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EX-31.2 - EXHIBIT 31.2 - Village Bank & Trust Financial Corp.v438813_ex31-2.htm
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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

 

2

 

 

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.

 

3

 

 

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.

 

4

 

 

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.

 

5

 

 

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.

 

6

 

 

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.

 

7

 

 

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.

 

8

 

 

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):

 

9

 

 

           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 

 

10

 

 

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.

 

11

 

 

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;

 

12

 

 

·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 

 

13

 

 

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):

 

14

 

 

   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 

 

15

 

 

   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 

 

16

 

 

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 

 

17

 

 

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 

 

18

 

 

               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 

 

19

 

 

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 

 

20

 

 

   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.

 

21

 

 

 

·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.

  

22

 

 

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   $- 

 

23

 

 

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.

 

24

 

 

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                

 

25

 

 

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:

 

26

 

 

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.

 

27

 

 

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 

 

28

 

 

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<