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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2014

 

¨ 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: 001-35852

 

Cordia Bancorp Inc.

(Exact name of registrant as specified in its charter)

Virginia   26-4700031
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

11730 Hull Street Road, Midlothian, Virginia   23112
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code (804) 763-1336

 

Securities registered under Section 12(b) of the Act:

Title of each class   Name of each exchange on which registered
Common Stock, $0.01 par value    The NASDAQ Stock Market, LLC

 

Securities registered under Section 12(g) of the Act: None

 

Indicate by check mark if the issuer is a well-known seasoned issuer, as defined by rule 405 of the Securities Act. Yes  ¨     No  x

 

Indicate by check mark if the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes  ☐     No  x

 

Indicate by check mark if the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ( § 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨

 

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

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

(Do not check if a smaller reporting company)

 

Smaller reporting company

x

 

 

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

 

The aggregate market value of the common stock held by non-affiliates as of June 30, 2014 was $22,098,113 based on a closing price of $4.21.

 

The number of shares of common stock outstanding as of March 05, 2015 was 6,504,106. 

 

Documents Incorporated by Reference

 

Portions of the Proxy Statement for the 2015Annual Meeting of Shareholders are incorporated in Part III of this Form 10-K.

 

 
 

  

Table of Contents

 

    Page
     
PART I
     
Item 1. Business 2
Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 17
Item 2. Properties 17
Item 3. Legal Proceedings 17
Item 4. Mine Safety Disclosures 17
     
PART II
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 18
Item 6. Selected Financial Data 19
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 37
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 86
Item 9A Controls and Procedures 86
Item 9B. Other Information 86
     
PART III
     
Item 10. Directors, Executive Officers and Corporate Governance 87
Item 11. Executive Compensation 87
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 87
Item 13. Certain Relationships, and Related Transactions, and Director Independence 88
Item 14. Principal Accounting Fees and Services 88
     
PART IV
     
Item 15. Exhibits, Financial Statement Schedules 89
     
SIGNATURES
     
Signatures   91

  

i
 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains forward-looking statements. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. Accordingly, these statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of several factors more fully described under the caption “Risk Factors” and elsewhere in this report.

 

Any or all of the forward-looking statements in this report may turn out to be inaccurate. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our respective financial condition, results of operations, business strategy and financial needs. There are important factors that could cause actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements including, but not limited to, statements regarding:

  

  changes in general economic and financial market conditions;
     
  changes in the regulatory environment;
     
  economic conditions generally and in the financial services industry;
     
  changes in the economy affecting real estate values;
     
  our ability to achieve loan and deposit growth;
     
  the completion of future acquisitions or business combinations and our ability to integrate the acquired business into our business model;
     
  projected population and income growth in our targeted market areas; and
     
  volatility and direction of market interest rates and a weakening of the economy which could materially impact credit quality trends and the ability to generate loans.

 

All forward-looking statements are necessarily only estimates of future results, and actual results may differ materially from expectations. You are, therefore, cautioned not to place undue reliance on such statements which should be read in conjunction with the other cautionary statements that are included elsewhere in this report. In particular, you should consider the numerous risks described in the “Risk Factors” section of this report. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

 

1
 

  

PART I

 

Item 1.Business

 

General

 

Cordia Bancorp Inc. (“Cordia” or the “Company”) was incorporated in Virginia in 2009 by a team of former bank CEOs, directors and advisors seeking to invest in undervalued or troubled community banks in the Mid-Atlantic and Southeast. On December 10, 2010, Cordia purchased $10,300,000 of the common stock of Bank of Virginia (“BVA” or the “Bank”) at a price of $7.60 per share, resulting in the ownership of 59.8% of the outstanding shares. On August 28, 2012, Cordia purchased an additional $3,000,000 of BVA common stock at a price of $3.60 per share. Cordia’s principal business activity is the ownership of the outstanding shares of common stock of BVA. On March 29, 2013, Cordia and BVA completed a share exchange pursuant to which each outstanding share of BVA common stock held by persons other than Cordia was exchanged for 0.664 of a share of Cordia common stock. As a result of the share exchange, BVA became a wholly-owned subsidiary of Cordia. Aside from the shares of BVA common stock, Cordia’s other assets totaled $1.8 million at December 31, 2014, consisting primarily of $1.8 million of cash and $11 thousand of prepaid expenses. In April 2014, Cordia completed a private placement offering totaling $15.4 million, the proceeds of which have been used primarily to support organic growth in BVA.

 

Cordia does not own or lease any property, but instead uses the premises, equipment and other property of BVA. Because Cordia does not have any business activities separate from the operations of BVA, the information in this document regarding the business of Cordia reflects the activities of Cordia and BVA on a consolidated basis. References to ‘‘we’’ and ‘‘our’’ in this document refer to Cordia and BVA, collectively.

 

BVA was incorporated in the state of Virginia in September 2002 and commenced business on January 12, 2004. BVA is a state chartered bank headquartered in Midlothian, Virginia with total assets of approximately $318.6 million at December 31, 2014 and is a member of the Federal Reserve System. We provide retail banking services to individuals and commercial customers through five banking locations in Chesterfield County, Virginia and one in Henrico County, Virginia.

 

Marketing Focus and Business Strategy

 

BVA is organized to serve consumers and small- to mid-size businesses and professional concerns. We believe that we can be successful by offering a superior level of customer service with a management team more focused on the needs of our borrowers than many of our competitors. We believe that this approach is enthusiastically supported by many members of the community. BVA competes directly with a number of institutions in the local area, including larger regional and super-regional banks, as well as international institutions that tend to have less emphasis on interaction with the customers than the community banks in our target market. BVA offers traditional loan and deposit products for commercial and consumer purposes.

 

Our banking strategy includes these primary elements:

 

  provide personalized relationship banking to all of our customers at a higher level of service than that provided by nationwide and regional banks, which are among our primary competitors;
     
  staff BVA with executive and lending officers who have extensive experience, relationships, and visibility in the Richmond commercial banking market;
     
  offer an array of products and services and innovative banking technologies on a competitive basis;
     
  focus on reliable and profitable market niches, such as small and medium size businesses;
     
  enhance income through a fair but profitable schedule of fees for all bank products and services;
     
  add additional branches or loan offices throughout our market area as regulatory and economic conditions may allow; and
     
  raise additional capital to support organic growth as well as acquisitions of other depository institutions.

 

2
 

  

Location and Service Area

 

BVA’s primary market area is the Commonwealth of Virginia, with a focus on Central Virginia. We also lend selectively to borrowers in the states of North Carolina, Maryland and in Washington D.C.  In addition, the Bank is receptive to opportunities afforded through prior relationships its board of directors and senior managers may have with individuals or organizations in other states.

 

BVA provides retail banking services through six full-service banking locations in the greater Richmond, Virginia market, including Chesterfield and Henrico Counties and Colonial Heights, Virginia.

 

Richmond, the state capital of Virginia, is a city with historic significance and charm, as well as close proximity to recreational attractions such as the Atlantic Ocean, the Blue Ridge Mountains and the Shenandoah Valley, well known theme parks, major educational institutions, historical attractions and many other amenities. Additionally, the Richmond area is in close proximity to other large metropolitan areas, including Norfolk, Virginia and Washington, D.C., and lies at the intersection of two growth corridors coming south along Interstate 95 from Washington, DC and Northern Virginia and coming west along Interstate 64 from the Tidewater area.

 

BVA’s locations in Chesterfield and Henrico County and the city of Colonial Heights, Virginia, are generally south and west of Downtown Richmond. They offer BVA business opportunities and the potential of strong economic growth through their commercial and industrial enterprises, an educated work force, well-designed and developed infrastructure and a competitive tax structure. These advantages are reflected by the area’s major commercial employers such as Altria, Genworth Financial, Markel Corporation, Pfizer Pharmaceuticals, Hewlett Packard, Kraft Foods, WellPoint, United Parcel Service, Verizon, Philip Morris, Dupont and others. This economic environment has historically offered a wealth of job opportunities for the residents of the Richmond area.

 

Lending Services

 

BVA offers a full range of short-to-medium term commercial and personal loans, in addition to its core lending in owner occupied and non-owner occupied commercial real estate loans. Commercial loans include both secured and unsecured loans for working capital (including inventory and receivables), business expansion (including acquisition of real estate and improvements), and purchase of equipment and machinery. Consumer loans and lines of credit include secured and unsecured loans for financing automobiles, home improvements, refinanced student loans, education and personal investments. The Bank does not currently provide new loans for land acquisition, development and construction. Historically, the Bank has not originated significant volume of one-to-four family residential loans.

 

In 2013 the Bank launched a new initiative partnering with GradCapital, LLC to purchase rehabilitated student loans that are 98% guaranteed by the US Government and serviced by Xerox Education Service. During 2014 and 2013 the Bank purchased an aggregate of $87.4 million of such loans.

 

In the fourth quarter of 2014 the Bank launched CordiaGrad, a student loan refinancing program aimed at high-achieving student loan borrowers who have earned their degrees, established their careers, and maintained good to excellent credit. CordiaGrad is dedicated to offering significant rate savings to holders of federal, private, or parent student loans. To date, the average CordiaGrad customer has lowered their interest rate by 2.50% and reduced their total interest costs by more than $23,000 over the lifetime of their loans.

 

Banking Services

 

BVA offers a full range of deposit services that include interest-bearing and non-interest-bearing checking accounts, commercial accounts, savings and money market accounts, as well as certificates of deposit and individual retirement accounts (IRAs). We solicit these accounts from individuals, businesses, and other organizations. These accounts are tailored to our principal market area at rates competitive to those offered in our market area. All deposit accounts are insured by the Federal Deposit Insurance Corporation (‘‘FDIC’’) up to the maximum amount allowed by law (subject to aggregation rules).

 

Other Deposit Banking Services

 

BVA offers online banking, remote deposit capture, mobile banking, text banking, safe deposit boxes, cashier’s checks, banking by mail, and direct deposit. BVA is associated with a worldwide Automated Teller Machines (‘‘ATMs’’) network that is convenient for and offered free to our customers. BVA also offers debit card and credit card services through a correspondent bank, as well as 24-hour telephone banking. BVA is committed to monitoring developments in technology and providing its customers with the latest technological bank products.

 

3
 

  

Market Share and Competition

 

Excluding Capital One Bank, which gathers deposits nationwide over the Internet, as of June 30, 2014 , there were 344 banking offices, representing 31 financial institutions, operating in the Richmond, Virginia metropolitan statistical area (‘‘MSA’’) and holding just over $32.4 billion in deposits including $245.2 million held by Bank of Virginia or 0.76% of the MSA. Within the MSA, our primary market is Chesterfield County, where we had $207.9 million, or 5.3% of a $4.0 billion market base. In addition, our remaining deposits come from our small but growing presence in Henrico County. We believe that our management team and the economic and demographic dynamics of our service area combined with our business strategy will allow us to gain a larger share of both areas’ deposits.

 

The financial services industry is highly competitive and changes in the competitive landscape continue to affect all aspects of BVA’s business. Our competitors include large national, super regional and regional banks like Wells Fargo, Bank of America, SunTrust and BB&T, as well as numerous community banks competing for the same customer base.

 

Broadly, competition among providers of financial products and services continues to increase, with consumers having the opportunity to select from a growing variety of traditional and nontraditional alternatives. The industry continues to consolidate, which affects competition by eliminating some regional and community institutions, while strengthening the franchises of acquirers. The ability of non-bank financial entities to provide services previously reserved for commercial banks has also intensified competition. 

 

In the two Virginia counties in which BVA operates, the strongest competition is other local community banks, savings and loan associations, credit unions, mortgage companies, finance companies, and insurance companies and others providing financial services. Many competitors have greater capital resources than us and more access to long-term, lower cost sources of funding. They may have extensive advertising campaigns, larger branch networks, and offer a broader selection of services and products. Some competitors have other advantages, such as tax exemption in the case of credit unions, and lesser regulation in the case of mortgage companies and specialty finance companies. These various factors make deposit competition strong among institutions in our primary market area.

 

Funding Activities

 

Deposits are the primary source of funds for BVA’s lending and investing activities and their cost is the largest category of interest expense. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. Federal Home Loan Bank (‘‘FHLB’’) advances and other secured and unsecured borrowings all provide supplemental liquidity sources. BVA’s funding activities are monitored and governed through BVA’s overall asset-liability management process. BVA conducts its funding activities in compliance with all applicable laws and regulations. The following is a brief description of the various sources of funds used by BVA.

 

Deposits. Deposits, BVA’s most attractive source of funding because of their stability and relative cost, are attracted principally from clients within BVA’s branch and borrower network and our general market area. We offer a broad selection of deposit instruments to individuals and businesses, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market deposit accounts, certificates of deposit and individual retirement accounts. Deposit account terms vary with respect to the minimum balance required; the time period the funds must remain on deposit and service charge schedules. Interest rates paid on specific deposit types are determined based on (i) the interest rates offered by competitors, (ii) the anticipated amount and timing of funding needs, (iii) the availability and cost of alternative sources of funding, and (iv) the anticipated future economic and interest rate conditions. BVA has also obtained a portion of its deposit base through wholesale funding products.

 

Federal Home Loan Bank (‘‘FHLB’’) Borrowings and Other Borrowings. BVA’s ability to borrow funds from non-deposit sources provides additional flexibility in meeting its liquidity needs as well as managing its cost of funds. Non-deposit funding options include Federal Funds purchased, securities sold under repurchase agreements, and short-term and long-term FHLB borrowings.

 

Investment Activities

 

BVA invests in securities that comply with all applicable regulations and that meet with Board approval. Permissible securities are U.S. government and agency debt obligations; agency guaranteed mortgage-backed securities; state, county, and municipal securities; money market instruments; mutual funds; corporate bonds and trust preferred securities. A balanced maturity distribution is sought in order to minimize the market exposure of investments in any one year. BVA’s investment activities are governed internally by a written, Board-approved policy. The investment policy is carried out by BVA’s Chief Executive Officer and Chief Financial Officer in conjunction with the Asset-Liability Committee (‘‘ALCO’’).

 

Investment strategies are reviewed by the Board’s ALCO based on the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of BVA. In general, the investment portfolio is managed in a manner appropriate to the attainment of the following goals: (i) to provide a sufficient balance of liquid securities to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure public funds, trust deposits as prescribed by law and other borrowings; and (iii) to earn an appropriate return on funds invested that is commensurate with policy objectives.

 

4
 

  

Employees

 

As of December 31, 2014, BVA had 55 full-time equivalent employees. Management of BVA considers its relations with employees to be excellent. No employees are represented by a union or any similar group, and BVA has never experienced any strike or labor dispute.

 

SUPERVISION AND REGULATION

 

The regulatory framework applicable to Cordia and BVA is designed to protect depositors, federal deposit insurance funds and the banking system as a whole, and not to protect security holders. Such statutes, regulations and policies are continually under review by Congress, state legislatures, and federal and state regulators. A change in statutes, regulations or regulatory policies, including changes in interpretation or implementation thereof, could have a material effect on our business.

 

General

 

As a bank holding company, Cordia is subject to regulation, examination and supervision by the Board of Governors of the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and by the Virginia Bureau of Financial Institutions (“VBFI”). BVA is a Virginia state-chartered commercial bank and a member of the Federal Reserve Bank of Richmond, and its deposits are insured by the FDIC. It is subject to regulation, examination and supervision by the Federal Reserve and the VBFI. Numerous federal and state laws, as well as regulations promulgated by the Federal Reserve, the FDIC and state banking regulators, govern almost all aspects of the operation of BVA.

 

Bank Holding Company Regulation

 

The BHCA limits a bank holding company’s business to owning or controlling banks and engaging in other banking-related activities. Bank holding companies must obtain the Federal Reserve’s approval before they: (1) acquire direct or indirect ownership or control of any voting shares of any bank that results in total ownership or control, directly or indirectly, of more than 5% of the voting shares of such bank; (2) merge or consolidate with another bank holding company; or (3) acquire substantially all of the assets of any additional banks. Subject to certain state laws, such as age and contingency restrictions, a bank holding company that is adequately capitalized and adequately managed may acquire the assets of both in-state banks and out-of-state banks. With certain exceptions, the BHCA prohibits bank holding companies from acquiring direct or indirect ownership or control of voting shares in any company that is not a bank or a bank holding company unless the Federal Reserve determines that the activities of such company are incidental or closely related to the business of banking. If a bank holding company is well-capitalized and meets certain criteria specified by the Federal Reserve, it may engage de novo in certain permissible non-banking activities without prior Federal Reserve approval.

 

A number of provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), a few of which are described here, affect the regulation and operations of banks and bank holding companies. Pursuant to the Dodd-Frank Act, the FDIC is given back-up supervisory authority over bank holding companies engaging in conduct that poses a foreseeable and material risk to the Deposit Insurance Fund (“DIF”), and the Federal Reserve gains heightened authority to examine, prescribe regulations and take action with respect to all of a bank holding company’s subsidiaries. A newly created agency, the Office of Financial Research, has authority to collect data from all financial institutions for the purpose of studying threats to U.S. financial stability.

