Exhibit 10.1

 
 
UNITED STATES OF AMERICA
BEFORE THE
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
WASHINGTON, D.C.
 
 

     
Written Agreement by and among
 
Docket Nos.      10-179-WA/RB-HC
   
10-179-WA/RB-SM
HIGHLANDS BANKSHARES, INC.
Abingdon, Virginia
         
HIGHLANDS UNION BANK
Abingdon, Virginia
         
and
         
FEDERAL RESERVE BANK OF RICHMOND
Richmond, Virginia
         

 
WHEREAS, in recognition of their common goal to maintain the financial soundness
of Highlands Bankshares, Inc., Abingdon, Virginia ("Bankshares"), a registered
bank holding company, and its subsidiary bank, Highlands Union Bank, Abingdon,
Virginia (the "Bank"), a state-chartered bank that is a member of the Federal
Reserve System, Bankshares, the Bank, and the Federal Reserve Bank of Richmond
(the "Reserve Bank") have mutually agreed to enter into this Written Agreement
(the "Agreement"); and
WHEREAS, on, October 13, 2010, the boards of directors of Bankshares and the
Bank, at duly constituted meetings, adopted resolutions authorizing and
directing James D. Moorefield to enter into this Agreement on behalf of
Bankshares and the Bank, and consenting to compliance with each and every
applicable provision of this Agreement by Bankshares and the Bank, and their
institution-affiliated parties, as defined in sections 3(u) and

 
 

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8(b)(3) of the Federal Deposit Insurance Act, as amended (the "FDI Act") (12
U.S.C. §§ 1813(u) and 1818(b)(3)).
 
NOW, THEREFORE, Bankshares, Bank, and the Reserve Bank agree as follows:
 
Source of Strength
    1.          The board of directors of Bankshares shall take appropriate
steps to fully utilize Bankshares's financial and managerial resources, pursuant
to section 225.4(a) of Regulation Y of the Board of Governors of the Federal
Reserve System (the "Board of Governors") (12 C.F.R. § 225.4(a)), to serve as a
source of strength to the Bank, including, but not limited to, taking steps to
ensure that the Bank complies with this Agreement, and any other supervisory
action taken by the Bank's federal or state regulator.
 
Board Oversight
    2.          Within 60 days of this Agreement, the board of directors of the
Bank shall submit to the Reserve Bank a written plan to strengthen board
oversight of the management and operations of the Bank. The plan shall, at a
minimum, address, consider, and include:
(a)          The actions that the board of directors will take to improve the
Bank's condition and maintain effective control over, and supervision of, the
Bank's major operations and activities, including but not limited to, credit
risk management, asset quality, capital, earnings, liquidity, and information
technology;
(b)          a description of the information and reports that will be regularly
reviewed by the board of directors in its oversight of the operations and
management of the Bank, including information on the Bank's adversely classified
assets, allowance for loan and lease losses ("ALLL"), capital, liquidity, and
earnings;

 
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(c)          the maintenance of adequate and complete minutes of all board and
committee meetings, approval of such minutes, and their retention for
supervisory review;
(d)          policies to ensure prompt resolution of regulatory concerns; and
(e)          the establishment of a written management succession plan for key
senior officers.
 
Credit Risk Management
 
3.          Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank an acceptable written plan to strengthen credit risk management
practices. The plan shall, at a minimum, address, consider, and include:
(a)          strategies to minimize credit losses and reduce the level of
problem assets; and
(b)          stress testing of loan and portfolio segments.
 
Credit Administration
 
 4.   Within 60 days of this Agreement, the Bank shall submit to the Reserve
Bank an acceptable written credit administration program that shall, at a
minimum, address, consider, and include:
(a)          An analysis of a borrower's and any guarantor's repayment sources,
global financial condition, income, liquidity, cash flow and contingent
liabilities;
(b)          the preparation of appropriate and complete documentation to
support the granting of, renewal or modification of loans;
(c)          the cessation of the practice of capitalizing interest on problem
loans;
(d)          policies and procedures for the timely performance of appraisals;
and
(e)          the development and implementation of a workout process, including,
but not limited to, appropriate workout plans for problem loans.

