Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Cordia Bancorp IncFinancial_Report.xls
EX-31.2 - EXHIBIT 31.2 - Cordia Bancorp Incv408286_ex31-2.htm
EX-32 - EXHIBIT 32 - Cordia Bancorp Incv408286_ex32.htm
EX-31.1 - EXHIBIT 31.1 - Cordia Bancorp Incv408286_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended March 31, 2015

 

Commission File No. 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)

 

(804) 763-1336

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

 

YES x                          NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

YES x                          NO o

 

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

 

Large accelerated filer     o              Accelerated filer o      Smaller reporting company x

 

Non-accelerated filer     o  (Do not check if a smaller reporting company)

 

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

 

As of April 29, 2015, there were 6,584,106 shares of common stock outstanding.

 

 
 

 

    Page
PART I
     
Financial Information  
     
Item 1. Condensed Consolidated Financial Statements 1
  Condensed Consolidated Balance Sheets 1
  Condensed Consolidated Statements of Operations 2
  Condensed Consolidated Statements of Comprehensive Income (Loss) 3
  Condensed Consolidated Statements of Cash Flows 4
  Notes to Condensed Consolidated Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 51
     
Item 4. Controls and Procedures 51
     
PART II
     
Other Information    
     
Item 1. Legal Proceedings 52
Item 1A. Risk Factors 52
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 52
Item 3. Defaults Upon Senior Securities 52
Item 4. Mine Safety Disclosures 52
Item 5. Other Information 52
Item 6. Exhibits 52
     
Signatures   53

 

i
 

  

Item 1. Condensed Consolidated Financial Statements

 

Cordia Bancorp

Condensed Consolidated Balance Sheets

 

   (Unaudited)     
(dollars in thousands, except per share data)  March 31,
2015
   December 31,
2014
 
Assets          
Cash and due from banks  $9,602   $5,484 
Federal funds sold and interest-bearing deposits with banks   23,495    16,363 
Total cash and cash equivalents   33,097    21,847 
Securities available for sale, at fair market value   41,411    53,483 
Securities held to maturity, at cost (fair value $20,647 and $21,047 at March 31, 2015 and December 31, 2014, respectively)   20,132    20,716 
Restricted securities   2,405    2,092 
Loans held for sale   117    - 
Loans net of allowance for loan losses of $1,102 and $1,089, at March 31, 2015 and December 31, 2014, respectively   218,651    211,870 
Premises and equipment, net   4,402    4,432 
Accrued interest receivable   1,986    2,040 
Other real estate owned, net of valuation allowance   1,647    1,641 
Other assets   696    479 
Total assets  $324,544   $318,600 
           
Liabilities and stockholders' equity          
Deposits          
Non-interest bearing  $27,628   $30,709 
Savings and interest-bearing demand   83,077    83,339 
Time deposits   154,920    151,555 
Total deposits   265,625    265,603 
Accrued expenses and other liabilities   1,061    861 
FHLB borrowings   30,000    25,000 
Total liabilities   296,686    291,464 
           
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, 5,183,669 and 5,103,669 shares outstanding  (includes 131,800 and 52,580 of nonvested shares) at March 31, 2015 and December 31, 2014,  respectively   51    51 
Nonvoting common stock - 5,000,000 shares authorized, $0.01 par value, 1,400,437 shares outstanding at March 31, 2015 and December 31, 2014   14    14 
Additional paid-in capital   33,011    32,956 
Retained deficit   (5,066)   (5,417)
Accumulated other comprehensive loss   (152)   (468)
Total stockholders' equity   27,858    27,136 
Total liabilities and stockholders' equity  $324,544   $318,600 

 

See Notes to the Condensed Consolidated Financial Statements

 

1
 

  

Cordia Bancorp

Condensed Consolidated Statements of Operations

(Unaudited)

 

   Three months ended March 31, 
(dollars in thousands, except per share data)  2015   2014 
Interest income          
Interest and fees on loans  $2,183   $2,149 
Investment securities   363    207 
Federal funds sold and deposits with banks   7    6 
Total interest income   2,553    2,362 
Interest expense          
Interest on deposits   454    426 
Interest on FHLB borrowings   89    41 
Total interest expense   543    467 
Net interest income   2,010    1,895 
(Recovery of) provision for loan losses   (340)   20 
Net interest income after (recovery of) provision for loan losses   2,350    1,875 
Non-interest income          
Service charges on deposit accounts   30    26 
Net gain on sale of available for sale securities   114    64 
Other income   69    33 
Total non-interest income   213    123 
Non-interest expense          
Salaries and employee benefits   1,280    1,406 
Professional services   84    106 
Occupancy   153    151 
Data processing and communications   198    142 
FDIC assessment and bank fees   90    94 
Bank franchise taxes   49    29 
Student loan sevicing fees and other loan expenses   146    126 
Other real estate expenses, net   6    5 
Supplies and equipment   73    75 
Insurance   20    41 
Director's fees   26    16 
Marketing and business development   18    6 
Other   69    85 
Total non-interest expense   2,212    2,282 
Net income (loss) before income taxes   351    (284)
Income taxes   -    - 
Net income (loss)  $351   $(284)
           
Basic net income (loss) per common share  $0.05   $(0.10)
Diluted net income (loss) per common share  $0.05   $(0.10)
Weighted average common shares outstanding, basic   6,559,217    2,788,302 
Weighted average common shares outstanding, diluted   6,559,217    2,788,302 

 

See Notes to the Condensed Consolidated Financial Statements

 

2
 

 

Cordia Bancorp

Condensed Consolidated Statement of Comprehensive Income (Loss)

(Unaudited)

 

   Three Months Ended March 31, 
(dollars in thousands)  2015   2014 
Net income (loss)  $351   $(284)
           
Other comprehensive income (loss)          
Unrealized securities gains (losses) arising during peiriod   418    51 
Less:  Reclassification adjustment for net securities gains included in net income   (114)   (64)
Add:  Amortization of unrealized losses for securities transferred from available for sale to held to maturity   12    12 
Total other comprehensive income (loss)   316    (1)
           
Comprehensive income (loss)  $667   $(285)

 

See Notes to the Condensed Consolidated Financial Statements

 

3
 

 

Cordia Bancorp

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Three Months Ended March 31, 
(dollars in thousands)  2015   2014 
Cash flows from operating activities:          
Net income (loss)  $351   $(284)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities          
Net amortization of premium on investment securities   113    71 
Purchase accounting accretion, net   (38)   (108)
Depreciation   74    70 
Amortization of deferred loan costs and fees   83    40 
(Recovery of) provision for loan losses   (340)   20 
Gain on available for securities   (114)   (64)
Other real estate owned valuation adjustment   -    2 
Stock based compensation   55    24 
Loans held for sale          
Originations   (1,374)   - 
Proceeds   1,278    - 
Gain on sale   (21)   - 
Changes in assets and liabilities:          
Decrease (increase) in accrued interest receivable   54    (522)
Increase in other assets   (226)   (118)
Decrease in accrued expenses and other liabilities   224    11,179 
Net cash (used in) provided by operating activities   119    10,310 
Cash flows from investing activities:          
Purchase of securities available for sale   (3,080)   (7,910)
(Purchase) redemptions of restricted securities, net   (313)   (455)
Proceeds from sales, maturities, and paydowns of securities available for sale   15,481    8,005 
Proceeds from payments/maturities of securities held to maturity   572    253 
Net increase in commercial and consumer loans   (10,132)   (5,421)
Net decrease (increase) in purchased guaranteed student loans   3,629    (25,608)
Improvements to other real estate owned   (6)   - 
Purchase of premises and equipment   (42)   (34)
Net cash provided by (used in) investing activities   6,109    (31,170)
Cash flows from financing activities:          
Net (decrease) increase in demand savings, interest-bearing checking and money market deposits   (3,343)   12,937 
Net increase in time deposits   3,365    11,277 
Proceeds from FHLB advances   5,000    10,000 
Net cash provided by investing activities   5,022    34,214 
Net increase in cash and cash equivalents   11,250    13,354 
Cash and cash equivalents, beginning of period   21,847    13,984 
Cash and cash equivalents, end of period  $33,097   $27,338 
Supplemental disclosure of cash flow information          
Cash payments for interest  $525   $466 
Supplemental disclosure of noninvesting activities          
Unrealized gains (losses) on securities available for sale  $304   $(13)
Amortization of unrealized losses transferred to held to maturity  $12   $12 

 

See Notes to the Condensed Consolidated Financial Statements

 

4
 

  

Cordia Bancorp

Notes to Condensed 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, 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.

 

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.

 

Basis of Presentation

 

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and prevailing practices within the financial services industry for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2015. In the opinion of management, all adjustments (comprising only normal recurring accruals) necessary for a fair presentation of the results of the interim periods have been included.

 

These statements should be read in conjunction with the financial statements and accompanying notes included in the Company’s 2014 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 25, 2015.

 

5
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

Principles of Consolidation

 

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

 

Summary of Significant Accounting Policies

 

We provide a summary of our significant accounting policies in our 2014 Form 10-K under “Note 1 – Organization and Summary of Significant Accounting Policies”. There have been no significant changes to these policies during 2015.

 

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 adoption of the new guidance did not have a material impact on the Company’s 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 adoption of the new guidance did not have a material impact on the Company’s 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. In April 2015, the FASB voted in favor of a one year deferral of the effective date of this amendment. An exposure draft is expected with a 30 day comment period. The Company is currently assessing the impact that ASU 2014-09 will have on its (consolidated) financial statements.

 

6
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

In June 2014, the FASB issued ASU 2014-10, “Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation.” The amendments in this ASU remove all incremental financial reporting requirements from U.S. GAAP for development stage entities, including the removal of Topic 915, “Development Stage Entities,” from the FASB Accounting Standards Codification. In addition, this ASU adds an example disclosure and removes an exception provided to development stage entities in Topic 810, “Consolidation,” for determining whether an entity is a variable interest entity. The presentation and disclosure requirements in Topic 915 will no longer be required for the first annual period beginning after December 15, 2014. The revised consolidation standards are effective for annual periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-10 to have a material impact on its consolidated financial statements.

 

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 adoption of the new guidance did not have a material impact on the Company’s 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 is currently assessing the impact that ASU 2014-12 will have 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 adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

 

7
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

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.

 

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 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.

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU are intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB Accounting Standards Codification™ and improves current GAAP by placing more emphasis on risk of loss when determining a controlling financial interest, reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity (VIE), and changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or VIEs. 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 is permitted, including adoption in an interim period. ASU 2015-02 may be applied retrospectively in previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. The Company does not expect the adoption of ASU 2015-02 to have a material impact on its consolidated financial statements.

 

8
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The Company does not expect the adoption of ASU 2015-03 to have a material impact on its consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The amendments in this ASU provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The amendments do not change the accounting for a customer’s accounting for service contracts. As a result of the amendments, all software licenses within the scope of Subtopic 350-40 will be accounted for consistent with other licenses of intangible assets. The amendments in this ASU are effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. An entity can elect to adopt the amendments either: (1) prospectively to all arrangements entered into or materially modified after the effective date; or (2) retrospectively. The Company is currently assessing the impact that ASU 2015-05 will have 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”).

 

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.

 

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 purchase accounting adjustments are now recorded in the BVA financial statements and the Cordia financial statements no longer reflect adjustments for non-controlling interests.

 

9
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

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

 

   Three Months Ended March 31, 
(dollars in thousands)  2015   2014 
Loans  $21   $91 
Premises and equipment   2    2 
Core deposit intangible   (9)   (9)
Building lease obligations   24    24 
Net impact to net income  $38   $108 

 

Note 3.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 144 thousand shares of the Company’s common stock (100% of the stock options outstanding) were not included in the computation of earnings per share for the 2015 period because the share awards exercise prices exceeded the average market price of the Company’s common stock and, therefore, the effect would have been anti-dilutive. Options to purchase 116 thousand shares of the Company’s common stock (100% of the options outstanding) were not included in the computation of earnings per share for the 2014 period because the share award exercise prices exceeded the average market price of the Company’s common stock during all periods presented and, therefore, the effect would have been anti-dilutive. The three month loss for 2014 also creates an anti-dilutive effect.

 

For the periods ended March 31, 2015 and 2014, 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 not deemed “more likely than not” to vest. All other vested and non-vested 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 the basic and diluted per common share calculations.

 

The calculation for basic and diluted earnings per common share for the periods ended March 31, 2015 and 2014 are as follows:

 

Three months ended March 31, 2015 and 2014:        
         
(dollars in thousands)  2015   2014 
         
Net income (loss) attributable to Company  $351   $(284)
           
Weighted average common shares outstanding, basic   6,559,217    2,788,302 
           
Dilutive effect of stock options   -    - 
           
Weighted average common shares outstanding, diluted   6,559,217    2,788,302 
           
Basic income (loss) per common share  $0.05   $(0.10)
           
Diluted income (loss) per common share  $0.05   $(0.10)

 

10
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

Note 4.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. We classify securities as available for sale or held to maturity based on our investment strategy and management’s assessment of our intent and ability to hold the securities until maturity. The total securities portfolio (excluding restricted securities) was $61.5 million at March 31, 2015 as compared to $74.2 million at December 31, 2014. At March 31, 2015, the securities portfolio consisted of $41.4 million of securities available for sale, at fair value and $20.1 million of securities held to maturity, at amortized cost.

 

The table below presents the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale at March 31, 2015 and December 31, 2014.

 

   March 31, 2015 
       Gross Unrealized     
(dollars in thousands)  Amortized Cost   Gains   Losses   Fair Value 
U.S. Government agencies  $3,448   $12   $(13)  $3,447 
Agency guaranteed mortgage-backed securities   37,840    185    (61)   37,964 
Total  $41,288   $197   $(74)  $41,411 

 

   December 31, 2014 
       Gross Unrealized     
(dollars in thousands)  Amortized Cost   Gains   Losses   Fair Value 
U.S. Government agencies  $3,735   $1   $(17)  $3,719 
Agency guaranteed mortgage-backed securities   49,930    21    (187)   49,764 
Total  $53,665   $22   $(204)  $53,483 

  

The table below presents the carry value, gross unrealized gains and losses, and fair value of securities held to maturity at March 31, 2015 and December 31, 2014.

