Village Bank & Trust Financial Corp. - FORM 10-Q

Attached files

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EX-31.2 - EXHIBIT 31.2 - Village Bank & Trust Financial Corp.	v438813_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Village Bank & Trust Financial Corp.	v438813_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - Village Bank & Trust Financial Corp.	v438813_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number: 0-50765

VILLAGE BANK AND TRUST FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Virginia		16-1694602
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

13319 Midlothian Turnpike, Midlothian, Virginia		23113
(Address of principal executive offices)		(Zip code)

804-897-3900

(Registrant’s telephone number, including area code)

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨	Accelerated Filer ¨
Non-Accelerated Filer ¨ (Do not check if smaller reporting company)	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 equity, as of the latest practicable date.

1,417,775 shares of common stock, $4.00 par value, outstanding as of April 24, 2016

Village Bank and Trust Financial Corp.

Form 10-Q

TABLE OF CONTENTS

Part I – Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets March 31, 2016 (unaudited) and December 31, 2015	3

Consolidated Statements of Operations For the Three Months Ended March 31, 2016 and 2015 (unaudited)	4

Consolidated Statements of Comprehensive Income For the Three Months Ended March 31, 2016 and 2015 (unaudited)	5

Consolidated Statements of Shareholders’ Equity For the Three Months Ended March 31, 2016 and 2015 (unaudited)	6

Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2016 and 2015 (unaudited)	7

Notes to Consolidated Financial Statements (unaudited)	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	39

Item 3. Quantitative and Qualitative Disclosures About Market Risk	59

Item 4. Controls and Procedures	59

Part II – Other Information

Item 1. Legal Proceedings	60

Item 1A. Risk Factors	60

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3. Defaults Upon Senior Securities	60

Item 4. Mine Safety Disclosures	60

Item 5. Other Information	60

Item 6. Exhibits	61

Signatures	62

Part I – Financial Information

ITEM 1 – FINANCIAL STATEMENTS

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Balance Sheets

March 31, 2016 (Unaudited) and December 31, 2015

(in thousands, except share data)

	March 31,			December 31,
	2016			2015
Assets
Cash and due from banks	$	22,653		$	17,076
Federal funds sold		8,069			186
Total cash and cash equivalents		30,722			17,262
Investment securities available for sale		27,186			37,919
Loans held for sale		9,150			14,373
Loans
Outstandings		313,246			306,771
Allowance for loan losses		(3,611	)		(3,562	)
Deferred fees and costs, net		688			670
Total loans, net		310,323			303,879
Other real estate owned, net of valuation allowance		6,134			6,249
Assets held for sale		11,800			12,631
Premises and equipment, net		13,586			13,671
Bank owned life insurance		7,178			7,130
Accrued interest receivable		2,038			2,060
Other assets		4,873			4,767

	$	422,990		$	419,941

Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest bearing demand	$	78,986		$	78,282
Interest bearing		290,098			286,566
Total deposits		369,084			364,848
Federal Home Loan Bank advances		5,000			6,000
Long-term debt - trust preferred securities		8,764			8,764
Other borrowings		558			508
Accrued interest payable		91			1,346
Other liabilities		8,226			8,116
Total liabilities		391,723			389,582

Shareholders' equity
Preferred stock, $4 par value, $1,000 liquidation preference, 1,000,000 shares authorized; 5,715 shares issued and outstanding at March 31, 2016 and December 31, 2015		23			23
Common stock, $4 par value - 10,000,000 shares authorized; 1,417,775 shares issued and outstanding at March 31, 2016 and December 31, 2015		5,562			5,562
Additional paid-in capital		58,664			58,497
Accumulated deficit		(33,724	)		(33,948	)
Common stock warrant		732			732
Stock in directors rabbi trust		(1,034	)		(1,034	)
Directors deferred fees obligation		1,034			1,034
Accumulated other comprehensive income (loss)		10			(507	)
Total shareholders' equity		31,267			30,359

	$	422,990		$	419,941

See accompanying notes to consolidated financial statements.

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Operations

Three Months Ended March 31, 2016 and 2015

(Unaudited)

(in thousands, except per share data)

	2016			2015
Interest income
Loans	$	3,765		$	3,624
Investment securities		120			155
Federal funds sold		13			18
Total interest income		3,898			3,797

Interest expense
Deposits		599			636
Borrowed funds		40			122
Total interest expense		639			758

Net interest income		3,259			3,039
Provision for loan losses		-			-
Net interest income after provision for loan losses		3,259			3,039

Noninterest income
Service charges and fees		536			592
Gain on sale of loans		1,146			1,229
Gain on sale of investment securities, net		109			7
Rental income		320			239
Other		85			103
Total noninterest income		2,196			2,170

Noninterest expense
Salaries and benefits		2,659			2,668
Commissions		249			292
Occupancy		448			478
Equipment		183			187
Supplies		79			70
Professional and outside services		718			647
Advertising and marketing		85			72
Foreclosed assets, net		101			132
FDIC insurance premium		62			234
Other operating expense		469			434
Total noninterest expense		5,053			5,214

Income (loss) before income taxes		402			(5	)
Income tax expense		-			-

Net income (loss)		402			(5	)

Preferred stock dividends and amortization of discount		(178	)		(163	)
Preferred stock principal forgiveness		-			4,404
Preferred stock dividend forgiveness		-			2,215
Net income available to common shareholders	$	224		$	6,451

Earnings per share, basic	$	0.16		$	15.77
Earnings per share, diluted	$	0.16		$	15.40

See accompanying notes to consolidated financial statements.

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income

Three Months Ended March 31, 2016 and 2015

(Unaudited)

(in thousands)

	2016			2015

Net income (loss)	$	402		$	(5	)
Other comprehensive income
Unrealized holding gains arising during the period		889			658
Tax effect		302			224
Net change in unrealized holding gains on securities available for sale, net of tax		587			434

Reclassification adjustment
Reclassification adjustment for gains realized in net income (loss)		(109	)		(7	)
Tax effect		(37	)		(2	)
Reclassification for gains included in net income, net of tax		(72	)		(5	)

Minimum pension adjustment		3			3
Tax effect		1			1
Minimum pension adjustment, net of tax		2			2

Total other comprehensive income		517			431

Total comprehensive income	$	919		$	426

See accompanying notes to consolidated financial statements.