 
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Loan Grading and Loan Review
 
5.     Within 30 days of this Agreement, the Bank shall submit to the Reserve
Bank an acceptable written program for the effective grading of the Bank's loan
portfolio. The program shall provide for policies, procedures, and processes for
the timely and ongoing grading of loans. The program shall, at a minimum,
address, consider, and include:
(a)         Standards and criteria for assessing the credit quality of loans,
including a discussion of the factors used to assign appropriate risk grades to
loans;
(b)          procedures for the early identification of problem loans;
(c)          procedures to re-evaluate the grading of loans in the event of
material changes, in the borrower's performance or the value of the collateral;
(d)          procedures to evaluate the grading of all loans assigned less than
a pass grade at least quarterly;
(e)          designation of the person(s) responsible for the grading of loans;
(f)           controls to ensure staffs consistent application and adherence to
the loan grading system; and
(g)          a mechanism for reporting to senior management and the board of
directors, at least monthly, that at a minimum: summarizes the Bank's loan
grades; describes trends in asset quality; identifies the loans that are
nonperforming, adversely graded, or identified as needing special attention,
describes the status of those loans, and describes the actions taken, or to be
taken, by management for strengthening of the quality of any such loans.
6.          Within 30 days of this Agreement, the Bank shall conduct a review of
the adequacy of the staffing of the loan review function, and shall prepare a
written report that summarizes the findings. Within the same time period, the
report shall be submitted to the

 
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Reserve Bank.
 
Asset Improvement
       7.     The Bank shall not, directly or indirectly, extend, renew, or
restructure any credit to or for the benefit of any borrower, including any
related interest of the borrower, whose loans or other extensions of credit are
criticized in the combined report of inspection and examination conducted by the
Reserve Bank that commenced on March 22, 2010 (the "Report of Examination"), or
in any subsequent report of examination, without the prior approval of a
majority of the full board of directors or a designated committee thereof. The
board of directors or its committee shall document in writing the reasons for
the extension of credit, renewal, or restructuring, specifically certifying
that: (i) the Bank's risk management policies and practices for loan workout
activity are acceptable; (ii) the extension of credit is necessary to improve
and protect the Bank's interest in the ultimate collection of the credit already
granted and maximize its potential for collection; (iii) the extension of credit
reflects prudent underwriting based on reasonable repayment terms and is
adequately secured; and all necessary loan documentation has been properly and
accurately prepared and filed; (iv) the Bank has performed a comprehensive
credit analysis indicating that the borrower has the willingness and ability to
repay the debt as supported by an adequate workout plan, as necessary; and (v)
the board of directors or its designated committee reasonably believes that the
extension of credit will not impair the Bank's interest in obtaining repayment
of the already outstanding credit and that the extension of credit or renewal
will be repaid according to its terms. The written certification shall be made a
part of the minutes of the meetings of the board of directors or its committee,
as appropriate, and a copy of the signed certification, together with the credit
analysis and related information that was used in the determination, shall be
retained by the Bank in the borrower's credit file for subsequent

 
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supervisory review. For purposes of this Agreement, the term "related interest"
is defined as set forth in section 215.2(n) of Regulation O of the Board of
Governors (12 C.F.R. § 215.2(n)).
8.      (a)   Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank an acceptable written plan designed to improve the Bank's position
through repayment, amortization, liquidation, additional collateral, or other
means on each loan, relationship, or other asset in excess of $500,000,
including other real estate owned ("OREO"), that are past due as to principal or
interest more than 90 days as of the date of this Agreement, are on the Bank's
problem loan list, or were adversely classified in the Report of Examination.
(b)          Within 30 days of the date that any additional loan, relationship,
or other asset in excess of $500,000, including OREO, becomes past due as to
principal or interest for more than 90 days, is on the Bank's problem loan list,
or is adversely classified in any subsequent report of examination of the Bank,
the Bank shall submit to the Reserve Bank an acceptable written plan to improve
the Bank's position on such loan, relationship, or asset.
(c)          Within 30 days after the end of each calendar quarter thereafter,
the Bank shall submit a written progress report to the Reserve Bank to update
each asset improvement plan, which shall include, at a minimum, the carrying
value of the loan or other asset and changes in the nature and value of
supporting collateral, along with a copy of the Bank's current problem loan
list, a list of all loan renewals and extensions without full collection of
interest in the last quarter, and past due/non-accrual report.
Allowance for Loan and Lease Losses
     9.   (a)    Within 10 days of this Agreement, the Bank shall eliminate from
its books, by charge-off or collection, all assets or portions of assets
classified "loss" in the Report of Examination that have not been previously
collected in full or charged off. The Bank shall,

