,990

 
$
57

 
$
1,520

 
$
78,527


Investment securities available for sale with a fair value of $28,989 and $26,856 at March 31, 2018 and December 31, 2017, 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:
 
 
March 31, 2018
 
 
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
 
$
4,071

 
$
102

 
$
6,921

 
$
513

 
$
10,992

 
$
615

Mortgage-backed securities
 
14,150

 
368

 
40,278

 
1,599

 
54,428

 
1,967

SBA Pools
 
160

 
1

 
5,948

 
191

 
6,108

 
192

Total
 
$
18,381

 
$
471

 
$
53,147

 
$
2,303

 
$
71,528

 
$
2,774


 
 
December 31, 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
 
$
1,744

 
$
18

 
$
7,158

 
$
281

 
$
8,902

 
$
299

Mortgage-backed securities
 
14,540

 
177

 
42,415

 
911

 
56,955

 
1,088

SBA Pools
 
176

 
1

 
6,206

 
132

 
6,382

 
133

Total
 
$
16,460

 
$
196

 
$
55,779

 
$
1,324

 
$
72,239

 
$
1,520


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 March 31, 2018 and December 31, 2017, 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 March 31, 2018 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
 
599

 
602

 
Due after five years through ten years
 
866

 
827

 
Due after ten years
 
17,382

 
16,619

 
Total investment securities with scheduled maturities
 
18,972

 
18,173

 
Mortgage-backed securities
 
57,926

 
55,967

 
Total investment securities available for sale
 
$
76,898

 
$
74,140


The following table summarizes the securities gains (losses) recognized for the period presented:
 
 
Three months ended March 31
 
 
 
2018
 
2017
 
Gross gains
 
$

 
$

 
Gross losses
 

 

 
Securities gains, net
 
$

 
$

 



Note 4  -  Loans and Allowance for Loan Losses
 The composition of net loans is as follows:
 
 
March 31, 2018
 
December 31, 2017
Real estate secured:
 
 
 
 
Residential 1-4 family
 
$
171,731

 
$
174,889

Multifamily
 
18,157

 
19,469

Construction and land loans
 
16,933

 
15,907

Commercial, owner occupied
 
82,151

 
82,121

Commercial, non-owner occupied
 
34,437

 
33,748

Second mortgages
 
4,670

 
4,684

Equity lines of credit
 
35,568

 
34,378

Farmland
 
12,977

 
13,188

Total real estate secured
 
376,624

 
378,384

Non-real estate secured
 
 
 
 
Personal
 
13,617

 
14,192

Commercial
 
38,734

 
36,785

Agricultural
 
3,002

 
2,950

Total non-real estate secured
 
55,353

 
53,927

Gross loans
 
431,977

 
432,311

Less:
 
 
 
 
Allowance for loan losses
 
4,000

 
3,954

Net deferred fees
 
711

 
737

Loans, net
 
$
427,266

 
$
427,620



10



The following table is an analysis of past due loans as of March 31, 2018:
 
 
Past Due
 
 
 
 
 
 
 
 
30-89 days
 
90 days and over
 
Total
 
Current
 
Total
 
> 90 Days and Accruing
Real estate secured
 
 
 
 
 
 
 
 
 
 
 
 
Residential 1-4 family
 
$
1,647

 
$
689

 
$
2,336

 
$
169,395

 
$
171,731

 
$
243

Equity lines of credit
 

 

 

 
35,568

 
35,568

 

Multifamily
 

 

 

 
18,157

 
18,157

 

Farmland
 
678

 
194

 
872

 
12,105

 
12,977

 

Construction, land development, other land loans
 
74

 

 
74

 
16,859

 
16,933

 

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied
 
601

 
317

 
918

 
81,233

 
82,151

 

Non-owner-occupied
 
1,707

 

 
1,707

 
32,730

 
34,437

 

Second mortgages
 

 

 

 
4,670

 
4,670

 

Non-real estate secured
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
95

 
17

 
112

 
13,505

 
13,617

 

Commercial
 
104

 
209

 
313

 
38,421

 
38,734

 

Agricultural
 

 

 

 
3,002

 
3,002

 

Total
 
$
4,906

 
$
1,426

 
$
6,332

 
$
425,645

 
$
431,977

 
$
243


The following table is an analysis of past due loans as of December 31, 2017:
 
 
Past Due
 
 
 
 
 
 
 
 
30-89 days
 
90 days and over
 
Total
 
Current
 
Total
 
> 90 Days and Accruing
Real estate secured
 
 
 
 
 
 
 
 
 
 
 
 
Residential 1-4 family
 
$
1,092

 
$
566

 
$
1,658

 
$
173,231

 
$
174,889

 
$

Equity lines of credit
 

 

 

 
34,378

 
34,378

 

Multifamily
 

 

 

 
19,469

 
19,469

 

Farmland
 
234

 
50

 
284

 
12,904

 
13,188

 

Construction, land development, other land loans
 

 

