PINX:HBKA Highlands Bankshares Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012

[   ] 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.
 
5,011,152 shares of common stock, par value $0.625 per share,
outstanding as of May 14, 2012
 
 


 
 
 

 

Highlands Bankshares, Inc.

FORM 10-Q
For the Quarter Ended March 31, 2012


INDEX
   
PART I. FINANCIAL INFORMATION
PAGE
   
Item 1.  Financial Statements
 
   
Consolidated Balance Sheets
  at March 31, 2012 (Unaudited) and December 31, 2011
 
3
 
 
Consolidated Statements of Income (Unaudited)
  for the Three Months Ended March 31, 2012 and 2011
4
   
    Consolidated Statements of Comprehensive Income (Unaudited)
  for the Three Months Ended March 31, 2012 and 2011
 
  5
Consolidated Statements of Cash Flows (Unaudited)
  for the Three Months Ended March 31, 2012 and 2011
6
   
Consolidated Statements of Changes in
  Stockholders’ Equity (Unaudited) for the Three Months
  Ended March 31, 2012 and 2011
7
   
Notes to Consolidated Financial Statements (Unaudited)
8-37
   
Item 2. Management’s Discussion and Analysis of
              Financial Condition and Results of Operations
38-44
   
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

 
 
PART I.
FINANCIAL INFORMATION
 
ITEM 1.  Financial Statements

Consolidated Balance Sheets
(Amounts in thousands)
   
(Unaudited)
 March 31, 2012
   
(Note 1)
December 31, 2011
 
                                              ASSETS
           
Cash and due from banks
  $ 18,383     $ 15,734  
Federal funds sold
    69,956       70,341  
                 
   Total Cash and Cash Equivalents
    88,339       86,075  
                 
Investment securities available for sale  (amortized cost $63,982 at  March 31, 2012, $67,372 at December 31, 2011)
    61,438       64,252  
Other investments, at cost
    5,308       5,308  
Loans, net of allowance for loan losses of $8,928 at March 31, 2012, $9,024 at December 31, 2011
    392,369       398,780  
Premises and equipment, net
    21,713       21,883  
Deferred tax assets
    8,420       8,615  
Interest receivable
    2,385       2,369  
Bank owned life Insurance
    13,345       13,230  
Other real estate owned, net
    15,731       16,724  
Other assets
    3,041       3,747  
                 
    Total Assets
  $ 612,089     $ 620,983  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
LIABILITIES
               
                 
Deposits:
               
  Non-interest bearing
  $ 105,931     $ 98,950  
  Interest bearing
    400,079       416,411  
                 
    Total Deposits
    506,010       515,361  
                 
Interest, taxes and other liabilities
    2,276       2,570  
Other short-term borrowings
    57,677       57,676  
Long-term debt
    13,920       13,964  
Capital securities
    3,150       3,150  
                 
    Total Other Liabilities
    77,023       77,360  
                 
    Total Liabilities
    583,033       592,721  
                 
STOCKHOLDERS’ EQUITY
               
                 
Common stock (5,011 shares issued and outstanding)
    3,132       3,132  
Additional paid-in capital
    7,783       7,783  
Retained earnings
    19,820       19,406  
Accumulated other comprehensive income (loss)
    (1,679 )     (2,059 )
                 
  Total Stockholders’ Equity
    29,056       28,262  
                 
    Total Liabilities and Stockholders’ Equity
  $ 612,089     $ 620,983  
                 
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, 2012
   
Three Months Ended March 31, 2011
 
INTEREST INCOME
           
Loans receivable and fees on loans
  $ 5,930     $ 6,427  
Securities available for sale:
               
  Taxable
    234       284  
  Exempt from taxable income
    200       225  
Other investment income
    21       17  
Federal funds sold
    42       36  
                 
    Total Interest Income
    6,427       6,989  
                 
INTEREST EXPENSE
               
Deposits
    1,297       1,798  
Other borrowed funds
    845       907  
                 
    Total Interest Expense
    2,142       2,705  
                 
    Net Interest Income
    4,285       4,284  
                 
Provision for Loan Losses
    505       3,603  
                 
    Net Interest Income after Provision for Loan Losses
    3,780       681  
                 
NON-INTEREST INCOME
               
Securities gains (losses), net
    3       29  
Service charges on deposit accounts
    491       494  
Other service charges, commissions and fees
    504       396  
Other  operating income
    228       166  
Other than temporary impairment charge
    (167 )     (114 )
 