 
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within 30 days from the receipt of any federal or state report of examination,
charge off all assets classified "loss" unless otherwise approved in writing by
the Reserve Bank.
   (b)           Within 60 days of this Agreement, the Bank shall review and
revise its ALLL methodology consistent with relevant supervisory guidance,
including the Interagency Policy Statements on the Allowance for Loan and Lease
Losses, dated July 2, 2001 (SR 01-17 (Sup)) and December 13, 2006 (SR 06-17),
and the findings and recommendations regarding the ALLL set forth in the Report
of Examination, and submit a description of the revised methodology to the
Reserve Bank. The revised ALLL methodology shall be designed to maintain an
adequate ALLL and shall address, consider, and include, at a minimum, the
reliability of the Bank's loan grading system, the volume of criticized loans,
concentrations of credit, the current level of past due and nonperforming loans,
past loan loss experience, evaluation of probable losses in the Bank's loan
portfolio, including adversely classified loans, and the impact of market
conditions on loan and collateral valuations and collectability.
(c)          Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank an acceptable written program for the maintenance of an adequate
ALLL. The program shall include policies and procedures to ensure adherence to
the Bank's revised ALLL methodology and provide for periodic reviews and updates
to the ALLL methodology, as appropriate. The program shall also provide for a
review of the ALLL by the board of directors on at least a quarterly calendar
basis. Any deficiency found in the ALLL shall be remedied in the quarter it is
discovered, prior to the filing of the Consolidated Reports of Condition and
Income, by additional provisions. The board of directors shall maintain written
documentation of its review, including the factors considered and conclusions
reached by the Bank in determining the adequacy of the ALLL. During the term of
this Agreement, the Bank shall submit to the Reserve

 
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Bank, within 30 days after the end of each calendar quarter, a written report
regarding the board of directors' quarterly review of the ALLL and a description
of any changes to the methodology used in determining the amount of the ALLL for
that quarter.
 
Capital Plan
 
    10.    Within 60 days of this Agreement, Bankshares and the Bank shall
submit to the Reserve Bank an acceptable joint written plan to maintain
sufficient capital at Bankshares on a consolidated basis, and at the Bank as a
separate legal entity on a stand-alone basis. The plan shall, at a minimum,
address, consider, and include:
(a)           Bankshares's current and future capital requirements, including
compliance with the Capital Adequacy Guidelines for Bank Holding Companies:
Risk-Based Measure and Tier 1 Leverage Measure, Appendices A and D of Regulation
Y of the Board of Governors (12 C.F.R. Part 225, App. A and D);
(b)          the Bank's current and future capital requirements, including
compliance with the Capital Adequacy Guidelines for State Member Banks:
Risk-Based Measure and Tier 1 Leverage Measure, Appendices A and B of Regulation
H of the Board of Governors (12 C.F.R. Part 208, App. A and B);
(c)          the adequacy of the Bank's capital, taking into account the volume
of classified assets, concentrations of credit, the adequacy of the ALLL,
current and projected asset growth, projected earnings, and the results of the
consolidated organization's stress testing;
(d)          the source and timing of additional funds to fulfill Bankshares's
and the Bank's future capital requirements; and
(e)          the requirements of section 225.4(a) of Regulation Y of the Board
of Governors that Bankshares serve as a source of strength to the Bank.

 
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11.          Bankshares and the Bank shall notify the Reserve Bank, in writing,
no more than 30 days after the end of any calendar quarter in which any of
Bankshares's consolidated capital ratios or the Bank's capital ratios (total
risk-based, Tier 1 risk-based, or leverage) fall below the approved capital
plan's minimum ratios. Together with the notification, the Bankshares and the
Bank shall submit an acceptable written plan that details the steps Bankshares
or the Bank, as appropriate, will take to increase Bankshares's or the Bank's
capital ratios to or above the approved capital plan's minimums.
 
Liquidity and Funds Management
 
12.          Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank an acceptable revised written contingency funding plan that, at a
minimum, includes adverse scenario planning and identifies and quantifies
available sources of liquidity for each scenario.
 
Investment Portfolio Management
 
13.          Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank an acceptable revised written investment policy that shall, at a
minimum, address, consider, and include:
(a)          A description of acceptable and unacceptable types of investments
within the categories of permissible investments;
(b)          a well-documented pre-purchase analysis of the characteristics and
risks of a proposed investment;
(c)          periodic review of the credit quality and liquidity of the
investment portfolio;
(d)          enhancements to the pricing methodology and documentation
requirements for all investments, including those less liquid and those which
have no readily

 
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quoted market prices;
(e)          procedures to mitigate risk and control loss exposure;
(f)           reporting, review, and approval procedures to and by the board of
directors;
(g)          procedures to assess for impairments and to ensure that the Bank's
valuation processes and impairment analyses, including recognition of Other Than
Temporary Impairment ("OTTI"), are in accordance with generally accepted
accounting principles, including FASB Staff Position (FSP) FAS 115-2 and FAS
124-2, Recognition and Presentation of Other Than Temporary Impairments, and
regulatory reporting instructions;
(h)          an independent validation of OTTI; and
(i)          the annual review of the investment policy by the board of
directors.
 