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

Three Months Ended March 31, 2016 and 2015

(Unaudited)

(dollar amounts in thousands)

																	Directors		Accumulated
						Additional								Stock in			Deferred		Other
	Preferred			Common		Paid-in			Accumulated					Directors			Fees		Comprehensive
	Stock			Stock		Capital			Deficit			Warrant		Rabbi Trust			Obligation		Income (Loss)			Total


Balance, December 31, 2015	$	23		$	5,562	$	58,497		$	(33,948	)	$	732	$	(1,034	)	$	1,034	$	(507	)	$	30,359
Preferred stock dividend		-			-		-			(178	)		-		-			-		-			(178	)
Stock based compensation		-			-		167			-			-		-			-		-			167
Minimum pension adjustment (net of income taxes of $1)		-			-		-			-			-		-			-		2			2
Net income		-			-		-			402			-		-			-		-			402
Change in unrealized gain (loss) on investment securities available-for-sale, net of reclassification and tax effect		-			-		-			-			-		-			-		515			515

Balance, March 31, 2016	$	23		$	5,562	$	58,664		$	(33,724	)	$	732	$	(1,034	)	$	1,034	$	10		$	31,267

Balance, December 31, 2014	$	59		$	1,339	$	58,188		$	(40,539	)	$	732	$	(878	)	$	878	$	(721	)	$	19,058
Preferred stock dividend		-			-		-			(163	)		-		-			-		-			(163	)
Restricted stock issuance		-			7		(85	)		-			-		(156	)		156		-			(78	)
Issuance of common stock, net of offering expense of $1,200		-			2,875		5,842			-			-		-			-		-			8,717
Preferred stock exchanged for common stock		(18	)		1,332		(1,314	)		-			-		-			-		-			-
Preferred stock principal forgiveness		(18	)		-		(4,386	)		4,404			-		-			-		-			-
Preferred stock dividend forgiveness		-			-		-			2,215			-		-			-		-			2,215
Stock based compensation		-			-		80			-			-		-			-		-			80
Minimum pension adjustment (net of income taxes of $1)		-			-		-			-			-		-			-		2			2
Net loss		-			-		-			(5	)		-		-			-		-			(5	)
Change in unrealized gain (loss) on investment securities available-for-sale, net of reclassification and tax effect		-			-		-			-			-		-			-		429			429

Balance, March 31, 2015	$	23		$	5,553	$	58,325		$	(34,088	)	$	732	$	(1,034	)	$	1,034	$	(290	)	$	30,255

See accompanying notes to consolidated financial statements.

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2016 and 2015

(Unaudited)

(dollars in thousands)

	2016			2015

Cash Flows from Operating Activities
Net income (loss)	$	402		$	(5	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		203			214
Deferred income taxes		123			(15	)
Valuation allowance (recovery) deferred income taxes		(123	)		15
Write-down of other real estate owned		72			80
Valuation allowance other real estate owned		(15	)		(14	)
Gain on securities sold		(109	)		(7	)
Gain on loans sold		(1,146	)		(1,229	)
(Gain) loss on sale of other real estate owned		2			(67	)
Stock compensation expense		167			80
Proceeds from sale of mortgage loans		37,624			43,727
Origination of mortgage loans for sale		(31,255	)		(48,808	)
Amortization of premiums and accretion of discounts on securities, net		57			71
Decrease (increase) in interest receivable		22			(52	)
Increase in bank owned life insurance		(48	)		(48	)
Decrease (increase) in other assets		462			(273	)
Increase (decrease) in interest payable		(1,255	)		53
Increase (decrease) in other liabilities		(68	)		252
Net cash provided by (used in) operating activities		5,115			(6,026	)

Cash Flows from Investing Activities
Purchases of available for sale securities		-			(3,206	)
Proceeds from the sale or calls of available for sale securities		11,565			6,611
Net increase in loans		(6,444	)		(1,336	)
Proceeds from sale of other real estate owned		56			1,154
Purchases of premises and equipment		(118	)		(801	)
Net cash provided by investing activities		5,059			2,422

Cash Flows from Financing Activities
Net proceeds from sale of common stock, net of expenses of $990		-			8,965
Net increase (decrease) in deposits		4,236			(2,028	)
Net decrease in Federal Home Loan Bank advances		(1,000	)		(1,000	)
Net increase (decrease) in other borrowings		50			(745	)
Net cash provided by financing activities		3,286			5,192

Net increase in cash and cash equivalents		13,460			1,588
Cash and cash equivalents, beginning of period		17,262			49,103

Cash and cash equivalents, end of period	$	30,722		$	50,691

Supplemental Disclosure of Cash Flow Information
Cash payments for interest	$	1,894		$	705
Supplemental Schedule of Non Cash Activities
Real estate owned assets acquired in settlement of loans	$	1		$	-
Dividends on preferred stock accrued	$	178		$	163
Non-Cash conversion of preferred shares	$	-		$	4,619
Forgiveness of principal and accrued dividends	$	-		$	6,619

See accompanying notes to consolidated financial statements.

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three Months Ended March 31, 2016 and 2015

(Unaudited)

Note 1 - Principles of presentation

Village Bank and Trust Financial Corp. (the “Company”) is the holding company of Village Bank (the “Bank”). The consolidated financial statements include the accounts of the Company, the Bank and the Bank’s subsidiary. All material intercompany balances and transactions have been eliminated in consolidation.

On August 6, 2014, the Company filed Articles of Amendment to its Articles of Incorporation with the Virginia State Corporation Commission to effect a reverse stock split of its outstanding common stock which became effective on August 8, 2014. As a result of the reverse split, every sixteen shares of the Company’s issued and outstanding common stock were consolidated into one issued and outstanding share of common stock. The computations of basic and diluted earnings (loss) per share have been adjusted retroactively to reflect the reverse stock split.

In the opinion of management, the accompanying condensed consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the three month period ended March 31, 2016 is not necessarily indicative of the results to be expected for the full year ending December 31, 2016. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the Securities and Exchange Commission (“SEC”).

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of March 31, 2016 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

Note 2 - Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and statements of operations for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses and its related provision, the valuation allowance on the deferred tax asset, and the estimate of the fair value of assets held for sale.

