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EX-32.1 - EXHIBIT 32.1 - Village Bank & Trust Financial Corp.v465847_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Village Bank & Trust Financial Corp.v465847_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Village Bank & Trust Financial Corp.v465847_ex31-1.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, 2017

 

¨ 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 Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer ¨ Accelerated Filer ¨
Non-Accelerated Filer ¨  (Do not check if smaller reporting company) Smaller Reporting Company x
Emerging growth company ¨  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

 

1,429,827 shares of common stock, $4.00 par value, outstanding as of April 24, 2017

 

 

 

 

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, 2017 (unaudited) and December 31, 2016
3
   
Consolidated Statements of Operations
For the Three Months Ended
March 31, 2017 and 2016 (unaudited)
4
   
Consolidated Statements of Comprehensive Income
For the Three Months Ended
March 31, 2017 and 2016 (unaudited)
5
   
Consolidated Statements of Shareholders’ Equity
For the Three Months Ended
March 31, 2017 and 2016 (unaudited)
6
   
Consolidated Statements of Cash Flows
For the Three Months Ended
March 31, 2017 and 2016 (unaudited)
7
   
Notes to Consolidated Financial Statements (unaudited) 8
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
   
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, 2017 (Unaudited) and December 31, 2016

(in thousands, except share data)

 

   March 31,   December 31, 
   2017   2016 
Assets          
Cash and due from banks  $14,929   $10,848 
Federal funds sold   9,940    948 
Total cash and cash equivalents   24,869    11,796 
Investment securities available for sale   43,484    43,894 
Loans held for sale   7,334    14,784 
Loans          
Outstandings   339,904    337,100 
Allowance for loan losses   (3,372)   (3,373)
Deferred fees and costs, net   671    660 
Total loans, net   337,203    334,387 
Other real estate owned, net of valuation allowance   1,508    2,926 
Assets held for sale   841    841 
Premises and equipment, net   12,686    12,758 
Bank owned life insurance   7,132    7,093 
Accrued interest receivable   2,192    2,274 
Other assets   14,080    14,049 
           
   $451,329   $444,802 
           
Liabilities and Shareholders' Equity          
Liabilities          
Deposits          
Noninterest bearing demand  $95,472   $92,574 
Interest bearing   293,136    290,703 
Total deposits   388,608    383,277 
Federal Home Loan Bank advances   7,400    2,400 
Long-term debt - trust preferred securities   8,764    8,764 
Other borrowings   78    81 
Accrued interest payable   73    70 
Other liabilities   3,229    6,596 
Total liabilities   408,152    401,188 
           
Shareholders' equity          
           
Preferred stock, $4 par value, $1,000 liquidation preference, 1,000,000 shares authorized; 5,027 shares issued and outstanding at March 31, 2017 and 5,715 shares issued and outstanding at December 31, 2016   20    23 
Common stock, $4 par value - 10,000,000 shares authorized; 1,429,827 shares issued and outstanding at March 31, 2017 and 1,428,261 shares issued and outstanding at December 31, 2016   5,642    5,629 
Additional paid-in capital   57,966    58,643 
Accumulated deficit   (20,915)   (21,172)
Common stock warrant   732    732 
Stock in directors rabbi trust   (1,010)   (1,034)
Directors deferred fees obligation   1,010    1,034 
Accumulated other comprehensive loss   (268)   (241)
Total shareholders' equity   43,177    43,614 
           
   $451,329   $444,802 

 

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, 2017 and 2016

(Unaudited)

(in thousands, except per share data)

 

   2017   2016 
Interest income          
Loans  $3,958   $3,765 
Investment securities   163    120 
Federal funds sold   11    13 
Total interest income   4,132    3,898 
           
Interest expense          
Deposits   566    599 
Borrowed funds   73    40 
Total interest expense   639    639 
           
Net interest income   3,493    3,259 
Provision for loan losses   -    - 
           
Net interest income after provision for loan losses   3,493    3,259 
           
Noninterest income          
Service charges and fees   559    536 
Gain on sale of loans   1,376    1,146 
Gain (loss) on sale of investment securities   (9)   109 
Rental income   -    320 
Other   90    85 
Total noninterest income   2,016    2,196 
           
Noninterest expense          
Salaries and benefits   3,009    2,659 
Commissions   366    249 
Occupancy   267    448 
Equipment   183    183 
Cease use lease obligation   (125)   - 
Supplies   56    79 
Professional and outside services   786    718 
Advertising and marketing   89    85 
Foreclosed assets, net   (192)   101 
FDIC insurance premium   69    62 
Other operating expense   452    469 
Total noninterest expense   4,960    5,053 
           
Income before income tax expense   549    402 
Income tax expense   134    - 
           
Net income   415    402 
           
Preferred stock dividends and amortization of discount   (158)   (178)
Net income available to common shareholders  $257   $224 
           
Earnings per share, basic  $0.18   $0.16 
Earnings per share, diluted  $0.18   $0.16 

 

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, 2017 and 2016

(Unaudited)

(in thousands)

 

   2017   2016 
         
Net income  $415   $402 
Other comprehensive income (loss)          
Unrealized holding gains (losses) arising during the period   (53)   889 
Tax effect   (18)   302 
Net change in unrealized holding gains (losses) on securities available for sale, net of tax   (35)   587 
           
Reclassification adjustment          
Reclassification adjustment for (gains) losses realized in net income   9    (109)
Tax effect   3    (37)
Reclassification for (gains) losses included in net income, net of tax   6    (72)
           
Minimum pension adjustment   3    3 
Tax effect   1    1 
Minimum pension adjustment, net of tax   2    2 
           
Total other comprehensive income (loss)   (27)   517 
           
Total comprehensive income  $388   $919 

 

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, 2017 and 2016

(Unaudited)

(in thousands)

 

                           Directors   Accumulated     
           Additional   Retained       Stock in   Deferred   Other     
   Preferred   Common   Paid-in   Earnings       Directors   Fees   Comprehensive     
   Stock   Stock   Capital   (Deficit)   Warrant   Rabbi Trust   Obligation   Income (Loss)   Total 
                                     
Balance, December 31, 2016  $23   $5,629   $58,643   $(21,172)  $732   $(1,034)  $1,034   $(241)  $43,614 
Preferred stock redemption   (3)   -    (685)   -    -    -    -    -    (688)
Preferred stock dividend   -    -    -    (158)   -    -    -    -    (158)
Restricted stock redemption                            24    (24)        - 
Issuance of common stock   -    13    (13)   -    -    -    -    -    - 
Stock based compensation   -    -    21    -    -    -    -    -    21 
Minimum pension adjustment (net of income taxes of $1)   -    -    -    -    -    -    -    2    2 
Net income   -    -    -    415    -    -    -    -    415 
Change in unrealized gain (loss) on investment securities available-for-sale, net of reclassification and tax effect   -    -    -    -    -    -    -    (29)   (29)
                                              
Balance, March 31, 2017  $20   $5,642   $57,966   $(20,915)  $732   $(1,010)  $1,010   $(268)  $43,177 
                                              
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 

 

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, 2017 and 2016

(Unaudited)

 (in thousands)

 

   2017   2016 
         
Cash Flows from Operating Activities          
Net income  $415   $402 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   185    203 
Deferred income taxes   132    123 
Valuation allowance (recovery) on net deferred tax asset   -    (123)
Write-down of other real estate owned   346    72 
Valuation allowance other real estate owned   (331)   (15)
(Gain) loss on securities sold   9    (109)
Gain on loans sold   (1,376)   (1,146)
(Gain) loss on sale of other real estate owned   (218)   2 
Stock compensation expense   21    167 
Proceeds from sale of mortgage loans   44,633    37,624 
Origination of mortgage loans for sale   (35,807)   (31,255)
Amortization of premiums and accretion of discounts on securities, net   21    57 
Decrease in interest receivable   82    22 
Increase in bank owned life insurance   (39)   (48)
Decrease (increase) in other assets   (147)   462 
Increase (decrease) in interest payable   3    (1,255)
Decrease in other liabilities   (609)   (68)
Net cash provided by operating activities   7,320    5,115 
           
Cash Flows from Investing Activities          
Purchases of available for sale securities   (2,055)   - 
Proceeds from the sale or calls of available for sale securities   2,392    11,565 
Net increase in loans   (2,816)   (6,444)
Proceeds from sale of other real estate owned   1,621    56 
Purchases of premises and equipment   (113)   (118)
Net cash provided by (used in) investing activities   (971)   5,059 
           
Cash Flows from Financing Activities          
Redeemption of preferred stock   (688)   - 
Payment of preferred dividends   (2,916)   - 
Net increase in deposits   5,331    4,236 
Net increase (decrease) in Federal Home Loan Bank advances   5,000    (1,000)
Net increase (decrease) in other borrowings   (3)   50 
Net cash provided by financing activities   6,724    3,286 
           
Net increase in cash and cash equivalents   13,073    13,460 
Cash and cash equivalents, beginning of period   11,796    17,262 
           
Cash and cash equivalents, end of period  $24,869   $30,722 
           
Supplemental Disclosure of Cash Flow Information          
Cash payments for interest  $636   $1,894 
Supplemental Schedule of Non Cash Activities          
Real estate owned assets acquired in settlement of loans  $-   $1 
Dividends on preferred stock accrued  $158   $178 

 

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, 2017 and 2016

(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.