Earnings Plan and Budget
 
14.           (a)         Within 90 days of this Agreement, the Bank shall
submit to the Reserve Bank a written business plan for 2011 to improve the
Bank's earnings and overall condition. The plan, at a minimum, shall provide for
or describe:
(i)           a realistic and comprehensive budget for 2011, including income
statement and balance sheet projections; and
(ii)           a description of the operating assumptions that form the basis
for, and adequately support, major projected income, expense, and balance sheet
components.
(b)           During the term of this Agreement, a business plan and budget for
each calendar year subsequent to 2011 shall be submitted to the Reserve Bank at
least 30 days prior to the beginning of that calendar year.

 
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Information Technology
 
15.           Within 60 days of this Agreement, the Bank shall submit to the
Reserve Bank an acceptable written program for information technology ("IT").
The program shall, at a minimum, address, consider, and include:
(a)           An enterprise-wide information security risk assessment, as
required by Appendix D-2 to Regulation H of the Board of Governors (12 C.F.R.
Part 208, App. D-2) and Appendix F to Regulation Y of the Board of Governors (12
U.S.C. Part 225, App.F), to enable the Bank to meet all applicable requirements
for protecting nonpublic customer information and to assist the Bank in making
future appropriate adjustments to its information security safeguards;
(b)          revised current policies, procedures, and controls to address
logical information security;
(c)          procedures and controls to strengthen the effectiveness and
integrity of the Bank's information security program; and
(d)          the information technology security deficiencies noted in the
Report of Examination.
     16.           Within 60 days of this Agreement, the Bank shall submit to
the Reserve Bank an acceptable written disaster recovery and business continuity
program for the Bank that describes the specific actions that will be taken to
ensure the prompt resumption of business activity in the event of an emergency
that affects information technology systems and operations. The program shall,
at a minimum, address, consider, and include:
(a)          A risk assessment;
(b)          the designation of a qualified business continuity officer;

 
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(c)           back-up systems necessary to recover and restore facilities,
hardware, software, communications, data files, customer files and services, and
other pertinent operations;
(d)           written contracts with service providers and vendors;
(e)           periodic testing;
                (f)        annual board of directors' review of the program; and
(g)           the deficiencies noted in the Report of Examination related to
business continuity and disaster recovery.
 
Dividends and Distributions
 
17.     (a)          Bankshares and the Bank shall not declare or pay any
dividends without the prior written approval of the Reserve Bank and the
Director of the Division of Banking Supervision and Regulation of the Board of
Governors (the "Director").
  (b)          Bankshares and its nonbank subsidiary shall not directly or
indirectly take any other form of payment representing a reduction in capital
from the Bank without the prior written approval of the Reserve Bank.
  (c)          Bankshares and its nonbank subsidiary shall not make any
distributions of interest, principal, or other sums on subordinated debentures
or trust preferred securities without the prior written approval of the Reserve
Bank and the Director.
  (d)          All requests for prior written approval shall be received at
least 30 days prior to the proposed dividend declaration date, proposed
distribution on subordinated debentures, and required notice of deferral on
trust preferred securities. All requests shall contain, at a minimum, current
and projected information, as appropriate, on Bankshares's capital, earnings,
and cash flow; the Bank's capital, asset quality, earnings, and ALLL needs; and
identification of the sources of funds for the proposed payment or distribution.
For requests to

 
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declare or pay dividends, Bankshares and the Bank, as appropriate, must also
demonstrate that the requested declaration or payment of dividends is consistent
with the Board of Governors' Policy Statement on the Payment of Cash Dividends
by State Member Banks and Bank Holding Companies, dated November 14, 1985
(Federal Reserve Regulatory Service, 4-877 at page 4-323).
 
Debt and Stock Redemption
 
    18.        (a)          Bankshares and its nonbank subsidiary shall not,
directly or indirectly, incur, increase, or guarantee any debt without the prior
written approval of the Reserve Bank. All requests for prior written approval
shall contain, but not be limited to, a statement regarding the purpose of the
debt, the terms of the debt, and the planned source(s) for debt repayment, and
an analysis of the cash flow resources available to meet such debt repayment.
        (b)           Bankshares shall not, directly or indirectly, purchase or
redeem any shares of its stock without the prior written approval of the Reserve
Bank.
 