               
    Total Non-Interest Income
    1,059       971  
                 
NON-INTEREST EXPENSE
               
Salaries and employee benefits
    2,267       2,528  
Occupancy expense of bank premises
    277       260  
Furniture and equipment expense
    333       338  
Other operating expense
    1,263       1,337  
Foreclosed Assets – Loss on Sale / Write-down
    39       253  
Foreclosed Assets – Operating Expenses
    190       312  
                 
    Total Non-Interest Expense
    4,369       5,028  
                 
    Income (Loss) Before Income Taxes
    470       (3,376 )
                 
Income Tax Expense (Benefit) (Note 3)
    56       (1,253 )
                 
    Net Income (Loss)
  $ 414     $ (2,123 )
                 
Basic Earnings (Loss)  Per Common Share (Note 6)
  $ 0.08     $ (0.43 )
                 
Earnings (Loss) Per Common Share – Assuming Dilution
  $ 0.08     $ (0.43 )
                 
Dividends Per Share
  $ -     $ -  

See accompanying Notes to Consolidated Financial Statements
 

 
 
4

 
Consolidated Statements of Comprehensive Income
(Amounts in thousands)
(Unaudited)
 
   
Three Months Ended  March 31, 2012
   
Three Months Ended March 31, 2011
 
             
             
Net Income (Loss)
  $ 414     $ (2,123 )
                 
     Other Comprehensive Income
               
          Unrealized gains on securities during the period
    579       415  
  Less: reclassification adjustment for gains included in net income
    (3 )     (29 )
          Other Comprehensive Income, before tax
    576       386  
           Income tax expense related to other
           comprehensive income
    196       130  
    Other Comprehensive Income
    380       256  
Comprehensive Income (Loss)
  $ 794     $ (1,867 )
                 

See accompanying Notes to Consolidated Financial Statements


































 
 
 
 
 
 
 
 
 
 
 

 
 
5

 
 

Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
 
   
Three Months Ended
   
Three Months Ended
 
   
March 31, 2012
   
March 31, 2011
 
CASH FLOWS FROM OPERATING  ACTIVITIES:
           
Net income (loss)
  $ 414     $ (2,123 )
Adjustments to reconcile net income  (loss) to net cash provided by 
operating activities
               
Provision for loan losses
    505       3,603  
Depreciation and amortization
    254       288  
Net realized (gains) losses on available for sale securities
    (3 )     (29 )
Net amortization on securities
    170       135  
                Other than temporary impairment charge
    167       114  
Amortization of Capital issue costs
    1       2  
                Increase in interest receivable
    (16 )     (177 )
Valuation adjustment of other real estate owned
    -       195  
(Increase) decrease in other assets
    673       (1,126 )
Decrease in interest, taxes and other liabilities
    (294 )     (201 )
                 
Net cash provided by operating activities
     1,871       681  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Securities available for sale:
               
        Proceeds from sale of securities
    506       2,332  
Proceeds from maturities of debt and equity securities
    4,200       1,726  
Purchase of debt and equity securities
    (1,650 )     (6,374 )
Net decrease in loans
    4,780       9,568  
Proceeds from sales of other real estate owned
    2,119       558  
Premises and equipment expenditures
    (168 )     (4 )
                 
Net cash provided by investing activities
    9,787       7,806  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Net decrease in time deposits
    (22,671 )     (12,494 )
Net increase in demand, savings and other deposits
    13,320       8,222  
Increase (decrease) in short-term borrowings
    1       (7,993 )
Decrease in long-term debt
    (44 )     (118 )
                 
Net cash  used in financing activities
    (9,394 )     (12,383 )
                 
Net increase (decrease) in cash and cash equivalents
    2,264       (3,896 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR
    86,075       82,152  
                 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 88,339     $ 78,256  
                 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
               
Cash paid during the year for:
               
Interest
  $ 1,973     $ 2,980  
Income taxes
  $ -     $ -  
                 
       SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS
               
Transfer of loans to other real estate owned
  $ 1,125     $ 1,446  

See accompanying Notes to Consolidated Financial Statements




 
6

 