 

Holding companies of banks chartered under Virginia law are subject to applicable provisions of Virginia’s banking laws and to the examination, supervision and enforcement powers of the VBFI. Among other powers, the VBFI has the authority to issue and enforce cease and desist orders on such holding companies.

 

Change in Control

 

Subject to certain exceptions, the BHCA and the Change in Bank Control Act, together with regulations promulgated thereunder, require Federal Reserve approval prior to any person or company acquiring “control” of a bank or bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities. Control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of an institution’s voting securities and either that institution has registered securities under Section 12 of the Exchange Act or no other person owns a greater percentage of that class of voting securities immediately after the transaction. In certain cases, a company may also be presumed to have control under the Bank Holding Company Act if it acquires 5% or more of any class of voting securities.

 

Pursuant to the Dodd-Frank Act, a bank holding company may acquire control of an out-of-state bank only if the bank holding company is well-capitalized and well-managed, and interstate merger transactions are prohibited unless the resulting bank would be well-capitalized and well-managed following the transaction. Virginia state law requires that the VBFI approve in advance any proposed change of control of a Virginia state-chartered bank. Under Virginia law, a person is deemed to control another entity if (1) it owns 25% or more of the voting shares of the entity, (2) the person is presumed to control the entity under the BHCA, or (3) the VBFI determines that the person exercises a controlling influence over the management and policies of the entity.

 

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Capital Requirements

 

The Federal Reserve has adopted guidelines pursuant to which it assesses the adequacy of capital in examining and supervising state-chartered member banks such as BVA. These guidelines include quantitative measures that assign risk weightings to assets and off-balance sheet items and that define and set minimum regulatory capital requirements. Bank holding companies with consolidated assets of less than $500 million that are not engaged in significant nonbanking activities, do not conduct significant off-balance sheet activities, and do not have a material amount of debt or equity securities outstanding that are registered with the SEC are not subject to the Federal Reserve’s capital adequacy guidelines for bank holding companies.

 

As of December 31, 2014, BOVA’s capital levels were above those currently required to be deemed “well-capitalized.”

 

Federal banking regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition.

 

On July 9, 2013, the federal bank regulatory agencies issued a final rule that will revise their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision (“Basel III”) and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more and top-tier savings and loan holding companies.

 

The rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4.0% to 6.0% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property.

 

The rule also includes changes in what constitutes regulatory capital, some of which are subject to a two-year transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock will be required to be deducted from capital, subject to a two-year transition period. Finally, Tier 1 capital will include accumulated other comprehensive income (which includes all unrealized gains and losses on available for sale debt and equity securities), subject to a two-year transition period.

 

The new capital requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and non-residential mortgage loans that are 90 days past due or otherwise on nonaccrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (up from 100%) for mortgage servicing rights and deferred tax assets that are not deducted from capital; and increased risk-weights (from 0% to up to 600%) for equity exposures.

 

Finally, the rule limits capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.

 

The final rule became effective on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016, at 0.625% of risk-weighted assets, increasing each year until fully implemented at 2.5% on January 1, 2019.

 

Bank Holding Companies as a Source of Strength

 

Federal Reserve regulations require that a bank holding company serve as a source of financial and managerial strength to each bank that it controls and, under appropriate circumstances, to commit resources to support each such controlled bank. This support may be required at times when the bank holding company may not have the resources to provide the support.

 

Under the prompt corrective action provisions, if a controlled bank is undercapitalized, then the regulators could require the bank holding company to guarantee the bank’s capital restoration plan. In addition, if the Federal Reserve believes that a bank holding company’s activities, assets or affiliates represent a significant risk to the financial safety, soundness or stability of a controlled bank, then the Federal Reserve could require the bank holding company to terminate the activities, liquidate the assets or divest the affiliates. The regulators may require these and other actions in support of controlled banks even if such actions are not in the best interests of the bank holding company or its stockholders. Because Cordia is a bank holding company, Cordia is viewed as a source of financial and managerial strength for any controlled depository institutions, like BVA.

 

6
 

  

The Dodd-Frank Act also directs federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as sources of financial strength for the institution. The term “source of financial strength” is defined under the Dodd-Frank Act as the ability of a company to provide financial assistance to its insured depository institution subsidiaries in the event of financial distress. The appropriate federal banking agency for such a depository institution may require reports from companies that control the insured depository institution to assess their abilities to serve as sources of strength and to enforce compliance with the source-of-strength requirements. The appropriate federal banking agency may also require a holding company to provide financial assistance to a bank with impaired capital. Under this requirement, in the future we could be required to provide additional financial assistance to BVA should it experience financial distress.

 

In addition, any capital loans by Cordia to BVA will be subordinate in right of payment to deposits and certain other indebtedness of BVA. In the event of our bankruptcy, any commitment by us to a federal bank regulatory agency to maintain the capital of BVA will be assumed by the bankruptcy trustee and entitled to a priority of payment.

 

FDICIA Prompt Corrective Action

 

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) established a system of prompt corrective action to resolve the problems of undercapitalized insured depository institutions. Under this system, the federal banking regulators are required to rate insured depository institutions on the basis of five capital categories as described above under “Capital Requirements.” The federal banking regulators are also required to take mandatory supervisory actions and are authorized to take other discretionary actions with respect to insured depository institutions in the three undercapitalized categories, the severity of which will depend upon the capital category in which the insured depository institution is assigned. Generally, subject to a narrow exception, FDICIA requires the banking regulators to appoint a receiver or conservator for an insured depository institution that is critically undercapitalized. The federal banking regulations specify the relevant capital level for each category.

 

The FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a dividend, or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. See “Dividends.” “Undercapitalized” depository institutions are also subject to restrictions on borrowing from the Federal Reserve System, may not accept brokered deposits absent a waiver from the FDIC, and are subject to growth limitations. In addition, a depository institution’s holding company must guarantee a capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. Federal banking regulators may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.

 

“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

 

Virginia law gives the VBFI powers similar to those granted to the FDIC under the prompt corrective action provisions of the FDICIA.

 

Dividends

 

Cordia is a legal entity separate and distinct from BVA and its subsidiaries. The principal source of funds for Cordia’s payment of any future dividends on its capital stock and principal and interest on its debt is dividends from BVA. Various federal and state statutory provisions and regulations limit the amount of dividends, if any, Cordia and BVA may pay without regulatory approval.

 

The Federal Reserve has authority to prohibit a bank holding company from paying dividends or making other distributions. The Federal Reserve has issued a policy statement that a bank holding company should not pay cash dividends unless its net income available to common stockholders has been sufficient to fully fund the dividends and the prospective rate of earnings retention appears to be consistent with the holding company’s capital needs, asset quality and overall financial condition. Accordingly, a bank holding company should not pay cash dividends that exceed its net income or that can only be funded in ways that weaken the bank holding company’s financial health, such as by borrowing. The Dodd-Frank Act and Basel III impose additional restrictions on the ability of banking institutions to pay dividends.

 

Dividends that may be paid by a member bank without the express approval of the Federal Reserve are limited to that bank’s retained net profits for the preceding two calendar years plus retained net profits up to the date of any dividend declaration in the current calendar year. Retained net profits, as defined by the Federal Reserve, consist of net income less dividends declared during the period.

 

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Federal bank regulators have the authority to prohibit BVA from engaging in unsafe or unsound practices in conducting its business, and the payment of dividends, depending on the bank’s financial condition, could be deemed an unsafe or unsound practice. The ability of BVA to pay dividends in the future is subject to regulatory approval.

 

Deposit Insurance and Assessments

 

Deposits held by BVA are insured by the DIF as administered by the FDIC up to the maximum amount deposit insurance amount of $250,000 per depositor, per insured depository institution for each account ownership category.

 

The FDIC maintains the DIF by assessing each depository institution an insurance premium. The amount of the FDIC assessments paid by a DIF member institution is based on its relative risk of default as measured by the company’s FDIC supervisory rating, and other various measures, such as the level of brokered deposits, secured debt and debt issuer ratings.

 

The DIF assessment base rate currently ranges from 2.5 to 45 basis points for institutions that do not trigger factors for brokered deposits and unsecured debt, and higher rates for those that do trigger those risk factors.

 

All FDIC-insured depository institutions must pay a quarterly assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds, which are referred to as FICO bonds, were issued to capitalize the Federal Savings and Loan Insurance Corporation.

 

Transactions with Affiliates and Insiders

 

A variety of legal limitations restrict BVA from lending or otherwise supplying funds or in some cases transacting business with Cordia or its nonbank subsidiaries. BVA is subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W. Section 23A places limits on the amount of covered transactions which include loans or extensions of credit to, investments in or certain other transactions with, affiliates as well as the amount of advances to third parties collateralized by the securities or obligations of affiliates. The aggregate of all covered transactions is limited to 10% of the bank’s capital and surplus for any one affiliate and 20% for all affiliates. Furthermore, within the foregoing limitations as to amount, each covered transaction must meet specified collateral requirements ranging from 100% to 130%. Also, banks are prohibited from purchasing low quality assets from an affiliate.

 

Section 23B, among other things, prohibits an institution from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with nonaffiliated companies. Except for limitations on low quality asset purchases and transactions that are deemed to be unsafe or unsound, Regulation W generally excludes affiliated depository institutions from treatment as affiliates. Transactions between a bank and any of its subsidiaries that are engaged in certain financial activities may be subject to the affiliated transaction limits. The Federal Reserve also may designate bank subsidiaries as affiliates.

 

Banks are also subject to quantitative restrictions on extensions of credit to executive officers, directors, principal shareholders, and their related interests. In general, such extensions of credit (1) may not exceed certain dollar limitations, (2) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (3) must not involve more than the normal risk of repayment or present other unfavorable features. Certain extensions of credit also require the approval of a bank’s board of directors.

 

The Dodd-Frank Act expands the Section 23A and 23B affiliate transaction rules. Among other things, upon the statutory changes’ effective date, the scope of the definition of “covered transaction” under Section 23A will expand, collateral requirements will increase and certain exemptions will be eliminated.

 

Standards for Safety and Soundness

 

The Federal Deposit Insurance Act requires the federal bank regulators to prescribe the operational and managerial standards for all insured depository institutions relating to: (1) internal controls; (2) information systems and audit systems; (3) loan documentation; (4) credit underwriting; (5) interest rate risk exposure; and (6) asset quality.

 

The regulators also must prescribe standards for earnings, and stock valuation, as well as standards for compensation, fees and benefits. The Interagency Guidelines Prescribing Standards for Safety and Soundness set forth the safety and soundness standards used to identify and address problems at insured depository institutions before capital becomes impaired. Under the rules, if a regulator determines that a bank fails to meet any standards prescribed by the guidelines, the regulator may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.

 

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Regulatory Examination

 

Cordia and BVA must undergo regular on-site examinations by the appropriate banking agencies. A bank regulator conducting an examination has complete access to the books and records of the examined institution. The results of the examination are confidential. The cost of examinations may be assessed against the examined institution as the agency deems necessary or appropriate.

  

State Law and Regulation

 

BVA, as a Virginia state-chartered institution, is subject to regulation by the VBFI, which conducts regular examinations to ensure that its operations and policies conform with applicable law and safe and sound banking practices. Among other things, state law regulates the amount of credit that can be extended to any one borrower and the amount of money that can be invested in various types of assets. BVA generally cannot extend credit to any one borrower in an amount greater than 15% of the sum of BVA’s capital, surplus and loan loss reserve. Direct, indirect and related debt are including in the calculation of the exposure to one borrower or obligor. State law also regulates the types of loans BVA can make.

  

Community Reinvestment Act

 

The Community Reinvestment Act (the “CRA”) requires that the appropriate federal bank regulator evaluate the record of our banking subsidiary in meeting the credit needs of its local community, including low and moderate income neighborhoods. These evaluations are considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could result in additional requirements and limitations on the bank. As of its last CRA regulatory exam, completed on April 1, 2013, BVA received a rating of “satisfactory.”

 

Consumer Protection Regulations

 

Retail activities of banks are subject to a variety of statutes and regulations designed to protect consumers. The Dodd-Frank Act established the Consumer Financial Protection Bureau (the “CFPB”) that, together with the statute’s changes to consumer protection laws such as limits on debit card interchange fees and provisions on mortgage-related matters, will likely increase the compliance costs of consumer banking operations. Interest and other charges collected or contracted for by banks are subject to state usury laws and federal laws concerning interest rates. The CFPB has exclusive authority to require reports and conduct examinations, for purposes of ensuring compliance with federal consumer financial laws and related matters, of insured depository institutions with more than $10 billion of assets. For insured depository institutions with assets of $10 billion or less, such as BVA, the CFPB can require reports and conduct examinations on a sample basis.

 

Loan operations are also subject to federal laws applicable to credit transactions, such as:

 

  the federal Truth-In-Lending Act and Regulation Z issued by the Federal Reserve, governing disclosures of credit terms to consumer borrowers;
  the Home Mortgage Disclosure Act and Regulation C issued by the Federal Reserve, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
  the Equal Credit Opportunity Act and Regulation B issued by the Federal Reserve, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
  the Fair Credit Reporting Act and Regulation V issued by the Federal Reserve, governing the use and provision of information to consumer reporting agencies;
  the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and
  the guidance of the various federal agencies charged with the responsibility of implementing such federal laws.

 

Deposit operations also are subject to:

 

  the Truth in Savings Act and Regulation DD issued by the Federal Reserve, which requires disclosure of deposit terms to consumers;
 

Regulation CC issued by the Federal Reserve, which relates to the availability of deposit funds to consumers;

 

 

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  the Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
  the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of ATMs and other electronic banking services.

 

Commercial Real Estate Lending

 

Lending operations that involve concentrations of commercial real estate loans are subject to enhanced scrutiny by federal banking regulators. The regulators have advised financial institutions of the risks posed by commercial real estate lending concentrations. Such loans generally include land development, construction loans and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance identifies institutions with the following characteristics as potentially being exposed to excessive risk concentrations and that may warrant greater supervisory scrutiny:

 

  total construction and land development loans represent 100% or more of the institution’s total risk-based capital, or
     
  total commercial real estate loans, as defined, represent 300% or more of the institution’s total risk-based capital, and the outstanding balance of the institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.

 

The Dodd-Frank Act contains provisions on credit risk retention that require federal banking regulators to adopt regulations mandating the retention of 5% of the credit risk of certain assets transferred, sold or conveyed through issuances of asset-backed securities. Regulations being implemented will provide for the allocation of the risk retention obligation between securitizers and originators of loans.

  

Branching

 

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Act”) permits nationwide interstate banking and branching under certain circumstances. This legislation generally authorizes interstate branching and relaxes federal law restrictions on interstate banking. Currently, bank holding companies may purchase banks in any state, and states may not prohibit these purchases. Additionally, banks are permitted to merge with banks in other states, as long as the home state of neither merging bank has opted out under the legislation. The Interstate Act requires regulators to consult with community organizations before permitting an interstate institution to close a branch in a low-income area.

 

Virginia enacted “opting in” legislation in accordance with the Interstate Act, allowing banks to engage in interstate merger transactions, subject to certain “aging” requirements. Once an out-of-state bank has acquired a bank within the state, either through merger or acquisition of all or substantially all of the bank’s assets, the out-of-state bank may open additional branches within the state. In addition, an out-of-state bank may establish a de novo branch in Virginia or acquire a branch in Virginia if the out-of-state bank’s home state gives Virginia banks substantially the same or more favorable rights to establish and maintain branches in that state. 

 

Anti-Tying Restriction

 

In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for products and services on the condition that (1) the customer obtain or provide some additional credit, property, or services from or to the bank or bank holding company or their subsidiaries, or (2) the customer not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. A bank may, however, offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products. Also, certain foreign transactions are exempt from the general rule.

 

Anti-Money Laundering

 

Financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and the periodic testing of the program. BVA is prohibited from entering into specified financial transactions and account relationships and must meet enhanced standards for due diligence in dealings with foreign financial institutions and foreign customers. We also must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious transactions. Recent laws provide law enforcement authorities with increased access to financial information maintained by banks. Anti-money requirements have been substantially strengthened as a result of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”), enacted in 2001 and renewed in 2006 and extended, in part, in 2011. Bank regulators routinely examine institutions for compliance with these requirements and must consider compliance in connection with the regulatory review of applications.

 

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The USA Patriot Act amended, in part, the Bank Secrecy Act and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. The statute also creates enhanced information collection tools and enforcement mechanics for the U.S. government, including: (1) requiring standards for verifying customer identification at account opening; (2) promulgating rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (3) requiring reports by nonfinancial trades and businesses filed with the Treasury’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (4) mandating the filing of suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations. The statute also requires enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons.

 

The Federal Bureau of Investigation may send bank regulators lists of the names of persons suspected of involvement in terrorist activities. Cordia may be subject to a request for a search of its records for any relationships or transactions with persons on those lists and may be required to report any identified relationships or transactions. Furthermore, the Office of Foreign Assets Control (“OFAC”) is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, bank regulators lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If we find a name on any transaction, account or wire transfer that is on an OFAC list, we must freeze such account, file a suspicious activity report and notify the appropriate authorities.

 

Privacy and Credit Reporting

 

Financial institutions are required to disclose their policies for collecting and protecting confidential customer information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties, with some exceptions, such as the processing of transactions requested by the consumer. Financial institutions generally may not disclose certain consumer or account information to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing. Federal and state bank regulators have prescribed standards for maintaining the security and confidentiality of consumer information, and we are subject to such standards, as well as certain federal and state laws or standards for notifying consumers in the event of a security breach. 

 

Enforcement Powers

 

Banks and their “institution-affiliated parties,” including directors, management, employees, agents, independent contractors and consultants, such as attorneys and accountants, and others who participate in the conduct of the institution’s affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. Violations can include failure to timely file required reports, filing false or misleading information or submitting inaccurate reports. Civil penalties may be as much as $1 million a day for such violations and criminal penalties for some financial institution crimes may include imprisonment for 20 years. Regulators have flexibility to commence enforcement actions against institutions and institution-affiliated parties, and the FDIC has the authority to terminate deposit insurance. When issued by a banking regulator, cease-and-desist orders or other regulatory agreements may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts, or take other actions determined to be appropriate by the ordering agency. Federal and state banking regulators also may remove a director or officer from an insured depository institution (or bar them from the industry) if a violation is willful or reckless.

 

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EXECUTIVE OFFICERS

 

The following individuals currently serve as executive officers of Cordia and BVA.

 

Name   Position
Jack Zoeller   President and Chief Executive Officer of Cordia
Mark Severson  

Chairman of the Board and Chief Executive Officer of BVA

Executive Vice President and Chief Financial Officer of Cordia and BVA

Don Andree   Executive Vice President and Chief Lending Officer, BVA
Roy Barzel   Executive Vice President and Chief Credit Officer, BVA
Christy Quesenbery   Senior Vice President, Operations of BVA
Robert Sims   Senior Vice President, Retail Banking of BVA

 

Below is information about our executive officers who are not also directors. Ages presented are as of December 31, 2014.

 

Mark Severson joined BVA as Executive Vice President – Chief Financial Officer of Cordia and BVA in September 2013. Prior to Bank of Virginia, Mr. Severson had over 37 years of banking experience and had been Chief Financial Officer of several large financial institutions, including as Executive Vice President and Chief Financial Officer of Chemung Financial Corporation in Elmira, NY, from 2012-13 and prior to that as Executive Vice President and Chief Financial Officer of FNB United in Asheboro, NC, from 2007-2011. Age 60.

 

Don Andree has served as Executive Vice President and Chief Lending Officer of BVA since February 2015. He joined BVA as Senior Vice President — Special Assets in May 2011 and was promoted to Executive Vice President in September 2013. Prior to BVA, Mr. Andree spent 14 years at SunTrust Bank where his most recent position was Senior Vice President and Regional Manager for the Special Assets/Residential Builder group in the Mid-Atlantic Region. Formerly he served as Regional Credit Officer for greater Richmond and western Virginia. Age 61.

 

Roy Barzel joined BVA as Executive Vice President and Chief Credit Officer in April 2011. Prior to joining BVA, Mr. Barzel spent 25 years at SunTrust Bank in Richmond where his most recent position was Senior Vice President and Regional Credit Officer for commercial real estate in the Mid-Atlantic region. Formerly he served as the Senior Credit Officer for residential builders and land developers for all of SunTrust. Age 63.

 

Christy Quesenbery joined BVA as Senior Vice President — Operations in November 2011. Prior to Bank of Virginia, Ms. Quesenbery had over 30 years of banking experience, including most recently four years as Senior Vice President and Chief Administrative Officer at Virginia Partners Bank in Fredericksburg, VA. Age 56.

 

Robert Sims joined BVA as Senior Vice President — Retail Banking in September 2012. Prior to joining BVA, Mr. Sims was President/Founder of Sims Development Group in Stuart, FL from 2011 to 2012. Prior to that, he served 24 years in senior retail, marketing and treasury positions in three banking institutions, including most recently as Senior Vice President of NBT Bancorp in Norwich, NY. Age 49.

 

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Item 1A. Risk Factors

 

RISK FACTORS

 

The current economic conditions pose significant challenges that could adversely affect our financial condition and results of operations.

 

Our success depends to a large degree on the general economic conditions in Central Virginia, which is our primary market. Our market is recovering from a significant downturn in which we saw falling home prices, rising foreclosures and an increased level of commercial and consumer delinquencies. If economic conditions were to deteriorate again, we could experience any of the following consequences, each of which could further adversely affect our business:

 

 

  demand for our products and services could decline;
     
  problem assets and foreclosures may increase; and
     
  loan losses may increase.

 

We could experience further adverse consequences in the event of a prolonged economic downturn in our market due to our exposure to commercial loans across various lines of business. A prolonged economic downturn could adversely affect collateral values or cash flows of the borrowing businesses, and as a result our primary source of repayment could be insufficient to service the debt. Another adverse consequence in the event of a prolonged economic downturn in our market could be the loss of collateral value on commercial and real estate loans that are secured by real estate located in our market area. A further significant decline in real estate values in our market would mean that the collateral for many of our loans would provide less security. As a result, we would be more likely to suffer losses on defaulted loans because our ability to fully recover on defaulted loans by selling the real estate collateral would be diminished.

 

Future economic conditions in our market will also depend on factors outside of our control such as political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government, military and fiscal policies and inflation.

   

An inability to maintain our regulatory capital position could adversely affect our operations.

 

At December 31, 2014, BVA was classified as ‘‘well capitalized’’ for regulatory capital purposes. However, impairments to BVA’s loan or securities portfolio, declines in BVA’s earnings or a combination of these or other factors could change BVA’s capital position in a relatively short period of time. If we are unable to remain ‘‘well capitalized,’’ we will not be able to renew or accept brokered deposits without prior regulatory approval or offer interest rates on our deposit accounts that are significantly higher than the average rates in our market area. As a result, it could be more difficult for us to attract new deposits as our existing brokered and other deposits mature and do not rollover and to retain or increase non-brokered deposits. If we are not able to attract new deposits, our ability to fund our loan portfolio may be adversely affected. In addition, we would pay higher insurance premiums to the FDIC, which will reduce our earnings. Another adverse consequence of a decline in regulatory capital is that additional capital would be harder to raise.

  

Cordia may be unsuccessful in raising additional capital as needed, and a successful capital raise would dilute existing shareholders and possibly cause our stock price to decline.

 

At December 31, 2014, BVA was classified as ‘‘well capitalized’’ for regulatory capital purposes. Cordia may have a need to raise additional capital to support growth. Cordia may be unsuccessful in raising additional capital if the market is not receptive to offerings by small community banks. Furthermore, if we are successful in raising additional capital, the issuance of additional equity securities could be dilutive to holders of our common stock and the market price of our common stock could decline as a result of any such sales. Management cannot predict or estimate the amount, timing or nature of any future equity offerings. Thus, our shareholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings. There is no assurance that any such offering or issuance of equity securities may be able to be completed.

 

Our allowance for loan losses may not be adequate to cover actual losses.

 

Like all financial institutions, we maintain an allowance for loan losses (“ALL”) to provide for probable losses. Our ALL may not be adequate to cover actual loan losses and future provisions for loan losses could materially and adversely affect our operating results. The determination of the appropriate level of the ALL inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Our ALL is determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolution, changes in the size and composition of the loan portfolio, and industry information. Also included in management’s estimates for loan losses are considerations with respect to the impact of economic events, the outcome of which are uncertain.

 

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The application of the acquisition method of accounting impacted Cordia’s and, subsequently, BVA’s ALL. Under the acquisition method of accounting, all loans were recorded in Cordia’s financial statements at their fair value at the time of acquisition and the related ALL was eliminated because the fair value at the time was determined by the net present value of the expected cash flows taking into account estimated credit quality. We may in the future determine that our estimates of fair value are too high, in which case we would provide for additional loan losses associated with acquired loans.

 

The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review our loans and ALL. Although management believes that our ALL is adequate to provide for probable losses, there are no assurances that future increases in the ALL will not be needed or that regulators will not require us to increase our allowance. Either of these occurrences could materially and adversely affect our earnings and profitability.

 

BVA’s small-to-medium sized business clientele may have limited financial resources to weather a prolonged downturn or continued stress period in the economy.

 

We target our commercial development and marketing strategy primarily to serve the banking and financial services needs of small and medium sized businesses. These businesses generally have less capital or borrowing capacity than larger entities. If general economic conditions negatively impact this major economic sector in the markets in which we operate, our results of operations and financial condition may be adversely affected.

 

Changes in the fair value of our securities may reduce our stockholders’ equity and net income.

 

At December 31, 2014, we had securities classified as available for sale totaling $53.5 million and securities classified as held to maturity totaling $20.7 million. At such date, the aggregate net unrealized loss on available-for-sale securities totaled $204 thousand. We increase or decrease stockholders’ equity by the amount of the change in the unrealized gain or loss (the difference between the estimated fair value and the amortized cost) of the available-for-sale securities portfolio, under the category of accumulated other comprehensive income. Therefore, a decline in the estimated fair value of this portfolio will result in a decline in reported stockholders’ equity, as well as book value per common share and tangible book value per common share. This decrease will occur even though the securities are not sold. In the case of debt securities, if these securities are never sold and there are no credit impairments, the decrease will be recovered at the maturity of the securities. In the case of equity securities that have no stated maturity, the declines in fair value may or may not be recovered over time.

 

We conduct periodic reviews and evaluations of our entire securities portfolio to determine if the decline in the fair value of any security below its cost basis is other-than-temporary. Factors that we considered in our analysis of debt securities include, but are not limited to, intent to sell the security, evidence available to determine if it is more likely than not that we will have to sell the securities before recovery of the amortized cost, and probable credit losses. Probable credit losses are evaluated based upon, but are not limited to: the present value of future cash flows, the severity and duration of the decline in fair value of the security below its amortized cost, the financial condition and near-term prospects of the issuer, whether the decline appears to be related to issuer conditions or general market or industry conditions, the payment structure of the security, failure of the security to make scheduled interest or principal payments, and changes to the rating of the security by rating agencies. We generally view changes in fair value for debt securities caused by changes in interest rates as temporary, which is consistent with our experience. If we deem such decline to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged to earnings as a component of noninterest income. For the year ended December 31, 2014, we did not have any other-than-temporary impairment (“OTTI”) in our securities portfolio.

 

BVA is subject to interest rate risk that may negatively affect its financial performance.

 

BVA’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets, such as loans and securities, and interest expense paid on interest-bearing liabilities, such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond BVA’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest BVA receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) BVA’s ability to originate loans and obtain deposits, and (ii) the fair value of BVA’s financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, BVA’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

 

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BVA may lose members of its management team and have difficulty attracting skilled personnel.

 

BVA’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people can be intense and BVA may not be able to hire such people or to retain them. The unexpected loss of services of key personnel of BVA could have a material adverse impact on its business because of their skills, knowledge of BVA’s market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. In addition, recent regulatory proposals and guidance relating to compensation may negatively impact BVA’s ability to retain and attract skilled personnel.

 

The financial soundness of other financial institutions could adversely affect us.

 

Our ability to engage in routine funding transactions could be affected adversely by the actions and commercial soundness of other financial institutions. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, may lead to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us is liquidated at prices insufficient to recover the full amount of our financial exposure. There is no assurance that any such losses would not materially and adversely affect our results of operations.

 

New capital rules generally require insured depository institutions to hold more capital. The impact of the new rules on our financial condition and operations is uncertain but could be materially adverse.

 

In July 2013, the Federal Reserve Board adopted final rules for the Basel III capital framework. These rules substantially amend the regulatory risk-based capital rules applicable to BVA. The rules phase in over time beginning in 2015 and will become fully effective in 2019. Beginning in 2015, BVA's minimum capital requirements will be (i) a common Tier 1 equity ratio of 4.5%, (ii) a Tier 1 capital (common Tier 1 capital plus additional Tier 1 capital) of 6% (up from 4%) and (iii) a total capital ratio of 8% (the current requirement). BVA's leverage ratio requirement will remain at the 4% level now required. Beginning in 2016, a capital conservation buffer will phase in over three years, ultimately resulting in a requirement of 2.5% on top of the common Tier 1, Tier 1 and total capital requirements, resulting in a required common Tier 1 equity ratio of 7%, a Tier 1 ratio of 8.5%, and a total capital ratio of 10.5%. Failure to satisfy any of these three capital requirements will result in limits on paying dividends, engaging in share repurchases and paying discretionary bonuses. These limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions. As of December 31, 2014, BVA would exceed all capital adequacy requirements under Basel III to be considered well capitalized on a fully phased-in basis if such requirements were currently effective.

 

Our profitability may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.

 

The banking industry is subject to extensive regulation by state and federal banking authorities. Many of the banking regulations that govern us are intended to protect depositors, the public or the insurance fund maintained by the FDIC rather than our shareholders. Banking regulations affect our lending practices, capital structure, investment practices, dividend policy and many other aspects of our business. These requirements may constrain our rate of growth, and changes in regulations could adversely affect it. The burden imposed by these federal and state regulations may place banks at a competitive disadvantage compared to less regulated competitors. 

 

Regulation of the financial services industry is undergoing major changes, and future legislation could increase our cost of doing business or harm our competitive position.

 

In 2010 and 2011, in response to the financial crisis and recession that began in 2008, significant regulatory and legislative laws were enacted resulting in broader reform and increased regulation impacting financial institutions. The Dodd-Frank Act has created a significant shift in the way financial institutions operate. The agencies most affected by the enactment were the FDIC, the Federal Reserve and the Securities and Exchange Commission and the way the agencies oversee the financial system. Any future legislative changes could have a material impact on the profitability of Cordia, the value of assets held for investment or collateral for loans. They could require changes to business practices or force us to discontinue businesses and potentially expose us to additional costs, liabilities, enforcement action and reputational risk.

 

15
 

  

Our future success will depend on our ability to compete effectively in the highly competitive financial services industry.

 

We face substantial competition in all phases of our operations from a variety of different competitors that include other banks, both large and small and numerous less regulated financial services businesses. In particular, there is very strong competition for financial services in the market areas in which we conduct our business. Our future growth and success will depend on our ability to compete effectively in this highly competitive environment. Many of our competitors offer products and services that we do not offer, and many have substantially greater resources, such as greater capital resources and more access to longer term, lower costs funding sources. Many also have greater name recognition and market presence that benefit them in attracting business. In addition, larger competitors may be able to price loans and deposits more aggressively than we do. Our larger competitors generally have easier access to capital, and often on better terms. Some of the financial services organizations with which we compete are not subject to the same degree of regulation as is imposed on bank holding companies and federally insured state-chartered Banks, national banks and federal savings institutions. As a result, these non-bank competitors have certain advantages over us in accessing funding and in providing various services.

 

Other competitors are subject to similar regulation but have the advantages of larger established customer bases, higher lending limits, extensive branch networks, numerous automated teller machines, greater advertising-marketing budgets or other factors. Some of our competitors have other advantages, such as tax exemption in the case of credit unions, and lesser regulation in the case of mortgage companies and specialty finance companies. Deposit competition is strong among institutions in our primary market area.

 

We have operational risk that could impact our ability to provide services to our customers.

 

We have potential operational risk exposure throughout our organization. Integral to our performance is the continued effectiveness and efficiency of our technical systems, operational infrastructure, relationships with third parties and key individuals involved in our ongoing activities. Failure by any or all of these resources subjects us to risks that may vary in size, scale and scope. This includes but is not limited to operational or technical failures, unlawful tampering with our information technology infrastructure, terrorist activities, ineffectiveness or exposure due to interruption in third party support, as well as the loss of key individuals or failure of key individuals to perform properly.

 

 In addition, we provide our customers with the ability to bank remotely, including over the Internet and over the telephone. The secure transmission of confidential information over the Internet and other remote channels is a critical element of remote banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and could materially and adversely affect us.

 

Additionally, financial products and services have become increasingly technology-driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on the ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important, and the failure to do so could have a material adverse impact on our business and therefore on our financial condition and results of operations.

 

We do not plan to pay cash dividends in the foreseeable future.

 

We do not expect to pay cash dividends on our common stock in the foreseeable future. Our ability to declare and pay cash dividends will depend, among other things, upon restrictions imposed by the reserve and capital requirements of Virginia law and federal banking regulations, our income and financial condition, tax considerations, and general business conditions. The payment of dividends is subject to prior regulatory approval.  

 

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We are dependent on our information technology and telecommunications systems and third-party service providers; systems failures, interruptions and security breaches could have a material adverse effect on us.

 

Our business is dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party service providers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on us.