 

 
15,907

 
15,907

 

Commercial real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied
 
11

 
708

 
719

 
81,402

 
82,121

 

Non-owner-occupied
 

 

 

 
33,748

 
33,748

 

Second mortgages
 

 

 

 
4,684

 
4,684

 

Non-real estate secured
 
 
 
 
 
 
 
 
 
 
 
 
Personal
 
211

 
23

 
234

 
13,958

 
14,192

 

Commercial
 
502

 
279

 
781

 
36,004

 
36,785

 
26

Agricultural
 
49

 

 
49

 
2,901

 
2,950

 

Total
 
$
2,099

 
$
1,626

 
$
3,725

 
$
428,586

 
$
432,311

 
$
26


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 March 31, 2018 and December 31, 2017
 
 
March 31, 2018
 
December 31, 2017
Real estate secured
 
 
 
 
Residential 1-4 family
 
$
553

 
$
887

Commercial real estate:
 
 
 
 
Owner-occupied
 
575

 
708

Non-owner-occupied
 

 

Second mortgages
 

 

Equity lines of credit
 

 

Farmland
 
194

 
193

Non-real estate secured
 
 
 
 
Personal
 
14

 
23

Commercial and agricultural
 
209

 
254

Total
 
$
1,545

 
$
2,065


The following is a summary of residential real estate currently in the process of foreclosure as well as foreclosed residential real estate as of March 31, 2018.
 
 
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 March 31, 2018 and December 31, 2017. 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 March 31, 2018 and December 31, 2017
March 31, 2018
 
Residential 1-4 Family
 
Multifamily
 
Farmland
 
Construction, Land Loans
 
Commercial Real Estate- Owner Occupied
 
Commercial Real Estate Non-Owner Occupied
Quality
 
$
36,436

 
$

 
$
11

 
$
3,158

 
$
3,174

 
$
230

Satisfactory
 
89,329

 
10,055

 
3,965

 
5,921

 
45,999

 
13,932

Acceptable
 
39,696

 
8,102

 
3,616

 
6,177

 
28,795

 
16,351

Special Mention
 
909

 

 
3,185

 
1,677

 
978

 
1,569

Substandard
 
5,361

 

 
2,200

 

 
3,205

 
2,355

Doubtful
 

 

 

 

 

 

Total
 
$
171,731

 
$
18,157

 
$
12,977

 
$
16,933

 
$
82,151

 
$
34,437

December 31, 2017
 
Residential 1-4 Family
 
Multifamily
 
Farmland
 
Construction, Land Loans
 
Commercial Real Estate- Owner Occupied
 
Commercial Real Estate Non-Owner Occupied
Quality
 
$
33,107

 
$

 
$
13

 
$
2,870

 
$
3,535

 
$
295

Satisfactory
 
95,659

 
10,653

 
4,419

 
5,445

 
45,906

 
13,602

Acceptable
 
40,487

 
8,816

 
3,333

 
5,906

 
28,344

 
15,609

Special Mention
 
388

 

 
3,206

 
1,565

 
2,542

 
2,226

Substandard
 
5,248

 

 
2,217

 
121

 
1,661

 
2,016

Doubtful
 

 

 

 

 
133

 

Total
 
$
174,889

 
$
19,469

 
$
13,188

 
$
15,907

 
$
82,121

 
$
33,748


12




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.
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

13



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 March 31, 2018:

 
 
Consumer - Non Real Estate
 
Equity Line of Credit /Second Mortgages
 
Commercial - Non Real Estate
 
Agricultural - Non Real Estate
Performing
 
$
13,600

 
$
40,238

 
$
38,525

 
$
3,002

Nonperforming (>90 days past due)
 
17

 

 
209

 

Total
 
$
13,617

 
$
40,238

 
$
38,734

 
$
3,002


Credit Risk Profile based on payment activity as of December 31, 2017:

 
 
Consumer - Non Real Estate
 
Equity Line of Credit /Second Mortgages
 
Commercial - Non Real Estate
 
Agricultural - Non Real Estate
Performing
 
$
14,169

 
$
39,062

 
$
36,506

 
$
2,950

Nonperforming (>90 days past due)
 
23

 

 
279

 

Total
 
$
14,192

 
$
39,062

 
$
36,785

 
$
2,950


14




The following tables reflect the Bank's impaired loans at March 31, 2018:
March 31, 2018
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With no related allowance
 
 
 
 
 
 
 
 
Real estate secured
 
 
 
 
 
 
 
 
 
 
Residential 1-4 family
 
$
4,769

 
$
4,769

 

 
$
6,084

 
$
74

Equity lines of credit
 
35

 
35

 

 
42

 

Multifamily
 

 

 

 

 

Farmland
 
656

 
656

 

 
571

 
12

Construction, land development, other land loans
 
1,677

 
1,677

 

 
1,721

 

Commercial real estate- owner occupied
 
932

 
932

 