Consolidated Statements of Changes in Stockholders’ Equity
(Amounts in thousands)
(Unaudited)
 
                     
Accumulated
       
         
Additional
         
Other
   
Total
 
   
Common Stock
   
Paid-in
   
Retained
   
Comprehensive
   
Stockholders’
 
   
Shares
   
Par Value
   
Capital
   
Earnings
   
Income
   
Equity
 
                                     
Balance, December 31, 2010
    5,011     $ 3,132     $ 7,783     $ 25,923     $ (3,958 )   $ 32,880  
                                                 
Net income / (loss)
    -       -       -       (2,123 )     -       (2,123 )
                                                 
Other comprehensive income
    -       -       -       -       256       256  
                                                 
Balance, March 31, 2011
    5,011     $ 3,132     $ 7,783     $ 23,800     $ (3,702 )   $ 31,013  
                                                 
Balance, December 31, 2011
    5,011     $ 3,132     $ 7,783     $ 19,406     $ (2,059 )   $ 28,262  
                                                 
Net income / (loss)
    -       -       -       414       -       414  
                                                 
Other comprehensive income
    -       -       -       -       380       380  
                                                 
                                                 
Balance, March 31, 2012
    5,011     $ 3,132     $ 7,783     $ 19,820     $ (1,679 )   $ 29,056  
                                                 
                                                 

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, 2011 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, 2011 (the “2011 Form 10-K”). The notes included herein should be read in conjunction with the notes to consolidated financial statements included in the 2011 Form 10-K. The results of operations for the three-month period ended March 31, 2012 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:

   
March 31, 2012
   
December 31, 2011
 
Real Estate Secured:
           
Residential 1-4 family
  $ 168,837     $ 169,027  
Multifamily
    16,847       15,375  
Construction and Land Loans
    19,758       23,295  
Commercial, Owner Occupied
    68,081       71,367  
Commercial, Non-owner occupied
    37,671       36,489  
Second mortgages
    11,245       12,247  
Equity lines of credit
    8,793       9,126  
Farmland
    12,276       12,207  
      343,508       349,133  
                 
Secured (other) and unsecured
               
Personal
    22,939       23,824  
Commercial
    31,487       32,407  
Agricultural
    3,702       2,784  
      58,128       59,015  
                 
Overdrafts
    205       207  
                 
      401,841       408,355  
Less:
               
  Allowance for loan losses
    8,928       9,024  
  Net deferred fees
    544       551  
      9,472       9,575  
                 
Loans, net
  $ 392,369     $ 398,780  








 
8

 
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
 
 
    The following table is an analysis of past due loans as of March 31, 2012:

   
30-59 Days Past Due
   
60-89 Days Past Due
   
Greater Than 90 Days
   
Total Past Due
   
Current
   
Total Financing Receivables
   
Recorded Investment > 90 Days and Accruing
 
                                           
Real Estate Secured
                                         
Residential 1-4 family
  $ 2,339     $ 1,122     $ 4,792     $ 8,253     $ 160,584     $ 168,837     $ 819  
Equity lines of credit
    56       3       168       227       8,566       8,793       168  
Multifamily
    -       -       97       97       16,750       16,847       -  
Farmland
    316       133       -       449       11,827       12,276       -  
Construction, Land Development, Other Land Loans
    438       29       1,233       1,700       18,058       19,758       -  
Commercial Real Estate- Owner Occupied
    784       351       5,716       6,851       61,230       68,081       -  
Commercial Real Estate- Non Owner Occupied
    1,604       -       742       2,346       35,325       37,671       -  
Second Mortgages
    74       132       92       298       10,947       11,245       -  
Non Real Estate Secured
                                                       
Personal
    305       125       57       487       22,657       23,144       12  
Business
    804       60       608       1,472       30,015       31,487       -  
Agricultural
    -       6       634       640       3,062       3,702       -  
                                                         
          Total
  $ 6,720     $ 1,961     $ 14,139     $ 22,820     $ 379,021     $ 401,841     $ 999  
                                                         

 
The following table is an analysis of past due loans as of  December 31, 2011:
 