 

Our third-party service providers may be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. We may be required to expend significant additional resources to protect against the threat of such security breaches and computer viruses, or to alleviate problems caused by such security breaches or viruses. To the extent that the activities of our third-party service providers or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation and other possible liabilities.

 

Security breaches and other disruptions could compromise our information and expose us to liability, which would cause our business and reputation to suffer.

 

In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners; and personally identifiable information of our customers and employees. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. We, our customers, and other financial institutions with which we interact, are subject to ongoing, continuous attempts to penetrate key systems by individual hackers, organized criminals, and in some cases, state-sponsored organizations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such unauthorized access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties; disrupt our operations and the services we provide to customers; damage our reputation; and cause a loss of confidence in our products and services, all of which could adversely affect our business, revenues and competitive position. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses, or to alleviate problems caused by security breaches or viruses.

 

To remain competitive, we must keep pace with technological change.

 

Financial products and services have become increasingly technology-driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on the ability to keep pace with technological advances and to invest in new technology as it becomes available. Many of our competitors have greater resources to invest in technology than we do and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important, and the failure to do so could have a material adverse impact on our business and therefore on our financial condition and results of operations.

 

Item 1B.Unresolved Staff Comments

 

None

 

Item 2.Properties

 

BVA owns three branch locations. The main office located at 11730 Hull Street Rd., Midlothian, Virginia 23112 is approximately 9,000 square feet and also houses most support operations. The Patterson branch is at 10501 Patterson Road, Richmond, Virginia. The third branch location is at 200 Snead Avenue, Colonial Heights, Virginia. BVA’s other three facilities presently in operation are leased. All three leased facilities, (906 Branchway Road, Richmond, Virginia, 15001 Dogwood Villas Drive, Chesterfield, Virginia and 4023 West Hundred Road, Chester, Virginia) are full service branches and include drive-up access and safe deposit boxes. The latter branch contains a lease provision allowing for the purchase of the location at a predefined price. All of BVA’s properties are in good operating condition and are adequate for BVA’s present needs.

 

Item 3.Legal Proceedings

 

Neither the Company nor the Bank is a party to, nor is any of their property the subject of, any material legal proceedings other than ordinary routine litigation incident to their businesses.

 

Item 4.Mine Safety Disclosures

 

Not applicable

 

17
 

  

 PART II

 

  Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Shares of Cordia common stock are listed and trade on the Nasdaq Capital Market under the symbol “BVA.” Cordia has not paid any dividends on its common stock since its formation. As of March 5, 2015, there were approximately 277 holders of record of Cordia common stock.

 

The following table sets forth the high and low sales prices of the common stock as reported on the NASDAQ Capital Market for the four quarters of 2014 and 2013. Cordia common stock commenced trading on the NASDAQ Capital Market on April 1, 2013.

 

   2014   2013 
Quarter  High   Low   High   Low 
                     
First quarter  $4.93   $4.01   $-   $- 
                     
Second quarter   4.57    4.12    8.00    3.79 
                     
Third quarter   4.69    3.42    5.50    3.83 
                     
Fourth quarter   4.14    3.32    4.99    4.11 

 

Cordia did not repurchase any of its common stock during the fourth quarter or the year ended December 31, 2014 and did not have any outstanding repurchase plans during that period.

 

See Item 1 – Business – Supervision and Regulation – Dividends for more information relating to restrictions on dividends.

 

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Item 6.Selected Financial Data

 

Summarized Balance Sheet Data at            
December 31, (dollars in thousands, except per share amounts)  2014   2013   2012 
Loans, net of unearned income  $212,959   $174,007   $113,070 
Allowance for loan losses   1,089    1,489    2,110 
Securities   74,199    39,320    18,511 
Total assets   318,600    235,148    178,696 
Deposits   265,603    210,814    154,428 
FHLB borrowings   25,000    10,000    10,000 
Stockholders' equity   27,136    13,287    13,139 
Book value per share  $4.17   $4.78   $4.24 

 

Summarized Earnings Data for the               
Years ended December 31, (dollars in thousands)   2014    2013    2012 
Total interest income  $10,217   $9,865   $8,441 
Total interest expense   1,991    1,808    1,552 
Net interest income before provision for loan losses   8,226    8,057    6,889 
Provision for loan losses   305    19    588 
Net interest income after provision for loan losses   7,921    8,038    6,301 
Non-interest income   467    300    252 
Non-interest expense   8,800    7,642    7,279 
Income (loss) before non-controlling interest   (412)   696    (726)
Less non-controlling interest   -    -    182 
Net income (loss) attributable to Cordia  $(412)  $696   $(544)

 

Selected Per Share Data               
At or for the years ended December 31,   2014    2013    2012 
Weighted average shares outstanding, basic   4,675,468    2,602,357    1,705,112 
Basic income (loss) per share  $(0.09)  $0.27   $(0.32)
Weighted average shares outstanding, diluted   4,675,468    2,615,387    1,705,112 
Diluted income (loss) per share  $(0.09)  $0.27   $(0.32)

 

Selected Ratios               
At or for the years ended December 31,   2014    2013    2012 
Return on average assets   (0.14)%   0.30%   (0.44)%
Return on average equity   (1.77)%   5.07%   (5.80)%
Average equity to average assets   8.19%   5.86%   7.52%
Leverage ratio (1)   8.24%   6.09%   8.71%
Total risk-based capital (1)   15.52%   11.25%   13.55%
Net interest margin   3.04%   3.64%   4.20%

 

(1) Ratios are for Bank of Virginia

 

19
 

  

Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion is intended to assist the reader in understanding and evaluating the financial condition and results of operations of Cordia and its wholly owned subsidiary, Bank of Virginia (“BVA”). This discussion and analysis should be read in conjunction with Cordia’s consolidated financial statements and related notes thereto located elsewhere in this report.

 

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the valuation of other real estate owned, intangible assets, acquired loans with specific credit-related deterioration and fair value measurements.

 

Executive Overview

 

During the past three years, the Company has spent much time restructuring the balance sheet as we worked through asset quality issues, recruited new staff, and reorganized our lending and deposit activities while addressing the requirements of BVA’s Written Agreement. In March 2013, the Company completed its Plan of Share Exchange with Bank of Virginia, effectively combining the two stockholder bases. The Written Agreement was lifted by banking regulators in August 2013.

 

Since the beginning of 2013, the Company has substantially increased its lending and funding activities. During this period, the Bank purchased $85.6 million of rehabilitated student loans that are 98% guaranteed by the U.S. Government and serviced by Xerox Education Services. The Bank also significantly expanded its deposit base, primarily involving direct certificate of deposit accounts and retail transaction accounts, while substantially reducing its cost of funds.

 

During 2013, the Company hired an Executive Vice President and Chief Financial Officer with extensive banking experience including all aspects of raising capital and evaluating strategic growth alternatives. In 2014, BVA hired five new officers whose primary responsibilities are to increase asset originations – including a senior vice president of residential mortgage lending, two first vice presidents of commercial lending, a vice president of student lending and a residential mortgage loan officer.

 

On April 10, 2014, Cordia completed the sale of approximately 363 shares of Mandatorily Convertible, Noncumulative, Nonvoting, Perpetual Preferred Stock, Series A, $0.01 par value per share, to accredited investors at a purchase price of $42,500 per share for total gross proceeds of $15.4 million. The capital raise included investments by 100% of Cordia’s directors. The net proceeds of the offering are being used primarily to support the second phase of its organic growth strategy in BVA.

 

On June 25, 2014, upon stockholder approval, each share of Series A Preferred Stock mandatorily converted into 10,000 shares of Cordia’s common stock at an initial conversion price of $4.25 per share, for a total issuance of approximately 3,629,871 new shares of common stock, of which 2,229,434 are voting and 1,400,437 are nonvoting. The holders of the Series A Preferred Stock did not receive any dividends under the provisions of the stock purchase agreements.

 

In the fourth quarter of 2014 the Bank launched CordiaGrad, a private student loan refinancing program aimed at high-achieving student loan borrowers. This program is expected to generate a substantial volume of loans for the Bank’s portfolio. Beginning in April 2014 the Bank ceased purchasing rehabilitated, federally guaranteed student loans.

 

Results of Operations

 

Net Income (Loss)

 

Consolidated net loss was $412 thousand for the year ended December 31, 2014 compared to consolidated net income of $696 thousand for the year ended December 31, 2013. The major factors contributing to this decrease in 2014 were primarily decreases in the accretion of acquisition accounting adjustments and increases in non-interest expenses related to building our infrastructure to grow the company.

 

Net Interest Income

 

Net interest income is the largest component of our income, and is affected by the interest rate environment and the volume and the composition of interest-earning assets and interest-bearing liabilities. Our interest-earning assets include loans, investment securities, interest-bearing deposits in other banks, and federal funds sold. Our interest-bearing liabilities include deposits and advances from the FHLB.

 

20
 

  

Net interest income increased $169 thousand from $8.1 million for the year ended December 31, 2013 to $8.2 million for the year ended December 31, 2014. Interest income increased $352 thousand to $10.2 million in 2014 from $9.9 million in 2013. The increase in net interest income in 2014 was primarily due to an increase in average interest-earning assets of $48.7 million or 22.0% for the year ended December 31, 2014 offset by a significant reduction in net interest margin of 60 basis points. The significant reduction in net interest margin was primarily due to the decrease in the accretion of acquisition accounting adjustments. The yield on loans held for investment includes the annualized impact of accretion on purchased loans.

 

Interest expense for the year ended December 31, 2014 was $2.0 million, compared to $1.8 million for the year ended December 31, 2013. The increase of $183 thousand was primarily due to a decline in the accretion of acquisition adjustments on time deposit amortization (a reduction in interest expense) from $169 thousand in 2013 to zero in 2014. In addition, interest expense on FHLB borrowings increased by $66 thousand from $164 thousand for the year ended December 31, 2013 to $230 thousand for the year ended December 31, 2014. This increase was due to an increase in average FHLB borrowings from $10.0 million in 2013 to $18.6 million in 2014. This increase was offset by a $52 thousand decline in cost of deposits related to an improvement in pricing strategy and funding mix. The reduction in cost of deposits was achieved while also increasing deposit funding by $54.8 million or 26.0% from 2013 to 2014.

 

Net interest margin was 3.04% and 3.64% for the years ended December 31, 2014 and 2013, respectively. The decrease in net interest margin was primarily the result of a decrease in the yield on loans held for investment caused by the decrease in the accretion of acquisition accounting adjustments. Excluding acquisition accounting adjustments, the net interest margin was 2.96% and 2.99% for the years ended December 31, 2014 and 2013, respectively. The cost of total deposits was 0.81% for the year ended December 31, 2014 compared to 0.87% for the year ended December 31, 2013, primarily due to shifting the retail deposit mix away from time deposits into transaction accounts as well as lower cost direct certificates of deposits. The Company’s balance sheet is in an asset sensitive position as of December 31, 2014.

 

21
 

  

Average Balances and Yields

 

The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented.

 

For the years ended                                    
December 31, (dollars
in thousands)
  2014   2013   2012 
   Average
Balance
   Interest   Yield/
Rate
   Average
Balance
   Interest   Yield/
Rate
   Average
Balance
   Interest   Yield/
Rate
 
Earning Assets:                                             
Loans held for investment  $198,227   $8,923    4.50%  $170,200   $9,366    5.50%  $113,101   $7,784    6.88%
Securities   61,156    1,269    2.08%   23,159    426    1.84%   18,250    587    3.22%
Federal Funds and deposits with banks   10,780    25    0.23%   28,089    73    0.26%   32,503    70    0.22%
Total earning assets   270,163    10,217    3.78%   221,448    9,865    4.45%   163,854    8,441    5.15%
Allowance for loan losses   (1,369)             (2,788)             (5,744)          
Other assets   16,234              14,480              8,467           
Total  $285,028             $233,140             $166,577           
Interest-bearing liabilities:                                             
Demand deposits  $13,167    42    0.32%  $13,919    56    0.40%  $13,362    81    0.61%
Savings deposits   61,161    179    0.29%   49,376    196    0.40%   21,385    109    0.51%
Time deposits   142,973    1,540    1.08%   124,911    1,392    1.11%   98,099    1,339    1.36%
FHLB borrowings   18,616    230    1.24%   10,000    164    1.64%   3,251    23    0.71%
                                              
Total interest-bearing liabilities   235,917    1,991    0.84%   198,206    1,808    0.91%   136,097    1,552    1.14%
Demand deposits   24,140              20,662              17,026           
Other liabilities   1,629              681              926           
Stockholders' equity   23,342              13,591              12,528           
Total  $285,028             $233,140             $166,577           
                                              
Net interest income       $8,226             $8,057             $6,889      
Net interest rate spread             2.94%             3.54%             4.01%
Net interest margin             3.04%             3.64%             4.20%

 

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The table below analyzes interest income, interest expense, and net interest income for the year ended December 31, 2014 compared to the year ended December 31, 2013 and the year ended December 31, 2013 compared to the year ended December 31, 2012.

 

   2014   2013 
   Increase (decrease) due to changes in:   Increase (decrease) due to changes in: 
(dollars in thousands)  Average
Volume
   Average
Rate
   Increase
(Decrease)
   Average
Volume
   Average
Rate
   Increase
(Decrease)
 
                         
Interest Income:                              
Loans  $1,542   $(1,985)  $(443)  $3,930   $(2,348)  $1,582 
Securities   699    144    843    158    (319)   (161)
Federal Funds and deposits with banks   (45)   (3)   (48)   (10)   13    3 
Total interest income   2,196    (1,844)   352    4,078    (2,654)   1,424 
Interest Expense:                              
Demand deposits   (3)   (11)   (14)   3    (28)   (25)
Savings deposits   47    (64)   (17)   143    (56)   87 
Time deposits   201    (53)   148    366    (313)   53 
FHLB borrowings   141    (75)   66    48    93    141 
Total interest expense   386    (203)   183    560    (304)   256 
Change in net interest income  $1,810   $(1,641)  $169   $3,518   $(2,350)  $1,168 

 

Provision for Loan Losses

 

Provision expense was $305 thousand during the year ended December 31, 2014 as compared to $19 thousand during the year ended December 31, 2013. This amount reflects our emphasis on highly accurate risk rating processes, early detection of problem loans, accurate assessment of the extent of losses and aggressive management of problem loans through restructures, refinancing to other institutions, or other means of mitigating potential losses. The allowance for loan losses was $1.1 million at December 31, 2014, compared to $1.5 million at December 31, 2013.

 

An analysis of the changes in the allowance for loan losses is presented under the caption “—Allowance for Loan Losses” on page 26.

 

Non-interest Income

 

Non-interest income for the year ended December 31, 2014 was $467 thousand, compared to $300 thousand for the year ended December 31, 2013. The improvement was primarily the result of a net gain on the sale of AFS securities.

 

The following table sets forth the principal components of non-interest income:

 

For the years ended December 31, (dollars in thousands)  2014   2013 
Service charges on deposit accounts  $123   $132 
Net gain on sale of "AFS" securities   177    - 
Other fee income, net   167    168 
Total non-interest income  $467   $300 

 

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Non-interest Expense

 

Non-interest expense increased $1.2 million to $8.8 million for the year ended December 31, 2014 from $7.6 million for the year ended December 31, 2013. The increase was due primarily to increases of $630 thousand in salaries and benefits, $127 thousand in data processing and communications and $396 thousand in student loan servicing expenses. This increase in salaries and benefits was primarily the result of increased incentive compensation, stock-based compensation and staff additions associated with the Company’s growth strategy.

 

The following table sets forth the primary components of non-interest expense:

 

For the years ended December 31, (dollars in thousands)  2014   2013 
Salaries and employee benefits  $4,846   $4,216 
Professional services   427    501 
Occupancy   565    565 
Data processing and communications   698    571 
FDIC assessment and bank fees   385    388 
Bank franchise taxes   102    73 
Student loan servicing fees and other loan expenses   671    275 
Other real estate expenses, net   46    12 
Supplies and equipment   318    274 
Insurance   167    166 
Directors fees   187    138 
Marketing and business development   51    88 
Other operating expenses   337    375 
Total non-interest expense  $8,800   $7,642 

 

Income Tax Expense

 

Under the provisions of the Internal Revenue Code, the Company has approximately $18.7 million of net operating loss carryforwards, which will expire if unused beginning in 2024. As of December 31, 2014, net deferred tax assets (“DTA”) of $6.2 million have been fully reserved with a valuation allowance. It is estimated that all of the valuation allowance is available to be reversed if and when it is deemed to be more-likely-than-not that all of the deferred tax asset will be realized. Of the net operating losses that occurred prior to the change in control of BVA in December 2010 and Cordia in April 2014, the amount of the loss carryforward available to offset taxable income is limited to approximately $254,000 per year for twenty years for BVA and zero for Cordia. DTAs related to net operating losses in excess of the amount realizable during the 20 year carryforward period have been written off.

 

Financial Condition

 

Loans

 

Loans represent the largest category of earning assets and typically provide higher yields than the other types of earning assets. Loans carry inherent credit and liquidity risks associated with the creditworthiness of our borrowers and general economic conditions. At December 31, 2014, total loans held for investment (net of allowance for loan losses) were $211.9 million versus $172.5 million at December 31, 2013. There were no loans held for sale at December 31, 2014 and 2013, respectively.

 

24
 

  

The following table sets forth the composition of the loan portfolio by category at the dates indicated and highlights our general emphasis on commercial and commercial real-estate lending.

 

   At December 31, 
   2014   2013   2012   2011   2010 
(dollars in thousands)  Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent   Amount   Percent 
Commercial Real Estate:                                                  
Acquisition, development and construction  $2,159    1.0%  $3,475    2.0%  $3,313    2.9%  $6,065    5.7%  $9,539    6.9%
Non-owner occupied   51,512    24.2%   28,606    16.4%   30,747    27.2%   30,644    28.7%   30,696    22.3%
Owner occupied   49,582    23.3%   50,500    29.0%   39,570    35.0%   31,790    29.7%   33,924    24.7%
Commercial and industrial   24,153    11.3%   21,085    12.1%   23,488    20.8%   19,492    18.2%   33,125    24.1%
Guaranteed studentloans   64,870    30.5%   55,427    31.9%   -    -    -    -    -    - 
Consumer:                                                  
Residential mortgage   8,377    3.9%   7,156    4.1%   7,260    6.4%   8,003    7.5%   23,817    17.3%
HELOC   11,074    5.2%   7,250    4.2%   8,395    7.4%   10,298    9.6%   3,886    2.8%
Other   1,232    0.6%   508    0.3%   297    0.3%   655    0.6%   2,566    1.9%
Total loans   212,959    100.0%   174,007    100.0%   113,070    100.0%   106,947    100.0%   137,553    100.0%
Allowance for loan losses   (1,089)        (1,489)        (2,110)        (2,285)        (50)     
Total loans, net of allowance for loan losses  $211,870        $172,518        $110,960        $104,662        $137,503      

 

 

The largest component of the loan portfolio is comprised of various types of commercial real estate loans. At December 31, 2014, commercial real estate loans totaled $103.3 million or 48.5% of the total portfolio. Guaranteed student loans totaled $64.9 million, commercial and industrial loans, totaled $24.2 million and consumer loans, which were comprised principally of residential mortgage and home equity loans, totaled $20.7 million.

 

At December 31, 2014, single family residential mortgage loans totaled $8.4 million while home equity lines totaled $11.1 million. Residential real estate loans consisted of first and second mortgages on single or multi-family residential dwellings.

 

Our loan portfolio also includes consumer lines of credit and installment loans. At December 31, 2014, those consumer loans totaled $1.2 million and represented 0.6% of the total loan portfolio.

 

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The repayment of maturing loans in the loan portfolio is also a source of liquidity for Cordia. The following tables set forth our loans maturing within specified intervals after the dates indicated. These tables were prepared based on the contractually outstanding balance and the contractual maturity date. These balances differ from the general ledger balances because of certain acquisition accounting adjustments.

 

(dollars in thousands)  Within One
Year
   Over One Year
Within Five
Years
   Over Five
Years
   Total 
Commercial Real Estate:                    
Acquisition, development and construction  $1,463   $695   $-   $2,158 
Other Commercial Real Estate   8,296    34,262    8,997    51,555 
Owner occupied   2,350    37,841    9,402    49,593 
Commercial and industrial   8,884    12,515    2,791    24,190 
Guaranteed student loans   21    1,238    63,611    64,870 
Consumer   6,004    9,249    5,502    20,755 
Totals  $27,018   $95,800   $90,303   $213,121 
Loans maturing after one year with:                    
Fixed interest rates  $96,584                
Floating interest rates   89,519                
Total  $186,103                

 

The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their maturities. Renewal of such loans is subject to review and credit approval as well as modification of terms. Consequently, we believe the treatment in the above table presents fairly the maturity and repricing structure of the loan portfolio as shown in the above table.

 

Allowance for Loan Losses

 

At December 31, 2014, our allowance for loan losses (“ALLL”) was $1.1 million, or 0.51% of total loans outstanding and 49.0% of non-performing loans. Excluding the guaranteed portion of the student loan portfolio, ALLL was 0.73% of total loans outstanding less guaranteed student loans. At December 31, 2013, ALLL was $1.5 million, or 0.86% of total loans outstanding and 25.9% of non-performing loans. The decrease of 35 basis points in the allowance for loan losses percentage of total loans was primarily due to a significant decrease in the historical loss experience at year-end December 31, 2014 compared to year-end December 31, 2013.

 

Management has developed policies and procedures for evaluating the overall quality of the loan portfolio, the timely identification of potential problem credits and impaired loans and the establishment of an appropriate ALLL. The acquired loan portfolio was originally recorded at fair value, which includes a credit mark-to-market, based on the acquisition method of accounting. Loans renewed (performing loans acquired) or originated since the date of our initial investment are evaluated and an appropriate ALLL is established. Any worsening of acquired impaired loans since the date of Cordia’s investment in BVA is evaluated for further impairment. Additional impairment on acquired impaired loans is recorded through the provision for loan losses. Any improvement in cash flows of acquired impaired loans is amortized as a yield adjustment over the remaining life of the loans. A fuller explanation may be found in the table under the caption “Loans With Deteriorated Credit Quality” regarding accretable and nonaccretable discount. Loan losses are charged against the allowance when management believes the uncollectability of a loan is confirmed, which decreases the balance of the allowance. Subsequent recoveries, if any, are credited back to the ALLL.

 

The ALLL consists of a specific component allocated to impaired loans and a general component allocated to the aggregate of all unimpaired loans. The amount of the ALLL is established through the application of a standardized model, the components of which are: an impairment analysis of identified loans to determine the level of any specific reserves needed on impaired loans, and a broad analysis of historical loss experience, economic factors and portfolio-related environmental factors to determine the level of general reserves needed. The model inputs include an evaluation of historical charge-offs, the current trends in delinquencies, and adverse credit migration and trends in the size and composition of the loan portfolio, including concentrations in higher risk loan types. Results from regulatory exams are also reflected in these assessments.

 

26
 

  

The ALLL is evaluated quarterly by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the specific borrowers’ ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The use of various estimates and judgments in our ongoing evaluation of the required level of allowance can significantly affect our results of operations and financial condition and may result in either greater provisions to increase the allowance or reduced provisions based upon management’s current view of portfolio and economic conditions and the application of revised estimates and assumptions. The ALLL consists of specific and general components. The specific component relates to loans that are classified as substandard or worse. For such loans that are also classified as impaired, a specific allowance is established. The general component covers loans graded special mention or better and is based on an analysis of historical loss experience, national and local economic factors, and environmental factors specific to the loan portfolio composition.

 

Changes affecting the ALLL are summarized in the following table.

 

For the years ended December 31, (dollars in thousands)  2014   2013   2012   2011   2010 
Allowance for loan losses at beginning of period  $1,489   $2,110   $2,285   $50   $- 
                          
Provision for loan losses   305    19    588    2,763    50 
                          
Charge-offs:                         
Commercial real estate   (120)   (289)   (635)   (528)   - 
Commercial and industrial   (485)   -    (286)   -    - 
Guaranteed Student Loans   (359)   (94)   -    -    - 
Consumer   -    (403)   (223)   -    - 
Total charge-offs   (964)   (786)   (1,144)   (528)   - 
                          
Recoveries:                         
Commercial real estate   139    -    346    -    - 
Commercial and industrial   91    135    16    -    - 
Guaranteed Student Loans   -    -    -    -    - 
Consumer   29    11    19    -    - 
Total recoveries   259    146    381    -    - 
Net charge-offs   (705)   (640)   (763)   (528)   - 
Allowance for loan losses at end of period  $1,089   $1,489   $2,110   $2,285   $50 
                          
Allowance for loan losses to non-performing loans   49.0%   37.8%   36.8%   28.7%   0.7%
Allowance for loan losses to total loans outstanding at end of period   0.51%   0.86%   1.87%   2.14%   0.04%
Net charge-offs to average loans during the period   0.36%   0.38%   0.70%   0.43%   NA 

 

27
 

  

Included in the above table is the activity related to the portion of ALLL for loans acquired with deteriorated credit quality. Because of the nature and limited number of these loans, they are individually evaluated for additional impairment on a quarterly basis. Activity related only to that portion of the ALLL is as follows:

 

Years ended December 31, (dollars in thousands)  2014   2013   2012   2011   2010 
Allowance for loan losses at beginning of period  $234   $537   $387   $910   $- 
Provision for loan losses   (7)   (14)   406    -    - 
                          
Charge-offs:                         
Commercial real estate   (120)   (289)   (229)   (523)   - 
Commercial and industrial   (17)   -    -    -    - 
Consumer   -    -    (27)   -    - 
Total charge-offs   (137)   (289)   (256)   (523)   - 
                          
Recoveries:                         
Commercial real estate   -    -    -    -    - 
Commercial and industrial   -    -    -    -    - 
Consumer   -    -    -    -    - 
Total recoveries   -    -    -    -    - 
Net charge-offs   (137)   (289)   (256)   (523)   - 
Allowance for loan losses at end of period  $90   $234   $537   $387    - 

 

The table below provides the breakout of the allowance for loan losses by portfolio class.

 

   At December 31, 2014   At December 31, 2013   At December 31, 2012   At December 31, 2011   At December 31, 2010 
(dollars in
thousands)
  Amount   % of
Allowance
to total
allowance
   % of
Loans in
category
to total
loans
   Amount   % of
Allowance
to total
allowance
   % of
Loans in
category
to total
loans
   Amount   % of
Allowance
to total
allowance
   % of
Loans in
category
to total
loans
   Amount   % of
Allowance
to total
allowance
   % of
Loans in
category
to total
loans
   Amount   % of
Allowance
to total
allowance
   % of
Loans in
category
to total
loans
 
Commercial real estate  $392    36%   49%  $661    45%   48%  $810    38%   65%  $1,016    44%   64%  $50    100%   54%
Commercial and industrial   357    33%   11%   377    25%   12%   782    37%   21%   685    30%   18%   -    -    24%
Guaranteed Student Loans   144    13%   30%   268    18%   32%   -    -    -    -    -    -    -    -    - 
Consumer   196    18%   10%   183    12%   8%   518    25%   14%   584    26%   18%   -    -    22%
Total allowance for loan losses  $1,089    100%   100%  $1,489    100%   100%  $2,110    100%   100%  $2,285    100%   100%  $50    100%   100%

 

Asset Quality

 

Risk Rating Process

 

On a quarterly basis, the process of estimating the allowance for loan losses begins with review of the risk rating assigned to individual loans. Through this process, loans graded substandard or worse are evaluated for impairment in accordance with ASC Topic 310 “Accounting by Creditors for Impairment of a Loan.” Refer to Note 4 of the Notes to the Consolidated Financial Statements for more detail.

 

28
 

  

 

The following is the distribution of loans by credit quality and class as of:

 

December 31, 2014 (dollars in thousands)  Commercial Real Estate           Consumer     
Credit quality class  Acq-Dev
Construction
   Non-owner
Occupied
   Owner
Occupied
   Commercial
and
Industrial
   Guaranteed
Student
Loans
   Residential
Mortgage
   HELOC   Other   Total 
1 Highest quality  $-   $-   $-   $-   $-   $-   $-   $-   $- 
2 Above average quality   -    2,225    2,788    2,498    64,870    24    1,394    719    74,518 
3 Satisfactory   458    30,473    26,608    14,883    -    3,325    6,140    425    82,312 
4 Pass   476    17,236    16,986    5,593    -    4,768    2,589    88    47,736 
5 Special mention   -    123    -    68    -    75    319    -    585 
6 Substandard   267    -    -    142    -    -    268    -    677 
7 Doubtful   -    -    -    -    -    -    -    -    - 
    1,201    50,057    46,382    23,184    64,870    8,192    10,710    1,232    205,828 
Loans acquired with deteriorating credit quality   958    1,455    3,200    969    -    185    364    -    7,131 
Total loans  $2,159   $51,512   $49,582   $24,153   $64,870   $8,377   $11,074   $1,232   $212,959 

 

December 31, 2013 (dollars in thousands)  Commercial Real Estate           Consumer     
Credit quality class  Acq-Dev
Construction
   Non-owner
Occupied
   Owner
Occupied
   Commercial
and
Industrial
   Guaranteed
Student 
Loans
   Residential
Mortgage
   HELOC   Other   Total 
1 Highest quality  $-   $-   $-   $-   $-   $-   $-   $-   $- 
2 Above average quality   -    2,078    2,966    2,170    55,427    73    205    80    62,999 
3 Satisfactory   325    10,563    25,264    8,290    -    3,965    3,541    350    52,298 
4 Pass   1,500    12,990    14,606    8,128    -    2,710    2,243    78    42,255 
5 Special mention   299    1,449    3,486    268    -    203    630    -    6,335 
6 Substandard   267    -    336    759    -    15    177    -    1,554 
7 Doubtful   -    -    -    -    -    -    -    -    - 
    2,391    27,080    46,658    19,615    55,427    6,966    6,796    508    165,441 
Loans acquired with deteriorating credit quality   1,084    1,526    3,842    1,470    -    190    454    -    8,566 
Total loans  $3,475   $28,606   $50,500   $21,085   $55,427   $7,156   $7,250   $508   $174,007 

 

As shown in the tables above, substandard and worse loans were $677 thousand at December 31, 2014, or 0.3% of the total loan portfolio. This compares to $1.6 million or 0.9% at December 31, 2013. Special mention loans decreased $5.8 million from $6.3 million at December 31, 2013 to $585 thousand at December 31, 2014 and loans graded “pass” or better increased $47.0 million to $204.6 million at December 31, 2014 as compared to $157.6 million at December 31, 2013. The decrease in special mention loans is due to loans that have been re-underwritten and reclassified to pass grade. Loans acquired by Cordia in December 2010 with deteriorating credit quality have declined $1.5 million from $8.6 million at December 31, 2013 to $7.1 million at December 31, 2013. The majority of these loans are now pass rated performing credits.

 

The Bank has continued to employ a third party loan review firm for annual reviews and periodic special assignments.  The most recent review was completed in May 2014, with another review scheduled during the second quarter of 2015.  The scope of the 2014 loan file review totaled approximately 70% of the Bank’s exposure and included the following:

 

All classified loans or total relationship exposure over $250,000;

 

All special mention loans or total relationship exposures over $500,000;

 

A random sample of pass-rated loans determined by the loan review firm under $500,000;

 

All loans past due as of the review date;

 

All OREO properties;

 

All insider loans, including loans to directors, significant shareholders, and executive management granted since the last review;

 

Any loans that management or the board of directors requested be reviewed;

 

Annual review of the allowance for loan and lease loss reserve and methodology.

 

29
 

  

Nonperforming Assets

 

The past due status of a loan is based on the contractual due date of the most delinquent payment due. Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans greater than 90 days past due may remain on an accrual status if management determines it has adequate collateral and cash flow to cover the principal and interest or the borrower is in the process of refinancing. If a loan or a portion of a loan that is delinquent more than 90 days is adversely classified, or is partially charged off, the loan is generally classified as nonaccrual. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the full collectability of principal and interest of a loan, it is placed on nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due.

 

When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed, and the amortization of related deferred loan fees or costs is suspended. While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered.

 

Loans placed on non-accrual status generally may be returned to accrual status after:

 

  · payments are received for approximately six (6) consecutive months in accordance with the loan documents, and any doubt as to the loan's full collectability has been removed; or

 

  · the loan is restructured and supported by a well-documented credit evaluation of the borrower's financial condition and the prospects for full payment.

 

When a restructured loan is returned to accrual status after restructuring, the risk rating remains unchanged until a satisfactory payment history is re-established, typically for approximately six months, at which time it is returned to accrual status.

 

Nonperforming assets totaled $3.9 million or 1.2% of total assets at December 31, 2014 and are comprised of non-accrual loans of $2.2 million and real estate owned of $1.6 million. The balance of nonperforming assets at December 31, 2013 was $7.3 million or 3.1% of total assets. The decrease in nonperforming loans at December 31, 2014 from December 31, 2013 was a result of management’s aggressive approach to workout and resolution of problem loans coupled with growth in total assets.

 

Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at the estimated fair market value of the property, less estimated disposal costs. Any excess of the principal over the estimated fair market value at the time of acquisition is charged to the allowance for loan losses. The estimated fair market value is reviewed periodically by management and any write-downs are charged against current earnings. Development and improvement costs relating to property are capitalized unless such added costs cause the properties recorded value to exceed the estimated fair market value. Net operating income or expenses of such properties are included in collection, repossession and other real estate owned expenses.

 

30
 

 

A summary of nonperforming assets, including troubled debt restructurings, as of the dates indicated follows:

 

   Years ended December 31, 
(dollars in thousands)  2014   2013   2012   2011   2010 
Non-accrual troubled debt restructurings  $-   $119   $-   $446   $- 
Other non-accrual loans   2,221    3,815    5,471    7,503    6,915 
Total non-accrual loans   2,221    3,934    5,471    7,949    6,915 
Real estate owned   1,641    1,545    1,768    1,262    551 
Total non-performing assets  $3,862   $5,479   $7,239   $9,211   $7,466 
                          
Total non-accrual loans to total loans   1.04%   2.26%   4.84%   7.43%   5.03%
Total non-accrual loans to total assets   0.70%   1.67%   3.06%   4.80%   3.25%
Total non-performing assets to total assets   1.21%   2.33%   4.05%   5.56%   3.51%
                          
Accruing troubled debt restructurings  $1,260   $1,837   $2,060   $2,530   $- 
                          
Total loans  $212,959   $174,007   $113,070   $106,947   $137,553 
Total assets  $318,600   $235,148   $178,696   $165,551   $212,526 

 

Student loans with a past due balance greater than 90 days are not included in the balance of nonperforming assets. Guaranteed student loans accrue interest until the date the guaranty is paid. The guarantor’s payment covers approximately 98% of principal and accrued interest. Upon receipt of payment, the unguaranteed portion is charged off to the ALLL.

 

Loans With Deteriorated Credit Quality

 

In the acquisition of BVA certain loans were acquired which showed evidence of deterioration in credit quality. These loans are accounted for under the guidance of ASC 310-30. Information related to these loans as of the dates indicated is provided in the following table.

 

At December 31, (dollars in thousands)  2014   2013 
Contract principal balance  $7,178   $8,689 
Accretable yield   (42)   (62)
Nonaccretable difference   (5)   (61)
Book value of loans  $7,131   $8,566 

 

Investment Securities

 

Our investment portfolio consists of U.S. agency debt and agency guaranteed mortgage-backed securities. Our investment security portfolio includes securities classified as available for sale as well as securities classified as held to maturity. The total securities portfolio (excluding restricted securities) was $74.2 million at December 31, 2014 as compared to $39.3 million at December 31, 2013. At December 31, 2014, the securities portfolio consisted of $53.5 million of securities available for sale and $20.7 million of securities held to maturity.

 

31
 

 

 Amortized cost and fair values of securities available for sale are as follows:

 

   Years end December 31, 
   2014   2013   2012 
(dollars in thousands)  Amortized
Cost
   Fair Value   Amortized
Cost
   Fair Value   Amortized
Cost
   Fair Value 
U.S. Government agencies  $2,705   $2,689   $7,038   $7,041   $3,425   $3,455 
Agency guaranteed mortgage-backed securities   50,960    50,794    17,578    17,526    15,007    15,056 
Total  $53,665   $53,483   $24,616   $24,567   $18,432   $18,511 

 

Carrying value and fair value of securities held to maturity are as follows:

 

   Years end December 31, 
   2014   2013   2012 
(dollars in thousands)  Carry Value   Fair Value   Carry Value   Fair Value   Carry Value   Fair Value 
Agency guaranteed mortgage-backed securities  $20,716   $21,047   $14,753   $14,597   $-   $- 
Total  $20,716   $21,047   $14,753   $14,597   $-   $- 

 

The portfolio is available to support liquidity needs of BVA as well as a source of interest income. During 2014, the Company sold $23.4 million of available for sale securities and recognized a gain of $177 thousand in noninterest income. During 2013, sales of available securities were $3.3 million with no material gains or losses recognized.

 

As of December 31, 2014, we had gross unrealized losses of $204 thousand and $2 thousand on our available for sale and held to maturity securities portfolios, respectively. As of December 31, 2014, we had $45 thousand of unrealized losses greater than 12 months on our available for sale portfolio and had no material unrealized losses greater than 12 months on our held to maturity portfolio. All of the unrealized losses are attributable to increases in interest rates and not to credit deterioration. Currently, we do not believe that it is probable that we will be unable 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 likely we will be required to sell the investments before recovery of their amortized cost bases, we do not consider these investments to be other-than-temporarily impaired at December 31, 2014. See Note 3. Securities for more information on unrealized losses on the securities portfolio.

 

The following tables set forth the scheduled maturities and average yields of securities available for sale at December 31, 2014.

 

   Within one year   After one year 
within five years
   After five years
within ten years
   After ten years     
(dollars in thousands)  Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield   Total 
U.S. Government agencies  $-    -   $-    -   $-    -   $2,689    1.47%  $2,689 
Agency guaranteed mortgage-backed securities   -    -    1,030    1.15%   335    1.38%   49,429    1.99%   50,794 
Total  $-    -   $1,030    1.15%  $335    1.38%  $52,118    1.96%  $53,483 

 

The following tables set forth the scheduled maturities and average yields of securities held to maturity at December 31, 2014.

 

   Within one year   After one year
within five years
   After five years within
ten years
   After ten years     
(dollars in thousands)  Amount   Yield   Amount   Yield   Amount   Yield   Amount   Yield   Total 
Agency guaranteed mortgage-backed securities   -    -    -    -    3,696    2.98%   17,020    2.60%   20,716 
Total  $-    -   $-    -   $3,696    2.98%  $17,020    2.60%  $20,716 

 

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Deposits and Other Interest-Bearing Liabilities

 

At December 31, 2014, total deposits were $265.6 million, compared to $210.8 million at December 31, 2013. Core deposits, which by FDIC guidelines exclude certificates of deposit of $250,000 or more and insured brokered deposits, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $234.8 million at December 31, 2014, or 88.4% of total deposits, compared to $194.5 million at December 31, 2013, or 92.3% of total deposits. Deposits, including core deposits, have been the primary source of funding and have enabled us to successfully meet both our short-term and long-term liquidity needs. During the year ended December 31, 2014, money market deposits increased $22.0 million, of which $13.0 million was insured brokered deposits. In addition, during the year ended December 31, 2014, time deposits increased by $24.3 million. Our loan-to-deposit ratio was 80.2% at December 31, 2014 and 82.5% at December 31, 2013.

 

The following table sets forth our deposits by category at the dates indicated.

 

   At December 31, 
   2014   2013   2012 
(dollars in thousands)  Amount   Percent   Amount   Percent   Amount   Percent 
Non-interest bearing demand accounts  $30,709    12%  $22,845    11%  $19,498    12%
NOW accounts   13,239    5%   13,072    6%   14,830    10%
Savings and money market accounts   70,100    26%   47,613    23%   24,563    16%
Times deposits - less than $100,000   49,557    19%   51,053    24%   54,142    35%
Times deposits - $100,000 or more   101,998    38%   76,231    36%   41,395    27%
Total  $265,603    100%  $210,814    100%  $154,428    100%

 

At December 31, 2014, 57.9% of our time deposits over $100,000 had maturities within twelve months. Large certificate of deposit customers tend to be more sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes in comparison to core deposits.

 

The maturity distribution of our time deposits of $100,000 or more and other time deposits at December 31, 2014, is set forth in the following table:

 

(dollars in thousands)  Time Deposits
less than
$100,000
   Time
Deposits
$100,000
or more
   Total 
Months to maturity:            
Three months or less  $8,221   $21,798   $30,019 
Over three months to twelve months   19,978    37,210    57,188 
Over twelve months to three years   17,839    35,836    53,675 
Over three years   3,519    7,154    10,673 
Total  $49,557   $101,998   $151,555 

 

Management monitors maturity trends in time deposits as part of its overall asset liability management and retail pricing strategies.

 

Liquidity and Capital Resources

 

Liquidity

 

Liquidity management involves monitoring our sources and uses of funds in order to meet our short-term and long-term cash flow requirements while optimizing profits. Liquidity represents an institution’s ability to meet present and future financial obligations, including through the sale of existing assets or the acquisition of additional funds through short-term borrowings. BVA’s primary access to liquidity comes from several sources: operating cash flows from payments received on loans and mortgage-backed securities, increased deposits, and cash reserves. BVA’s secondary sources of liquidity are Federal Funds sold, unpledged securities available for sale, and borrowings from correspondent banks, the FHLB and the Federal Reserve Bank Discount Window. Liquidity strategies are implemented and monitored by the Asset/Liability Committee (“ALCO”) of our BVA Board of Directors.

 

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BVA’s deposit base grew by 26.0% from $210.8 million at December 31, 2013 to $265.6 million at December 31, 2014. The growth in deposits was primarily driven by growth in savings and money market accounts and time deposits in excess of $100,000. Savings and money market accounts grew 47.2% from $47.6 million at December 31, 2013 to $70.1 million at December 31, 2014. Time deposits in excess of $100,000 grew 33.8% from $76.2 million at December 31, 2013 to $102.0 million at December 31, 2014. As BVA looks to implement other loan growth initiatives, it has developed several funding strategies, including judicious use of brokered and direct certificates of deposits, to augment core deposit growth and further reduce the cost of funds. Development of several sources of funding beyond core deposit growth ensures maximum liquidity access without dependence on higher cost sources of funds.

 

BVA maintains an investment portfolio of available for sale marketable securities that may be used for liquidity purposes by either pledging them through repurchase transactions against borrowings from the FHLB or a correspondent bank or by selling them on the open market. Those securities consist primarily of U.S. Government agency debt securities. To the extent any securities are pledged against borrowing from one credit facility, the borrowing ability of other secured borrowing facilities would be reduced by a like amount.

 

Borrowings

 

As of December 31, 2014, BVA had a total of $22.5 million committed repurchase lines with correspondent banks through which borrowings could be made against the pledge of marketable securities subject to mark-to-market valuations and standard collateral borrowing ratios. These lines were unused during 2013 and 2014 and remain fully available. BVA also maintains a $2.5 million unsecured line of credit as well as a $2.0 million unsecured lines of credit with other correspondent banks that were available for direct borrowings or Federal Funds purchased.

 

BVA is a member of the Federal Home Loan Bank of Atlanta (FHLB), which provides access to additional lines of credit and other products offered by the FHLB. These borrowings are largely secured by BVA’s loan portfolio. The FHLB maintains a blanket security agreement on qualifying collateral. As of December 31, 2014 and 2013, BVA had $25.0 million and $10.0 million in secured borrowings outstanding, at a stated average interest rate of 1.25%, with the FHLB Atlanta against pledged eligible mortgage loan collateral and investment securities. As of December 31, 2014, BVA had a total credit availability of $35.2 million at the FHLB which could be accessed through pledging a combination of eligible mortgage loan collateral and investment securities. The FHLB offers a variety of floating and fixed rate loans at terms ranging from overnight to 20 years; therefore, BVA can match borrowings mitigating interest rate risk.

 

Liquidity Contingency Plan

 

Historically BVA has maintained both a retail branch-based and an asset-based liquidity strategy and has not depended materially on brokered deposits or utilized securitization as sources of liquidity. BVA strives to follow regulatory guidance in the management of liquidity risk and has established a Board-approved Contingency Funding Plan (CFP) that prescribes liquidity risk limits and guidelines and includes pro forma cash flow analyses of BVA’s sources and uses of funds under various liquidity scenarios. BVA’s CFP includes funding alternatives that can be implemented if access to normal funding sources is reduced.

 

We are not aware of any trends, events or uncertainties that are reasonably likely to have a material adverse effect on our short term or long term liquidity. Based on the current and expected liquidity needs, including any liquidity needs associated with loan growth or generated by off-balance sheet transactions such as commitments to extend credit, commitments to purchase securities and standby letters of credit, we expect to be able to meet our obligations for the next twelve months.

 

Capital

 

BVA is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our financial statements. Under the regulatory capital adequacy guidelines BVA must meet specific capital guidelines that are based on quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators.

 

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Quantitative measures established by regulation to ensure capital adequacy require financial institutions 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 (as defined), and of Tier 1 capital (as defined) to average assets (as defined). At December 31, 2014 and December 31, 2013, BVA met all capital adequacy requirements to which it was subject. BVA is also required to maintain capital at a minimum level as a proportion of quarterly average assets, which is known as the leverage ratio. The minimum levels to be considered well-capitalized are 5% for tier 1 leverage ratio, 6% for tier 1 risk-based capital ratio, and 10% for total risk-based capital ratio.

 

BVA exceeded all the regulatory capital requirements at the dates indicated and was considered well-capitalized, as set forth in the following table. Cordia completed a capital raise of $15.4 million on April 10, 2014. A substantial portion of the proceeds were invested in BVA, resulting in BVA having capital ratios as of December 31, 2014 that are materially higher than the capital ratios as of December 31, 2013.

 

   Minumum Requirements         
At December 31, (dollars in thousands)  Well
Capitalized
   Adequately
Capitalized
   2014   2013 
Tier 1 capital            $25,985   $14,127 
Tier 2 capital             1,089    1,489 
Total qualifying capital            $27,074   $15,616 
Total risk-adjusted assets            $174,476   $138,869 
                     
Tier 1 leverage ratio   5%   4%   8.24%   6.09%
Tier 1 risked-based capital ratio   6%   4%   14.89%   10.17%
Total risk-based capital ratio   10%   8%   15.52%   11.25%

 

Cordia is considered a small bank holding company, based on its asset size under $500 million. Accordingly it is exempt from Federal regulatory guidelines related to leverage ratios and risk-based capital.

 

Interest Rate Sensitivity

 

The pricing and maturity of assets and liabilities are monitored and managed in order to diminish the potential adverse impact that changes in rates could have on net interest income. The principal monitoring techniques employed by BVA are the Economic Value of Equity (“EVE”) and Net Interest Income or Earnings at Risk (“NII” or “EaR”). EVE and NII are cash flow and earnings simulation modeling techniques which predict likely economic outcomes given various interest rate scenarios.

 

Interest rate sensitivity can be managed by closely matching the interest rate repricing periods of assets or liabilities at the time they are acquired and by adjusting that match as the balance sheet grows or the mix of asset and liability characteristics or interest rates change. That adjustment can be accomplished by selling securities available for sale, replacing an asset or liability at maturity with those of different characteristics, or adjusting the interest rate during the life of an asset or liability. Managing the amount of different assets and liabilities that reprice in a given time interval may help to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.

 

Application of a 200 basis point rate increase would result in an 11.1% increase in net interest income at December 31, 2014, as compared to a 11.6% increase at December 31, 2013. A 200 basis point rate increase would result in the depreciation of the Bank’s equity value by 5.9% at December 31, 2014 compared to a depreciation of 15.1% at December 31, 2013.

 

Off-Balance Sheet Risk/Commitments and Contingencies

 

Through our operations, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At December 31, 2014, we had issued commitments to extend credit of $15.6 million through various types of commercial lending arrangements. The majority of these commitments to extend credit had variable rates.

 

We evaluate each customer’s credit worthiness for such commitments on a case-by-case basis in the same manner as for the approval of a direct loan. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on our credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, commercial and residential real estate.

 

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Contractual obligations as of December 31, 2014 are summarized in the following table.

 

   Payments due by period     
(Dollars in thousands)  Within one year   After one year
within three years
   After three year
within five years
   After five
years
   Total 
Time deposits  $87,207   $53,675   $10,673   $-   $151,555 
Operating lease obligations   334    588    433    -    1,355 
Total  $87,541   $54,263   $11,106   $-   $152,910 

 

Critical Accounting Policies

 

Cordia’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Cordia’s financial position and results of operations are affected by management’s application of accounting policies, including judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in our financial position and/or results of operations.

 

Estimates, assumptions, and judgments are necessary principally when assets and liabilities are required to be recorded at estimated fair value, when a decline in the value of an asset carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded based upon the probability of occurrence of a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are either based on quoted market prices or provided by third party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management primarily through the use of internal or third party modeling techniques and/or appraisal estimates.

 

Cordia’s accounting policies are fundamental to understanding Management’s Discussion and Analysis. The following is a summary of Cordia’s “critical accounting policies.” In addition, the disclosures presented in the Notes to the Consolidated Financial Statements and in this section provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

 

Business Combinations

 

Cordia accounts for its business combinations under the acquisition method of accounting, a cost allocation process which requires the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, Cordia relies on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques.

 

Acquired Loans with Specific Credit-Related Deterioration.

 

Acquired loans with specific credit deterioration are accounted for by Cordia in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 310-30. Certain acquired loans, those for which specific credit-related deterioration, since origination, is identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on non-accrual status and have no accretable yield.

 

Allowance for Loan Losses

 

We monitor and maintain an allowance for loan losses (“ALLL”) to absorb losses inherent in the loan portfolio. We maintain policies and procedures that address the systems of controls over the following areas of maintenance of the ALLL: the systematic methodology used to determine the appropriate level of the ALLL to provide assurance they are maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; and the loan grading system.

 

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We evaluate loans graded substandard or worse individually for impairment. These evaluations are based upon expected discounted cash flows or collateral values. If the evaluation shows that the loan’s expected discounted cash flows or underlying collateral is not sufficient to repay the loan as agreed in accordance with the terms of the loan, then a specific reserve is established for the amount of impairment, which represents the difference between the principal amount of the loan less the expected discounted cash flows or value of the underlying collateral, net of selling costs.