 
1,242

 

Commercial real estate- non owner occupied
 

 

 

 
32

 

Second mortgages
 
122

 
122

 

 
166

 

Non-real estate secured
 
 

 
 
 
 
 
 
 
 
Personal
 

 

 

 
48

 
11

Commercial and agricultural
 
1,177

 
1,177

 

 
841

 
12

Total
 
$
9,368

 
$
9,368

 

 
$
10,747

 
$
109


March 31, 2018
 
Recorded Investment
 
Unpaid Principal Balance
 
Related Allowance
 
Average Recorded Investment
 
Interest Income Recognized
With an allowance recorded
 
 
 
 
 
 
 
 
Real estate secured
 
 
 
 
 
 
 
 
 
 
Residential 1-4 family
 
$
525

 
$
525

 
$
19

 
$
300

 
$
2

Equity lines of credit
 

 

 

 

 

Multifamily
 

 

 

 

 

Farmland
 
1,621

 
1,621

 
192

 
1,676

 

Construction, land development, other land loans
 

 

 

 

 

Commercial real estate- owner occupied
 
2,376

 
2,376

 
516

 
2,125

 

Commercial real estate- non owner occupied
 
4,027

 
4,027

 
782

 
3,960

 

Second mortgages
 

 

 

 

 

Non-real estate secured
 
 
 
 
 
 
 
 
 
 
Personal
 
21

 
21

 
23

 
12

 

Commercial and agricultural
 
349

 
349

 
234

 
426

 

Total
 
$
8,919

 
$
8,919

 
$
1,766

 
$
8,499

 
$
2



15




The following tables reflect the Bank's impaired loans at December 31, 2017:
December 31, 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
 
$
7,398

 
$
7,398

 

 
$
6,123

 
$
279

Equity lines of credit
 
49

 
49

 

 
37

 

Multifamily
 

 

 

 
495

 
56

Farmland
 
486

 
486

 

 
586

 
42

Construction, land development, other land loans
 
1,765

 
1,765

 

 
1,753

 
67

Commercial real estate- owner occupied
 
1,552

 
1,552

 

 
3,677

 
22

Commercial real estate- non owner occupied
 
63

 
63

 

 
973

 
19

Second mortgages
 
209

 
209

 

 
198

 
3

Non real estate secured
 
 
 
 
 
 
 
 
 
 
Personal
 
95

 
95

 

 
55

 

Commercial and agricultural
 
504

 
504

 

 
274

 

Total
 
$
12,121

 
$
12,121

 

 
$
14,171

 
$
488


December 31, 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
 
$
74

 
$
74

 
$
11

 
$
267

 
$
24

Equity lines of credit
 

 

 

 

 

Multifamily
 

 

 

 

 

Farmland
 
1,731

 
1,731

 
257

 
962

 
13

Construction, land development, other land loans
 

 

 

 
183

 
24

Commercial real estate- owner occupied
 
1,873

 
1,873

 
465

 
1,506

 
196

Commercial real estate- non owner occupied
 
3,892

 
3,892

 
955

 
2,951

 
141

Second mortgages
 

 

 

 
9

 

Non real estate secured
 
 
 
 
 
 
 
 
 
 
Personal
 
2

 
2

 
2

 
27

 

Commercial and agricultural
 
502

 
502

 
418

 
568

 
4

Total
 
$
8,074

 
$
8,074

 
$
2,108

 
$
6,473

 
$
402




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 month periods ended March 31, 2018 and March 31, 2017.

Three months ended March 31, 2018
 
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,  2017
 
$
133

 

 
$
1

 
$
1,636

 
$
955

 
$
12

 
$

 
$
54

 
$
265

 
$
383

 
$
515

 
$
3,954

Provision expense (credit) for credit losses
 
3

 
3

 
2

 
(219
)
 
(167
)
 
(3
)
 
6

 
139

 
21

 
(136
)
 
523

 
172

Charge-offs
 

 

 

 
95

 

 
5

 

 

 
88

 
149

 

 
337

Recoveries
 
(8
)
 

 
(1
)
 
(17
)
 

 

 

 
(1
)
 
(30
)
 
(154
)
 

 
(211
)
Net charge-offs (recoveries)
 
(8
)
 

 
(1
)
 
78

 

 
5

 

 
(1
)
 
58

 
(5
)
 

 
126

Balance at March 31, 2018
 
$
144

 
$
3

 
$
4

 
$
1,339

 
$
788

 
$
4

 
$
6

 
$
194

 
$
228

 
$
252

 
$
1,038

 
$
4,000

Allowance allocated by impairment method:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated
 
$
19

 
$

 
$

 
$
516

 
$
782

 
$

 
$

 
$
192

 
$
24

 
$
233

 
$

 
$
1,766

Collectively evaluated
 
125

 
3

 
4

 
823

 
6

 
4

 
6

 
2

 
204

 
19

 
1,038

 
2,234

Loan balances by impairment method used: