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

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Village Bank & Trust Financial Corp.	tv478303_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Village Bank & Trust Financial Corp.	tv478303_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Village Bank & Trust Financial Corp.	tv478303_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 September 30, 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.

1,430,854 shares of common stock, $4.00 par value, outstanding as of October 31, 2017

Village Bank and Trust Financial Corp.

Form 10-Q

TABLE OF CONTENTS

Part I – Financial Information

	Item 1. Financial Statements

	Consolidated Balance Sheets September 30, 2017 (unaudited) and December 31, 2016	3

	Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)	4

	Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)	5

	Consolidated Statements of Shareholders’ Equity For the Nine Months Ended September 30, 2017 and 2016 (unaudited)	6

	Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 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	47

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	74

	Item 4. Controls and Procedures	74

Part II – Other Information

	Item 1. Legal Proceedings	75

	Item 1A. Risk Factors	75

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	75

	Item 3. Defaults Upon Senior Securities	75

	Item 4. Mine Safety Disclosures	75

	Item 5. Other Information	75

	Item 6. Exhibits	76

Signatures		77

Part I – Financial Information

ITEM 1 – FINANCIAL STATEMENTS

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Balance Sheets

September 30, 2017 (Unaudited) and December 31, 2016

(in thousands, except share data)

	September 30,			December 31,
	2017			2016
Assets
Cash and due from banks	$	15,684		$	10,848
Federal funds sold		15,026			948
Total cash and cash equivalents		30,710			11,796
Investment securities available for sale		44,834			43,894
Loans held for sale		5,641			14,784
Loans
Outstandings		347,002			337,100
Allowance for loan losses		(3,243	)		(3,373	)
Deferred fees and costs, net		676			660
Total loans, net		344,435			334,387
Other real estate owned, net of valuation allowance		1,788			2,926
Assets held for sale		841			841
Premises and equipment, net		13,077			12,758
Bank owned life insurance		7,222			7,093
Accrued interest receivable		2,516			2,274
Other assets		13,642			14,049

	$	464,706		$	444,802

Liabilities and Shareholders' Equity
Liabilities
Deposits
Noninterest bearing demand	$	103,396		$	92,574
Interest bearing		304,008			290,703
Total deposits		407,404			383,277
Federal Home Loan Bank advances		1,600			2,400
Long-term debt - trust preferred securities		8,764			8,764
Other borrowings		-			81
Accrued interest payable		142			70
Other liabilities		3,162			6,596
Total liabilities		421,072			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 September 30, 2017 and 5,715 shares issued and outstanding at December 31, 2016		20			23
Common stock, $4 par value - 10,000,000 shares authorized; 1,430,854 shares issued and outstanding at September 30, 2017 and 1,428,261 shares issued and outstanding at December 31, 2016		5,661			5,629
Additional paid-in capital		58,028			58,643
Accumulated deficit		(20,631	)		(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		(176	)		(241	)
Total shareholders' equity		43,634			43,614

	$	464,706		$	444,802

See accompanying notes to consolidated financial statements.

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Operations

Three and Nine Months Ended September 30, 2017 and 2016

(Unaudited)

(in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Interest income
Loans	$	4,135		$	4,013		$	12,086		$	11,583
Investment securities		178			72			506			261
Federal funds sold		67			19			111			46
Total interest income		4,380			4,104			12,703			11,890

Interest expense
Deposits		615			590			1,770			1,784
Borrowed funds		73			70			227			174
Total interest expense		688			660			1,997			1,958

Net interest income		3,692			3,444			10,706			9,932
Provision for loan losses		-			-			-			-
Net interest income after provision for loan losses		3,692			3,444			10,706			9,932

Noninterest income
Service charges and fees		591			673			1,785			1,858
Gain on sale of loans		1,395			2,043			4,195			4,630
Gain on sale of asset held for sale		-			-			-			504
Gain (loss) on sale of investment securities		-			15			(9	)		162
Rental income		-			-			-			582
Other		92			114			270			292
Total noninterest income		2,078			2,845			6,241			8,028

Noninterest expense
Salaries and benefits		2,985			3,045			9,042			8,463
Commissions		431			533			1,180			1,163
Occupancy		269			324			821			1,188
Equipment		193			197			553			573
Write down of assets held for sale		-			-			-			220
Cease use lease obligation		-			-			(125	)		-
Supplies		55			81			173			232
Professional and outside services		742			743			2,254			2,220
Advertising and marketing		134			76			274			239
Foreclosed assets, net		11			79			(151	)		250
FDIC insurance premium		69			90			207			287
Other operating expense		502			541			1,460			1,484
Total noninterest expense		5,391			5,709			15,688			16,319
								-
Income before income tax expense		379			580			1,259			1,641
Income tax expense (benefit)		106			(11,352	)		333			(11,352	)