 

   March 31, 2015 
       Gross Unrealized     
(dollars in thousands)  Carry Value   Gains   Losses   Fair Value 
Agency guaranteed mortgage-backed securities  $20,132   $515   $-   $20,647 
Total  $20,132   $515   $-   $20,647 

 

   December 31, 2014 
       Gross Unrealized     
(dollars in thousands)  Carry Value   Gains   Losses   Fair Value 
Agency guaranteed mortgage-backed securities  $20,716   $333   $(2)  $21,047 
Total  $20,716   $333   $(2)  $21,047 

 

11
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

The amortized cost and fair value of securities available for sale as of March 31, 2015, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties. They are as follows:

 

(Dollars in thousands)  Amortized
Cost
   Fair Value 
Over one year within five years  $1,026   $1,034 
Over five years within ten years   2,678    2,671 
Over ten years   37,584    37,706 
Total  $41,288   $41,411 

 

The carry value and fair value of securities held to maturity as of March 31, 2015, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties. They are as follows:

 

(Dollars in thousands)  Carry
Value
   Fair Value 
Over five years within ten years  $3,680   $3,872 
Over ten years   16,452    16,775 
Total  $20,132   $20,647 

 

As of March 31, 2015, the portfolio is concentrated in average maturities of over ten years, although a substantial majority of recently purchased securities have effective duration much shorter than ten years. The portfolio is available to support liquidity needs of the Company. During the three months ended March 31, 2015, the Company sold $13.1 million available for sale securities and recognized gross gains of $114 thousand in noninterest income. During the three months ended March 31, 2014, the Company sold $7.1 million available for sale securities and recognized a gross gain of $64 thousand in noninterest income.

 

Unrealized losses on investments at March 31, 2015 and December 31, 2014 were as follows:

 

   March 31, 2015 
   Less than 12 Months   12 Months or Longer   Total 
             
(dollars in thousands)  Fair Value   Unrealized Losses   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
U.S. Government agencies  $-   $-   $1,661   $(13)  $1,661   $(13)
Agency guaranteed mortgage-backed securities   9,559    (61)   -    -    9,559    (61)
Total  $9,559   $(61)  $1,661   $(13)  $11,220   $(74)

 

   December 31, 2014 
     
(dollars in thousands)  Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
U.S. Government agencies  $-   $-   $2,689   $(17)  $2,689   $(17)
Agency guaranteed mortgage-backed securities   43,406    (161)   1,904    (28)   45,310    (189)
Total  $43,406   $(161)  $4,593   $(45)  $47,999   $(206)

 

12
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

  

As of March 31, 2015, there were one U.S. Government agency securities and four agency guaranteed mortgage-backed securities with unrealized losses totaling $74 thousand. As of December 31, 2014, there were two U.S. Government agency securities and 35 agency guaranteed mortgage-backed securities with unrealized losses totaling $206 thousand. All of the unrealized losses are attributable to increases in interest rates and not to credit deterioration. Currently, the Company believes that it is probable that it will be able to collect all amounts due according to the contractual terms of the investments. Because the decline in market value is attributable to changes in interest rates and not to credit quality and because it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2015.

 

Six and four investment securities with combined market values of $12.0 million and $7.8 million were pledged to secure public funds with the State of Virginia at March 31, 2015 and December 31, 2014, respectively. We had $14.5 million in eight securities and $9.6 million in six securities pledged to secure FHLB advances at March 31, 2015 and December 31, 2014, respectively.

  

Note 5.Loans, Allowance for Loan Losses and Credit Quality

 

Loans by Loan Class

 

The Bank categorizes its loan receivables into four main categories which are commercial real estate loans, commercial and industrial loans, guaranteed student loans, and consumer loans. Each category of loan has a different level of credit risk. Real estate loans are generally safer than loans secured by other assets because the value of the underlying collateral is generally ascertainable and does not fluctuate as much as other assets. Owner occupied commercial real estate loans are generally the least risky type of commercial real estate loan. Non owner occupied commercial real estate loans and construction and development loans contain more risk. Commercial loans, which can be secured by real estate or other assets, or which can be unsecured, are generally more risky than commercial real estate loans. Guaranteed student loans are guaranteed by the U.S. Department of Education for approximately 98% of the principal and interest. Consumer loans may be secured by residential real estate, automobiles or other assets or may be unsecured. Those secured by residential real estate are the least risky and those that are unsecured are the most risky type of consumer loans. Any type of loan which is unsecured is generally more risky than a secured loan due to the higher risk of loss in the event of a default. These levels of risk are general in nature, and many factors including the creditworthiness of the borrower or the particular nature of the secured asset may cause any type of loan to be more or less risky than another. In the commercial real estate category of the loan portfolio the segments are acquisition-development-construction, non-owner occupied and owner occupied. In the consumer category of the loan portfolio the segments are residential real estate, home equity lines of credit and other. Management has not further divided its eight segments into classes. This provides management and the Board with sufficient information to evaluate the risks within the Bank’s portfolio.

 

13
 

  

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

The following table exhibits loans by sub-segment at March 31, 2015 and December 31, 2014.

 

(dollars in thousands)  March 31, 2015   December 31, 2014 
Commercial Real Estate:          
Acquisition, development and construction  $2,083   $2,159 
Non-owner occupied   58,323    51,512 
Owner occupied   49,328    49,582 
Commercial and industrial   24,057    24,153 
Guaranteed student loans   61,441    64,870 
Consumer:          
Residential mortgage   11,563    8,377 
HELOC   11,158    11,074 
Other   1,800    1,232 
Total loans   219,753    212,959 
Allowance for loan losses   (1,102)   (1,089)
Total loans, net of allowance for loan losses  $218,651   $211,870 

 

Included in the loan balances above are net deferred loan costs of $1.3 million and $1.2 million at March 31, 2015 and December 31, 2014, respectively. Also included in the loan balances above are premiums related to guaranteed student loans of $905 thousand at March 31, 2015 and $931 thousand at December 31, 2014.

 

Loans Acquired with Evidence of Deterioration in Credit Quality

 

Acquired in the acquisition of Bank of Virginia and included in the table above, are purchased performing loans and loans acquired with evidence of deterioration in credit quality. The purchased performing loans are $8.8 million and $9.0 million at March 31, 2015 and December 31, 2014, respectively. As these loans are re-underwritten, they are removed from the “purchase” classification. The loans acquired with evidence of deterioration in credit quality are accounted for under the guidance ASC 310-30 “Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality.” Information related to these loans is as follows:

 

(dollars in thousands)  March 31, 2015   December 31, 2014 
Contract principal balance  $6,179   $7,178 
Accretable yield   (38)   (42)
Nonaccretable difference   (5)   (5)
Carrying value of loans  $6,136   $7,131 

 

A discount is applied to these loans such that the carrying amount approximates the cash flows expected to be received from the borrower or from the liquidation of collateral. Due to a high level of uncertainty regarding the timing and amount of these cash flows in December 2010, Management initially considered the entire discount to be nonaccretable. However, due to improvement in the status of some credits, the majority of the discount was subsequently transferred to accretable and is amortized as a yield adjustment over the lives of the individual loans. Cash flows received on loans with a nonaccretable discount are applied on a cost recovery method, whereby payments are applied first to the loan balance. When the loan balance is fully recovered, payments are then applied to income. Any future reductions in carrying value as a result of deteriorating credit quality require an allowance for loan losses (“ALLL”) related to these loans.