 

For loans without individual measures of impairment which are loans graded Special Mention or better, we make estimates of losses for pools of loans grouped by similar characteristics, including the type of loan as well as the assigned loan classification. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade and the predominant collateral type for the group. The resulting estimate of losses for pools of loans is adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.

 

The amount of estimated impairment for individually evaluated loans and pools of loans is added together for a total estimate of loan losses. This estimate of losses is compared to our ALLL as of the evaluation date and, if the estimate of losses is greater than the ALLL, an additional provision to the allowance would be made through a charge to the income statement. If the estimate of losses is less than the existing allowance, the degree to which the ALLL exceeds the estimate is evaluated to determine whether the ALLL falls outside a range of estimates. If the estimate of losses is below the range of reasonable estimates, the ALLL is reduced by way of a credit to the provision for loan losses. 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 ALLL is materially overstated. If different assumptions or conditions were to prevail and it is determined that the ALLL is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made in future periods. These additional provisions may be material to the Financial Statements.

 

Impact of Inflation

 

Since the assets and liabilities of financial institutions such as BVA are primarily monetary in nature, interest rates have a more significant effect on BVA’s performance than do the effects of changes in the general rate of inflation and changes in prices of goods and services. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, we seek to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

 

The information required by this Item 7A is incorporated by reference to information appearing in the MD&A Section of this Annual Report on Form 10-K, more specifically in the sections entitled “Interest Rate Sensitivity” and “Liquidity Contingency Plan”.

 

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Item 8. Financial Statements and Supplementary Data

  

Cordia Bancorp

Consolidated Balance Sheets

(dollars in thousands, except per share data)

 

 

   December 31,
2014
   December 31,
2013
 
Assets          
Cash and due from banks  $5,484   $5,290 
Federal funds sold and interest-bearing deposits with banks   16,363    8,694 
Total cash and cash equivalents   21,847    13,984 
Securities available for sale, at fair market value   53,483    24,567 
Securities held to maturity, at cost (fair value $21,047 and $14,597 at December 31, 2014 and 2013, respectively)   20,716    14,753 
Restricted securities   2,092    1,074 
Loans net of allowance for loan losses of $1,089 and $1,489 at December 31, 2014 and 2013, respectively   211,870    172,518 
Premises and equipment, net   4,432    4,464 
Accrued interest receivable   2,040    1,655 
Other real estate owned, net of valuation allowance   1,641    1,545 
Other assets   479    588 
Total assets  $318,600   $235,148 
           
Liabilities and stockholders' equity          
Deposits          
Non-interest bearing  $30,709   $22,845 
Savings and interest-bearing demand   83,339    60,685 
Time deposits   151,555    127,284 
Total deposits   265,603    210,814 
Accrued expenses and other liabilities   861    1,047 
FHLB borrowings   25,000    10,000 
Total liabilities   291,464    221,861 
           
Stockholders' equity          
Preferred stock, 2,000 shares authorized, $0.01 par value, none issued and outstanding   -    - 
Common stock:          
Common stock - 120,000,000 shares authorized, $0.01 par value,  5,103,669 and 2,788,302 shares were outstanding at December 31, 2014 and 2013, respectively   51    28 
Nonvoting common stock - 5,000,000 shares authorized, $0.01 par value, 1,400,437 and 0 shares were outstanding at December 31, 2014 and 2013, respectively   14    - 
Additional paid-in capital   32,956    18,648 
Retained deficit   (5,417)   (5,005)
Accumulated other comprehensive loss   (468)   (384)
Total stockholders' equity   27,136    13,287 
Total liabilities and stockholders' equity  $318,600   $235,148 

 

See Notes to the Consolidated Financial Statements

 

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Cordia Bancorp

Consolidated Statements of Operations

For the years ended December 31, (dollars in thousands, except per share data)

 

   2014   2013 
Interest income          
Interest and fees on loans  $8,923   $9,366 
Investment securities   1,269    426 
Federal funds sold and deposits with banks   25    73 
Total interest income   10,217    9,865 
Interest expense          
Interest on deposits   1,761    1,644 
Interest on FHLB borrowings   230    164 
Total interest expense   1,991    1,808 
Net interest income   8,226    8,057 
Provision for loan losses   305    19 
Net interest income after provision for loan losses   7,921    8,038 
Non-interest income          
Service charges on deposit accounts   123    132 
Net gain on sale of available for sale securities   177    - 
Other fee income   167    168 
Total non-interest income   467    300 
Non-interest expense          
Salaries and employee benefits   4,846    4,216 
Professional services   427    501 
Occupancy   565    565 
Data processing and communications   698    571 
FDIC assessment and bank fees   385    388 
Bank franchise taxes   102    73 
Student loan servicing fees and other loan expenses   671    275 
Other real estate expenses, net   46    12 
Supplies and equipment   318    274 
Insurance   167    166 
Director's fees   187    138 
Marketing and business development   51    88 
Other operating expenses   337    375 
Total non-interest expense   8,800    7,642 
Net income (loss) before income taxes   (412)   696 
Income taxes   -    - 
Net income (loss)  $(412)  $696 
Basic net income (loss) per common share  $(0.09)  $0.27 
Diluted net income (loss) per common share  $(0.09)  $0.27 
Weighted average shares outstanding, basic   4,675,468    2,602,357 
Weighted average shares outstanding, diluted   4,675,468    2,615,387 

 

See Notes to the Consolidatd Financial Statements

 

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Cordia Bancorp

Consolidated Statement of Comprenhensive Income (Loss)

For the years ended December 31, (dollars in thousands)

 

   2014   2013 
Net income (loss)  $(412)  $696 
           
Other comprehensive loss          
Unrealized losses on available for sale securities arising during period   (309)   (448)
Less: reclassification adjustment for net secuirties gains included in net income   177    - 
Add: Amortization of available for sale to held to maturiy reclassification adjustment   48    8 
Total other comprehensive loss   (84)   (440)
           
Comprehensive income (loss)  $(496)  $256 

 

See Notes to the Consolidated Financial Statements

 

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Consolidated Statements of Changes in Stockholders' Equity

For the years ended December 31, 2014 and 2013 (dollars in thousands)

 

   Preferred
Stock
   Common
Stock -
Voting
   Common
Stock -
Nonvoting
   Additional
Paid-in
Capital
   Retained
Deficit
   Accumulated Other
Comprehensive
Income (Loss)
   Non-
controlling
Interest
   Total 
Balance, December 31, 2012  $-   $21   $-   $14,428   $(5,701)  $56   $4,335   $13,139 
Net income   -    -    -    -    696    -    -    696 
Other comprehensive loss   -    -    -    -    -    (440)   -    (440)
Exchange of Bank of Virginia common stock for Cordia common stock, net of stock issuance costs   -    7    -    4,121    -    -    (4,335)   (207)
Stock-based compensation   -    -    -    99    -    -    -    99 
Balance, December 31, 2013  $-   $28   $-   $18,648   $(5,005)  $(384)  $-   $13,287 
Net loss   -    -    -    -    (412)   -    -    (412)
Other comprehensive loss   -    -    -    -    -    (84)   -    (84)
Issuance of preferred stock   14,135    -    -    -    -    -    -    14,135 
Redemption of preferred stock   (14,135)   -    -    -    -    -    -    (14,135)
Issuance of common stock        23    14    14,038                   14,075 
Stock-based compensation   -    -    -    270    -    -    -    270 
Balance, December 31, 2014  $-   $51   $14   $32,956   $(5,417)  $(468)  $-   $27,136 

 

See Notes to the Consolidated Financial Statements

 

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Cordia Bancorp

Consolidated Statements of Cash Flows

For the years ended December 31,2014 and 2013 (dollars in thousands)

 

   2014   2013 
Cash flows from operating activities:          
Net income (loss)  $(412)  $696 
Adjustments to reconcile net income/(loss) to net cash provided by (used in) operating activities          
Net amortization of premium on investment securities   366    162 
Purchase accounting accretion, net   (291)   (924)
Depreciation   294    279 
Provision for loan losses   305    19 
Gain on available for securities   (177)   - 
Gain on sale of other real estate owned   -    (36)
Other real estate owned valuation adjustment   (13)   - 
Stock based compensation   270    99 
Net change in loans held for sale   -    28,949 
Changes in assets and liabilities:          
Increase in accrued interest receivable   (385)   (1,236)
Decrease in other assets   109    48 
(Increase) decrease in accrued expenses and other liabilities   (92)   12 
Net cash (used in) provided by operating activities   (26)   28,068 
Cash flows from investing activities:          
Purchase of securities available for sale   (58,624)   (23,565)
Purchase of securities held to maturity   (7,686)   (5,135)
(Purchase) redemptions of restricted securities, net   (1,018)   82 
Proceeds from sales, maturities, and paydowns of securities available for sale   29,458    7,088 
Proceeds from payments/maturities of securities held to maturity   1,700    125 
Proceeds from sale of other real estate owned   -    259 
Net increase in commercial and consumer loans   (29,713)   (5,378)
Net increase in purchased guaranteed student loans   (9,802)   (55,510)
Purchase of premises and equipment   (254)   (343)
Net cash used in investing activities   (75,939)   (82,377)
Cash flows from financing activities:          
Proceeds from sale of stock (stock issuance costs), net   14,075    (207)
Net increase in demand savings, interest-bearing checking and money market deposits   30,123    24,603 
Net increase in time deposits   24,630    31,916 
Proceeds from FHLB advances   15,000    - 
Net cash provided by investing activities   83,828    56,312 
Net increase in cash and cash equivalents   7,863    2,003 
Cash and cash equivalents, beginning of period   13,984    11,981 
Cash and cash equivalents, end of period  $21,847   $13,984 
Supplemental disclosure of cash flow information          
Cash payments for interest  $1,973   $1,838 
Supplemental disclosure of noninvesting activities          
Fair value adjustments for securities  $(309)  $(448)
Loans transferred to other real estate owned  $(83)  $- 
Transfer of securities from available for sale to held to maturity  $-   $(9,740)

 

See Notes to the Consolidated Financial Statements

 

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Cordia Bancorp

Notes to Consolidated Financial Statements

 

Note 1. Organization and Summary of Significant Accounting Policies

 

Organization

 

Cordia Bancorp Inc. (“Company” or “Cordia”) was incorporated in 2009 by a team of former bank CEOs, directors and advisors seeking to invest in undervalued community banks in the Mid-Atlantic and Southeast. The Company was approved as a bank holding company by the Board of Governors of the Federal Reserve in November 2010 and granted the authority to purchase a majority interest in Bank of Virginia (“Bank” or “BVA”) at that time.

 

On December 10, 2010, Cordia purchased $10.3 million of BVA’s common stock at a price of $7.60 per Bank share, resulting in the ownership of 59.8% of the outstanding shares. On August 28, 2012, Cordia purchased an additional $3.0 million of BVA common stock at a price of $3.60 per share.

 

On March 29, 2013, the Company completed a share exchange with the Bank resulting in the Bank becoming a wholly owned subsidiary of the Company. Under the terms of the Agreement and Plan of Share Exchange between the Company and the Bank, each outstanding share of the Bank’s common stock owned by persons other than the Company were exchanged for 0.664 of a share of the Company’s common stock. Shares of the Company’s stock are listed on the Nasdaq Stock Market under the symbol “BVA”. The Company has owned 100.0% of the Bank’s shares since the completion of the exchange.

 

On April 10, 2014, Cordia completed the sale of approximately 363 shares of Mandatorily Convertible, Noncumulative, Nonvoting, Perpetual Preferred Stock, Series A, $0.01 par value per share, to accredited investors at a purchase price of $42,500 per share for total gross proceeds of $15.4 million. The capital raise included investments by 100% of Cordia’s directors. The net proceeds of the offering are being used primarily to support the second phase of its organic growth strategy in BVA.

 

On June 25, 2014, upon stockholder approval, each share of Series A Preferred Stock mandatorily converted into 10,000 shares of Cordia’s common stock at a conversion price of $4.25 per share, for a total issuance of approximately 3,629,871 new shares of common stock, of which 2,229,434 are voting and 1,400,437 are nonvoting. The holders of the Series A Preferred Stock did not receive any dividends under the provisions of the stock purchase agreements.

 

Cordia’s principal business is the ownership of BVA. Because Cordia does not have any business activities separate from the operations of BVA, the information in this document regarding the business of Cordia reflects the activities of Cordia and BVA on a consolidated basis. References to “we” and “our” in this document refer to Cordia and BVA, collectively.

 

The Bank was organized under the laws of the Commonwealth of Virginia to engage in a general banking business serving the communities in and around the Richmond, Virginia metropolitan area. The Bank commenced regular operations on January 12, 2004, and is a member of the Federal Reserve System, Federal Deposit Insurance Corporation and the Federal Home Loan Bank of Atlanta. The Bank is subject to the regulations of the Federal Reserve System and the State Corporation Commission of Virginia. Consequently, it undergoes periodic examinations by these regulatory authorities.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include all accounts of the Company and the Bank. All material intercompany balances and transactions have been eliminated in consolidation.

 

Prior to the completion of the share exchange in March 2013, the non-controlling interest reflected the ownership interest of the minority shareholders of the Bank. Items of income and other comprehensive income applicable to Bank operations were allocated to the non-controlling interest account based on the ownership percentage of the minority shareholders. Subsequent to the exchange, the non-controlling interest is no longer reflected in the consolidated financial statements of the Company, as the Bank is a wholly-owned subsidiary.

 

43
 

 

Cordia Bancorp

Notes to Consolidated Financial Statements

 

Summary of Significant Accounting Policies

 

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The more significant of these policies are summarized below.

 

(a) Use of Estimates

 

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the valuation of other real estate owned, intangible assets, acquired loans with specific credit-related deterioration and fair value measurements.

 

(b) Cash and Cash Equivalents

 

For purposes of the statement of cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one day periods.

 

(c) Securities

 

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at estimated fair value. Other securities, such as Federal Reserve Bank stock and Federal Home Loan Bank stock, are carried at cost and are listed on the balance sheet as restricted securities.

 

In estimating other than temporary impairment losses management considers, (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) our ability to retain our investment for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (1) the Company intends to sell the security or (2) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more-than-likely that the Company will be required to sell the security before recovery, management must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income.

 

For equity securities carried at cost as restricted securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the investment until a recovery of value. Other-than-temporary impairment of an equity security results in a write-down that must be included in income. The Company regularly reviews each security for other-than-temporary impairment based on criteria that include the extent to which costs exceed market price, the duration of that market decline, the financial health of and specific prospects for the issuer, management’s best estimate of the present value of cash flows expected to be collected on these debt securities, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company would be required to sell the security before recovery. The Company adjusts amortization or accretion on each bond on a level yield basis monthly.

 

44
 

  

Cordia Bancorp

Notes to Consolidated Financial Statements

 

(d) Loans Held For Sale

  

Secondary market mortgage loans are designated as held for sale at the time of their origination. These loans are pre-sold with servicing released and the Company does not retain any interest after the loans are sold. These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government–sponsored enterprises (conforming loans). In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk. Loans held for sale are carried at the lower of cost or fair value. Gains on sales of loans are recognized at the loan closing date and are included in noninterest income. The company did not have any loans classified as held for sale as of December 31, 2014 or 2013.

 

(e) Loans

 

The Company grants commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by commercial loans throughout the greater Richmond, Virginia metropolitan area. The ability of the Bank’s debtors to honor their contracts is dependent upon numerous factors including the collateral performance, general economic conditions, as well as the underlying strength of borrowers and guarantors.

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses and net deferred fees and costs. Interest income is accrued on the unpaid principal balance. Loan origination and commitment fees and certain direct costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield. The Bank is amortizing these amounts on an effective interest method over the loan’s contractual life or to the pay-off date if the balance is repaid prior to maturity. Loans are recorded based on purpose, collateral and repayment period. Interest is calculated on a 365/360 for commercial loans and 365/365 for consumer loans. Interest is accrued on a daily basis.

 

The Company was licensed by the U.S. Department of Education as a rehabilitated student lender effective November 2012. In the first quarter of 2013, the Company began purchasing rehabilitated student loans guaranteed by the U.S. Department of Education. The guarantee covers approximately 98% of principal and accrued interest. The unguaranteed principal balance of these loans was approximately $1.3 million at December 31, 2014 and $1.1 million at December 31, 2013. The company ceased purchasing rehabilitated, federally guaranteed student loans in April 2014.

 

The past due status of a loan is based on the contractual due date of the most delinquent payment due. Each loan will be placed in one of the following categories: current, 1-29 days past due, 30-59 days past due, 60-89 days past due and 90 days and over past due. Generally, the accrual of interest on a loan is discontinued at the time the loan becomes 90 days delinquent unless the credit is well-secured or in process of collection or refinancing. Due to the guaranty by the U.S. Department of Education, Guaranteed Student Loans continue to accrue interest up until payment is received from the guarantor.