Net income		273			11,932			926			12,993

Preferred stock dividends and amortization of discount		(113	)		(186	)		(385	)		(547	)
Net income available to common shareholders	$	160		$	11,746		$	541		$	12,446

Earnings per share, basic	$	0.11		$	8.21		$	0.38		$	8.74
Earnings per share, diluted	$	0.11		$	8.21		$	0.38		$	8.74

See accompanying notes to consolidated financial statements.

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income

Three and Nine Months Ended September 30, 2017 and 2016

(Unaudited)

(in thousands)

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2017		2016			2017		2016

Net income	$	273	$	11,932		$	926	$	12,993
Other comprehensive income
Unrealized holding gains arising during the period		33		22			80		902
Tax effect		11		8			27		307
Net change in unrealized holding gains on securities available for sale, net of tax		22		14			53		595

Reclassification adjustment
Reclassification adjustment for (gains) losses realized in income		-		(15	)		9		(162	)
Tax effect		-		(5	)		3		(55	)
Reclassification for (gains) losses included in net income, net of tax		-		(10	)		6		(107	)

Minimum pension adjustment		3		3			9		9
Tax effect		1		1			3		3
Minimum pension adjustment, net of tax		2		2			6		6

Total other comprehensive income		24		6			65		494

Total comprehensive income	$	297	$	11,938		$	991	$	13,487

See accompanying notes to consolidated financial statements.

Village Bank and Trust Financial Corp. and Subsidiary

Consolidated Statements of Shareholders' Equity

Nine Months Ended September 30, 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		-			-		-			(385	)		-		-			-			-			(385	)
Restricted stock redemption															24			(24	)					-
Issuance of common stock		-			32		(32	)		-			-		-			-			-			-
Stock based compensation		-			-		102			-			-		-			-			-			102
Minimum pension adjustment (net of income taxes of $3)		-			-		-			-			-		-			-			6			6
Net income		-			-		-			926			-		-			-			-			926
Change in unrealized gain on investment securities available-for-sale, net of reclassification and tax effect		-			-		-			-			-		-			-			59			59

Balance, September 30, 2017	$	20		$	5,661	$	58,028		$	(20,631	)	$	732	$	(1,010	)	$	1,010		$	(176	)	$	43,634

Balance, December 31, 2015	$	23		$	5,562	$	58,497		$	(33,948	)	$	732	$	(1,034	)	$	1,034		$	(507	)	$	30,359
Preferred stock dividend		-			-		-			(547	)		-		-			-			-			(547	)
Issuance of common stock		-			56		(56	)		-			-		-			-			-			-
Stock based compensation		-			-		156			-			-		-			-			-			156
Minimum pension adjustment (net of income taxes of $3)		-			-		-			-			-		-			-			6			6
Net income		-			-		-			12,993			-		-			-			-			12,993
Change in unrealized gain on investment securities available-for-sale, net of reclassification and tax effect		-			-		-			-			-		-			-			488			488

Balance, September 30, 2016	$	23		$	5,618	$	58,597		$	(21,502	)	$	732	$	(1,034	)	$	1,034		$	(13	)	$	43,455

See accompanying notes to consolidated financial statements.

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2017 and 2016
(Unaudited)
*(in thousands)*

	2017			2016

Cash Flows from Operating Activities
Net income	$	926		$	12,993
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		552			606
Deferred income taxes		332			645
Valuation allowance (recovery) on net deferred tax asset		-			(11,997	)
Write-down of other real estate owned		351			466
Valuation allowance other real estate owned		(331	)		(335	)
Write-down of assets held for sale		-			220
(Gain) loss on securities sold		9			(162	)
Gain on loans sold		(4,195	)		(4,630	)
Gain on sale of assets held for sale		-			(504	)
Loss on sale and disposal of premises and equipment		-			2
Gain on sale of other real estate owned		(218	)		(59	)
Stock compensation expense		102			156
Proceeds from sale of mortgage loans		132,070			157,290
Origination of mortgage loans for sale		(118,732	)		(154,380	)
Amortization of premiums and accretion of discounts on securities, net		66			116
Increase in interest receivable		(242	)		(294	)
Increase in bank owned life insurance		(129	)		(139	)
Decrease in other assets		50			2,611
Increase (decrease) in interest payable		72			(1,282	)
Decrease in other liabilities		(903	)		(2,290	)
Net cash provided by (used in) operating activities		9,780			(967	)