 

14
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

  

A summary of changes to the accretable yield and nonaccretable differences during the three months ended March 31, 2015 and 2014 is as follows:

 

   2015   2014 
(dollars in thousands)  Accretable
Yield
   Nonaccretable
Difference
   Accretable
Yield
   Nonaccretable
Difference
 
Beginning balance  $42   $5   $62   $61 
Charge-offs related to loans covered by ASC 310-30   -    -    -    - 
Transfers   -    -    -    - 
Accretion   (4)        (5)   - 
Ending balance  $38   $5   $57   $61 

 

Credit Quality Indicators

 

Credit risk ratings reflect the current risk of default and/or loss for a given asset. The risk of loss is driven by factors intrinsic to the borrower and the unique structural characteristics of the loan. The credit risk rating begins with an analysis of the borrower’s credit history, ability to repay the debt as agreed, use of proceeds, and the value and stability of the value of the collateral securing the loan. The attributes ordinarily considered when reviewing a borrower are as follows:

 

· industry/industry segment; · financial flexibility/debt capacity;
· position within industry; · management and controls; and
· earnings, liquidity and operating cash flow trends; · quality of financial reporting.
· asset and liability values;    

 

The unique structural characteristics ordinarily considered when reviewing a loan are as follows:

 

·credit terms/loan documentation;
·guaranty/third party support;
·collateral; and
·loan maturity.

 

15
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

  

On a quarterly basis, the process of estimating the ALLL begins with management’s review of the risk rating assigned to individual credits. Through this process, loans adversely risk rated are evaluated for impairment based on ASC 310-40. The following is a summary of the risk rating definitions the Company uses to assign a risk grade to each loan within the portfolio:

 

Grade 1 - Highest Quality Loans to persons and businesses with unquestionable financial strength and character that carry extremely low probabilities of default. Balance sheets and cash flow are extremely strong relative to the magnitude of debt. This rating would be analogous to the highest investment grade ratings.   
   
Grade 2 - Above Average Quality    Loans to persons and business entities with unquestioned character that carry low probabilities of default. Borrowers have strong, stable earnings and financial condition.
   
Grade 3 - Satisfactory Loans to persons and businesses with acceptable financial condition that carry average probabilities of default. Borrower’s exhibit adequate cash flow to service debt and have acceptable levels of leverage.
   
Grade 4 - Pass Loans to persons and businesses with a lack of stability in the primary source of repayment or temporary weakness in their balance sheet or earnings. These loans carry above average probabilities of default. These borrowers generally have higher leverage and less liquidity than loans rated 3-Satisfactory.
   
Grade 5- Special Mention Loans to borrowers that exhibit potential credit weakness or a downward trend that warrant additional supervision. While potentially weak, the loan is currently marginally acceptable and no loss of principal or interest is envisioned.
   
Grade 6 – Substandard Borrowers with one or more well defined weaknesses that jeopardize the orderly liquidation of the debt. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. Possibility of loss or protracted workout exists if immediate corrective action is not taken.
   
Grade 7 – Doubtful Loans with all the weaknesses inherent in a Substandard classification, with the added provision that the weaknesses make collection of debt in full highly questionable and improbable, based on currently existing facts, conditions, and values. Serious problems exist to the point where a partial loss of principal is likely.
   
Grade 8 – Loss Borrower is deemed incapable of repayment of the entire principal. A charge-off is required for the portion of principal management has deemed it will not be repaid.

 

16
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

  

The following is the distribution of loans by credit quality and segment as of March 31, 2015 and December 31, 2014:

 

March 31, 2015 (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   -    2,196    2,742    2,047    61,441    11    1,161    311    69,909 
3 Satisfactory   407    33,795    24,231    16,342    -    6,687    6,418    1,402    89,282 
4 Pass   456    20,773    19,603    5,136    -    4,607    2,632    87    53,294 
5 Special mention   79    121    -    60    -    28    318    -    606 
6 Substandard   188    -    -    26    -    46    266    -    526 
7 Doubtful   -    -    -    -    -    -    -    -    - 
    1,130    56,885    46,576    23,611    61,441    11,379    10,795    1,800    213,617 
Loans acquired with deteriorated credit quality   953    1,438    2,752    446    -    184    363    -    6,136 
Total loans  $2,083   $58,323   $49,328   $24,057   $61,441   $11,563   $11,158   $1,800   $219,753 

 

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 deteriorated 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 

 

17
 

 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

  

A summary of the balances of loans outstanding by days past due, including accruing and non-accruing loans by portfolio class as of March 31, 2015 and December 31, 2014 is as follows:

 

   Commercial Real Estate           Consumer     
                     
At March 31, 2015 ( in thousands)  Acq-Dev
Construction
   Non-owner
Occupied
   Owner
Occupied
   Commercial
and
Industrial
   Guaranteed
Student
Loans
   Residential
Mortgage
   HELOC   Other   Total 
30 - 59 days  $-   $-   $-   $-   $3,415   $-   $-   $-   $3,415 
60 - 89 days   -    -    -    -    2,498    -    -    -    2,498 
> 90 days   548    -    1,201    9    9,557    44    75    -    11,434 
Total past due   548    -    1,201    9    15,470    44    75    -    17,347 
Current   1,535    58,323    48,127    24,048    45,971    11,519    11,083    1,800    202,406 
Total loans  $2,083   $58,323   $49,328   $24,057   $61,441   $11,563   $11,158   $1,800   $219,753 
> 90 days still accruing  $-   $-   $-   $-   $9,557   $-   $-   $-   $9,557 

 

   Commercial Real Estate           Consumer     
                     
At December 31, 2014 (in thousands)  Acq-Dev
Construction
   Non-owner
Occupied
   Owner
Occupied
   Commercial
and
Industrial
   Guaranteed
Student
Loans
   Residential
Mortgage
   HELOC   Other   Total 
30 - 59 days  $-   $-   $-   $-   $4,029   $-   $-   $-   $4,029 
60 - 89 days   -    -    885    -    1,989    -    75    -    2,949 
> 90 days   548    -    314    121    11,378    44    -    -    12,405 
Total past due   548    -    1,199    121    17,396    44    75    -    19,383 
Current   1,611    51,512    48,383    24,032    47,474    8,333    10,999    1,232    193,576 
Total loans  $2,159   $51,512   $49,582   $24,153   $64,870   $8,377   $11,074   $1,232   $212,959 
> 90 days still accruing  $-   $-   $-   $-   $11,378   $-   $-   $-   $11,378 

 

Non-accrual Loans

 

Loans are placed on nonaccrual status when management believes the collection of the principal and interest is doubtful. A delinquent loan is generally placed in nonaccrual status when:

 

·principal and/or interest is past due for 90 days or more, unless the loan is well-secured or in the process of collection;
·the financial strength of the borrower or a guarantor has materially declined;
·collateral value has declined; or
·other facts would make the repayment in full of principal and interest unlikely.

 

Loans placed on nonaccrual status are reported to the Board at its next regular meeting. When a loan is placed on nonaccrual, all interest which has been accrued is charged back against current earnings as a reduction in interest income, which adversely affects the yield on loans in the period of reversal. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain.