 

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, 2017 is not necessarily indicative of the results to be expected for the full year ending December 31, 2017. 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, 2016 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, 2017 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 per common share computation (in thousands, except per share data):

  

   Three Months Ended March 31, 
   2017   2016 
Numerator          
Net income - basic and diluted  $415   $402 
Preferred stock dividend   (158)   (178)
Net income available to common shareholders  $257   $224 
           
Denominator          
Weighted average shares outstanding - basic   1,428    1,418 
Dilutive effect of common stock options and restricted stock awards   -    - 
           
Weighted average shares outstanding - diluted   1,428    1,418 
           
Earnings per share - basic  $0.18   $0.16 
Earnings per share - diluted  $0.18   $0.16 

 

Outstanding options and warrants to purchase common stock were considered in the computation of diluted earnings per share for the periods presented. Stock options for 2,008 and 2,616 shares were not included in computing diluted earnings per share for the three months ended March 31, 2017 and 2016, respectively, because their effects were anti-dilutive.

 

 8 

 

 

Note 4 – Investment securities available for sale

 

At March 31, 2017 and December 31, 2016, 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, 2017                              
US Government Agencies                              
One to five years  $27,400   $27,589   $-   $(191)  $27,398    1.29%
Five to ten years   2,000    2,053    -    (15)   2,038    2.00%
More than ten years   2,824    2,830    -    (11)   2,819    1.36%
    32,224    32,472    -    (217)   32,255    1.34%
Mortgage-backed securities                              
One to five years   3,994    4,087    -    (14)   4,073    1.45%
More than ten years   7,355    7,243    1    (88)   7,156    2.40%
    11,349    11,330    1    (102)   11,229    2.07%
                               
Total investment securities  $43,573   $43,802   $1   $(319)  $43,484    1.52%
                               
December 31, 2016                              
US Government Agencies                              
One to five years  $29,400   $29,607   $-   $(213)  $29,394    1.25%
More than ten years   2,862    2,868    -    (16)   2,852    1.08%
    32,262    32,475    -    (229)   32,246    1.24%
Mortgage-backed securities                              
One to five years   3,457    3,524    -    (33)   3,491    1.78%
More than ten years   8,253    8,170    1    (14)   8,157    2.16%
    11,710    11,694    1    (47)   11,648    2.05%
                               
Total investment securities  $43,972   $44,169   $1   $(276)  $43,894    1.45%

 

Investment securities with book values of approximately $1,043,000 and $1,050,000 at March 31, 2017 and December 31, 2016, 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, 
   2017   2016 
         
Gross realized gains  $-   $109 
Gross realized losses   (9)   - 
           
   $(9)  $109 

 

The Company sold approximately $2 million and $11 million of investment securities available for sale at a loss of $9,000 and a gain $109,000 for the three months ended March 31, 2017 and 2016, 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.

 

 9 

 

 

Investment securities available for sale that have an unrealized loss position at March 31, 2017 and December 31, 2016 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, 2017                              
US Government Agencies  $29,437   $(206)  $2,819   $(11)  $32,256   $(217)
Mortgage-backed securities   11,150    (102)   -    -    11,150    (102)
                               
   $40,587   $(308)  $2,819   $(11)  $43,406   $(319)
                               
December 31, 2016                              
US Government Agencies  $27,291   $(213)  $2,852   $(16)  $33,143   $(229)
Mortgage-backed securities   9,450    (47)   -    -    9,450    (47)
                               
   $36,741   $(260)  $2,852   $(16)  $42,593   $(276)

 

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, 2017.

 

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, 2017   December 31, 2016 
   Amount   %   Amount   % 
Construction and land development                    
Residential  $6,699    1.97%  $6,770    2.01%
Commercial   29,141    8.57%   27,092    8.04%
    35,840    10.54%   33,862    10.05%
Commercial real estate                    
Owner occupied   70,601    20.78%   66,021    19.59%
Non-owner occupied   57,729    16.98%   57,944    17.19%
Multifamily   6,836    2.01%   8,824    2.62%
Farmland   297    0.09%   310    0.09%
    135,463    39.86%   133,099    39.49%
Consumer real estate                    
Home equity lines   19,771    5.82%   20,691    6.14%
Secured by 1-4 family residential,                    
First deed of trust   52,324    15.39%   54,791    16.25%
Second deed of trust   5,746    1.69%   5,768    1.71%
    77,841    22.90%   81,250    24.10%
Commercial and industrial loans
(except those secured by real estate)
   43,425    12.78%   39,390    11.68%
Guaranteed student loans   45,364    13.35%   47,398    14.06%
Consumer and other   1,971    0.57%   2,101    0.62%
                     
Total loans   339,904    100.0%   337,100    100.0%
Deferred loan cost, net   671         660      
Less: allowance for loan losses   (3,372)        (3,373)     
                     
   $337,203        $334,387      

 

 10 

 

 

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 $19,089,000 and $27,073,000 at March 31, 2017 and December 31, 2016, 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, 2017                         
Construction and land development                         
Residential  $6,699   $-   $-   $-   $6,699 
Commercial   27,872    1,168    101    -    29,141 
    34,571    1,168    101    -    35,840 
Commercial real estate                         
Owner occupied   70,601              -    70,601 
Non-owner occupied   50,748    3,356    3,625    -    57,729 
Multifamily   6,650    186    -    -    6,836 
Farmland   297    -    -    -    297 
    128,296    3,542    3,625    -    135,463 
Consumer real estate                         
Home equity lines   18,481    448    842    -    19,771 
Secured by 1-4 family residential                         
First deed of trust   47,248    2,509    2,567    -    52,324 
Second deed of trust   5,383    124    239    -    5,746 
    71,112    3,081    3,648    -    77,841 
Commercial and industrial loans
(except those secured by real estate)
   42,174    633    618    -    43,425 
Guaranteed student loans   45,364              -    45,364 
Consumer and other   1,915    45    11    -    1,971 
                          
Total loans  $323,432   $8,469   $8,003   $-   $339,904 
                          
December 31, 2016                         
Construction and land development                         
Residential  $6,770   $-   $-   $-   $6,770 
Commercial   25,342    1,648    102    -    27,092 
    32,112    1,648    102    -    33,862 
Commercial real estate                         
Owner occupied   58,788    3,565    3,668    -    66,021 
Non-owner occupied   57,944    -    -    -    57,944 
Multifamily   8,634    190    -    -    8,824 
Farmland   310    -    -    -    310 
    125,676    3,755    3,668    -    133,099 
Consumer real estate                         
Home equity lines   19,501    487    703    -    20,691 
Secured by 1-4 family residential                         
First deed of trust   49,648    2,847    2,296    -    54,791 
Second deed of trust   5,399    125    244    -    5,768 
    74,548    3,459    3,243    -    81,250 
Commercial and industrial loans
(except those secured by real estate)
   39,390    -    -    -    39,390 
Guaranteed student loans   46,009    739    650    -    47,398 
Consumer and other   2,043    52    6    -    2,101 
Guaranteed Student loans                         
Total loans  $319,778   $9,653   $7,669   $-   $337,100 

 

 11 

 

 