Cash Flows from Investing Activities
Purchases of available for sale securities		(4,379	)		(10,000	)
Proceeds from the sale or calls of available for sale securities		3,454			21,933
Proceeds from the sale of assets held for sale		-			7,338
Net increase in loans		(10,333	)		(22,488	)
Proceeds from sale of other real estate owned		1,621			3,101
Purchases of premises and equipment		(871	)		(700	)
Net cash used in investing activities		(10,508	)		(816	)

Cash Flows from Financing Activities
Redeemption of preferred stock		(688	)		-
Payment of preferred dividends		(2,916	)		-
Net increase in deposits		24,127			14,372
Net increase (decrease) in Federal Home Loan Bank advances		(800	)		2,200
Net decrease in other borrowings		(81	)		(293	)
Net cash provided by financing activities		19,642			16,279

Net increase in cash and cash equivalents		18,914			14,496
Cash and cash equivalents, beginning of period		11,796			17,262

Cash and cash equivalents, end of period	$	30,710		$	31,758

Supplemental Disclosure of Cash Flow Information
Cash payments for interest	$	1,925		$	3,239
Supplemental Schedule of Non Cash Activities
Real estate owned assets acquired in settlement of loans	$	285		$	268
Bank financed sale of asset held for sale	$	-		$	4,912
Dividends on preferred stock accrued	$	385		$	547

See accompanying notes to consolidated financial statements.

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 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 nine month period ended September 30, 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 September 30, 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						Nine Months Ended
	September 30,						September 30,
	2017			2016			2017			2016
Numerator
Net income - basic and diluted	$	273		$	11,932		$	926		$	12,993
Preferred stock dividend		(113	)		(186	)		(385	)		(547	)
Net income available to common shareholders	$	160		$	11,746		$	541		$	12,446

Denominator
Weighted average shares outstanding - basic		1,431			1,430			1,430			1,423
Dilutive effect of common stock options and restricted stock awards		-			-			-			-

Weighted average shares outstanding - diluted		1,431			1,430			1,430			1,423

Earnings per share - basic	$	0.11		$	8.21		$	0.38		$	8.74
Earnings per share - diluted	$	0.11		$	8.21		$	0.38		$	8.74

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 2,337 shares were not included in computing diluted earnings per share for the three and nine months ended September 30, 2017, and stock options for 2,587 and 1,742 were not included in computed diluted earnings per share for the three and nine months ended September 30, 2016, because their effects were anti-dilutive.

Note 4 – Investment securities available for sale

At September 30, 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
September 30, 2017
US Government Agencies
One to five years	$	27,400	$	27,558	$	-	$	(150	)	$	27,408		1.29	%
Five to ten years		2,000		2,049		-		(4	)		2,045		2.00	%
More than ten years		2,548		2,553		-		(15	)		2,538		1.78	%
		31,948		32,160		-		(169	)		31,991		1.37	%
Mortgage-backed securities
One to five years		3,595		3,673		-		(12	)		3,661		1.44	%
More than ten years		6,967		6,864		1		(8	)		6,857		2.41	%
		10,562		10,537		1		(20	)		10,518		2.08	%

Corporate debt
Five to ten years		2,300		2,323		2		-			2,325		5.42	%

Total investment securities	$	44,810	$	45,020	$	3	$	(189	)	$	44,834		1.75	%

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	%

There were no investment securities pledged to secure deposit repurchase agreements at September 30, 2017 and approximately $1,050,000 at December 31, 2016.

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

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
	2017		2016		2017			2016

Gross realized gains	$	-	$	15	$	-		$	162
Gross realized losses		-		-		(9	)		-

	$	-	$	15	$	(9	)	$	162

The Company sold approximately $2 million of investment securities available for sale at a loss of $9,000 for the nine months ended September 30, 2017. The Company sold approximately $4 million and $22 million of investment securities for the three and nine months ended September 30, 2016 resulting in a net gain of $15,000 and $162,000, respectively. The sale of these securities, which had fixed interest rates, allowed the Company to decrease its exposure to the anticipated upward movement in interest rates that would result in unrealized losses being recognized in shareholders’ equity.