Note 3 - Earnings per common share

The following table presents the basic and diluted earnings (loss) per common share computation (in thousands, except per share data):

	Three Months Ended March 31,
	2016			2015
Numerator
Net income (loss) - basic and diluted	$	402		$	(5	)
Preferred stock dividend and accretion		(178	)		(163	)
Preferred stock principal forgiveness		-			4,404
Preferred stock dividend forgiveness		-			2,215
Net income available to common shareholders	$	224		$	6,451

Denominator
Weighted average shares outstanding - basic		1,418			409
Dilutive effect of common stock options and restricted stock awards		-			10

Weighted average shares outstanding - diluted		1,418			419

Earnings per share - basic	$	0.16		$	15.77
Earnings per share - diluted	$	0.16		$	15.40

Outstanding options and warrants to purchase common stock were considered in the computation of diluted earnings (loss) per share for the periods presented. Stock options for 2,616 and 6,485 shares were not included in computing diluted earnings per share for the three months ended March 31, 2016 and 2015, respectively, because their effects were anti-dilutive.

Note 4 – Investment securities available for sale

At March 31, 2016 and December 31, 2015, all of our securities were classified as available for sale. The following table presents the composition of our investment portfolio at the dates indicated (dollars in thousands):

					Gross		Gross			Estimated
	Par		Amortized		Unrealized		Unrealized			Fair		Average
	Value		Cost		Gains		Losses			Value		Yield
March 31, 2016
US Government Agencies
One to five years	$	11,000	$	11,253	$	49	$	-		$	11,302		0.91	%
Five to ten years		8,000		8,520		92		-			8,612		2.73	%
More than ten years		3,190		3,197		-		(14	)		3,183		1.07	%
		22,190		22,970		141		(14	)		23,097		1.31	%
Mortgage-backed securities
One to five years		1,708		1,750		5		(4	)		1,751		1.35	%
More than ten years		1,050		1,098		1		(1	)		1,098		1.30	%
		2,758		2,848		6		(5	)		2,849		1.37	%
Municipals
More than ten years		1,130		1,253		-		(13	)		1,240		3.72	%
		1,130		1,253		-		(13	)		1,240		3.72	%

Total investment securities	$	26,078	$	27,071	$	147	$	(32	)	$	27,186		1.43	%

December 31, 2015
US Government Agencies
One to five years	$	11,000	$	11,270	$	-	$	(157	)	$	11,113		0.91	%
Five to ten years		18,500		19,697		-		(403	)		19,294		2.32	%
More than ten years		3,312		3,319		-		(13	)		3,306		0.85	%
		32,812		34,286		-		(573	)		33,713		1.51	%
Mortgage-backed securities
One to five years		1,794		1,841		-		(28	)		1,813		1.30	%
More than ten years		1,149		1,202		1		(15	)		1,188		1.34	%
		2,943		3,043		1		(43	)		3,001		1.35	%
Municipals
More than ten years		1,130		1,255		-		(50	)		1,205		3.72	%
		1,130		1,255		-		(50	)		1,205		3.72	%

Total investment securities	$	36,885	$	38,584	$	1	$	(666	)	$	37,919		1.57	%

Investment securities with book values of approximately $5,156,000 and $5,968,000 at March 31, 2016 and December 31, 2015, respectively, were pledged to secure deposit repurchase agreements.

Gross realized gains and losses pertaining to available for sale securities are detailed as follows for the periods indicated (dollars in thousands):

	Three Months
	Ended March 31,
	2016		2015

Gross realized gains	$	109	$	13
Gross realized losses		-		(6	)

	$	109	$	7

The Company sold approximately $11 million and $7 million of investment securities available for sale at a net gain of $109,000 and $7,000 for the three months ended March 31, 2016 and 2015, respectively. The sale of these securities, which had fixed interest rates, allowed the Company to decrease its exposure to the anticipated upward movement in interest rates that would result in unrealized losses being recognized in shareholders’ equity.

Investment securities available for sale that have an unrealized loss position at March 31, 2016 and December 31, 2015 are detailed below (dollars in thousands):

	Securities in a loss					Securities in a loss
	position for less than					position for more than
	12 Months					12 Months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
March 31, 2016
US Government Agencies	$	3,183	$	(13	)	$	2,002	$	(1	)	$	5,185	$	(14	)
Municipals		511		(1	)		520		(12	)		1,031		(13	)
Mortgage-backed securities		1,001		(1	)		870		(4	)		1,871		(5	)

	$	4,695	$	(15	)	$	3,392	$	(17	)	$	8,087	$	(32	)

December 31, 2015
US Government Agencies	$	18,598	$	(329	)	$	15,115	$	(244	)	$	33,713	$	(573	)
Municipals		707		(14	)		497		(36	)		1,204		(50	)
Mortgage-backed securities		2,899		(43	)		-		-			2,899		(43	)

	$	22,204	$	(386	)	$	15,612	$	(280	)	$	37,816	$	(666	)

All of the unrealized losses are attributable to increases in interest rates and not to credit deterioration. Currently, the Company believes that it is probable that the Company will be able to collect all amounts due according to the contractual terms of the investments. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other than temporarily impaired at March 31, 2016.

Note 5 – Loans and allowance for loan losses

The following table presents the composition of our loan portfolio (excluding mortgage loans held for sale) at the dates indicated (dollars in thousands):

	March 31, 2016						December 31, 2015
	Amount			%			Amount			%
Construction and land development
Residential	$	7,632			2.44	%	$	5,202			1.70	%
Commercial		24,476			7.82	%		25,948			8.46	%
		32,108			10.26	%		31,150			10.15	%
Commercial real estate
Owner occupied		70,801			22.60	%		69,256			22.58	%
Non-owner occupied		41,848			13.36	%		38,037			12.40	%
Multifamily		8,429			2.69	%		8,537			2.78	%
Farmland		382			0.12	%		388			0.13	%
		121,460			38.77	%		116,218			37.88	%
Consumer real estate
Home equity lines		21,784			6.95	%		20,333			6.63	%
Secured by 1-4 family residential,
First deed of trust		56,061			17.90	%		56,776			18.51	%
Second deed of trust		6,202			1.98	%		6,485			2.11	%
		84,047			26.83	%		83,594			27.25	%

Commercial and industrial loans (except those secured by real estate)		24,388			7.79	%		20,086			6.55	%
Guaranteed student loans		49,445			15.78	%		53,989			17.60	%
Consumer and other		1,798			0.57	%		1,734			0.57	%

Total loans		313,246			100.0	%		306,771			100.0	%
Deferred loan cost, net		688						670
Less: allowance for loan losses		(3,611	)					(3,562	)

	$	310,323					$	303,879

The Bank purchased portfolios of rehabilitated student loans guaranteed by the Department of Education (“DOE”). The guarantee covers approximately 98% of principal and accrued interest. The loans are serviced by a third-party servicer that specializes in handling the special needs of the DOE student loan programs.