 

When a loan is placed on nonaccrual or charged off, all interest accrued but not collected is reversed against interest income. The interest on loans in nonaccrual status is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

In situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a troubled debt restructuring (TDR). Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance, re-amortization, and other actions intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal, management measures any impairment on the restructuring as noted below for impaired loans. There were four loans with an aggregate principal balance of $1.3 million classified as TDRs as of December 31, 2014, while there were five loans with an aggregate principal balance of $2.0 million classified as TDRs as of December 31, 2013.

 

Acquired loans with specific credit deterioration are accounted for by Cordia in accordance with FASB Accounting Standards Codification 310-30. Certain acquired loans, those for which specific credit-related deterioration, since origination, is identified, are recorded at fair value reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation about the timing and amount of cash flows to be collected. Acquired loans deemed impaired and considered collateral dependent, with the timing of the sale of loan collateral indeterminate, remain on non-accrual status and have no accretable yield.

 

45
 

  

Cordia Bancorp

Notes to Consolidated Financial Statements

 

The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the “nonaccretable difference,” and is not recorded. Any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized as interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of such cash flows. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses, while subsequent increases in cash flows may result in a reversal of post-acquisition provision for loan losses, or a transfer from nonaccretable difference to accretable yield.

 

(f) Allowance for Loan Losses

 

The allowance for loan losses (“ALLL”) is increased by charges to income and decreased by charge-offs, net of recoveries. The ALLL is established and maintained at a level management deems adequate to cover probable losses inherent in the portfolio as of the balance sheet date and is based on management’s evaluation of the risks in the loan portfolio and changes in the nature and volume of loan activity. There are risks inherent in all loans, so an ALLL is maintained for loans to absorb probable losses on existing loans that may become uncollectible. The ALLL is established and maintained as losses are estimated to have occurred through a provision for loan losses charged to earnings, which increases the balance of the ALLL. Loan losses for all segments are charged against the ALLL when management believes the uncollectability of a loan is confirmed, which decreases the balance of the ALLL. Subsequent recoveries, if any, are credited back to the ALLL.

 

The amount of the ALLL is established through the application of a standardized model, the components of which are: an impairment analysis of specific loans to determine the level of any specific reserves needed and an estimate of the general reserves needed which consists of a weighted average of historical loss experience and adjustments for economic and environmental factors.

 

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

 

In order for the ALLL methodology to be considered valid and for Management to make the determination if any deficiencies exist in the process, the Bank at a minimum requires:

 

  - A review of trends in loan volume, delinquencies, restructurings and concentrations;
  - Tests of source documents and underlying assumptions to determine that the established methodology develops reasonable loss estimates; and
  - An evaluation of the appraisal process of the underlying collateral which may be accomplished by periodically comparing the appraised value to the actual sales price on selected properties sold.
  - Accurate loan risk ratings

 

Note 4 includes an additional discussion of how the ALLL is quantified. The use of various estimates and judgments in the Bank’s ongoing evaluation of the required level of ALLL can significantly affect the Bank’s results of operations and financial condition and may result in either greater provisions against earnings to increase the ALLL or reduced provisions based upon management’s current view of portfolio and economic conditions and the application of revised estimates and assumptions.

 

The specific component of the ALLL relates to loans that are classified as either doubtful, substandard or TDR. For such loans that are also classified as impaired, a loan level allowance is established. The evaluation of the need for a specific reserve involves the identification of impaired loans and an analysis of those loans’ repayment capacity from both primary (cash flow) and secondary (real estate and non-real estate collateral or guarantors) sources and making specific reserve allocations to impaired loans that exhibit inherent weaknesses and various other elevated credit risk factors. All available collateral is analyzed and valued, with discounts applied according to the age of any real estate appraisals or the liquidity of other asset classes. The analysis is compared to the aggregate Bank loan exposure, giving consideration to the Bank’s lien preference and other actual and contingent obligations of the borrower. Any loan guarantors are rated and their value weighted based on an analysis of the guarantor’s net worth, including liabilities, liquid assets, and annual cash flows and total contingent liabilities.

 

46
 

  

Cordia Bancorp

Notes to Consolidated Financial Statements

 

A loan is considered impaired when it is probable that the Bank will be unable to collect all amounts when due according to the contractual terms of the loan agreement. We do not consider a loan impaired during a period of insignificant delay in payment if we expect the ultimate collection of all amounts due. Impairment is measured as the difference between the recorded investment in the loan and the evaluation of the present value of expected future cash flows or the observable market price of the loan or collateral value of the impaired loan when that cash flow or collateral value is lower than the carrying value of that loan. Loans that are collateral dependent, that is, loans where repayment is expected to be provided solely by the underlying collateral, and for which management has determined foreclosure is probable, are measured for impairment based on the fair value of the collateral as described above.

 

The general component covers pass rated loans and special mention loans and is based on historical loss experience adjusted for qualitative factors.

 

The model estimates probable loan losses by analyzing historical loss experience and other trends within the portfolio, including trends in delinquencies and charge-offs, the opinions of regulators, changes in the growth rate, size and composition of the loan portfolio, particularly the level of Special Mention rated loans, the level of past due loans, the level of home equity loans and commercial real estate loans in aggregate and as a percentage of capital, and industry information.

 

A component of the general reserve for unimpaired loans is established based on a weighted average historical loss factor for the prior twelve quarters (with more weight given to the more recent quarters) and the level of unimpaired loans. Management applies a 45% weighting to the most recent four quarters, a 35% weighting to the next four quarters and a 20% weighting to the most distant four of the prior twelve quarters when calculating this component of the general reserve.

 

Also included in management’s estimates for loan losses are considerations with respect to the impact of local and national economic trends, the outcomes of which are uncertain. These events may include, but are not limited to, a general slowdown in the national or local economy, national and local unemployment rates, local real estate values, fluctuations in overall lending rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting the specific geographic area in which the Bank conducts business.

 

(g) Premises and Equipment

 

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the assets' estimated useful lives. Estimated useful lives range from 10 to 30 years for buildings and 3 to 10 years for autos, furniture, fixtures and equipment. The value of land is carried at cost.

 

(h) Other Real Estate Owned

 

Assets acquired through loan foreclosure are held for sale. They are initially recorded at fair market value at the date of foreclosure, less estimated selling costs thus establishing a new cost basis. Subsequent to foreclosure, valuations of the assets are periodically performed by management. Adjustments are made to the lower of the carrying amount or fair market value of the assets less selling costs. Revenue and expenses from operations and sales are included in other real estate expenses, net in the statement of operations. The Bank’s investment in foreclosed assets totaled $1.6 million and $1.5 million at December 31, 2014 and 2013, respectively.

 

(i) Goodwill and Other Intangibles

 

FASB ASC 805, Business Combinations, requires that the acquisition method of accounting be used for all business combinations. With acquisitions, the Company is required to record assets acquired, including any intangible assets, and liabilities assumed at fair value, which involves relying on estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation methods. The Company records goodwill per ASC 350, Intangibles-Goodwill and Others. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value-based test. Additionally, under ASC 350, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the assets can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful lives. Goodwill was determined to be impaired in December 2011 at the annual impairment evaluation and was written off in its entirely at that time. Core deposit intangibles of $104 thousand and $139 thousand are included in other assets at December 31, 2014 and 2013, respectively.

 

47
 

  

Cordia Bancorp

Notes to Consolidated Financial Statements

 

(j) Income Taxes

 

Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss carryforwards, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences.

 

Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, the recognition of the asset is less than probable. A valuation allowance has been recorded against the Company’s entire net deferred tax asset.

 

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the positions taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is recognized as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. As of December 31, 2014 and 2013, the Company had recorded no such liability.

  

Banks operating in Virginia are not subject to Virginia State Income Tax, but are subjected to Virginia Bank Franchise Taxes.

 

(k) Marketing Costs

 

The Company follows the policy of charging the production costs of marketing/advertising to expense as incurred unless the advertising campaign extends for a significant time period, in which case, such costs will be amortized to expense over the duration of the advertising campaign.

 

(l) Comprehensive Income (Loss)

 

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income (loss), are components of comprehensive income (loss).

 

(m) Earnings Per Share

 

Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. 

 

Options to purchase 145 thousand shares of the Company’s common stock were not included in the computation of earnings per share in 2014 because the effect would have been anti-dilutive due to the loss. Options to purchase 116 thousand shares of the Company’s common stock were not included in the computation of earnings per share in 2013 because the share awards exercise prices exceeded the average market price of the Company’s common stock for the period and, therefore, the effect would have been anti-dilutive.

 

For the years ended December 31, 2014 and 2013, 578,125 shares of unvested common stock were excluded from the computation of basic and diluted earnings per common share as they are performance based and deemed unlikely to vest. All other vested and nonvested restricted common shares, which carry all rights and privilege of a stockholder with respect to the stock, including the right to vote, were included in both the basic and diluted earnings per common share calculations.

 

48
 

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

The calculation for basic and diluted earnings per common share for the years ended December 31, are as follows:

 

(dollars in thousands)  2014   2013 
         
Net income (loss) attributable to Company  $(412)  $696 
           
Weighted average basic shares outstanding   4,675,468    2,602,357 
           
Basic income (loss) per common share  $(0.09)  $0.27 
           
Weighted average dilutive shares outstanding   4,675,468    2,615,387 
           
Diluted income (loss) per common share  $(0.09)  $0.27 

 

(n) Stock Option Plan

 

Authoritative accounting guidance requires the costs resulting from all share-based payments to employees be recognized in the financial statements. For stock option grants, stock-based compensation is estimated at the date of grant, using the Black-Scholes option valuation model for determining fair value. Restricted stock grants are expensed based on the grant date fair value of the Company’s common stock. The Company recognized stock-based compensation expense of $270 thousand and $99 thousand in 2014 and 2013, respectively.

 

 (o) Fair Value Measurements

 

Fair values of financial instruments are estimated using relevant market information and other assumptions as more fully disclosed in Note 14. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or market conditions could significantly affect the estimates.

 

(p) Transfer of Assets

 

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when 1) the assets have been isolated from the Company – put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership; 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets; and 3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity of the ability to unilaterally cause the holder to return specified assets.

 

 (q) Reclassification

 

In certain circumstances, reclassifications have been made to prior period information to conform to the 2014 presentation. Such reclassifications had no effect on previously reported stockholders’ equity or net income or loss.

 

49
 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

Recent Accounting Pronouncements

 

In January 2014, the FASB issued ASU 2014-01, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-01 to have a material impact on its consolidated financial statements.

 

In January 2014, the FASB issued ASU 2014-04, “Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company does not expect the adoption of ASU 2014-04 to have a material impact on its consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The amendments in this ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results and include disposals of a major geographic area, a major line of business, or a major equity method investment. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. Additionally, the new guidance requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-08 to have a material impact on its consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606.” This ASU applies to any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition, most industry-specific guidance, and some cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts.” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To be in alignment with the core principle, an entity must apply a five step process including: identification of the contract(s) with a customer, identification of performance obligations in the contract(s), determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue when (or as) the entity satisfies a performance obligation. Additionally, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer have also been amended to be consistent with the guidance on recognition and measurement. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements.

 

50
 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.” This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period beginning after December 15, 2014; however, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is not permitted. The Company does not expect the adoption of ASU 2014-11 to have a material impact on its consolidated financial statements.

 

In June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The new guidance applies to reporting entities that grant employees share-based payments in which the terms of the award allow a performance target to be achieved after the requisite service period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Existing guidance in “Compensation – Stock Compensation (Topic 718),” should be applied to account for these types of awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted and reporting entities may choose to apply the amendments in the ASU either on a prospective or retrospective basis. The Company does not expect the adoption of ASU 2014-12 to have a material impact on its consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-14, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure.” The amendments in this ASU apply to creditors that hold government-guaranteed mortgage loans and are intended to eliminate the diversity in practice related to the classification of these guaranteed loans upon foreclosure. The new guidance stipulates that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if (1) the loan has a government guarantee that is not separable from the loan prior to foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. Upon foreclosure, the other receivable should be measured on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2014. Entities may adopt the amendments on a prospective basis or modified retrospective basis as of the beginning of the annual period of adoption; however, the entity must apply the same method of transition as elected under ASU 2014-04. Early adoption is permitted provided the entity has already adopted ASU 2014-04. The Company does not expect the adoption of ASU 2014-14 to have a material impact on its consolidated financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” This update is intended to provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Management is required under the new guidance to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued when preparing financial statements for each interim and annual reporting period. If conditions or events are identified, the ASU specifies the process that must be followed by management and also clarifies the timing and content of going concern footnote disclosures in order to reduce diversity in practice. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-15 to have a material impact on its consolidated financial statements.

 

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Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

In November 2014, the FASB issued ASU No. 2014-16, “Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity.” The amendments in ASU do not change the current criteria in U.S. GAAP for determining when separation of certain embedded derivative features in a hybrid financial instrument is required. The amendments clarify how current U.S. GAAP should be interpreted in evaluating the economic characteristics and risks of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically, the amendments clarify that an entity should consider all relevant terms and features, including the embedded derivative feature being evaluated for bifurcation, in evaluating the nature of the host contract. Furthermore, the amendments clarify that no single term or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument. The amendments in this ASU also clarify that, in evaluating the nature of a host contract, an entity should assess the substance of the relevant terms and features (i.e., the relative strength of the debt-like or equity-like terms and features given the facts and circumstances) when considering how to weight those terms and features. The amendments in this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption, including adoption in an interim period, is permitted. The Company does not expect the adoption of ASU 2014-16 to have a material impact on its consolidated financial statements.

 

In November 2014, the FASB issued ASU No. 2014-17, “Business Combinations (Topic 805): Pushdown Accounting.” The amendments in ASU provide an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change-in-control event occurs. An acquired entity should determine whether to elect to apply pushdown accounting for each individual change-in-control event in which an acquirer obtains control of the acquired entity. If pushdown accounting is not applied in the reporting period in which the change-in-control event occurs, an acquired entity will have the option to elect to apply pushdown accounting in a subsequent reporting period to the acquired entity’s most recent change-in-control event. An election to apply pushdown accounting in a reporting period after the reporting period in which the change-in-control event occurred should be considered a change in accounting principle in accordance with Topic 250, Accounting Changes and Error Corrections. If pushdown accounting is applied to an individual change-in-control event, that election is irrevocable. The amendments in this ASU are effective on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event. However, if the financial statements for the period in which the most recent change-in-control event occurred already have been issued or made available to be issued, the application of this guidance would be a change in accounting principle. The Company does not expect the adoption of ASU 2014-17 to have a material impact on its consolidated financial statements.

 

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The amendments in this ASU eliminate from U.S. GAAP the concept of extraordinary items. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company does not expect the adoption of ASU 2015-01 to have a material impact on its consolidated financial statements.

 

Note 2. Business Combination

 

On December 10, 2010, the Company purchased 1,355,263 newly issued shares of the common stock of the Bank of Virginia (“BVA”), which gave it a 59.8% ownership interest. In accordance with ASC 805-10, this transaction was considered a business combination. Under the acquisition method of accounting, the assets and liabilities of the Bank were marked to fair value and goodwill was recorded for the excess of consideration paid over net fair value received. Based on the consideration paid and the fair value of the assets received and the liabilities assumed, goodwill of $5.9 million was recorded. Goodwill was determined to be impaired in its entirety during the fourth quarter of 2011. In addition to goodwill, other assets and liabilities of the Bank of Virginia were marked to their respective fair value as of December 10, 2010.

 

Estimated fair values differed substantially in some cases from the carrying amounts of the assets and liabilities reflected in the financial statements of BVA which, in most cases were valued at historical cost. Subsequent to that date, the fair value adjustments were amortized over the expected life of the related asset or liability or otherwise adjusted as required by generally accepted accounting principles (“GAAP”).

 

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Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

Interest income is impacted by the accretion of the fair value discount on the loan portfolio as well as the accretion of the accretable discount on loans acquired with deteriorated credit quality. Interest income is also impacted by the accretion on the investment securities that is the result of the reset of the amortized book value amount to the fair value as of the day of the acquisition. Interest expense is impacted by the amortization of the premiums on time deposits and the FHLB advances. Net interest income is impacted by the combination of all of these items.

 

Non-interest expense is impacted by a rent adjustment related to certain lease commitments being above market as of the day of the investment; and amortization of the core deposit intangible.

 

On March 29, 2013, the minority shareholders of BVA exchanged their common shares in the Bank for common shares of Cordia. For each share of BVA exchanged, 0.664 shares of Cordia were received. In connection with the exchange, BVA became a wholly-owned subsidiary of Cordia.

 

In addition, the increased ownership percentage of BVA by Cordia has impacted the accounting of both entities. All of Cordia’s acquisition accounting adjustments are now recorded in the BVA financial statements and the Cordia financial statements no longer reflect adjustments for non-controlling interests.

 

The accretion (amortization) of the acquisition accounting adjustments had the following impact on the financial statements:

 

   Income (Expense) 
   December 31, 
(dollars in thousands)  2014   2013 
Loans  $