Investment securities available for sale that have an unrealized loss position at September 30, 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
September 30, 2017
US Government Agencies	$	19,511	$	(95	)	$	12,480	$	(74	)	$	31,991	$	(169	)
Mortgage-backed securities		7,800		(15	)		587		(5	)		8,387		(20	)

	$	27,311	$	(110	)	$	13,067	$	(79	)	$	40,378	$	(189	)

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 September 30, 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):

	September 30, 2017						December 31, 2016
	Amount			%			Amount			%
Construction and land development
Residential	$	6,327			1.82	%	$	6,770			2.01	%
Commercial		28,721			8.28	%		27,092			8.04	%
		35,048			10.10	%		33,862			10.05	%
Commercial real estate
Owner occupied		71,834			20.70	%		66,021			19.59	%
Non-owner occupied		61,831			17.82	%		57,944			17.19	%
Multifamily		6,114			1.76	%		8,824			2.62	%
Farmland		278			0.08	%		310			0.09	%
		140,057			40.36	%		133,099			39.49	%
Consumer real estate
Home equity lines		20,595			5.94	%		20,691			6.14	%
Secured by 1-4 family residential,
First deed of trust		54,820			15.80	%		54,791			16.25	%
Second deed of trust		6,293			1.81	%		5,768			1.71	%
		81,708			23.55	%		81,250			24.10	%
Commercial and industrial loans (except those secured by real estate)		40,647			11.71	%		39,390			11.68	%
Guaranteed student loans		47,643			13.73	%		47,398			14.06	%
Consumer and other		1,899			0.55	%		2,101			0.62	%

Total loans		347,002			100.0	%		337,100			100.0	%
Deferred loan cost, net		676						660
Less: allowance for loan losses		(3,243	)					(3,373	)

	$	344,435					$	334,387

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 $25,111,000 and $27,073,000 at September 30, 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
September 30, 2017
Construction and land development
Residential	$	6,327	$	-	$	-	$	-	$	6,327
Commercial		27,495		1,129		97		-		28,721
		33,822		1,129		97		-		35,048
Commercial real estate
Owner occupied		70,657		798		379		-		71,834
Non-owner occupied		57,095		1,568		3,168		-		61,831
Multifamily		6,114		-		-		-		6,114
Farmland		278		-		-		-		278
		134,144		2,366		3,547		-		140,057
Consumer real estate
Home equity lines		19,495		378		722		-		20,595
Secured by 1-4 family residential
First deed of trust		50,626		2,016		2,178		-		54,820
Second deed of trust		5,944		206		143		-		6,293
		76,065		2,600		3,043		-		81,708
Commercial and industrial loans (except those secured by real estate)		35,440		3,916		1,291		-		40,647
Guaranteed student loans		47,643		-		-		-		47,643
Consumer and other		1,659		222		18		-		1,899

Total loans	$	328,773	$	10,233	$	7,996	$	-	$	347,002

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

Total loans	$	319,778	$	9,653	$	7,669	$	-	$	337,100

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
September 30, 2017
Construction and land development
Residential	$	-	$	-	$	-	$	-	$	6,327	$	6,327	$	-
Commercial		26		-		-		26		28,695		28,721		-
		26		-		-		26		35,022		35,048		-
Commercial real estate
Owner occupied		-		-		-		-		71,834		71,834		-
Non-owner occupied		-		-		-		-		61,831		61,831		-
Multifamily		-		-		-		-		6,114		6,114		-
Farmland		-		-		-		-		278		278		-
		-		-		-		-		140,057		140,057		-
Consumer real estate
Home equity lines		-		-		-		-		20,595		20,595		-
Secured by 1-4 family residential
First deed of trust		271		150		-		421		54,399		54,820		-
Second deed of trust		95		-		-		95		6,198		6,293		-
		366		150		-		516		81,192		81,708		-
Commercial and industrial loans (except those secured by real estate)		-		536		-		536		40,111		40,647		-
Guaranteed student loans		2,077		1,597		8,113		11,787		35,856		47,643		8,113
Consumer and other		-		4		-		4		1,895		1,899		-

Total loans	$	2,469	$	2,287	$	8,113	$	12,869	$	334,133	$	347,002	$	8,113

													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.