 

Loans placed on non-accrual status may, at the lenders discretion, be returned to accrual status after:

 

·payments are received for a reasonable period in accordance with the loan documents (typically for six (6) months), and any doubt as to the loan's full collectability has been removed; or
·the troubled loan is restructured and, evidenced by a credit evaluation of the borrower's financial condition and the prospects for full payment are good.

 

When a loan is returned to accrual status after restructuring, the pre-restructuring risk rating is maintained until a satisfactory payment history is re-established. Returning non-accrual loans to an accrual status requires the prior written approval of the Chief Credit Officer.

 

18
 

 

 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

A summary of non-accrual loans by portfolio class is as follows:

 

(dollars in thousands)  March 31,
2015
   December 31,
2014
 
Commercial Real Estate:          
Acquisition, development and construction  $548   $548 
Owner occupied   1,201    1,198 
Commercial and industrial   8    121 
Consumer:          
Residential mortgage   44    44 
HELOC   307    310 
Total non-accrual loans  $2,108   $2,221 
           
Non-accrual troubled debt restructurings included above  $-   $- 
Non-accrual purchased credit impaired loans included above  $1,742   $1,741 

 

Impaired Loans

 

All loans that are rated doubtful are assessed as impaired based on the expectation that collection of principal and interest when due is in doubt. All loans that are rated substandard or are expected to be downgraded to substandard, require additional analysis to determine if a specific reserve under ASC 310-40 is required. All loans that are rated special mention are presumed not to be impaired. However, special mention rated loans are typically evaluated for the following adverse characteristics that may indicate further analysis is warranted before completing an assessment of impairment:

 

·a loan is 60 days or more delinquent on scheduled principal or interest;
·a loan is presently in an unapproved over-advanced position;
·a loan is newly modified; or
·a loan is expected to be modified.

 

The following information is a summary of the Company’s policies pertaining to impaired loans:

 

A loan is deemed impaired when it qualifies for a risk rating of substandard or worse. Factors impairing repayment might include: inadequate repayment capacity, severe erosion of equity, likely reliance on non-primary source of repayment, guarantors with limited resources, and obvious material deterioration in borrower’s financial condition. The possibility of loss or protracted workout exists if immediate corrective action is not taken.

 

Once deemed impaired, the loan is then analyzed for the extent of the impairment. Impairment is the difference between the principal balance of the loan and (i) the discounted cash flows of the borrower or (ii) the fair market value of the collateral less the costs involved with liquidation (i.e., real estate commissions, attorney costs, etc.). This difference is then reflected as a component in the ALLL as a specific reserve.

 

Certain loans were identified and individually evaluated for impairment at March 31, 2015 and December 31, 2014. A number of these impaired loans were not charged with a valuation allowance due to management’s judgment that the cash flows from the underlying collateral or equity available from guarantors was sufficient to recover the Company’s entire investment, while other loans experienced collateral deterioration and supplemental specific reserves were added. The results of those analyses are presented in the following tables.

 

19
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

The following information is a summary of related impaired loans, excluding loans acquired with deteriorating credit quality, presented by portfolio class as of March 31, 2015:

 

(dollars in thousands)  Recorded
Investment(1)
   Unpaid
Principal(2)
   Related
Allowance
   Average
Recorded
Investment
   Interest
Recorded
 
With no related allowance recorded:                         
Commercial Real Estate:                         
Acquisition, development and construction  $188   $188   $-   $188   $- 
Non-owner occupied   -    -    -    -    - 
Owner occupied   -    -    -    -    - 
Commercial and industrial   26    30    -    30    - 
Consumer:                  -      
Residential mortgage   45    45    -    47    1 
HELOC   191    191    -    192    1 
Other   -    -    -         - 
   $450   $454   $-   $457   $2 
With an allowance recorded:                         
Commercial Real Estate:                         
Acquisition, development and construction  $-   $-   $-   $-   $- 
Non-owner occupied   -    -    -    -    - 
Owner occupied   -    -    -    -    - 
Commercial and industrial   -    -    -    -    - 
Consumer:                         
Residential mortgage   -    -    -    -    - 
HELOC   75    75    33    75    - 
Other   -    -    -    -    - 
   $75   $75   $33   $75   $- 
Total:                         
Commercial Real Estate:                         
Acquisition, development and construction  $188   $188   $-   $188   $- 
Non-owner occupied   -    -    -    -    - 
Owner occupied   -    -    -    -    - 
Commercial and industrial   26    30    -    30    - 
Consumer:   -    -    -    -    - 
Residential mortgage   45    45    -    47    1 
HELOC   266    266    33    267    1 
Other   -    -    -    -    - 
Total  $525   $529   $33   $532   $2 

 

20
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

The following information is a summary of related impaired loans, excluding loans acquired with deteriorating credit quality, presented by portfolio class as of December 31, 2014:

 

(dollars in thousands)  Recorded
Investment(1)
   Unpaid
Principal(2)
   Related
Allowance
   Average
Recorded
Investment
   Interest
Recorded
 
With no related allowance recorded:                         
Commercial Real Estate:                         
Acquisition, development and construction  $267   $267   $-   $269   $6 
Non-owner occupied   -    -    -    -    - 
Owner occupied   -    -    -    -    - 
Commercial and industrial   32    34    -    46    2 
Consumer:                  -      
Residential mortgage   -    -    -    -    - 
HELOC   193    193    -    197    3 
Other   -    -    -         - 
   $492   $494   $-   $512   $11 
With an allowance recorded:                         
Commercial Real Estate:                         
Acquisition, development and construction  $-   $-   $-   $-   $- 
Non-owner occupied   -    -    -    -    - 
Owner occupied   -    -    -    -    - 
Commercial and industrial   110    540    110    309    7 
Consumer:                         
Residential mortgage   -    -    -    -    - 
HELOC   75    75    33    75    - 
Other   -    -    -    -    - 
   $185   $615   $143   $384   $7 
Total:                         
Commercial Real Estate:                         
Acquisition, development and construction  $267   $267   $-   $269   $6 
Non-owner occupied   -    -    -    -    - 
Owner occupied   -    -    -    -    - 
Commercial and industrial   142    574    110    355    9 
Consumer:   -    -    -    -    - 
Residential mortgage   -    -    -    -    - 
HELOC   268    268    33    272    3 
Other   -    -    -    -    - 
Total  $677   $1,109   $143   $896   $18 

 

(1)The amount of the investment in a loan, which is not net of a valuation allowance, but which does reflect any direct write-down of the investment.
(2)The contractual amount due, which reflects paydowns applied in accordance with loan documents, but which does not reflect any direct write-downs.

 

Loans with deteriorated credit quality acquired as part of the Bank of Virginia acquisition are accounted for under the requirements of ASC 310-30. These loans are not considered impaired and not included in the table above.