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, 2017                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $6,699   $6,699   $- 
Commercial   -    -    -    -    29,141    29,141    - 
    -    -    -    -    35,840    35,840    - 
Commercial real estate                                   
Owner occupied   -    -    -    -    70,601    70,601    - 
Non-owner occupied   -    -    -    -    57,729    57,729    - 
Multifamily   186    -    -    186    6,650    6,836    - 
Farmland   -    -    -    -    297    297    - 
    186    -    -    186    135,277    135,463    - 
Consumer real estate                                   
Home equity lines   56    -    -    56    19,715    19,771    - 
Secured by 1-4 family residential                                   
First deed of trust   354    302    -    656    51,668    52,324    - 
Second deed of trust   44    -    -    44    5,702    5,746    - 
    454    302    -    756    77,085    77,841    - 
Commercial and industrial loans
(except those secured by real estate)
   26    -    -    26    43,399    43,425    - 
Guaranteed student loans   3,422    1,625    6,930    11,977    33,387    45,364    6,930 
Consumer and other   4    5    -    9    1,962    1,971    - 
                                    
Total loans  $4,092   $1,932   $6,930   $12,954   $326,950   $339,904   $6,930 
                                    
                           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, 2016                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $6,770   $6,770   $- 
Commercial   -    -    -    -    27,092    27,092    - 
    -    -    -    -    33,862    33,862    - 
Commercial real estate                                   
Owner occupied   -    -    -    -    66,021    66,021    - 
Non-owner occupied   -    -    -    -    57,944    57,944    - 
Multifamily   190    -    -    190    8,634    8,824    - 
Farmland   -    -    -    -    310    310    - 
    190    -    -    190    132,909    133,099    - 
Consumer real estate                                   
Home equity lines   -    -    -    -    20,691    20,691    - 
Secured by 1-4 family residential                                   
First deed of trust   414    63    -    477    54,314    54,791    - 
Second deed of trust   128    -    -    128    5,640    5,768    - 
    542    63    -    605    80,645    81,250    - 
Commercial and industrial loans
(except those secured by real estate)
   15    62    -    77    39,313    39,390    - 
Guaranteed student loans   2,743    1,923    8,174    12,840    34,558    47,398    8,174 
Consumer and other   11    -    -    11    2,090    2,101    - 
                                    
Total loans  $3,501   $2,048   $8,174   $13,723   $323,377   $337,100   $8,174 

 

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.

 

 12 

 

 

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 (in thousands):

  

   March 31, 2017 
       Unpaid     
   Recorded   Principal   Related 
   Investment   Balance   Allowance 
With no related allowance recorded               
Construction and land development               
Commercial  $101   $168   $- 
Commercial real estate               
Owner occupied   1,606    1,621    - 
Non-owner occupied   2,217    2,217    - 
    3,823    3,838    - 
Consumer real estate               
Home equity lines   842    842    - 
Secured by 1-4 family residential               
First deed of trust   3,472    3,472    - 
Second deed of trust   525    771    - 
    4,839    5,085    - 
Commercial and industrial loans
(except those secured by real estate)
   492    839    - 
    9,255    9,930    - 
                
With an allowance recorded               
Construction and land development               
Commercial   474    474    7 
Commercial real estate               
Owner occupied   3,938    3,953    60 
Non-Owner occupied   -    -    - 
    3,938    3,953    60 
Consumer real estate               
Secured by 1-4 family residential               
First deed of trust   1,303    1,303    169 
Second deed of trust   176    176    94 
    1,479    1,479    263 
Commercial and industrial loans
(except those secured by real estate)
   87    203    43 
Consumer and other   5    5    5 
    5,983    6,114    378 
                
Total               
Construction and land development               
Commercial   575    642    7 
    575    642    7 
Commercial real estate               
Owner occupied   5,544    5,574    60 
Non-owner occupied   2,217    2,217    - 
    7,761    7,791    60 
Consumer real estate               
Home equity lines   842    842    - 
Secured by 1-4 family residential,               
First deed of trust   4,775    4,775    169 
Second deed of trust   701    947    94 
    6,318    6,564    263 
                
Commercial and industrial loans
(except those secured by real estate)
   579    1,042    43 
Consumer and other   5    5    5 
   $15,238   $16,044   $378 

 

 13 

 

 

   December 31, 2016 
       Unpaid     
   Recorded   Principal   Related 
   Investment   Balance   Allowance 
With no related allowance recorded               
Construction and land development               
Commercial  $102   $169   $- 
Commercial real estate               
Owner occupied   1,487    1,487    - 
Non-owner occupied   2,236    2,236    - 
    3,723    3,723    - 
Consumer real estate               
Home equity lines   703    703    - 
Secured by 1-4 family residential               
First deed of trust   3,514    3,518    - 
Second deed of trust   619    865    - 
    4,836    5,086    - 
Commercial and industrial loans
(except those secured by real estate)
   538    768    - 
    9,199    9,746    - 
                
With an allowance recorded               
Construction and land development               
Commercial   479    479    9 
Commercial real estate               
Owner occupied   4,117    4,132    86 
Non-Owner occupied   -    -    - 
    4,117    4,132    86 
Consumer real estate               
Secured by 1-4 family residential               
First deed of trust   1,550    1,550    144 
Second deed of trust   90    90    90 
    1,640    1,640    234 
Commercial and industrial loans
(except those secured by real estate)
   6    122    6 
    6,242    6,373    335 
                
Total               
Construction and land development               
Commercial   581    648    9 
    581    648    9 
Commercial real estate               
Owner occupied   5,604    5,619    86 
Non-owner occupied   2,236    2,236    - 
    7,840    7,855    86 
Consumer real estate               
Home equity lines   703    703    - 
Secured by 1-4 family residential,               
First deed of trust   5,064    5,068    144 
Second deed of trust   709    955    90 
    6,476    6,726    234 
Commercial and industrial loans
(except those secured by real estate)
   544    890    6 
   $15,441   $16,119   $335 

 

 14 

 

 

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, 
   2017   2016 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                    
Construction and land development                    
Commercial  $99   $7   $98   $11 
    99    7    98    11 
Commercial real estate                    
Owner occupied   1,292    50    816    14 
Non-owner occupied   2,400    30    2,631    34 
    3,692    80    3,447    48 
Consumer real estate                    
Home equity lines   932    4    1,287    - 
Secured by 1-4 family residential                    
First deed of trust   3,867    40    4,092    47 
Second deed of trust   608    11    1,057    12 
    5,407    55    6,436    59 
Commercial and industrial loans
(except those secured by real estate)
   456    8    797    7 
Consumer and other   -    -    15    - 
    9,654    150    10,793    125 
                     
With an allowance recorded                    
Construction and land development                    
Commercial   796    -    1,743    6 
Commercial real estate                    
Owner occupied   4,216    -    5,600    57 
Non-Owner occupied   23    -    94    5 
    4,239    -    5,694    62 
Consumer real estate                    
Home equity lines   -    -    30    - 
Secured by 1-4 family residential                    
First deed of trust   1,491    -    2,042    6 
Second deed of trust   151    -    149    2 
    1,642    -    2,221    8 
Commercial and industrial loans
(except those secured by real estate)
   56    -    138    - 
Consumer and other   1                
    6,734    -    9,796    76 
                     
Total                    
Construction and land development                    
Commercial  $895   $7   $1,842   $17 
    895    7    1,842    17 
Commercial real estate                    
Owner occupied   5,508    50    6,416    71 
Non-owner occupied   2,423    30    2,725    39 
Multifamily   -    -    -    - 
Farmland   -    -    -    - 
    7,931    80    9,141    110 
Consumer real estate                    
Home equity lines   932    4    1,317    - 
Secured by 1-4 family residential,                    
First deed of trust   5,358    40    6,134    53 
Second deed of trust   759    11    1,206    14 
    7,049    55    8,657    67 
Commercial and industrial loans
(except those secured by real estate)
   512    8    936    7 
Consumer and other   1    -    15    - 
   $16,388   $150   $20,591   $201 

 

 15 

 

 

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, 2017                    
Construction and land development                    
Commercial  $474   $474   $-   $7 
    474    474    -    7 
Commercial real estate                    
Owner occupied   4,302    4,089    213    60 
Non-owner occupied   2,217    2,217    -    - 
    6,519    6,306    213    60 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   3,363    2,520    843    165 
Second deeds of trust   540    540    -    5 
    3,903    3,060    843    170 
Commercial and industrial loans
(except those secured by real estate)
   381    -    381    6 
   $11,277   $9,840   $1,437   $243 

  

               Specific 
               Valuation 
   Total   Performing   Nonaccrual   Allowance 
December 31, 2016                    
Construction and land development                    
Commercial  $479   $479   $-   $9 
    479    479    -    9 
Commercial real estate                    
Owner occupied   4,342    4,117    225    86 
Non-owner occupied   2,236    2,236    -    - 
    6,578    6,353    225    86 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   3,853    3,012    841    139 
Second deeds of trust   547    547    -    - 
    4,400    3,559    841    139 
Commercial and industrial loans
(except those secured by real estate)
   397    -    397    - 
   $11,854   $10,391   $1,463   $234 

 

There were no TDRs identified during the three months ended March 31, 2017 and 2016.