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):

	September 30, 2017
			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
With no related allowance recorded
Construction and land development
Commercial	$	97	$	164	$	-
Commercial real estate
Owner occupied		3,512		3,512
Non-owner occupied		2,176		2,176		-
		5,688		5,688		-
Consumer real estate
Home equity lines		601		601		-
Secured by 1-4 family residential
First deed of trust		3,968		3,968		-
Second deed of trust		594		802		-
		5,163		5,371		-
Commercial and industrial loans (except those secured by real estate)		463		693		-
Consumer and other		3		3
		11,414		11,919		-

With an allowance recorded
Construction and land development
Commercial		464		464		2
Commercial real estate
Owner occupied		1,922		1,937		21
		1,922		1,937		21
Consumer real estate
Home equity lines		138		138		4
Secured by 1-4 family residential
First deed of trust		765		765		62
Second deed of trust		86		86		5
		989		989		71
Commercial and industrial loans (except those secured by real estate)		785		901		233
		4,160		4,291		327

Total
Construction and land development
Commercial		561		628		2
		561		628		2
Commercial real estate
Owner occupied		5,434		5,449		21
Non-owner occupied		2,176		2,176		-
		7,610		7,625		21
Consumer real estate
Home equity lines		739		739		4
Secured by 1-4 family residential,
First deed of trust		4,733		4,733		62
Second deed of trust		680		888		5
		6,152		6,360		71
Commercial and industrial loans (except those secured by real estate)		1,248		1,594		233
Consumer and other		3		3		-
	$	15,574	$	16,210	$	327

	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

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				For the Nine Months
	Ended September 30, 2017				Ended September 30, 2017
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded
Construction and land development
Commercial	$	99	$	1	$	100	$	3
		99		1		100		3
Commercial real estate
Owner occupied		3,531		32		2,539		90
Non-owner occupied		2,187		23		2,206		82
		5,718		55		4,745		172
Consumer real estate
Home equity lines		751		16		761		17
Secured by 1-4 family residential
First deed of trust		3,737		24		3,615		86
Second deed of trust		555		9		563		27
		5,043		49		4,939		130
Commercial and industrial loans (except those secured by real estate)		470		35		493		49
Consumer and other		4		-		2		-
		11,334		140		10,279		354

With an allowance recorded
Construction and land development
Commercial		467		5		472		17
Commercial real estate
Owner occupied		1,929		17		2,978		58
		1,929		17		2,978		58
Consumer real estate
Home equity line		139		-		69		6
Secured by 1-4 family residential
First deed of trust		815		8		1,120		26
Second deed of trust		129		1		131		3
		1,083		9		1,320		35
Commercial and industrial loans (except those secured by real estate)		444		-		245		4
Consumer and other		-		-		1		-
		3,923		31		5,016		114

Total
Construction and land development
Commercial		566		6		572		20
		566		6		572		20
Commercial real estate
Owner occupied		5,460		49		5,517		148
Non-owner occupied		2,187		23		2,206		82
		7,647		72		7,723		230
Consumer real estate
Home equity lines		890		16		830		23
Secured by 1-4 family residential,
First deed of trust		4,552		32		4,735		112
Second deed of trust		684		10		694		30
		6,126		58		6,259		165
Commercial and industrial loans (except those secured by real estate)		915		35		738		53
Consumer and other		4		-		3		-
	$	15,257	$	171	$	15,295	$	468

	For the Three Months				For the Nine Months
	Ended September 30, 2016				Ended September 30, 2016
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
	Investment		Recognized		Investment		Recognized
With no related allowance recorded
Construction and land development
Commercial	$	92	$	-	$	211	$	40
		92		-		211		40
Commercial real estate
Owner occupied		935		-		933		29
Non-owner occupied		2,546		28		2,537		92
		3,481		28		3,470		121
Consumer real estate
Home equity lines		1,164		-		1,246		1
Secured by 1-4 family residential
First deed of trust		4,137		42		4,188		134
Second deed of trust		839		9		950		32
		6,140		51		6,384		167
Commercial and industrial loans (except those secured by real estate)		455		-		568		14
Consumer and other		-		-		5		-
		10,168		79		10,638		342

With an allowance recorded
Construction and land development
Commercial		1,423		7		1,531		19
Commercial real estate
Owner occupied		4,911		47		5,272		157
Non-Owner occupied		158		-		174		9
		5,069		47		5,446		166
Consumer real estate
Secured by 1-4 family residential
First deed of trust		1,680		-		1,800		9
Second deed of trust		171		-		185		4
		1,851		-		1,985		13
Commercial and industrial loans (except those secured by real estate)		99		-		122		-
		8,442		54		9,084		198