   
30-59 Days Past Due
   
60-89 Days Past Due
   
Greater Than 90 Days
   
Total Past Due
   
Current
   
Total Financing Receivables
   
Recorded Investment > 90 Days and Accruing
 
                                           
Real Estate Secured
                                         
Residential 1-4 family
  $ 3,471     $ 1,071     $ 4,236     $ 8,778     $ 160,249     $ 169,027     $ 171  
Equity lines of credit
    -       205       -       205       8,921       9,126       -  
Multifamily
    97       -       646       743       14,632       15,375       -  
Farmland
    -       134       -       134       12,073       12,207       -  
Construction, Land Development, Other Land Loans
    271       59       1,846       2,176       21,119       23,295       -  
Commercial Real Estate-Owner Occupied
    1,199       476       6,989       8,664       62,703       71,367       920  
Commercial Real Estate-Non Owner Occupied
    -       1,446       863       2,309       34,180       36,489       292  
Second Mortgages
    243       10       518       771       11,476       12,247       26  
Non Real Estate Secured
                                                       
Personal
    244       113       134       491       23,540       24,031       41  
Commercial
    224       25       630       879       31,528       32,407       -  
Agricultural
    17       7       2       26       2,758       2,784       -  
                                                         
          Total
  $ 5,766     $ 3,546     $ 15,864     $ 25,176     $ 383,179     $ 408,355     $ 1,450  
                                                         



 
 

 

 
9

 

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

Loans are considered delinquent when payments have not been made according to the terms of the contract The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection.  Credit card loans and other personal loans are typically charged off no later than 180 days past due.   In all cases, loans are placed on non-accrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
 
    The following is a summary of non-accrual loans at March 31, 2012 and December 31, 2011:
 
   
March 31, 2012
   
December 31, 2011
 
Real Estate Secured
           
Residential 1-4 Family
  $ 3,973     $ 4,065  
Multifamily
    97       646  
Construction and Land Loans
    1,233       1,846  
Commercial-Owner Occupied
    5,716       6,069  
Commercial- Non Owner Occupied
    742       4,871  
Second Mortgages
    92       492  
Equity Lines of Credit
    -       -  
Farmland
    -       630  
Secured (other) and Unsecured
               
Personal
    45       94  
Commercial
    608       630  
Agricultural
    634       2  
                 
Total
  $ 13,140     $ 19,345  
 
 
The December 31, 2011 total includes approximately $4.9 million of loans that were current and paying under the terms of their existing loan agreement but included in non-accrual per regulatory guidance.























 
10

 
Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
 
The following tables represent a summary of credit quality indicators of the Company’s loan portfolio at March 31, 2012 and December 31, 2011: 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 March 31, 2012
 
Grade (1)
 
Residential 1-4 Family
   
Multifamily
   
Farmland
   
Construction, Land Loans
   
Commercial Real Estate- Owner Occupied
   
Commercial Real Estate Non-Owner Occupied
 
                                     
Quality
    37,335       1,635       1,099       3,890       5,715       1,352  
Satisfactory
    78,026       11,107       3.,376       5,413       23,329       15,094  
Acceptable
    33,353       1,470       7,033       5,860       21,613       8,943  
Special Mention
    3,324       1,311       112       3,401       3,170       1,510  
Substandard
    16,799       1,324       656       1,194       14,254       10,772  
Doubtful
    -       -       -       -       -       -  
                                                 
     Total
  $ 168,837     $ 16,847     $ 12,276     $ 19,758     $ 68,081     $ 37,671  
 


Credit Risk Profile by Internally Assigned Grade as of December 31, 2011
 
Grade (1)
 
Residential 1-4 Family
   
Multifamily
   
Farmland
   
Construction, Land Loans
   
Commercial Real Estate- Owner Occupied
   
Commercial Real Estate Non-Owner Occupied
 
                                     
Quality
    37,509       1,220       1,104       4,108       6,119       1,604  
Satisfactory
    79,225       9,790       3,419       6,026       23,168       14,756  
Acceptable
    33,427       1,481       3,944       5,940       25,652       9,270  
Special Mention
    3,739       1,318       1,767       2,195       4,073       1,518  
Substandard
    15,127       1,566       1,973       5,026       12,355       9,341  
Doubtful
    -       -       -       -       -       -  
                                                 
     Total
  $ 169,027     $ 15,375     $ 12,207     $ 23,295     $ 71,367     $ 36,489  

 
(1)  Quality-- This grade is reserved for the Bank’s top quality loans. These loans have excellent sources of repayment, with no significant identifiable risk of collection.  Generally, loans assigned this rating will demonstrate the following characteristics:
 
·  
Conformity in all respects with Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).
 