Compliance with Laws and Regulations
 
    19.    (a)          In appointing any new director or senior executive
officer, or changing the responsibilities of any senior executive officer so
that the officer would assume a different senior executive officer position, the
Bank shall comply with the notice provisions of section 32 of the FDI Act (12
U.S.C. § 1831i) and Subpart H of Regulation Y of the Board of Governors (12
C.F.R. §§ 225.71 et seq.).
            (b)           The Bank shall comply with the restrictions on
indemnification and severance payments of section 18(k) of the FDI Act (12
U.S.C. § 1828(k)) and Part 359 of the Federal Deposit Insurance Corporation's
regulations (12 C.F.R. Part 359).

 
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Compliance with the Agreement
 
    20.     (a)          Within 10 days of this Agreement, Bankshares's and the
Bank's boards of directors shall appoint a joint committee (the "Compliance
Committee") to monitor and coordinate Bankshares's and the Bank's compliance
with the provisions of this Agreement. The Compliance Committee shall consist of
a majority of outside directors who are not executive officers of Bankshares or
the Bank as defined in sections 215.2(e)(1) and 215.2(m)(1) of Regulation O of
the Board of Governors (12 C.F.R. §§ 215.2(e)(1) and 215.2(m)(1)). The
Compliance Committee shall meet at least monthly, keep detailed minutes of each
meeting, and report its findings to Bankshares's and the Bank's boards of
directors.
         (b)            Within 30 days after the end of each calendar quarter
following the date of this Agreement, Bankshares and the Bank shall submit to
the Reserve Bank joint written progress reports detailing the form and manner of
all actions taken to secure compliance with this Agreement and the results
thereof.
 
Approval and Implementation of Plans, Program and Policy
 
21.       (a)          The Bank and, as applicable, Bankshares, shall submit
written plans, programs, and a policy that are acceptable to the Reserve Bank
within the applicable time periods set forth in paragraphs 3, 4, 5, 8(a), 8(b),
9(c), 10, 11, 12, 13, 15 and 16 of this Agreement.
    (b)          Within 10 days of approval by the Reserve Bank, the Bank and,
as applicable, Bankshares, shall adopt the approved plans, programs, and policy.
Upon adoption, the Bank and, as applicable, Bankshares, shall promptly implement
the approved plans, programs, and policy, and thereafter fully comply with them.
    (c)          During the term of this Agreement, the approved plans,
programs, and

 
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policy shall not be amended or rescinded without the prior written approval of
the Reserve Bank.
 
Communications
 
22.            All communications regarding this Agreement shall be sent to:
 
 
(a)
Mr. A. Linwood Gill, III

 
Vice President

 
Federal Reserve Bank of Richmond

 
P.O. Box 27622

 
Richmond, Virginia 23261-7622

 
 
(b)
Mr. Samuel L. Neese

 
Chief Executive Officer

 
Highlands Bankshares, Inc.

 
Highlands Union Bank

 
340 W. Main Street

 
Abingdon, Virginia 24210

 
Miscellaneous
 
23.          Notwithstanding any provision of this Agreement, the Reserve Bank
may, in its sole discretion, grant written extensions of time to Bankshares and
the Bank to comply with any provision of this Agreement.
24           The provisions of this Agreement shall be binding upon Bankshares
and the Bank and their institution-affiliated parties, in their capacities as
such, and their successors and assigns.
25.          Each provision of this Agreement shall remain effective and
enforceable until stayed, modified, terminated, or suspended in writing by the
Reserve Bank.
26.          The provisions of this Agreement shall not bar, estop, or otherwise
prevent the Board of Governors, the Reserve Bank, or any other federal or state
agency from taking any other action affecting Bankshares and the Bank or any of
their current or former institution- affiliated parties and their successors and
assigns.

 
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     27.           Pursuant to section 50 of the FDI Act (12 U.S.C. § 1831 aa),
this Agreement is enforceable by the Board of Governors under section 8 of the
FDI Act (12 U.S.C. § 1818).
 
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of
the 13th of October, 2010.
 
HIGHLANDS BANKSHARES, INC.
 
FEDERAL RESERVE BANK
HIGHLANDS UNION BANK
 
OF RICHMOND
                       
By:
/s/ James D. Moorefield
 
By:
/s/ A. Linwood Gill, III
   
James D. Moorefield
   
A. Linwood Gill, III
 
Chairman
   
Vice President

 
 

 
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