 

 16 

 

 

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

 

   March 31, 2017   March 31, 2016 
   Number of   Recorded   Number of   Recorded 
   Loans   Balance   Loans   Balance 
                 
Commercial real estate                    
Owner occupied   1   $151    -   $- 
Non-owner occupied   1    598    -    - 
    2    749    -    - 
Consumer real estate                    
Secured by 1-4 family residential                    
First deed of trust   14    1,190    1    262 
Second deed of trust   -    -    3    181 
    14    1,190    4    443 
Commercial and industrial
(except those secured by real estate)
   1    23    1    119 
    17   $1,962    5   $562 

 

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

 

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Three Months Ended March 31, 2017                         
Construction and land development                         
Residential  $41   $-   $-   $-   $41 
Commercial   300    (51)   -    -    249 
    341    (51)   -    -    290 
Commercial real estate                         
Owner occupied   611    (5)   -    13    619 
Non-owner occupied   406    (2)   -    -    404 
Multifamily   56    (12)   -    -    44 
Farmland   3    -    -    -    3 
    1,076    (19)   -    13    1,070 
Consumer real estate                         
Home equity lines   271    (16)   -    1    256 
Secured by 1-4 family residential                         
First deed of trust   447    67    -    18    532 
Second deed of trust   136    (2)   -    5    139 
    854    49    -    24    927 
Commercial and industrial loans
(except those secured by real estate)
   223    66    -    3    292 
Student loans   158    (11)   (42)   -    105 
Consumer and other   8    5    (1)   2    14 
Unallocated   713    (39)   -    -    674 
                          
   $3,373   $-   $(43)  $42   $3,372 

 

 17 

 

 

       Provision for             
   Beginning   (Recovery of)           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 

 

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Year Ended December 31, 2016                         
Construction and land development                         
Residential  $30   $10   $-   $1   $41 
Commercial   291    9    (10)   10    300 
    321    19    (10)   11    341 
Commercial real estate                         
Owner occupied   1,167    (490)   (66)   -    611 
Non-owner occupied   460    (106)   (1)   53    406 
Multifamily   51    5    -    -    56 
Farmland   17    (139)   -    125    3 
    1,695    (730)   (67)   178    1,076 
Consumer real estate                         
Home equity lines   448    (127)   (53)   3    271 
Secured by 1-4 family residential                         
First deed of trust   602    (40)   (140)   25    447 
Second deed of trust   111    21    (25)   29    136 
    1,161    (146)   (218)   57    854 
                          
Commercial and industrial loans
(except those secured by real estate)
   94    44    (15)   100    223 
Student loans   230    149    (221)   -    158 
Consumer and other   2    10    (13)   9    8 
Unallocated   59    654    -    -    713 
                          
   $3,562   $-   $(544)  $355   $3,373 

 

 18 

 

 

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. The allowance for loan losses included an unallocated portion of approximately $674,000 and $713,000 at March 31, 2017 and December 31, 2016, respectively.

 

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

 

·The activity in the provision for (recovery of) loan losses for the three months ended March 31, 2017 was not significant.

 

·The recovery of loan losses totaling $730,000 and $379,000 for the commercial real estate portfolio for the year ended December 31, 2016 and three months ended March 31, 2016, respectively, 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% at March 31, 2016 and to 0.20% at December 31, 2016. In addition, the portfolio was in a net-recovery position of $111,000 and $126,000 at December 31, 2016 and March 31, 2016, respectively.

 

·The recovery of loan losses totaling $146,000 and $111,000 for the consumer real estate portfolio for the year ended December 31, 2016 and three months ended March 31, 2016, respectively, 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% at December 31, 2015 to 0.03% at March 31, 2016 and to a net recovery position of 0.01% at December 31, 2016.

  

 19 

 

 

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

  

   Recorded Investment in Loans 
   Allowance       Loans 
   Ending           Ending         
   Balance   Individually   Collectively   Balance   Individually   Collectively 
                               
As of March 31, 2017                              
Construction and land development                              
Residential  $41   $-   $41   $6,699   $-   $6,699 
Commercial   249    7    242    29,141    575    28,566 
    290    7    283    35,840    575    35,265 
Commercial real estate                              
Owner occupied   619    60    559    70,601    5,544    65,057 
Non-owner occupied   404    -    404    57,729    2,217    55,512 
Multifamily   44    -    44    6,836    -    6,836 
Farmland   3    -    3    297    -    297 
    1,070    60    1,010    135,463    7,761    127,702 
Consumer real estate                              
Home equity lines   256    -    256    19,771    842    18,929 
Secured by 1-4 family residential                              
First deed of trust   532    169    363    52,324    4,775    47,549 
Second deed of trust   139    94    45    5,746    701    5,045 
    927    263    664    77,841    6,318    71,523 
Commercial and industrial loans
(except those secured by real estate)
   292    43    249    43,425    579    42,846 
Student loans   105    -    105    45,364    -    45,364 
Consumer and other   688    5    683    1,971    5    1,966 
                               
   $3,372   $378   $2,994   $339,904   $15,238   $324,666 
                               
As of December 31, 2016                              
Construction and land development                              
Residential  $41   $-   $41   $6,770   $-   $6,770 
Commercial   300    9    291    27,092    581    26,511 
    341    9    332    33,862    581    33,281 
Commercial real estate                              
Owner occupied   611    86    525    66,021    5,604    60,417 
Non-owner occupied   406    -    406    57,944    2,236    55,708 
Multifamily   56    -    56    8,824    -    8,824 
Farmland   3    -    3    310    -    310 
    1,076    86    990    133,099    7,840    125,259 
Consumer real estate                              
Home equity lines   271    -    271    20,691    703    19,988 
Secured by 1-4 family residential                              
First deed of trust   447    144    303    54,791    5,064    49,727 
Second deed of trust   136    90    46    5,768    709    5,059 
    854    234    620    81,250    6,476    74,774 
Commercial and industrial loans
(except those secured by real estate)
   223    6    217    39,390    544    38,846 
Student loans   158    -    158    47,398    -    47,398 
Consumer and other   721    -    721    2,101    -    2,101 
                               
   $3,373   $335   $3,038   $337,100   $15,441   $321,659 

 

 20 

 

 

Note 6 – Deposits

 

Deposits as of March 31, 2017 and December 31, 2016 were as follows (dollars in thousands):

 

   March 31,   December 31, 
   2017   2016 
         
Demand accounts  $95,472   $92,574 
Interest checking accounts   44,040    44,390 
Money market accounts   73,142    71,290 
Savings accounts   27,601    26,598 
Time deposits of $250,000 and over   12,803    13,372 
Other time deposits   135,550    135,053 
           
   $388,608   $383,277 

 

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, 2017 was 3.28%. 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, 2017 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, 2017 was 2.53%. 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, 2017 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 is current on these interest payments.

 

 21 

 

 

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, 
   2017   2016 
       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   2,337   $24.21   $12.76         2,929   $24.47   $12.71      
Granted   -    -    -         -    -    -      
Forfeited   -    -    -         -    -    -      
Exercised   -    -    -         -    -    -      
Options outstanding, end of period   2,337   $24.21   $12.76   $-    2,929   $24.47   $12.71   $- 
Options exercisable, end of period   2,337                   1,730                

 

The total number of shares underlying non-vested restricted stock was 31,210 and 47,348 at March 31, 2017 and 2016, respectively.

 

The fair value of the stock is based on the grant date of the award 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, 2017 and 2016, was $515,568 and $841,163, respectively. The time based unamortized compensation of $307,584 is expected to be recognized over a weighted average period of 1.64 years.

 

Stock-based compensation expense was approximately $21,000 and $167,000 for the three months ended March 31, 2017 and 2016, respectively.