Total
Construction and land development
Commercial		1,515		7		1,742		59
		1,515		7		1,742		59
Commercial real estate
Owner occupied		5,846		47		6,205		186
Non-owner occupied		2,704		28		2,711		101
		8,550		75		8,916		287
Consumer real estate
Home equity lines		1,164		-		1,246		1
Secured by 1-4 family residential,
First deed of trust		5,817		42		5,987		143
Second deed of trust		1,010		9		1,135		36
		7,991		51		8,368		180
Commercial and industrial loans (except those secured by real estate)		554		-		690		14
Consumer and other		-		-		5		-
	$	18,610	$	133	$	19,722	$	540

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
September 30, 2017
Construction and land development Commercial	$	464	$	464	$	-	$	2
		464		464		-		2
Commercial real estate
Owner occupied		4,232		4,037		195		21
Non-owner occupied		2,176		2,176		-		-
		6,408		6,213		195		21
Consumer real estate
Secured by 1-4 family residential
First deeds of trust		3,432		2,733		699		60
Second deeds of trust		597		530		67		5
		4,029		3,263		766		65
Commercial and industrial loans (except those secured by real estate)		351		230		121		-
	$	11,252	$	10,170	$	1,082	$	88

							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

The following table provides information about TDRs identified during the indicated period (dollars in thousands):

	Nine Months Ended
	September 30, 2017
			Pre-		Post-
			Modification		Modification
	Number of		Recorded		Recorded
	Loans		Balance		Balance

Secured by 1-4 family residential
First deed of trust		1	$	190	$	190
Second deed of trust		1		68		68
		2		258		258

		2	$	258	$	258

There were no TDRs identified during the nine months ended September 30, 2016.

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

	Nine Months Ended				Nine Months Ended
	September 30, 2017				September 30, 2016
	Number of		Recorded		Number of		Recorded
	Loans		Balance		Loans		Balance

Commercial real estate
Owner occupied		3	$	2,309		2	$	390
Non-owner occupied		-		-		-		-
		3		2,309		2		390
Consumer real estate
Secured by 1-4 family residential
First deed of trust		10		1,049		7		692
Second deed of trust		2		75		2		86
		12		1,124		9		778

Commercial and industrial (except those secured by real estate)		2		44		1		103
		17	$	3,477		12	$	1,271

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 September 30, 2017
Construction and land development
Residential	$	38	$	-		$	-		$	-	$	38
Commercial		213		(40	)		-			2		175
		251		(40	)		-			2		213
Commercial real estate
Owner occupied		515		9			-			-		524
Non-owner occupied		416		18			-			-		434
Multifamily		40		(1	)		-			-		39
Farmland		3		-			-			-		3
		974		26			-			-		1,000
Consumer real estate
Home equity lines		250		(3	)		-			-		247
Secured by 1-4 family residential
First deed of trust		462		(10	)		-			7		459
Second deed of trust		127		(89	)		-			7		45
		839		(102	)		-			14		751
Commercial and industrial loans (except those secured by real estate)		302		140			-			3		445
Student loans		99		45			(45	)		-		99
Consumer and other		9		(4	)		-			2		7
Unallocated		793		(65	)		-			-		728

	$	3,267	$	-		$	(45	)	$	21	$	3,243

			Provision for
	Beginning		(Recovery of)								Ending
	Balance		Loan Losses			Charge-offs			Recoveries		Balance

Three Months Ended September 30, 2016
Construction and land development
Residential	$	31	$	12		$	-		$	-	$	43
Commercial		259		22			(10	)		5		276
		290		34			(10	)		5		319
Commercial real estate
Owner occupied		711		(17	)		(57	)				637
Non-owner occupied		437		53			(1	)		51		540
Multifamily		54		2			-			-		56
Farmland		2		1			-			-		3
		1,204		39			(58	)		51		1,236
Consumer real estate
Home equity lines		259		4			-			1		264
Secured by 1-4 family residential
First deed of trust		490		79			(113	)		6		462
Second deed of trust		133		(11	)					6		128
		882		72			(113	)		13		854
Commercial and industrial loans (except those secured by real estate)		226		(46	)		(15	)		46		211
Guaranteed student loans		191		13			(16	)				188
Consumer and other		8		7			(12	)		5		8
Unallocated		722		(119	)		-			-		603