 

21
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

Activity in the ALLL for the three months ended March 31, 2015 and 2014 is summarized below:

 

   Commercial Real Estate           Consumer     
                     
(dollars in thousands)  Acquisition,
Development,
Construction
   Non-owner
Occupied
   Owner
Occupied
   Commercial and
Industrial
   Guaranteed
Student
Loans
   Residential
Mortgage
   HELOC   Other   Total 
Allowance for loan losses                                             
Beginning balance, December 31, 2014  $146   $97   $149   $357   $144   $98   $76   $22   $1,089 
                                              
Charge-offs   -    -    -    (109)   -    -    -    (47)   (156)
Recoveries   -    234    -    271    -    1    3    -    509 
Net (charge-offs) recoveries   -   234   -   162   -   1   3   (47)   353 
                                              
Provision (recovery)   24    (75)   (22)   (275)   (14)   (44)   11    55    (340)
Ending balance, March 31, 2015  $170   $256   $127   $244   $130   $55   $90   $30   $1,102 

 

   Commercial Real Estate           Consumer     
                     
(dollars in thousands)  Acquisition,
Development,
Construction
   Non-owner
Occupied
   Owner
Occupied
   Commercial
and

Industrial
   Guaranteed
Student
Loans
   Residential
Mortgage
   HELOC   Other   Total 
Allowance for loan losses                                             
Beginning balance, December 31, 2013  $300   $39   $322   $377   $268   $120   $20   $43   $1,489 
                                              
Charge-offs   (6)   -    -    -    (23)   -    -    -    (29)
Recoveries   -    -    -    4    -    1    -    19    24 
Net (charge-offs) recoveries   (6)   -    -    4    (23)   1    -    19    (5)
                                              
Provision (recovery)   (101)   58    (66)   94    59    19    (16)   (27)   20 
Ending balance, March 31, 2014  $193   $97   $256   $475   $304   $140   $4   $35   $1,504 

 

22
 

 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

A summary of the ALLL by portfolio segment and impairment evaluation methodology as of March 31, 2015 and December 31, 2014 is as follows:

 

   Commercial Real Estate           Consumer     
(dollars in thousands)  Acquisition,
Development,
Construction
   Non-owner
Occupied
   Owner
Occupied
   Commercial
and Industrial
   Guaranteed
Student
Loans
   Residential
Mortgage
   HELOC   Other   Total 
Allowance for loan losses for loans                                             
Individually evaluated for impairment  $-   $-   $-   $-   $-   $-   $33   $-   $33 
Collectively evaluated for impairment   43    256    127    244    130    55    57    30    942 
Loans acquired with deteriorated credit quality   127    -    -    -    -    -    -    -    127 
Ending balance, March 31, 2015  $170   $256   $127   $244   $130   $55   $90   $30   $1,102 
                                              
Gross loan balances                                             
Individually evaluated for impairment  $188   $-   $-   $26   $-   $45   $266   $-   $525 
Collectively evaluated for impairment   942    56,885    46,576    23,585    61,441    11,334    10,529    1,800    213,092 
Loans acquired with deteriorated credit quality   953    1,438    2,752    446    -    184    363    -    6,136 
Ending balance, March 31, 2015  $2,083   $58,323   $49,328   $24,057   $61,441   $11,563   $11,158   $1,800   $219,753 

 

   Commercial Real Estate           Consumer     
(dollars in thousands)  Acquisition,
Development,
Construction
   Non-owner
Occupied
   Owner
Occupied
   Commercial
and
Industrial
   Guaranteed
Student
Loans
   Residential
Mortgage
   HELOC   Other   Total 
Allowance for loan losses for loans                                             
Individually evaluated for impairment  $-   $-   $-   $110   $-   $-   $33   $-   $143 
Collectively evaluated for impairment   56    97    149    247    144    98    43    22    856 
Loans acquired with deteriorated credit quality   90    -    -    -    -    -    -    -    90 
Ending balance, December 31, 2014  $146   $97   $149   $357   $144   $98   $76   $22   $1,089 
                                              
Gross loan balances                                             
Individually evaluated for impairment  $267   $-   $-   $142   $-   $-   $268   $-   $677 
Collectively evaluated for impairment   934    50,057    46,382    23,042    64,870    8,192    10,442    1,232    205,151 
Loans acquired with deteriorated credit quality   958    1,455    3,200    969    -    185    364    -    7,131 
Ending balance, December 31, 2014  $2,159   $51,512   $49,582   $24,153   $64,870   $8,377   $11,074   $1,232   $212,959 

 

Troubled Debt Restructurings

 

A modification is classified as a troubled debt restructuring (“TDR”) if both of the following exist: (1) the borrower is experiencing financial difficulty and (2) the Company has granted a concession to the borrower.  The Company determines that a borrower may be experiencing financial difficulty if the borrower is currently delinquent on any of its debt, or if the Company is concerned that the borrower may not be able to perform in accordance with the current terms of the loan agreement in the foreseeable future.  Many aspects of the borrower’s financial situation are assessed when determining whether they are experiencing financial difficulty, particularly as it relates to commercial borrowers due to the complex nature of the loan structure, business/industry risk and borrower/guarantor structures.  Concessions may include the reduction of an interest rate at a rate lower than current market rate for a new loan with similar risk, extension of the maturity date, reduction of accrued interest, or principal forgiveness.  When evaluating whether a concession has been granted, the Company also considers whether the borrower has provided additional collateral or guarantors and whether such additions adequately compensate the Company for the restructured terms, or if the revised terms are consistent with those currently being offered to new loan customers.  The assessments of whether a borrower is experiencing (or is likely to experience) financial difficulty and whether a concession has been granted is subjective in nature and management’s judgment is required when determining whether a modification is a TDR.

 

Although each occurrence is unique to the borrower and is evaluated separately, for all portfolio segments, TDRs are typically modified through reduction in interest rates, reductions in payments, changing the payment terms from principal and interest to interest only, and/or extensions in term maturity.

 

23
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

During the three months ended March 31, 2015 and 2014, no loans were modified in troubled debt restructurings. At March 31, 2015 and December 31, 2014, two and four loans, respectively, were classified as trouble debt restructurings. The principal balance outstanding relating to these loans was $371 thousand and $1.3 million at March 31, 2015 and December 31, 2014, respectively, all of which were accruing. During the three months ended March 31, 2015 and 2014, no defaults occurred on loans modified as TDR’s in the preceding twelve months.

 

Note 6. Intangible Assets

 

In 2010, the Company acquired a majority interest in the Bank of Virginia. The Company recorded a core deposit intangible related to this acquisition of $249 thousand. This asset represents the estimated fair value of the core deposits and was determined based on the present value of future cash flows related to those deposits considering the industry standard “financial instrument” type present value methodology. The core deposit intangible is amortized over the estimated life of the deposits using the straight-line method. A summary of the first quarter 2015 activity in this account is as follows:

 

(dollars in thousands)    
Balance at December 31, 2014  $104 
Amortization   (9)
Balance at March 31, 2015  $95 

 

Amortization expense is expected to be approximately $35 thousand per year through 2016 and $34 thousand in 2017.

 

Note 7.    Fair Value Measurements

 

Fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another financial instrument. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price if one exists.

 

The following presents the methodologies and assumptions used to estimate the fair value of the Company’s financial instruments. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash flows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be significantly different.

 

Financial Instruments with Book Value Equal to Fair Value

 

The book values of cash and due from banks, federal funds sold and purchased, interest receivable, and interest payable are considered to be equal to fair value as a result of the short-term nature of these items.

 

Securities

 

The fair value for securities available for sale and securities held to maturity is based on current market quotations, where available. If quoted market prices are not available, fair value has been based on the quoted price of similar instruments. Restricted securities are valued at cost which is also the stated redemption value of the shares.

 

Restricted Securities

 

Restricted securities are valued at cost which is also the stated redemption value of the shares.