Loans pledged as collateral with the Federal Home Loan Bank of Atlanta (“FHLB”) as part of their lending arrangement with the Company totaled $7,807,000 and $7,891,000 at March 31, 2016 and December 31, 2015, respectively.

The Company assigns risk rating classifications to its loans. These risk ratings are divided into the following groups:

Risk rated 1 to 4 loans are considered of sufficient quality to preclude an adverse rating. These assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral;

Risk rated 5 loans are defined as having potential weaknesses that deserve management’s close attention;

Risk rated 6 loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any;

Risk rated 7 loans have all the weaknesses inherent in substandard loans, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable; and

Loans rated 6 or 7 are considered “Classified” loans for regulatory classification purposes.

The following tables provide information on the risk rating of loans at the dates indicated (dollars in thousands):

	Risk Rated		Risk Rated		Risk Rated		Risk Rated		Total
	1-4		5		6		7		Loans
March 31, 2016
Construction and land development
Residential	$	7,632	$	-	$	-	$	-	$	7,632
Commercial		22,514		565		1,397		-		24,476
		30,146		565		1,397		-		32,108
Commercial real estate
Owner occupied		64,881		4,795		1,125		-		70,801
Non-owner occupied		40,508		1,247		93		-		41,848
Multifamily		8,232		197		-		-		8,429
Farmland		382		-		-		-		382
		114,003		6,239		1,218		-		121,460
Consumer real estate
Home equity lines		19,994		432		1,358		-		21,784
Secured by 1-4 family residential
First deed of trust		50,309		2,888		2,864		-		56,061
Second deed of trust		5,474		127		601		-		6,202
		75,777		3,447		4,823		-		84,047
Commercial and industrial loans (except those secured by real estate)		22,672		1,195		521		-		24,388
Guaranteed student loans		49,445		-		-		-		49,445
Consumer and other		1,731		60		7		-		1,798

Total loans	$	293,774	$	11,506	$	7,966	$	-	$	313,246

December 31, 2015
Construction and land development
Residential	$	5,202	$	-	$	-	$	-	$	5,202
Commercial		24,053		572		1,323		-		25,948
		29,255		572		1,323		-		31,150
Commercial real estate
Owner occupied		64,261		2,850		2,145		-		69,256
Non-owner occupied		35,887		2,055		95		-		38,037
Multifamily		8,337		200		-		-		8,537
Farmland		388		-		-		-		388
		108,873		5,105		2,240		-		116,218
Consumer real estate
Home equity lines		18,539		435		1,359		-		20,333
Secured by 1-4 family residential
First deed of trust		51,200		2,710		2,866		-		56,776
Second deed of trust		5,751		128		606		-		6,485
		75,490		3,273		4,831		-		83,594
Commercial and industrial loans (except those secured by real estate)		18,873		373		840		-		20,086
Guaranteed student loans		53,989		-		-		-		53,989
Consumer and other		1,649		62		23		-		1,734

Total loans	$	288,129	$	9,385	$	9,257	$	-	$	306,771

The following table presents the aging of the recorded investment in past due loans and leases as of the dates indicated (dollars in thousands):

													Recorded
					Greater								Investment >
	30-59 Days		60-89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
March 31, 2016
Construction and land development
Residential	$	-	$	-	$	-	$	-	$	7,632	$	7,632	$	-
Commercial		34		-		-		34		24,442		24,476		-
		34		-		-		34		32,074		32,108		-
Commercial real estate
Owner occupied		-		-		-		-		70,801		70,801		-
Non-owner occupied		-		-		-		-		41,848		41,848		-
Multifamily		-		-		-		-		8,429		8,429		-
Farmland		-		-		-		-		382		382		-
		-		-		-		-		121,460		121,460		-
Consumer real estate
Home equity lines		92		-		-		92		21,692		21,784		-
Secured by 1-4 family residential
First deed of trust		480		96		-		576		55,485		56,061		-
Second deed of trust		115		-		-		115		6,087		6,202		-
		687		96		-		783		83,264		84,047		-
Commercial and industrial loans (except those secured by real estate)		97		-		-		97		24,291		24,388		-
Guaranteed student loans		3,434		2,332		8,436		14,202		35,243		49,445		8,436
Consumer and other		29		-		-		29		1,769		1,798		-

Total loans	$	4,281	$	2,428	$	8,436	$	15,145	$	298,101	$	313,246	$	8,436

													Recorded
					Greater								Investment >
	30-59 Days		60-89 Days		Than		Total Past				Total		90 Days and
	Past Due		Past Due		90 Days		Due		Current		Loans		Accruing
December 31, 2015
Construction and land development
Residential	$	-	$	-	$	-	$	-	$	5,202	$	5,202	$	-
Commercial		-		-		-		-		25,948		25,948		-
		-		-		-		-		31,150		31,150		-
Commercial real estate
Owner occupied		327		-		-		327		68,929		69,256		-
Non-owner occupied		-		110		-		110		37,927		38,037		-
Multifamily		-		-		-		-		8,537		8,537		-
Farmland		-		-		-		-		388		388		-
		327		110		-		437		115,781		116,218		-
Consumer real estate
Home equity lines		-		-		-		-		20,333		20,333		-
Secured by 1-4 family residential
First deed of trust		163		292		-		455		56,321		56,776		-
Second deed of trust		94		-		-		94		6,391		6,485		-
		257		292		-		549		83,045		83,594		-
Commercial and industrial loans (except those secured by real estate)		-		-		-		-		20,086		20,086		-
Guaranteed student loans		7,816		1,252		8,590		17,658		36,331		53,989		8,590
Consumer and other		10		-		-		10		1,724		1,734		-

Total loans	$	8,410	$	1,654	$	8,590	$	18,654	$	288,117	$	306,771	$	8,590

Loans greater than 90 days past due are student loans that are guaranteed by the DOE which covers approximately 98% of the principal and interest. Accordingly, these loans will not be placed on nonaccrual status.