 

 22 

 

 

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.

 

 23 

 

 

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, 2017 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  $32,255   $-   $32,255   $- 
Mortgage-backed securities   11,229    -    11,229    - 
                     
Financial Assets - Non-Recurring                    
Impaired loans   12,379    -    11,390    989 
Assets held for sale   841    -    -    841 
Real estate owned   1,508    -    1,508    - 

 

   Fair Value Measurement 
   at December 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  $32,246   $2,103   $30,143   $- 
Mortgage-backed securities   11,648    9,450    2,198    - 
                     
Financial Assets - Non-Recurring                    
Impaired loans   15,441    -    14,467    974 
Assets held for sale   841    -    -    841 
Real estate owned   2,926    -    2,926    - 

 

 24 

 

 

The following tables present qualitative information about Level 3 fair value measurements for financial instruments measured at fair value at March 31, 2017 and December 31, 2016 (dollars in thousands):

 

   March 31, 2017 
             Range 
   Fair Value   Valuation  Unobservable  (Weighted 
   Estimate   Techniques  Input  Average) 
   (In thousands) 
               
Impaired loans - real estate secured  $367   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  $622   Appraisal (1) or Discounted Cash Flow  Selling costs   10% 
           Discount for lack of marketability or practical life   0%-50% (20%) 
Real estate owned  $-   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  $841   Appraisal (1) or Internal Valuation (2)  Selling costs   6%-10% (7%) 
           Discount for lack of marketability and age of appraisal   6%-30% (15%) 

 

(1)Fair Value is generally determined through independent appraisals of the underlying collateral, which generally included various level 3 inputs which are not identifiable
(2)Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances

 

 25 

 

 

   December 31, 2016 
             Range 
   Fair Value   Valuation  Unobservable  (Weighted 
   Estimate   Techniques  Input  Average) 
   (In thousands) 
               
Impaired loans - real estate secured  $517   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  $457   Appraisal (1) or Discounted Cash Flow  Selling costs   10% 
           Discount for lack of marketability or practical life   0%-50% (20%) 
Real estate owned  $-   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  $841   Appraisal (1) or Internal Valuation (2)  Selling costs   6%-10% (7%) 
           Discount for lack of marketability and age of appraisal   6%-30% (15%) 

 

(1)Fair Value is generally determined through independent appraisals of the underlying collateral, which generally included various level 3 inputs which are not identifiable
(2)Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances

 

In general, fair value of securities is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon market prices determined by an outside, independent entity that primarily uses as inputs, observable market-based parameters. Fair value of loans held for sale is based upon internally developed models that primarily use as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.

 

Cash and cash equivalents – The carrying amount of cash and cash equivalents approximates fair value.

 

Investment securities – The fair value of investment securities available-for-sale is estimated based on bid quotations received from independent pricing services for similar assets. The carrying amount of other investments approximates fair value.

 

 26 

 

 

Loans – For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For all other loans, fair values are calculated by discounting the contractual cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loans, or by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

 

Assets held for sale –The carrying value of assets held for sale is based on fair value less selling costs.  Fair values for assets held for sale are estimated based on appraised values of the asset or management’s estimation of the value of the assets.

 

Deposits – The fair value of deposits with no stated maturity, such as demand, interest checking and money market, and savings accounts, is equal to the amount payable on demand at year-end. The fair value of certificates of deposit is based on the discounted value of contractual cash flows using the rates currently offered for deposits of similar remaining maturities.

 

Borrowings – The fair value of borrowings is based on the discounted value of contractual cash flows using the rates currently offered for borrowings of similar remaining maturities.

 

Accrued interest – The carrying amounts of accrued interest receivable and payable approximate fair value.

 

      March 31,   December 31, 
      2017   2016 
   Level in Fair                
   Value  Carrying   Estimated   Carrying   Estimated 
   Hierarchy  Value   Fair Value   Value   Fair Value 
   (In thousands)
Financial assets                       
Cash  Level 1  $14,929   $14,929   $10,848   $10,848 
Cash equivalents  Level 2   9,940    9,940    948    948 
Investment securities available for sale  Level 1   -    -    11,553    11,553 
Investment securities available for sale  Level 2   43,484    43,484    32,341    32,341 
Federal Home Loan Bank stock  Level 2   712    712    512    512 
Loans held for sale  Level 2   7,334    7,334    14,784    14,784 
Loans  Level 2   327,525    327,788    321,659    322,386 
Impaired loans  Level 2   11,390    11,390    14,467    14,467 
Impaired loans  Level 3   989    989    974    974 
Assets held for sale  Level 3   841    841    841    841 
Other real estate owned  Level 2   1,508    1,508    2,926    2,926 
Bank owned life insurance  Level 3   7,132    7,132    7,093    7,093 
Accrued interest receivable  Level 2   2,192    2,192    2,274    2,274 
                        
Financial liabilities                       
Deposits  Level 2   388,608    389,024    383,277    383,985 
FHLB borrowings  Level 2   7,400    7,400    2,400    2,402 
Trust preferred securities  Level 2   8,764    9,305    8,764    8,565 
Other borrowings  Level 2   78    78    81    81 
Accrued interest payable  Level 2   73    73    70    70 

 

Note 10 – Segment Reporting

 

Revenues from commercial banking operations consist primarily of interest earned on loans and securities and fees from deposit services. Mortgage banking operating revenues consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination fee income.

 

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The commercial banking segment provides the mortgage banking segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on the commercial banking segment’s cost of funds. Additionally, the mortgage banking segment leases premises from the commercial banking segment. These transactions are eliminated in the consolidation process.

 

The following table presents segment information as of and for the three months ended March 31, 2017 and 2016 (in thousands):

 

   Commercial   Mortgage       Consolidated 
   Banking   Banking   Eliminations   Totals 
Three Months Ended March 31, 2017                    
                     
Revenues                    
Interest income  $4,073   $65   $(6)  $4,132 
Gain on sale of loans   -    1,376    -    1,376 
Other revenues   551    133    (44)   640 
Total revenues   4,624    1,574    (50)   6,148 
                     
Expenses                    
Interest expense   639    6    (6)   639 
Salaries and benefits   2,018    991    -    3,009 
Commissions   -    366    -    366 
Other expenses   1,376    253    (44)   1,585 
Total operating expenses   4,033    1,616    (50)   5,599 
                     
Income before income taxes  $591   $(42)  $-   $549 
                     
Total assets  $454,583   $10,570   $(13,824)  $451,329 
                     
                     
Three Months Ended March 31, 2016                    
                     
Revenues                    
Interest income  $3,830   $81   $(13)  $3,898 
Gain on sale of loans   -    1,146    -    1,146 
Other revenues   1,007    96    (53)   1,050 
Total revenues   4,837    1,323    (66)   6,094 
                     
Expenses                    
Interest expense   639    13    (13)   639 
Salaries and benefits   1,885    774    -    2,659 
Commissions   -    249    -    249 
Other expenses   1,943    255    (53)   2,145 
Total operating expenses   4,467    1,291    (66)   5,692 
                     
Income (loss) before income taxes  $370   $32   $-   $402 
                     
Total assets  $427,401   $9,007   $(13,418)  $422,990 

 

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Note 11 – Shareholders’ equity and regulatory matters

 

Preferred Stock

 

On May 1, 2009, as part of the Capital Purchase Program (the “TARP Program”) established by the U.S. Department of the Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of 2008, the Company entered into a Letter Agreement and Securities Purchase Agreement—Standard Terms (collectively, the “Purchase Agreement”) with the Treasury, pursuant to which the Company sold (i) 14,738 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $4.00 per share, having a liquidation preference of $1,000 per share (the “preferred stock”) and (ii) a warrant (the “Warrant”) to purchase 31,190 shares of the Company’s common stock at an initial exercise price of $70.88 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $14,738,000 in cash. The fair value of the preferred stock was estimated using discounted cash flow methodology at an assumed market equivalent rate of 13%, with 20 quarterly payments over a five year period, and was determined to be $10,208,000. The fair value of the Warrant was estimated using the Black-Scholes option pricing model, with assumptions of 25% volatility, a risk-free rate of 2.03%, a yield of 6.162% and an estimated life of 5 years, and was determined to be $534,000. The aggregate fair value for both the preferred stock and Warrant was determined to be $10,742,000 with 95% of the aggregate attributable to the preferred stock and 5% attributable to the Warrant. Therefore, the $14,738,000 issuance was allocated with $14,006,000 being assigned to the preferred stock and $732,000 being allocated to the Warrant. The difference between the $14,738,000 face value of the preferred stock and the amount allocated of $14,006,000 to the preferred stock was accreted as a discount on the preferred stock using the effective interest rate method over five years.