 

24
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

Loans Held for Sale

 

Fair value is based on the price secondary markets are offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale.

 

Loans Held for Investment

The estimated value of loans held for investment is measured based upon discounted future cash flows using the current rates for similar loans, as well as assumptions related to credit risk.

 

Deposits

 

Deposits without a stated maturity, including demand, interest-bearing demand, and savings accounts, are reported at their carrying value in accordance with authoritative accounting guidance. No value has been assigned to the franchise value of these deposits. For other types of deposits with fixed maturities, fair value has been estimated by discounting future cash flows based on interest rates currently being offered on deposits with similar characteristics and maturities.

 

Borrowings and Other Indebtedness

 

Fair value has been estimated based on interest rates currently available to the Company for borrowings with similar characteristics and maturities.

 

Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees

 

Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. At March 31, 2015 and December 31, 2014, the fair value of loan commitments and standby letters of credit was deemed to be immaterial and therefore is not included.

 

Determination of Fair Value

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosure topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimate of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

 

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under market conditions depends on the facts and circumstances and requires the use of significant judgment.

 

Authoritative accounting literature specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

 

Level 1Valuation is based upon quoted prices for identical instruments traded in active markets.

 

25
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

Level 2Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

Level 3Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

The carrying value and fair values of financial assets and liabilities are as follows:

 

       Fair Value Measurements at March 31, 2015 
(dollars in thousands)  Carrying
amount
   Level 1   Level 2   Level 3   Fair Value 
Assets:                         
Cash and cash equivalents  $33,097   $33,097   $-   $-   $33,097 
Securities available for sale   41,411    -    41,411    -    41,411 
Securities held to maturity   20,132    -    20,647    -    20,647 
Restricted securities   2,405    -    2,405    -    2,405 
Loans held for sale   117    -    117    -    117 
Net loans held for investment   218,651    -    -    221,391    221,391 
Interest receivable   1,986         1,986         1,986 
Liabilities:                         
Demand deposits   27,628    -    27,628    -    27,628 
Savings and interest-bearing demand deposits   83,077    -    83,077    -    83,077 
Time deposits   154,920    -    155,316    -    155,316 
FHLB Borrowings   30,000    -    29,953    -    29,953 
Interest payable   179    -    179    -    179 

 

       Fair Value Measurements at December 31, 2014 
(dollars in thousands)  Carrying
amount
   Level 1   Level 2   Level 3   Fair Value 
Assets:                         
Cash and cash equivalents  $21,847   $21,847   $-   $-   $21,847 
Securities available for sale   53,483    -    53,483    -    53,483 
Securities held to maturity   20,716    -    21,047    -    21,047 
Restricted securities   2,092    -    2,092    -    2,092 
Net loans held for investment   211,870    -    -    213,861    213,861 
Interest receivable   2,040    -    2,040    -    2,040 
Liabilities:                         
Demand deposits   30,709    -    30,709    -    30,709 
Savings and interest-bearing demand deposits   83,339    -    83,339    -    83,339 
Time deposits   151,555    -    152,179    -    152,179 
FHLB Borrowings   25,000    -    24,753    -    24,753 
Interest payable   161    -    161    -    161 

 

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

 

Securities available for sale

 

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

 

26
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

The following table presents the balances of financial assets measured at fair value on a recurring basis:

 

       Quoted Prices
in Active
Markets for
Identical
Assets
   Significant Other
Observable Inputs
   Significant
Unobservable
Inputs
 
(dollars in thousands)  Balance   (Level 1)   (Level 2)   (Level 3) 
March 31, 2015                    
                     
U. S. Government Agencies  $3,447   $-   $3,447   $- 
Agency Guaranteed Mortgage-backed securities   37,964    -    37,964    - 
                     
December 31, 2014                    
                     
U. S. Government Agencies  $3,719   $-   $3,719   $- 
Agency Guaranteed Mortgage-backed securities   49,764    -    49,764    - 

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

 

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

 

Impaired Loans

 

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected when due. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the ALLL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Operations.

 

Other Real Estate Owned (OREO)

 

Other real estate owned (“OREO”) is measured at fair value less cost to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. Any initial fair value adjustment is charged against the ALLL. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest expense on the Consolidated Statements of Operations.

 

27
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

The following tables summarize the Company’s assets that were measured at fair value on a nonrecurring basis:

 

       Quoted Prices
in Active
Markets for
Identical
Assets
   Significant Other
Observable Inputs
   Significant
Unobservable
Inputs
 
(dollars in thousands)  Balance   (Level 1)   (Level 2)   (Level 3) 
March 31, 2015                    
Impaired loans  $42   $-   $-   $42 
OREO   1,647    -    -    1,647 
                     
December 31, 2014                    
Impaired loans  $42   $-   $-   $42 
OREO   1,641    -    -    1,641 

 

There were no outstanding or in-process residential mortgage OREO properties as of March 31, 2015 or December 31, 2014.

 

The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at March 31, 2015 and December 31, 2014:

 

   March 31, 2015 
(dollars in thousands)  Quantitative Information About Level 3 Fair Value Measurements 
Description  Fair Value   Valuation Technique  Unobservable input  Range
(Weighted
Average)
 
                 
Impaired loans  $42   Appraisals  Discount to reflect current market condition and estimated selling costs   0-10% 
Other real estate owned  $1,647   Appraisals  Discount to reflect current market condition and estimated selling costs   6-29% 

 

   December 31, 2014 
(dollars in thousands)  Quantitative Information About Level 3 Fair Value Measurements 
Description  Fair Value   Valuation Technique  Unobservable input  Range
(Weighted
Average)
 
               
Impaired loans  $42   Appraisals  Discount to reflect current market condition and estimated selling costs   0-10% 
Other real estate owned  $1,641   Appraisals  Discount to reflect current market condition and estimated selling costs   6-29% 
                 

 

28
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

Note 8.     Stock-Based Compensation

 

Stock-based compensation arrangements include stock options, restricted stock plans, performance-based awards, stock appreciation rights and employee stock purchase plans. ASC Topic 718 requires all share-based payments to employees to be valued using a fair value method on the date of grant and to be expensed based on that fair value over the applicable vesting period.

 

At the 2005 Annual Meeting, shareholders ratified approval of the Bank of Virginia 2005 Stock Option Plan (the “2005 Plan”) which made available up to 26,560 shares for potential grants of stock options. The Plan was instituted to encourage and facilitate investment in the common stock of the Bank by key employees and executives and to assist in the long-term retention of service by those executives. The Plan covers employees as determined by the Bank’s Board of Directors from time to time. Options under the Plan were granted in the form of incentive stock options.

 

At the 2011 Annual Meeting, the Bank’s shareholders approved a new share-based compensation plan (Bank of Virginia 2011 Stock Incentive Plan or the “2011 Plan”). Under this plan, employees, officers and directors of the Bank or its affiliates are eligible to receive grants, subject to approval by the board of directors. The plan’s intent was to reward employees, officers and directors of the Bank or its affiliates for their efforts, to assist in the long-term retention of service for those who were awarded, as well as align their interests with the Bank’s shareholders. At the 2014 Annual Meeting, Cordia shareholders approved an amendment to the 2011 Plan to increase the number of shares authorized for issuance by an additional 800,000 shares. As of March 31, 2015, there were 696,979 shares reserved under the 2011 Plan.