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by management. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Impaired loans are set forth in the following table as of the dates indicated (dollars in thousands):

	March 31, 2016
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded
Construction and land development
Commercial	$	52	$	119	$	-
Commercial real estate
Owner occupied		599		599
Non-owner occupied		2,621		2,621		-
		3,220		3,220		-
Consumer real estate
Home equity lines		1,238		1,247		-
Secured by 1-4 family residential
First deed of trust		4,090		4,121		-
Second deed of trust		1,106		1,376		-
		6,434		6,744		-
Commercial and industrial loans (except those secured by real estate)		368		598		-
		10,074		10,681		-

With an allowance recorded
Construction and land development
Commercial		1,764		1,764		91
Commercial real estate
Owner occupied		5,141		5,156		159
Non-Owner occupied		93		93		2
		5,234		5,249		161
Consumer real estate
Secured by 1-4 family residential
First deed of trust		1,892		1,892		338
Second deed of trust		97		97		97
		1,989		1,989		435
Commercial and industrial loans (except those secured by real estate)		143		245		8
		9,130		9,247		695

Total
Construction and land development
Commercial		1,816		1,883		91
		1,816		1,883		91
Commercial real estate
Owner occupied		5,740		5,755		159
Non-owner occupied		2,714		2,714		2
		8,454		8,469		161
Consumer real estate
Home equity lines		1,238		1,247		-
Secured by 1-4 family residential,
First deed of trust		5,982		6,013		338
Second deed of trust		1,203		1,473		97
		8,423		8,733		435
Commercial and industrial loans (except those secured by real estate)		511		843		8
	$	19,204	$	19,928	$	695

	December 31, 2015
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded
Construction and land development
Commercial	$	123	$	190	$	-
Commercial real estate
Owner occupied		1,066		1,066
Non-owner occupied		2,418		2,418		-
		3,484		3,484		-
Consumer real estate
Home equity lines		1,238		1,247		-
Secured by 1-4 family residential
First deed of trust		3,984		3,988		-
Second deed of trust		962		1,232		-
		6,184		6,467		-
Commercial and industrial loans (except those secured by real estate)		690		920		-
		10,481		11,061		-

With an allowance recorded
Construction and land development
Commercial		1,699		1,699		2
Commercial real estate
Owner occupied		5,719		5,734		383
Non-Owner occupied		449		449		26
		6,168		6,183		409
Consumer real estate
Secured by 1-4 family residential
First deed of trust		1,775		1,775		324
Second deed of trust		250		250		98
		2,025		2,025		422
Commercial and industrial loans (except those secured by real estate)		136		238		18
		10,028		10,145		851

Total
Construction and land development
Commercial		1,822		1,889		2
		1,822		1,889		2
Commercial real estate
Owner occupied		6,785		6,800		383
Non-owner occupied		2,867		2,867		26
		9,652		9,667		409
Consumer real estate
Home equity lines		1,238		1,247		-
Secured by 1-4 family residential,
First deed of trust		5,759		5,763		324
Second deed of trust		1,212		1,482		98
		8,209		8,492		422
Commercial and industrial loans (except those secured by real estate)		826		1,158		18
	$	20,509	$	21,206	$	851

The following is a summary of average recorded investment in impaired loans with and without a valuation allowance and interest income recognized on those loans for the periods indicated (dollars in thousands):

	For the Three Months Ended March 31,
	2016				2015
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded
Construction and land development
Residential	$	-	$	-	$	232	$	1
Commercial		98		11		2,967		39
		98		11		3,199		40
Commercial real estate
Owner occupied		816		14		1,680		17
Non-owner occupied		2,631		34		6,563		87
Multifamily		-		-		968		6
Farmland		-		-		14		-
		3,447		48		9,225		110
Consumer real estate
Home equity lines		1,287		-		800		4
Secured by 1-4 family residential
First deed of trust		4,092		47		6,401		90
Second deed of trust		1,057		12		1,183		14
		6,436		59		8,384		108
Commercial and industrial loans (except those secured by real estate)		797		7		227		2
Consumer and other		15		-		19		-
		10,793		125		21,054		260

With an allowance recorded
Construction and land development
Commercial		1,743		6		587		4
Commercial real estate
Owner occupied		5,600		57		6,597		66
Non-Owner occupied		94		5		102		1
		5,694		62		6,699		67
Consumer real estate
Home equity lines		30		-		-		-
Secured by 1-4 family residential
First deed of trust		2,042		6		1,285		-
Second deed of trust		149		2		254
		2,221		8		1,539		-
Commercial and industrial loans (except those secured by real estate)		138		-		493		5
		9,796		76		9,318		76

Total
Construction and land development
Residential		-		-		232		1
Commercial		1,842		17		3,554		43
		1,842		17		3,786		44
Commercial real estate
Owner occupied		6,416		71		8,277		83
Non-owner occupied		2,725		39		6,665		88
Multifamily		-		-		968		6
Farmland		-		-		14		-
		9,141		110		15,924		177
Consumer real estate
Home equity lines		1,317		-		800		4
Secured by 1-4 family residential,
First deed of trust		6,134		53		7,686		90
Second deed of trust		1,206		14		1,437		14
		8,657		67		9,923		108
Commercial and industrial loans (except those secured by real estate)		936		7		720		7
Consumer and other		15		-		19		-
	$	20,589	$	201	$	30,372	$	336

Included in impaired loans are loans classified as troubled debt restructurings (“TDRs”). A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. For loans classified as impaired TDRs, the Company further evaluates the loans as performing or nonaccrual. To restore a nonaccrual loan that has been formally restructured in a TDR to accrual status, we perform a current, well documented credit analysis supporting a return to accrual status based on the borrower’s financial condition and prospects for repayment under the revised terms. Otherwise, the TDR must remain in nonaccrual status. The analysis considers the borrower’s sustained historical repayment performance for a reasonable period to the return-to-accrual date, but may take into account payments made for a reasonable period prior to the restructuring if the payments are consistent with the modified terms. A sustained period of repayment performance generally would be a minimum of six months and would involve payments in the form of cash or cash equivalents.

An accruing loan that is modified in a TDR can remain in accrual status if, based on a current well-documented credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical repayment performance for a reasonable period before modification. The following is a summary of performing and nonaccrual TDRs and the related specific valuation allowance by portfolio segment for the periods indicated (dollars in thousands).