 

The preferred stock qualifies as Tier 1 capital and accrued cumulative dividends at a rate of 5% until May 1, 2014 and now accrues at a 9% rate. The preferred stock is generally non-voting, other than on certain matters that could adversely affect the preferred stock.

 

The Warrant was immediately exercisable. The Warrant provides for the adjustment of the exercise price and the number of shares of common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of common stock, and upon certain issuances of common stock at or below a specified price relative to the then-current market price of common stock. The Warrant expires ten years from the issuance date. Pursuant to the Purchase Agreement, the Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant.

 

In November 2013, the Company participated in a successful auction of the Company’s preferred stock by the Treasury that resulted in the purchase of the securities by private and institutional investors.

 

In accordance with the Company’s prior Written Agreement with the Federal Reserve Bank of Richmond (the “Reserve Bank”), the Company had been deferring quarterly cash dividends on the preferred stock since May 2011. The Written Agreement was terminated by the Reserve Bank as of July 28, 2016. With the termination of the Written Agreement, the Company is not required to defer the quarterly cash dividends on the preferred stock. At March 31 2017, the aggregate amount of the Company’s total accrued dividend payments on the preferred stock was $55,000 and reflected as a reduction of retained earnings.

 

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The Company received approval from state and federal regulators allowing the Bank to pay a special dividend to the Company for the sole purpose of paying all accrued and unpaid dividends on the preferred stock through February 15, 2017, as well as to redeem 688 shares of the total 5,715 shares outstanding. The accrued and unpaid dividends paid on February 15, 2017 amounted to $2,911,000. The 688 shares were redeemed on February 24, 2017 at a redemption price of $1,000 per share plus accrued dividends from February 15, 2017 to the redemption date.

 

Common Stock

 

On December 4, 2013, the Company issued 67,907 new shares of common stock through a private placement to directors and executive officers. The sale raised $1,684,075 in new capital for the Company. The $24.80 sale price for the common shares was equal to the stock’s book value at September 30, 2013, which represented a 30% premium over the closing price of the stock on December 3, 2013.

 

On August 6, 2014, the Company filed Articles of Amendment to its Articles of Incorporation with the Virginia State Corporation Commission to affect 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.

 

On March 27, 2015, the Company completed a rights offering to shareholders (the “Rights Offering”) and concurrent standby offering to Kenneth R. Lehman (the “Standby Offering”), in which the Company issued an aggregate of 1,051,866 shares of common stock (the total number of shares offered) at $13.87 per share for aggregate gross proceeds of $14,589,381 (including the value of the Company’s preferred stock exchanged by Mr. Lehman for shares of common stock of $4,618,813). In connection with the Rights Offering, 283,293 shares were issued to shareholders upon exercise of their basic subscription rights and 191,773 shares were issued to shareholders upon exercise of their oversubscription privileges (approximately 36.9% of the total number of shares requested pursuant to oversubscription privileges). In connection with the Standby Offering, Mr. Lehman purchased an aggregate of 576,800 shares of the Company’s common stock, 333,007 of which were issued in exchange for 9,023 shares of the Company’s preferred stock and 243,793 of which were purchased for cash. Also, as part of the Standby Offering, Mr. Lehman forgave $2,215,009 in accrued and unpaid dividends on the preferred stock.

 

Regulatory Matters

 

The Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under the capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

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Quantitative measures are established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 Capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 Capital to average assets (the Leverage ratio).

 

In July 2013, the Board of Governors of the Federal Reserve System and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision's capital guidelines for U.S. banks (commonly known as Basel III). Under the final rules, which began for the Company and the Bank on January 1, 2015 and are subject to a phase-in period through January 1, 2019, minimum requirements will increase for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio (“CET1 ratio”) of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets, which when fully phased-in, effectively results in a minimum CET1 ratio of 7.0%. Basel III raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% (which, with the capital conservation buffer, effectively results in a minimum Tier 1 capital ratio of 8.5% when fully phased-in), effectively results in a minimum total capital to risk-weighted assets ratio of 10.5% (with the capital conservation buffer fully phased-in), and requires a minimum leverage ratio of 4.0%. Basel III also makes changes to risk weights for certain assets and off-balance-sheet exposures. Management expects that the capital ratios for the Company and the Bank under Basel III will continue to exceed the well capitalized minimum capital requirements.

 

The Company meets eligibility criteria of a small bank holding company in accordance with the Federal Reserve Board’s Small Bank Holding Company Policy Statement issued February 2015, and is no longer obligated to report consolidated regulatory capital. The Bank continues to be subject to various capital requirements administered by banking agencies. The capital amounts and ratios at March 31, 2017 and December 31, 2016 for the Bank are presented in the table below (dollars in thousands):

  

           For Capital         
   Actual   Adequacy Purposes   To be Well Capitalized 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
                         
March 31, 2017                              
Total capital (to risk- weighted assets) Village Bank  $45,780    14.22%  $25,757    8.00%  $31,197    10.00%
                               
Tier 1 capital (to risk- weighted assets) Village Bank   42,408    13.17%   12,879    4.00%   19,318    6.00%
                               
Leverage ratio (Tier 1 capital to average assets) Village Bank   42,408    9.79%   17,322    4.00%   21,653    5.00%
                               
Common equity tier 1 (to risk- weighted assets) VillageBank   42,408    13.17%   14,488    4.50%   20,928    6.50%
                               
December 31, 2016                              
Total capital (to risk- weighted assets) Village Bank  $49,225    15.33%  $25,693    8.00%  $32,117    10.00%
                               
Tier 1 capital (to risk- weighted assets) Village Bank   45,852    14.28%   12,847    4.00%   19,270    6.00%
                               
Leverage ratio (Tier 1 capital to average assets) Village Bank   45,852    10.47%   17,523    4.00%   21,903    5.00%
                               
Common equity tier 1 (to risk- weighted assets) VillageBank   45,852    14.28%   14,452    4.50%   20,876    6.50%

 

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Note 12 – Commitments and contingencies

 

Off-balance-sheet risk – The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the financial statements. The contract amounts of these instruments reflect the extent of involvement that the Company has in particular classes of instruments.

 

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, and to potential credit loss associated with letters of credit issued, is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for loans and other such on-balance sheet instruments.

 

The Company had outstanding the following approximate off-balance-sheet financial instruments whose contract amounts represent credit risk at the dates indicated (dollars in thousands):

 

   March 31,   December 31, 
   2017   2016 
         
Undisbursed credit lines  $52,029   $55,315 
Commitments to extend or originate credit   26,529    16,467 
Standby letters of credit   4,751    4,397 
           
Total commitments to extend credit  $83,309   $76,179 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Historically, many commitments expire without being drawn upon; therefore, the total commitment amounts shown in the above table are not necessarily indicative of future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, as deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the customer. Collateral held varies but may include personal or income-producing commercial real estate, accounts receivable, inventory and equipment.

 

Standby letters of credit are written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

 

Concentrations of credit risk – All of the Company’s loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Company’s market area. Although the Company is building a diversified loan portfolio, a substantial portion of its clients’ ability to honor contracts is reliant upon the economic stability of the Richmond, Virginia area, including the real estate markets in the area. The concentrations of credit by type of loan are set forth in Note 5. The distribution of commitments to extend credit approximates the distribution of loans outstanding.

 

Approximately 15% of the Company’s loan portfolio consists of student loans that are guaranteed by the DOE and covers approximately 98% of the principal and interest in the event of default.  The Company utilizes a third party vendor with significant experience and expertise to service these loans.  In the unlikely event that the third party servicer does not service the loans in accordance with the DOE requirements and could not reimburse the Company for losses sustained as a result of servicing errors, the Company could sustain additional losses beyond what has been factored in the allowance for loan losses.