·  
Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.
 
·  
Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.
 
 
For existing loans, all of the requirements above apply plus all payments have been made as agreed, current financial information on all borrowers and guarantors has been obtained and analyzed, and overall business operating trends are either stable or improving.
 
Satisfactory-- This grade is given to performing loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this rating will demonstrate the following characteristics:
 
·  
General conformity to the Bank's policy requirements, product guidelines and underwriting standards.  Any exceptions that are identified during the underwriting and approval process have been adequately mitigated by other factors.
 
·  
Documented historical cash flow that meets or exceeds required minimum Bank guidelines, or that can be supplemented with verifiable cash flow from other sources.  
 
 
 
11

 

 

Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
 
·  
Adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor
 
 
For existing loans, all of the requirements outlined above will apply, plus all payments have been made as agreed, current financial information on all borrowers and guarantors has been obtained and analyzed, and overall business operating trends are stable with any declines considered minor and temporary.
 
Acceptable -- This grade is given to loans that show signs of weakness in either adequate sources of repayment or collateral, but have demonstrated mitigating factors that minimize the risk of delinquency or loss.  Loans assigned this rating may demonstrate some or all of the following characteristics:
 
 
·  
Additional exceptions to the Bank's policy requirements, product guidelines or underwriting standards that present a higher degree of risk to the Bank.  Although the combination and/or severity of identified exceptions is greater, all exceptions have been properly mitigated by other factors.
 
 
·  
Unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time.  Repayment weaknesses may be due to minor operational issues, financial trends, or reliance on projected (not historic) performance.
 
 
·  
Marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.
 
 
For existing loans, payments have generally been made as agreed with only minor and isolated delinquencies.
 
Special Mention -- This grade is given to Watch List loans that include the following characteristics:
 
 
·  
Loans with underwriting guideline tolerances and/or exceptions with no identifiable mitigating factors.
·  
Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank's position at some future date.  Potential weaknesses are the result of deviations from prudent lending practices.
·  
Loans where adverse economic conditions that develop subsequent to the loan origination do not jeopardize liquidation of the debt, but do substantially increase the level of risk may also warrant this rating.
 
Substandard -- Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
 
The weaknesses may include, but are not limited to:
 
·  
  High debt to worth ratios and or declining or negative earnings trends
·  
Declining or inadequate liquidity
·  
Improper loan structure  or questionable repayment sources
·  
Lack of well-defined secondary repayment source, and
·  
Unfavorable competitive comparisons.
 
Such loans are no longer considered to be adequately protected due to the borrower's declining net worth, lack of earnings capacity, declining collateral margins and/or unperfected collateral positions. A possibility of loss of a portion of the loan balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals.
 
 
 
12

 

Notes to Consolidated Financial Statements
(Unaudited)
(in thousands, except share, per share and percentage data)
 
 
Doubtful  --  Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual status, and no definite repayment schedule exists.
 
However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are:
 
·  
Injection of capital
·  
Alternative financing
·  
Liquidation of assets or the pledging of additional collateral.
 
 
Credit Risk Profile based on payment activity as of  March 31, 2012:
 
   
Consumer - Non Real Estate
   
Equity Line of Credit / Second Mortgages
   
Commercial - Non Real Estate
   
Agricultural - Non Real Estate
 
                         
Performing
  $ 23,087     $ 19,778     $ 30,879     $ 3,068  
Nonperforming (>90 days past due)
    57       260       608       634  
                                 
     Total
  $ 23,144     $ 20,038     $ 31,487     $ 3,702  
                                 

Credit Risk Profile based on payment activity as of December 31, 2011:
 
   
Consumer - Non Real Estate
   
Equity Line of Credit /Jr. liens
   
Commercial - Non Real Estate
   
Agricultural - Non Real Estate
 
                         
Performing
  $ 23,897     $ 20,855     $ 31,777     $ 2,782  
Nonperforming (>90 days past due)
    134       518       630       2  
                                 
     Total
  $ 24,031     $ 21,373     $ 32,407     $ 2,784  
                                 


















 
13

 

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

The following tables reflect the Bank’s impaired loans at March 31, 2012:
   