							Specific
							Valuation
	Total		Performing		Nonaccrual		Allowance
March 31, 2016
Construction and land development
Residential	$	-	$	-	$	-	$	-
Commercial		1,694		1,694		-		80
		1,694		1,694		-		80
Commercial real estate
Owner occupied		5,688		5,429		259		159
Non-owner occupied		2,714		2,714		-		2
		8,402		8,143		259		161
Consumer real estate
Home equity lines		85		-		85		-
Secured by 1-4 family residential
First deeds of trust		4,242		3,260		982		275
Second deeds of trust		686		686		-		-
		5,013		3,946		1,067		275
Commercial and industrial loans (except those secured by real estate)		119		-		119		1
Consumer and other		-		-		-		-
	$	15,228	$	13,783	$	1,445	$	517

							Specific
							Valuation
	Total		Performing		Nonaccrual		Allowance
December 31, 2015
Construction and land development
Residential	$	-	$	-	$	-	$	-
Commercial		1,699		1,699		-		2
		1,699		1,699		-		2
Commercial real estate
Owner occupied		5,730		5,458		272		184
Non-owner occupied		2,866		2,866		-		26
Multifamily		-		-		-		-
		8,596		8,324		272		210
Consumer real estate
Home equity lines		87		-		87		-
Secured by 1-4 family residential
First deeds of trust		4,283		3,544		739		236
Second deeds of trust		693		693		-		1
		5,063		4,237		825		237
Commercial and industrial loans (except those secured by real estate)		127		-		127		18
Consumer and other		-		-		-		-
	$	15,485	$	14,260	$	1,225	$	467

There were no TDRs identified during the three months ended March 31, 2016 and 2015.

The following table summarizes defaults on TDRs identified for the indicated periods (dollars in thousands):

	March 31, 2016				March 31, 2015
	Number of		Recorded		Number of		Recorded
	Loans		Balance		Loans		Balance

Commercial real estate
Owner occupied		-	$	-		1	$	406
		-		-		1		406
Consumer real estate
Secured by 1-4 family residential
First deed of trust		1		262		1		121
Second deed of trust		3		181		-		-
		4		443		1		121

Commercial and industrial (except those secured by real estate)		1		119		-		-
		5	$	562		2	$	527

Activity in the allowance for loan losses is as follows for the periods indicated (dollars in thousands):

	Beginning		Provision for								Ending
	Balance		Loan Losses			Charge-offs			Recoveries		Balance

Three Months Ended March 31, 2016
Construction and land development
Residential	$	30	$	13		$	-		$	1	$	44
Commercial		291		62			-			-		353
		321		75			-			1		397
Commercial real estate
Owner occupied		1,167		(182	)		-			-		985
Non-owner occupied		460		(59	)		-			1		402
Multifamily		51		-			-			-		51
Farmland		17		(138	)		-			125		4
		1,695		(379	)		-			126		1,442
Consumer real estate
Home equity lines		448		(57	)		-			1		392
Secured by 1-4 family residential
First deed of trust		602		(35	)		(27	)		6		546
Second deed of trust		111		(19	)		-			5		97
		1,161		(111	)		(27	)		12		1,035
Commercial and industrial loans (except those secured by real estate)		94		(23	)		-			24		95
Guaranteed student loans		230		63			(87	)		-		206
Consumer and other		2		(2	)		(1	)		1		-
Unallocated		59		377			-			-		436

	$	3,562	$	-		$	(115	)	$	164	$	3,611

	Beginning		Provision for								Ending
	Balance		Loan Losses			Charge-offs			Recoveries		Balance

Three Months Ended March 31, 2015
Construction and land development
Residential	$	34	$	51		$	-		$	1	$	86
Commercial		202		242			(115	)		1		330
		236		293			(115	)		2		416
Commercial real estate
Owner occupied		1,837		59			-			-		1,896
Non-owner occupied		607		76			-			-		683
Multifamily		77		39			-			-		116
Farmland		130		(125	)		-			-		5
		2,651		49			-			-		2,700
Consumer real estate
Home equity lines		469		214			-			-		683
Secured by 1-4 family residential
First deed of trust		1,345		(429	)		-			358		1,274
Second deed of trust		275		(67	)		-			9		217
		2,089		(282	)		-			367		2,174
Commercial and industrial loans (except those secured by real estate)		506		(52	)		(162	)		12		304
Student Loans		217		-			-			-		217
Consumer and other		30		(8	)		(2	)		13		33

	$	5,729	$	-		$	(279	)	$	394	$	5,844

	Beginning		Provision for								Ending
	Balance		Loan Losses			Charge-offs			Recoveries		Balance

Year Ended December 31, 2015
Construction and land development
Residential	$	34	$	(6	)	$	-		$	2	$	30
Commercial		202		292			(252	)		49		291
		236		286			(252	)		51		321
Commercial real estate
Owner occupied		1,837		(576	)		(127	)		33		1,167
Non-owner occupied		607		(151	)		-			4		460
Multifamily		77		(26	)		-			-		51
Farmland		130		(113	)		-			-		17
		2,651		(866	)		(127	)		37		1,695
Consumer real estate
Home equity lines		469		36			(62	)		5		448
Secured by 1-4 family residential
First deed of trust		1,345		(1,020	)		(103	)		380		602
Second deed of trust		275		(159	)		(55	)		50		111
		2,089		(1,143	)		(220	)		435		1,161
Commercial and industrial loans (except those secured by real estate)		506		(350	)		(162	)		100		94
Guaranteed student loans		217		13			-			-		230
Consumer and other		30		1			(55	)		26		2
Unallocated		-		59			-			-		59

	$	5,729	$	(2,000	)	$	(816	)	$	649	$	3,562

The allowance for loan losses at each of the periods presented includes an amount that could not be identified to individual types of loans referred to as the unallocated portion of the allowance. We recognize the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. We concluded that the unallocated portion of the allowance was acceptable given the continued higher level of classified assets and was within a reasonable range around the estimate of losses.

Discussion of the recovery of loan losses related to specific loan types are provided following:

The recovery of loan losses totaling $379,000 for the commercial real estate portfolio in the first quarter of 2016 was attributable to changes in our assessment of the general component of the allowance for loan losses as it related to this portfolio. The general component allocated to this portfolio declined primarily as a result of declines in the historical loss experience from 0.57% in 2015 to 0.41% in the first quarter of 2016. In addition, the portfolio was in a net-recovery position of $126,000 for the first quarter of 2016.