 

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Prior Agreements with Regulators – In February 2012, the Bank entered into a Stipulation and Consent to the Issuance of a Consent Order with the Federal Deposit Insurance Corporation (the “FDIC”) and the Virginia Bureau of Financial Institutions (the “Supervisory Authorities”), and the Supervisory Authorities issued the related Consent Order effective February 3, 2012 (the “Consent Order”). In June 2012, the Company entered into a similar written agreement (the “Written Agreement”) with the Reserve Bank. As a result of the steps the Company and the Bank took to, among other things, improve asset quality, increase capital, augment management and board oversight, and increase earnings, the Consent Order was terminated effective December 14, 2015. In place of the Consent Order, the Bank’s Board of Directors made certain written assurances to the Supervisory Authorities in the form of a Memorandum of Understanding (“MOU”) that became effective November 17, 2015. Due to further improvements by the Company and the Bank in asset quality and earnings, and the correction of a prior Regulation W violation, the MOU was terminated effective May 12, 2016, and the Written Agreement was terminated effective July 28, 2016. With the terminations of the MOU and the Written Agreement, neither the Company nor the Bank is under any formal or informal agreements with its regulators.

 

Note 13 – Income Taxes

 

The net deferred tax asset is included in other assets on the balance sheet. Accounting Standards Codification Topic 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. Management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results. In making such judgments, significant weight is given to evidence that can be objectively verified. The deferred tax assets are analyzed quarterly for changes affecting realization.

 

In assessing the Company’s ability to realize its net deferred tax asset, management considers whether it is more likely than not that some portion or all of the net deferred tax asset will or will not be realized.  The Company’s ultimate realization of the net deferred tax asset is dependent upon the generation of future taxable income during the periods in which temporary differences become deductible.  Management considers the nature and amount of historical and projected future taxable income, the scheduled reversal of deferred tax assets and liabilities, and available tax planning strategies in making this assessment.  The amount of net deferred taxes recognized could be impacted by changes to any of these variables.

 

Each quarter, the Company weighs both the positive and negative information with respect to realization of the net deferred tax asset and analyzes its position as to whether or not a valuation allowance is required. Over the past several quarters, the positive information has been increasing while the negative information has been decreasing. Over the last eight quarters, the Company has demonstrated consistent earnings while its level of non-performing assets, which was the primary cause of the Company’s losses, has steadily decreased. Additionally, the Reserve Bank, the FDIC and the Virginia Bureau of Financial Institutions have terminated their formal agreements with the Company and the Bank, reducing regulatory risk.

 

Given the consistent earnings and improving asset quality, the Company’s analysis concluded that, it is more likely than not that the Company will generate sufficient taxable income within the applicable carry-forward periods to realize its net deferred tax asset.

 

There was a $134,000 income tax expense recorded for the three month period ended March 31, 2017 compared to no tax expense for the three month period ended March 31, 2016. The Company recognized an income tax benefit of $11,172,000 for the year ended December 31, 2016. The income tax benefit in 2016 was due to the reversal of the valuation allowance previously recorded against the net deferred tax asset as of September 30, 2016, offset by tax on pretax earnings for 2016 of $825,000.

 

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The net operating losses available to offset future taxable income amounted to $23,420,000 at March 31, 2017 and begin expiring in 2028; $1,257,000 of such amount is subject to a limitation by Section 382 of the Internal Revenue Code of 1986, as amended, to $908,000 per year.

 

Commercial banking organizations conducting business in Virginia are not subject to Virginia income taxes. Instead, they are subject to a franchise tax based on bank capital. The Company recorded franchise tax expense of approximately $85,000 and $19,000 for the three months ended March 31, 2017 and March 31, 2016, respectively.

 

Note 14 – Recent accounting pronouncements

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (Topic 606). The amendments in this ASU modify the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The ASU requires that entities apply a specific method to recognize revenue reflecting the consideration expected from customers in exchange for the transfer of goods and services. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. Entities are also required to disclose significant judgments and changes in judgments for determining the satisfaction of performance obligations.

 

In August 2015, the FASB issued ASU 2014-09 changing the effective date for ASU 2014-09 to annual reporting periods beginning after December 15, 2017 from December 15, 2016. The Company’s primary source of revenue is interest income from loans and their fees. As these items are outside the scope of the guidance, this income is not expected to be impacted by implementation of ASU 2014-09. The Company is still reviewing other sources of income such as secondary market lending fees and other deposit account fees to evaluate the impact of ASU 2014-09. Although the Company continues to evaluate the impact that ASU 2014-09 will have on its consolidated financial statements at this time we believe the adoption of this standard will not have a significant impact on the Company’s consolidated financial statements..

 

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in Other Comprehensive Income the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination with other deferred tax assets. The ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The Update also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is only permitted for the provision related to instrument-specific credit risk. The Company does not expect this to have a material impact on the Company’s financial position, results of operations or cash flows.

 

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In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. This ASU requires lessees to recognize assets and liabilities arising from most operating leases on the statement of financial position. ASU 2016-02 will be effective for the Company for the fiscal years beginning after December 15, 2018 with early adoption permitted. The Company has determined that the provisions of ASU-2016-02 may result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase liabilities, however, the Company does not expect this to have a material impact on the Company’s financial position, results of operations or cash flows.

 

In March 2016, the FASB issued ASU No. 2016-09 “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted; however if the Company elects to early adopt, then all amendments must be adopted in the same period. The Company has concluded the adoption of ASU No. 2016-09 did not have a material impact on its consolidated financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU amends guidance on reporting credit losses for assets held at amortized cost basis and available-for-sale debt securities by eliminating the probable initial recognition threshold (incurred loss methodology) and requiring entities to reflect its current estimate of all expected credit losses. The amendments in the ASU are effective beginning after December 15, 2019 and for interim periods within that year. Early adoption is permitted beginning after December 15, 2018. Entities will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings in the first period effective. While the Company is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements, it has taken steps to prepare for the implementation when it becomes effective, such as forming an internal task force, gathering pertinent data, consulting with outside professionals, and evaluating its current IT systems.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Payments (a consensus of Merging Issues Task Force).” This ASU attempts to clarify how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The purpose of this update is to reduce existing diversity in practice in eight areas addressed by the update. The amendment will be effective for the Company for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company has concluded the adoption of ASU No. 2016-15 will not have a material impact on its consolidated financial statements.

 

In March 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-08 “Receivables – Nonrefundable Fees and Other Cost (Subtopic 310-20), Premium Amortization on Purchased Callable Debit Securities.” These amendments shorten the amortization period for certain callable debit securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted including adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The amendments should be applied on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company does have exposure and is assessing the impact of ASU 2017-08 and may choose early adoption. Overall, the Company does not expect it to have a material impact on its accounting.

 

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Item 2 - Management’s Discussion and Analysis OF Financial condition and results of operations

 

Caution about forward-looking statements

 

In addition to historical information, this report may contain forward-looking statements. For this purpose, any statement that is not a statement of historical fact may be deemed to be a forward-looking statement. These forward-looking statements may include statements regarding profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy and financial and other goals. Forward-looking statements often use words such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements.

 

There are many factors that could have a material adverse effect on the operations and future prospects of the Company including, but not limited to:

 

·changes in assumptions underlying the establishment of allowances for loan losses, and other estimates;
·the risks of changes in interest rates on levels, composition and costs of deposits, loan demand, and the values and liquidity of loan collateral, securities, and interest sensitive assets and liabilities;
·the effects of future economic, business and market conditions;
·legislative and regulatory changes, including the Dodd-Frank Wall Street Reform and Consumer Protection Act and other changes in banking, securities, and tax laws and regulations and their application by our regulators, and changes in scope and cost of FDIC insurance and other coverages;
·our inability to maintain our regulatory capital position;
·the Company’s computer systems and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance, or other disruptions despite security measures implemented by the Company;
·changes in market conditions, specifically declines in the residential and commercial real estate market, volatility and disruption of the capital and credit markets, soundness of other financial institutions we do business with;
·risks inherent in making loans such as repayment risks and fluctuating collateral values;
·changes in operations of Village Bank Mortgage Corporation as a result of the activity in the residential real estate market;
·exposure to repurchase loans sold to investors for which borrowers failed to provide full and accurate information on or related to their loan application or for which appraisals have not been acceptable or when the loan was not underwritten in accordance with the loan program specified by the loan investor;
·governmental monetary and fiscal policies;
·changes in accounting policies, rules and practices;
·reliance on our management team, including our ability to attract and retain key personnel;
·competition with other banks and financial institutions, and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;
·demand, development and acceptance of new products and services;

 

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·problems with technology utilized by us;
·changing trends in customer profiles and behavior; and
·other factors described from time to time in our reports filed with the SEC.