	$	3,523	$	-		$	(224	)	$	120	$	3,419

			Provision for
	Beginning		(Recovery of)								Ending
	Balance		Loan Losses			Charge-offs			Recoveries		Balance

Nine Months Ended September 30, 2017
Construction and land development
Residential	$	41	$	(4	)	$	-		$	1	$	38
Commercial		300		(127	)		-			2		175
		341		(131	)		-			3		213
Commercial real estate
Owner occupied		611		(100	)		-			13		524
Non-owner occupied		406		28			-			-		434
Multifamily		56		(17	)		-			-		39
Farmland		3		-			-			-		3
		1,076		(89	)		-			13		1,000
Consumer real estate
Home equity lines		271		(25	)		-			1		247
Secured by 1-4 family residential
First deed of trust		447		90			(107	)		29		459
Second deed of trust		136		(120	)		-			29		45
		854		(55	)		(107	)		59		751
Commercial and industrial loans (except those secured by real estate)		223		209			-			13		445
Student loans		158		56			(115	)		-		99
Consumer and other		8		(5	)		(2	)		6		7
Unallocated		713		15			-			-		728

	$	3,373	$	-		$	(224	)	$	94	$	3,243

			Provision for
	Beginning		(Recovery of)								Ending
	Balance		Loan Losses			Charge-offs			Recoveries		Balance

Nine Months Ended September 30, 2016
Construction and land development
Residential	$	30	$	12		$	-		$	1	$	43
Commercial		291		(10	)		(10	)		5		276
		321		2			(10	)		6		319
Commercial real estate
Owner occupied		1,167		(464	)		(66	)		-		637
Non-owner occupied		460		27			-			53		540
Multifamily		51		5			-			-		56
Farmland		17		(139	)		-			125		3
		1,695		(571	)		(66	)		178		1,236
Consumer real estate
Home equity lines		448		(134	)		(53	)		3		264
Secured by 1-4 family residential
First deed of trust		602		(20	)		(140	)		20		462
Second deed of trust		111		23			(25	)		19		128
		1,161		(131	)		(218	)		42		854
Commercial and industrial loans (except those secured by real estate)		94		42			(15	)		90		211
Guaranteed student loans		230		101			(143	)		-		188
Consumer and other		2		13			(14	)		7		8
Unallocated		59		544			-			-		603

	$	3,562	$	-		$	(466	)	$	323	$	3,419

			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

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 $728,000, $713,000, and $603,000 at September 30, 2017, December 31, 2016, and September 30, 2016, respectively.

Discussion of the provision for (recovery of) loan losses related to specific loan types are provided following:

The recovery of loan losses totaling $102,000 for the consumer real estate portfolio for the three months ended September 30, 2017 was attributed to a decline in the general component of the allowance for loan losses as a result of a decrease in the historical loss experience from 0.16% as of June 30, 2017 to 0.13% as of September 30, 2017.

The provision for loan losses totaling $140,000 for the commercial and industrial loans (except those secured by real estate) for the three months ended September 30, 2017 was attributed to an increase of $172,000 in the specific reserve associated with loans evaluated individually for impairment.

The recovery of loan losses totaling $131,000 for the construction and land development portfolio for the nine months ended September 30, 2017 was attributed to a decline in the general component of the allowance for loan losses as a result of a decrease in the historical loss experience from 0.38% as of December 31, 2016 to 0.01% as of September 30, 2017.

The recovery of loan losses totaling $89,000, $730,000 and $571,000 for the commercial real estate portfolio for the nine months ended September 30, 2017, year ended December 31, 2016, and nine months ended September 30, 2016, respectively, was attributable to a decline in the general component of the allowance for loan losses as a result of decreases in the historical loss experience from 0.20% as of September 30, 2016 to a net recovery of 0.04% as of September 30, 2017. In addition, the portfolio was in a net-recovery position of $13,000 and $111,000 for the nine months ended September 30, 2017 and year ended December 31, 2016, respectively.

The recovery of loan losses totaling $55,000 for the consumer real estate portfolio for the nine months ended September 30, 2017 was attributed to a decrease of $104,000 in the specific reserve associated with loans evaluated individually for impairment. This decrease was offset by an increase in the general component allocated to this portfolio as a result of increases in the historical loss experience from 0.0022% as of year end December 31, 2016 to 0.13% for the nine months ended September 30, 2017. In addition, the portfolio was in a net charge-off position of $48,000 for the nine months ended September 30, 2017.