The recovery of loan losses totaling $111,000 for the consumer real estate portfolio in the first quarter of 2016 was also attributable to changes in our assessment of the general component of the allowance for loan losses as it related to this portfolio. The general component allocated to this portfolio declined primarily as a result of declines in the historical loss experience from 0.24% in 2015 to 0.03% in the first quarter of 2016.

The recovery of loan losses totaling $866,000 for the commercial real estate portfolio in 2015 was also attributable to changes in our assessment of the general component of the allowance for loan losses as it related to this portfolio. The general component allocated to this portfolio declined primarily as a result of declines in the historical loss experience from 0.96% in 2014 to 0.57% in 2015. In addition, net charge-offs on this portfolio decreased from $1,220,000 in 2014 to $90,000 in 2015. Also contributing to the declines in the general component were declines of approximately $6,179,000 and $7,021,000 in the outstanding loan balance of this portfolio at December 31, 2015 and 2014, respectively.

The recovery of loan losses totaling $1,143,000 for the consumer real estate portfolio in 2015 was also attributable to changes in our assessment of the general component of the allowance for loan losses as it related to this portfolio. The general component allocated to this portfolio declined primarily as a result of declines in the historical loss experience from 1.36% in 2014 to 0.24% in 2015. In addition, net charge-offs on this portfolio decreased from $562,000 in 2014 to a net recovery of $215,000 in 2015.

Loans were evaluated for impairment as follows for the periods indicated (dollars in thousands):

	Recorded Investment in Loans
	Allowance								Loans
							Loans acquired								Loans acquired
	Ending						with deteriorated		Ending						with deteriorated
	Balance		Individually		Collectively		credit quality		Balance		Individually		Collectively		credit quality

Period Ended March 31, 2016
Construction and land development
Residential	$	44	$	-	$	44	$	-	$	7,632	$	-	$	7,632	$	-
Commercial		353		91		262		-		24,476		1,816		22,660		-
		397		91		306		-		32,108		1,816		30,292		-
Commercial real estate
Owner occupied		985		159		826		-		70,801		5,740		65,061		-
Non-owner occupied		402		2		400		-		41,848		2,714		39,134		-
Multifamily		51		-		51		-		8,429		-		8,429		-
Farmland		4		-		4		-		382		-		382		-
		1,442		161		1,281		-		121,460		8,454		113,006		-
Consumer real estate
Home equity lines		392		-		392		-		21,784		1,238		20,546		-
Secured by 1-4 family residential
First deed of trust		546		338		208		-		56,061		5,982		50,079		-
Second deed of trust		97		97		-		-		6,202		1,203		4,999		-
		1,035		435		600		-		84,047		8,423		75,624		-
Commercial and industrial loans (except those secured by real estate)		95		8		87		-		24,388		511		23,877		-
Student loans		206		-		206				49,445		-		49,445		-
Consumer and other		436		-		436		-		1,798		-		1,798		-

	$	3,611	$	695	$	2,916	$	-	$	313,246	$	19,204	$	294,042	$	-

Year Ended December 31, 2015
Construction and land development
Residential	$	30	$	-	$	30	$	-	$	5,202	$	-	$	5,202	$	-
Commercial		291		2		289		-		25,948		1,822		24,126		-
		321		2		319		-		31,150		1,822		29,328		-
Commercial real estate
Owner occupied		1,167		383		784		-		69,256		6,785		62,471		-
Non-owner occupied		460		26		434		-		38,037		2,867		35,170		-
Multifamily		51		-		51		-		8,537		-		8,537		-
Farmland		17		-		17		-		388		-		388		-
		1,695		409		1,286		-		116,218		9,652		106,566		-
Consumer real estate
Home equity lines		448		-		448		-		20,333		1,238		19,095		-
Secured by 1-4 family residential
First deed of trust		602		324		278		-		56,776		5,759		51,017		-
Second deed of trust		111		98		13		-		6,485		1,212		5,273		-
		1,161		422		739		-		83,594		8,209		75,385		-
Commercial and industrial loans (except those secured by real estate)		94		18		76		-		20,086		826		19,260		-
Student loans		230		-		230				53,989		-		53,989		-
Consumer and other		61		-		61		-		1,734		-		1,734		-

	$	3,562	$	851	$	2,711	$	-	$	306,771	$	20,509	$	286,262	$	-

Note 6 – Deposits

Deposits as of March 31, 2016 and December 31, 2015 were as follows (dollars in thousands):

	March 31, 2016					December 31, 2015
	Amount		%			Amount		%

Demand accounts	$	78,986		21.4	%	$	78,282		21.4	%
Interest checking accounts		44,130		12.0	%		44,256		12.1	%
Money market accounts		66,447		18.0	%		64,841		17.8	%
Savings accounts		20,373		5.5	%		19,403		5.3	%
Time deposits of $250,000 and over		14,241		3.9	%		9,717		2.7	%
Other time deposits		144,907		39.2	%		148,349		40.7	%

Total	$	369,084		100.0	%	$	364,848		100.0	%

Note 7 – Trust preferred securities

During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On February 24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 2.15%) which adjusts, and is payable, quarterly. The interest rate at March 31, 2016 was 2.78%. The securities were redeemable at par beginning on March 15, 2010 and each quarter after such date until the securities mature on March 15, 2035. No amounts have been redeemed at March 31, 2016 and there are no plans to do so. The principal asset of the Trust is $5.2 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

During the third quarter of 2007, Village Financial Statutory Trust II, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On September 20, 2007, $3.6 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have LIBOR-indexed floating rate of interest (three-month LIBOR plus 1.4%) which adjusts, and is also payable, quarterly. The interest rate at March 31, 2016 was 2.03%. The securities may be redeemed at par at any time commencing in December 2012 until the securities mature in 2037. No amounts have been redeemed at March 31, 2016 and there are no plans to do so. The principal asset of the Trust is $3.6 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

The Trust Preferred Capital Notes may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. The portion of the Trust Preferred Capital Notes not considered as Tier 1 capital may be included in Tier 2 capital.

The obligations of the Company with respect to the issuance of the Trust Preferred Capital Notes constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the Trust Preferred Capital Notes. Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related Trust Preferred Capital Notes and require a deferral of common dividends.