 

These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements. Any forward-looking statement speaks only as of the date on which it is made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made.  In addition, past results of operations are not necessarily indicative of future results.

 

General

 

The Company’s primary source of earnings is net interest income, and its principal market risk exposure is interest rate risk. The Company is not able to predict market interest rate fluctuations and its asset/liability management strategy may not prevent interest rate changes from having a material adverse effect on the Company’s results of operations and financial condition.

 

Although we endeavor to minimize the credit risk inherent in the Company’s loan portfolio, we must necessarily make various assumptions and judgments about the collectability of the loan portfolio based on our experience and evaluation of economic conditions. If such assumptions or judgments prove to be incorrect, the current allowance for loan losses may not be sufficient to cover loan losses and additions to the allowance may be necessary, which would have a negative impact on net income.

 

Results of operations

 

The following presents management’s discussion and analysis of the financial condition of the Company at March 31, 2017 and December 31, 2016 and the results of operations for the Company for the three months ended March 31, 2017 and 2016. This discussion should be read in conjunction with the Company’s consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report.

 

Summary

 

For the three months ended March 31, 2017, the Company had net income of $415,000 and net income available to common shareholders of $257,000, or $0.18 per fully diluted share, compared to net income of $402,000 and net income available to common shareholders of $224,000, or $0.16 per fully diluted share, for the same period in 2016.

 

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There were significant changes in income and expense items when comparing 2017 and 2016 results. The more significant changes are reflected in the following table (in thousands):

 

   Q1 2017 
   Compared to 
   Q1 2016 
Increase (decrease) in     
Net interest income  $234 
Gains on loan sales   230 
Gains on sale of investments   (118)
Rental income   (320)
(Increase) decrease in     
Salaries and benefits   (350)
Commissions   (117)
Occupancy   181 
Cease use lease obligation   125 
Expenses related to foreclosed real estate   293 
      
   $158 

 

Net interest income

 

Net interest income, which represents the difference between interest earned on interest-earning assets and interest incurred on interest-bearing liabilities, is the Company’s primary source of earnings. Net interest income can be affected by changes in market interest rates as well as the level and composition of assets, liabilities and shareholders’ equity. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. The net yield on interest-earning assets (“net interest margin”) is calculated by dividing tax equivalent net interest income by average interest-earning assets. Generally, the net interest margin will exceed the net interest spread because a portion of interest earning assets are funded by various noninterest-bearing sources, principally noninterest-bearing deposits and shareholders’ equity.

 

   For the Three Months Ended March 31, 
   2017   2016   Change 
   (dollars in thousands) 
             
Average interest-earning assets  $395,994   $361,168   $34,826 
Interest income  $4,132   $3,898   $234 
Yield on interest-earning assets   4.23%   4.34%   (0.11)%
Average interest-bearing liabilities  $302,707   $303,080   $(373)
Interest expense  $639   $639   $- 
Cost of interest-bearing liabilities   0.86%   0.85%   0.01%
Net interest income  $3,493   $3,259   $234 
Net interest margin   3.58%   3.63%   (0.05)%

 

The increase in net interest income of $234,000 in the first quarter of 2017 was a result of positive movements in interest income. Interest income increased by $234,000 with interest income on loans increasing by $209,000 and interest income on investments increasing by $43,000. The increase in interest income on loans was attributable to an increase in average loans outstanding of $30,008,000. The increase in interest income on securities was due to an increase in average investment securities of $12,130,000. Interest expense remained steady as result of a minimal decline in average interest bearing liabilities of $373,000.

 

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The following table illustrates average balances of total interest-earning assets and total interest-bearing liabilities for the periods indicated, showing the average distribution of assets, liabilities, shareholders' equity and related income, expense and corresponding weighted-average yields and rates (dollars in thousands). The average balances used in these tables and other statistical data were calculated using daily average balances. We had no tax exempt interest-earning assets for the periods presented.

 

   Three Months Ended March 31, 2017   Three Months Ended March 31, 2016 
       Interest   Annualized       Interest   Annualized 
   Average   Income/   Yield   Average   Income/   Yield 
   Balance   Expense   Rate   Balance   Expense   Rate 
                         
Loans net of deferred fees  $341,088   $3,893    4.63%  $311,080   $3,684    4.76%
Loans held for sale   6,528    65    4.04%   7,980    81    4.08%
Investment securities   43,704    163    1.51%   31,574    120    1.53%
Federal funds and other   4,674    11    0.95%   10,534    13    0.50%
Total interest earning assets   395,994    4,132    4.23%   361,168    3,898    4.34%
                               
Allowance for loan losses and deferred fees   (3,389)             (3,643)          
Cash and due from banks   9,864              17,542           
Premises and equipment, net   12,766              13,659           
Other assets   25,735              31,759           
Total assets  $440,970             $420,485           
                               
Interest bearing deposits                              
Interest checking  $43,453   $19    0.18%  $43,893   $20    0.18%
Money market   72,418    68    0.38%   65,961    60    0.37%
Savings   21,802    9    0.17%   19,631    9    0.18%
Certificates   152,746    470    1.25%   158,632    510    1.29%
Total   290,419    566    0.79%   288,117    599    0.84%
Borrowings   12,288    73    2.41%   14,963    40    1.08%
Total interest bearing liabilities   302,707    639    0.86%   303,080    639    0.85%
Noninterest bearing deposits   88,870              77,519           
Other liabilities   5,809              8,820           
Total liabilities   397,386              389,419           
Equity capital   43,584              31,066           
Total liabilities and capital  $440,970             $420,485           
                               
Net interest income before provision for loan losses       $3,493             $3,259      
                               
Interest spread - average yield on interest earning assets, less average rate on interest bearing liabilities             3.38%             3.49%
                               
Annualized net interest margin (net interest income expressed as percentage of average earning assets)             3.58%             3.63%

 

Provision for (recovery of) loan losses

 

The amount of the loan loss provision (recovery) is determined by an evaluation of the level of loans outstanding, the level of non-performing loans, historical loan loss experience, delinquency trends, underlying collateral values, the amount of actual losses charged to the reserve in a given period and assessment of present and anticipated economic conditions.

 

The level of the allowance reflects changes in the size of the portfolio or in any of its components as well as management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

 

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The Company did not record a provision for loan losses for the three months ended March 31, 2017 and 2016.

 

The provision for (recovery of) loan losses by category is presented following (in thousands):

 

                   For Year Ended 
   Three Months Ended March 31,   December 31, 
   2017   2016   2016 
       Average       Average       Average 
   Provision   Loans   Provision   Loans   Provision   Loans 
   (Recovery)   Outstanding   (Recovery)   Outstanding   (Recovery)   Outstanding 
                         
Construction and land development  $(51)  $34,851   $75   $31,629   $19   $33,862 
Commercial real estate   (19)   136,866    (379)   119,910    (730)   133,099 
Consumer real estate   49    79,546    (111)   83,821    (146)   81,250 
Commercial and industrial   66    41,408    (23)   22,237    44    39,390 
Guaranteed student loans   (11)   46,381    63    51,717    149    47,398 
Consumer   5    2,036    (2)   1,766    10    2,101 
Unallocated   (39)   -    377    -    654    - 
                               
   $-   $341,088   $-   $311,080   $-   $337,100 

 

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. The allowance for loan losses included an unallocated portion of approximately $674,000 and $713,000 at March 31, 2017 and December 31, 2016, respectively.

 

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

 

·The activity in the provision for (recovery of) loan losses for the three months ended March 31, 2017 was not significant.

 

·The recovery of loan losses totaling $730,000 and $379,000 for the commercial real estate portfolio for the year ended December 31, 2016 and three months ended March 31, 2016, respectively, 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% at March 31, 2016 and to 0.20% at December 31, 2016. In addition, the portfolio was in a net-recovery position of $111,000 and $126,000 at December 31, 2016 and March 31, 2016, respectively.

 

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·The recovery of loan losses totaling $146,000 and $111,000 for the consumer real estate portfolio for the year ended December 31, 2016 and three months ended March 31, 2016, respectively, 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% at March 31, 2016 and to a net recovery position of 0.01% at December 31, 2016.