Recorded
 Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With No Related Allowance
                             
Real Estate Secured
                             
Residential 1-4 family
  $ 10,821     $ 10,821     $ -     $ 9,928     $ 123  
Equity lines of credit
    -       -       -       -       -  
Multifamily
    1,323       1,323       -       1,122       16  
Farmland
    277       277       -       280       5  
Construction, Land Development, Other Land Loans
    180       180       -       1,334       1  
Commercial Real Estate- Owner Occupied
    9,325       9,325       -       9,240       46  
Commercial Real Estate- Non Owner Occupied
    9,178       9,178       -       7,019       89  
Second Mortgages
    578       578       -       585       9  
Non Real Estate Secured
                                       
Personal /Consumer
    60       60       -       45       1  
Business Commercial
    713       713       -       1,580       6  
Agricultural
    20       20       -       10       -  
                                         
          Total
  $ 32,475     $ 32,475     $ -     $ 31,143     $ 296  



   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With an Allowance Recorded
                             
Real Estate Secured
                             
Residential 1-4 family
  $ 3,911     $ 3,911     $ 373     $ 3,859     $ 38  
Equity lines of credit
    -       -       -       -       -  
Multifamily
    -       -       -       -       -  
Farmland
    206       206       5       257       3  
Construction, Land Development, Other Land Loans
    944       944       345       1,741       -  
Commercial Real Estate- Owner Occupied
    3,343       3,343       439       2,665       20  
Commercial Real Estate- Non Owner Occupied
    1,595       1,595       188       3,039       6  
Second Mortgages
    108       108       8       108       2  
Non Real Estate Secured
                                       
Personal /Consumer
    39       39       5       57       -  
Business Commercial
    650       650       568       753       4  
Agricultural
    770       770       164       385       2  
Credit Cards
    -       -       -       -       -  
                                         
          Total
  $ 11,566     $ 11,566     $ 2,095     $ 12,864     $ 75  



 
14

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

The following tables reflect the Bank’s impaired loans at  December 31, 2011:

   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With No Related Allowance
                             
Real Estate Secured
                             
Residential 1-4 family
  $ 9,034     $ 9,342     $ -     $ 8,243     $ 285  
Equity lines of credit
    -       -       -       -       -  
Multifamily
    920       920       -       480       63  
Farmland
    283       283       -       529       16  
Construction, Land Development, Other Land Loans
    2,487       2,487       -       3,170       108  
Commercial Real Estate- Owner Occupied
    9,155       9,155       -       7,327       187  
Commercial Real Estate- Non Owner Occupied
    4,859       4,859       -       4,183       143  
Second Mortgages
    591       591       -       646       6  
Non Real Estate Secured
                                       
Personal
    30       30       -       26       3  
Commercial
    2,446       3,115       -       1,856       64  
Agricultural
    -       -       -       -       -  
                                         
          Total
  $ 29,805     $ 30,782     $ -     $ 26,460     $ 875  


   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
 Income
Recognized
 
With an Allowance Recorded
                             
Real Estate Secured
                             
Residential 1-4 family
  $ 3,806     $ 3,840     $ 571     $ 4,161     $ 132  
Equity lines of credit
    -       -       -       -       -  
Multifamily
    646       866       201       1,139       11  
Farmland
    307       307       38       309       11  
Construction, Land Development, Other Land Loans
    2,538       2,538       606       4,787       80  
Commercial Real Estate- Owner Occupied
    1,986       2,086       323       3,132       11  
Commercial Real Estate- Non Owner Occupied
    4,482       4,482       343       4,758       54  
Second Mortgages
    108       108       10       138       4  
Non Real Estate Secured
                                       
Personal
    74       74       41       62       4  
Commercial
    856       856       675       1,494       22  
Agricultural
    -       -       -       14       -  
                                         
          Total
  $ 14,803     $ 15,157     $ 2,808     $ 19,994     $ 329  



 
15

 

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


The following tables present the balance in the allowance for loan losses and the recorded investment in loans by loan category and is segregated by impairment
evaluation method as of March 31, 2011 and March 31, 2012.

Three months ended
March 31, 2011
 
Residential
1-4 Family
   
Multifamily
   
Construction and Land Loans
   
Commercial Owner Occupied
   
Commercial Non-Owner Occupied
   
Second Mortgages