The Company had been deferring interest payments since June 2011. Although we elected to defer payment of the interest due, the amounts had been accrued in the consolidated balance sheet and included in interest expense in the consolidated statement of operations.

The Company received notification on February 26, 2016 from the Federal Reserve Bank of Richmond (the “Reserve Bank”) approving the payment of all accrued and deferred interest payments on the trust preferred securities. On March 15, 2016, the Company made the regularly-scheduled quarterly interest payment and repaid all of the accrued and deferred interest on the trust preferred securities totaling $1,332,633, bringing the Company current as of such date. Although the Company intends to make future regularly-scheduled quarterly interest payments on the trust preferred securities, no assurance can be given that it will do so. The Reserve Bank’s approval was limited to the interest payments due through March 15, 2016 and, under the terms of the Company’s Written Agreement with the Reserve Bank, the Company must seek approval before making any future quarterly interest payments on the trust preferred securities.

Note 8 – Stock incentive plan

The Village Bank and Trust Financial Corp. Incentive Plan, which was adopted on February 28, 2006, authorized the issuance of up to 48,750 shares of common stock (after the reverse stock split) (the “2006 Plan”). On May 26, 2015, the Company’s shareholders approved the adoption of the Village Bank and Trust Financial Corp. 2015 Stock Incentive Plan (the “2015 Plan”) authorizing the issuance of up to 60,000 shares of common stock. The 2015 Plan was adopted to replace the 2006 Plan and any new awards will be made pursuant to the 2015 Plan. The prior awards made under the 2006 Plan were unchanged by the adoption of the 2015 Plan and continue to be governed by the terms of the 2006 Plan.

The following table summarizes stock options outstanding under the stock incentive plan at the indicated dates:

	Three Months Ended March 31,
	2016								2015
			Weighted								Weighted
			Average								Average
			Exercise		Fair Value		Intrinsic				Exercise		Fair Value		Intrinsic
	Options		Price		Per Share		Value		Options		Price		Per Share		Value

Options outstanding, beginning of period		2,929	$	24.47	$	12.71				6,830	$	92.34	$	52.74
Granted		-		-		-				-		-		-
Forfeited		-		-		-				-		-		-
Exercised		-		-		-				-		-		-
Options outstanding, end of period		2,929	$	24.47	$	12.71	$	-		6,830	$	92.34	$	52.74	$	-
Options exercisable, end of period		1,730								5,286

During the third quarter of 2015, we granted certain officers 40,675 restricted shares of common stock with a weighted average fair market value of $19.72 at the date of grant. These restricted stock awards have three-year grading vesting. Prior to vesting, these shares are subject to forfeiture to us without consideration upon termination of employment under certain circumstances. The total number of shares underlying non-vested restricted stock was 47,348 and 14,096 at March 31, 2016 and 2015, respectively.

The fair value of the stock is calculated under the same methodology as stock options and the expense is recognized over the vesting period. Unamortized stock-based compensation related to nonvested share based compensation arrangements granted under the stock incentive plan as of March 31, 2016 and 2015, was $841,163 and $403,046, respectively. The time based unamortized compensation of $428,743 is expected to be recognized over a weighted average period of 2.09 years.

Stock-based compensation expense was approximately $167,000 and $80,000 for the three months ended March 31, 2016 and 2015, respectively.

Note 9 — Fair value

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact and willing to transact.

Financial Accounting Standards Board (“FASB”) Codification Topic 820: Fair Value Measurements and Disclosures establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:

Level 1 Inputs — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 Inputs — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 Inputs — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods to determine the fair value of each type of financial instrument:

Securities: Fair values for securities available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Levels 1 and 2).

Impaired loans: The fair values of impaired loans are measured for impairment using the fair value of the collateral for collateral-dependent loans on a nonrecurring basis. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than two years old, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal if deemed significant using observable market data. Likewise, values for inventory and account receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Operations.

Real Estate Owned: Real estate owned assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, real estate owned assets are carried at net realizable value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

Assets held for sale: Assets held for sale were transferred from premises and equipment at cost less accumulated depreciation at the date of transfer. The Company periodically evaluates the value of assets held for sale and records an impairment charge for any subsequent declines in fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the assets held for sale as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the asset held for sale as nonrecurring Level 3.

Assets and liabilities measured at fair value under Topic 820 on a recurring and non-recurring basis are summarized below for the indicated dates (dollars in thousands):

	Fair Value Measurement
	at March 31, 2016 Using
			Quoted Prices
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets - Recurring
US Government Agencies	$	23,097	$	3,183	$	19,914	$	-
Mortgage-backed securities		2,849		-		2,849		-
Municipals		1,240		-		1,240		-

Financial Assets - Non-Recurring
Impaired loans		19,204		-		17,600		1,604
Assets held for sale		11,800		-		11,800		-
Real estate owned		6,134		-		6,075		59

	Fair Value Measurement
	at December 31, 2015 Using
			Quoted Prices
			in Active		Other		Significant
			Markets for		Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets - Recurring
US Government Agencies	$	33,713	$	3,307	$	30,406	$	-
Mortgage-backed securities		3,001		-		3,001		-
Municipals		1,205		-		1,205		-

Financial Assets - Non-Recurring
Impaired loans		20,509		-		18,862		1,647
Assets held for sale		12,631		-		12,631		-
Real estate owned		6,249		-		6,190		59

The following tables present qualitative information about Level 3 fair value measurements for financial instruments measured at fair value at March 31, 2016 and December 31, 2015 (dollars in thousands):

	March 31, 2016
					Range
	Fair Value		Valuation	Unobservable	(Weighted
	Estimate		Techniques	Input	Average)
	(In thousands)

Impaired loans - real estate secured	$	983	Appraisal (1) or Internal Valuation (2)	Selling costs	6%-10% (7%)
				Discount for lack of marketability and age of appraisal	6%-30% (10%)
Impaired loans - non-real estate secured	$	621	Appraisal (1) or Discounted Cash Flow	Selling costs	10%
				Discount for lack of marketability or practical life	0%-50% (20%)
Real estate owned	$	59	Appraisal (1) or Internal Valuation (2)	Selling costs	6%-10% (7%)
				Discount for lack of marketability and age of appraisal	6%-30% (15%)
Assets held for sale	$	11,800	Appraisal (1) or Internal Valuation (2)	Selling costs<

Village Bank & Trust Financial Corp. - FORM 10-Q - May 13, 2016

Attached files