The recovery of loan losses totaling $146,000 and $131,000 for the consumer real estate portfolio for the year ended December 31, 2016 and nine months ended September 30, 2016, respectively, was attributable to a decline in the general component of the allowance for loan losses as a result of decreases in the historical loss experience from 0.07% as of September 30, 2016 to 0.0022% as of December 31, 2016. In addition, the portfolio was in a net-charge off position of $161,000 and $176,000 for the year ended December 31, 2016 and the nine months ended September 30, 2016.

The provision for loan losses totaling $209,000 for the commercial and industrial loans (except those secured by real estate) for the nine months ended September 30, 2017 was attributed to an increase of $227,000 in the specific reserve associated with loans evaluated individually for impairment.

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 September 30, 2017
Construction and land development
Residential	$	38	$	-	$	38	$	6,327	$	-	$	6,327
Commercial		175		2		173		28,721		561		28,160
		213		2		211		35,048		561		34,487
Commercial real estate
Owner occupied		524		21		503		71,834		5,434		66,400
Non-owner occupied		434		-		434		61,831		2,176		59,655
Multifamily		39		-		39		6,114		-		6,114
Farmland		3		-		3		278		-		278
		1,000		21		979		140,057		7,610		132,447
Consumer real estate
Home equity lines		247		4		243		20,595		739		19,856
Secured by 1-4 family residential
First deed of trust		459		62		397		54,820		4,733		50,087
Second deed of trust		45		5		40		6,293		680		5,613
		751		71		680		81,708		6,152		75,556
Commercial and industrial loans (except those secured by real estate)		445		233		212		40,647		1,248		39,399
Student loans		99		-		99		47,643		-		47,643
Consumer and other		735		-		735		1,899		3		1,896

	$	3,243	$	327	$	2,916	$	347,002	$	15,574	$	331,428

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

Note 6 – Deposits

Deposits as of September 30, 2017 and December 31, 2016 were as follows (dollars in thousands):

	September 30,		December 31,
	2017		2016

Demand accounts	$	103,396	$	92,574
Interest checking accounts		48,673		44,390
Money market accounts		81,423		71,290
Savings accounts		27,601		26,598
Time deposits of $250,000 and over		15,348		13,372
Other time deposits		130,963		135,053

	$	407,404	$	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 September 30, 2017 was 3.47%. 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 September 30, 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 September 30, 2017 was 2.72%. 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 September 30, 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.

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 plans at the indicated dates:

	Nine Months Ended September 30,
	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	$	12.74
Granted		-		-		-				-		-		-
Forfeited		-		-		-				-		-		-
Exercised		-		-		-				-		-		-

Options outstanding, end of period		2,337	$	24.21	$	12.76	$	-		2,929	$	24.47	$	12.74	$	-
Options exercisable, end of period		2,337								1,730

During the second quarter of 2017, we granted certain officers 600 restricted shares of common stock with a weighted average fair market value of $28.83 at the date of grant. The restricted stock awards vest over two years. During the third quarter of 2017, we granted certain officers 5,450 restricted shares of common stock with a weighted average fair market value of $31.00 at the date of grant. These restricted stock awards vest over three years. During the second quarter of 2016, we granted certain officers 4,000 restricted shares of common stock with a weighted average fair market value of $20.00 at the date of grant. These restricted stock awards vest over two years. Prior to vesting, these shares are subject to forfeiture to us without consideration upon termination of employment under certain circumstances. The total number of shares underlying non-vested restricted stock was 28,437 and 51,665 at September 30, 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 September 30, 2017 and 2016, was $487,374 and $775,575, respectively. The time based unamortized compensation of $301,676 is expected to be recognized over a weighted average period of 1.99 years.

Stock-based compensation expense was approximately $102,000 and $156,000 for the nine months ended September 30, 2017 and 2016, respectively.

Note 9 – Fair value

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

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

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

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

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

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

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

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

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

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

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

	Fair Value Measurement
	at September 30, 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	$	31,991	$	-	$	31,991	$	-
Mortgage-backed securities		10,518		-		10,518		-
Other investments		2,325		1,000		1,325		-

Financial Assets - Non-Recurring
Impaired loans		15,574		-		14,039		1,535
Assets held for sale		841		-		-		841
Real estate owned		1,788		-		1,788		-

	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		-

The following tables present qualitative information about Level 3 fair value measurements for financial instruments measured at fair value at September 30, 2017 a

Village Bank & Trust Financial Corp. - FORM 10-Q - November 13, 2017

Attached files