 

There were 20,000 Cordia stock options granted outside of the plan prior to the share exchange in March 2013. In addition, there were 10,000 stock options and 12,500 restricted stock issued in September 2013 outside the plan as an inducement grant to a newly hired officer.

 

As of the merger on March 29, 2013, the 2005 and 2011 Plans were assumed by Cordia.

 

29
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

A summary of the Company’s option activity as of March 31, 2015 and changes during the period then ended are presented in the following table:

 

           Wgt. Avg.         
       Wgt. Avg.   Remaining   Wgt. Avg.   Aggregate 
       Exercise   Contractual   Grant Date   Intrinsic 
As of 12/31/2014  Stock Options   Price   Life   Fair Value   Value 
Outstanding   145,478   $6.94    7.88   $2.29   $- 
Vested   60,692   $9.24    7.18   $3.03   $- 
Nonvested   84,786   $5.29    8.39   $1.76   $- 
                          
Period Activity                         
Issued   600   $3.82    -   $0.44    - 
Exercised   -    -    -    -    - 
Forfeited   1,726   $7.12    -    2.13    - 
Expired   -    -    -    -    - 
                          
As of 3/31/2015                         
Outstanding   144,352   $6.93    7.66   $2.28   $972 
Vested   75,001   $8.43    7.11   $2.76   $112 
Nonvested   69,351   $5.30    8.25   $1.77   $860 

 

Aggregate intrinsic value is calculated as the difference between the quoted price and the award exercise price of the stock. To the extent that the quoted price is less than the exercise price, there is no value to the underlying option awards.

 

The remaining unrecognized compensation expense for the options granted totaled $91 thousand and $119 thousand at March31, 2015 and 2014, respectively.

 

                Wgt. Avg. 
Outstanding as of March 31, 2015       Wgt. Avg.   Remaining 
        Stock Options   Exercise   Contractual 
Range of Exercise Prices   Outstanding   Price   Life 
$3.62   $60.24    144,352   $6.93    7.66 
Total         144,352   $6.93    7.66 

 

Exercisable:       Wgt. Avg.         
        Stock Options   Exercise         
Range of Exercise Prices   Exercisable   Price         
$3.62   $60.24    75,001   $8.43         
Total         75,001   $8.43         

 

30
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

Assumptions:

 

The fair value of each option granted is estimated on the date of grant using the "Black-Scholes Option Pricing" method with the follwing assumptions.

 

   Three Months
Ended
   Year Ended 
   March 31,
2015
   December 31,
2014
 
Expected dividend rate   0.00%   0.00%
Expected volatility   30.00%   30.00%
Expected term in years   7    7 
Risk free rate   1.78%   2.15%

 

Total intrinsic value of options exercised:  $- 
Total fair value of shares vested:  $25,544 
Weighted-average period over which nonvested awards are expected to be recognized:   1.32 years 

 

31
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

A summary of the Company’s restricted stock activity as of March 31, 2015 and changes during the period then ended are presented in the following table:

 

       Wgt. Avg. 
       Grant Date 
As of 12/31/2014  Restricted Stock   Fair Value 
Nonvested   52,580   $4.23 
           
Period Activity          
Issued   80,000   $3.99 
Vested   780   $4.41 
Forfeited   -    - 
           
As of 3/31/2015          
Nonvested   131,800   $4.08 
           
Total fair value of shares vested:       $3,440 
Weighted-average period over which nonvested awards are expected to be recognized:        1.91 

 

The fair value of restricted stock granted during the quarter ended March 31, 2015 was $319 thousand.

 

The remaining unrecognized compensation expense for the shares granted totaled $493 thousand and $48 thousand as of March 31, 2015 and 2014, respectively.

 

578,125 of restricted shares of common stock were sold to founding investors of Cordia predominantly during 2009 and 2010 and are considered at March 31, 2015 more-likely-than-not to not vest due to significant performance based thresholds, which must be achieved by October 2016 for the restricted shares to vest..

 

Stock-based compensation expense was $55 thousand in the first quarter of 2015 and $24 thousand in the first quarter of 2014.

 

Cordia does not have any benefit plans or incentive compensation plans beyond those maintained by the Bank. Cordia does provide a life insurance benefit to the President and Chief Executive Officer under the terms of his employment agreement.

 

32
 

 

Cordia Bancorp

Notes to Condensed Consolidated Financial Statements (continued)

 

Note 9. Accumulated other Comprehensive Income (Loss)

 

The changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2015 and 2014 are summarized as follows:

 

(dollars in thousands)  Three Months Ended March 31, 
   2015   2014 
         
Beginning balance  $(468)  $(384)
           
Unrealized holding losses on available for sale securities   304    (13)
Amortization of available for sale to held to maturity reclassification adjustment   12    12 
Net current period other comprehensive loss   316    (1)
Ending balance  $(152)  $(385)

 

The following table presents information on amounts reclassified out of accumulated other comprehensive income (loss), by category, during the periods indicated:

 

(in thousands)  Three Months Ended March 31,   Affected Line Item on
   2015   2014   Consolidated Statement of Operations
            
Amortization of unrealized losses transferred to held to maturity  $12   $12   Interest income - investment securities
Realized gains on sales of available for sale securities   114    64   Net gain on sale of available-for-sale securities
Total reclassifications  $126   $76    

  

33
 

 

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. 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.

 

34
 

 

Item 2.

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” or the “Bank). This discussion and analysis should be read in conjunction with Cordia’s condensed consolidated financial statements and related notes thereto located elsewhere in this report.

 

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. 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. Aside from the shares of BVA common stock, Cordia’s other assets totaled $1.5 million at March 31, 2015, consisting primarily of $1.4 million of cash and $36 thousand of prepaid expenses.

 

BVA is a state chartered bank headquartered in Midlothian, Virginia with total assets of approximately $324.5 million at March 31, 2015. BVA provides retail banking services to individuals and commercial customers through five banking locations serving Chesterfield County and the City of Colonial Heights, Virginia and one in Henrico County, Virginia.

 

Executive Overview

 

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 experiences. 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. During the first quarter of 2015, CordiaGrad opened a new location in Washington DC. Beginning in April 2014 the Bank ceased purchasing rehabilitated, federally guaranteed student loans.

 

35
 

 

Results of Operations

 

Net Income (Loss)

 

Consolidated net income was $351 thousand for the quarter ended March 31, 2015 (the “2015 quarter”) compared to consolidated net loss of $284 thousand for the quarter ended March 31, 2014 (the “2014 quarter”). Net interest income increased in the 2015 quarter by $115 thousand from the 2014 quarter. A $340 thousand recovery of loan losses for the 2015 quarter was recorded compared to a provision of $20 thousand for the 2014 quarter. Noninterest income increased in the 2015 quarter by $90 thousand, while noninterest expense decreased $70 thousand compared to the 2014 quarter.

 

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.

 

Net interest income before the recovery of/provision for loan losses increased 6.1% or $115 thousand to $2.0 million for the 2015 quarter from $1.9 million for the 2014 quarter.

 

Interest income increased $191 thousand to $2.6 million during the 2015 quarter from $2.4 million for the 2014 quarter. Due primarily to a 33% increase in total average earning assets, offset in part by an 80 basis point decline in average yield on these assets. Excluding the accretion of acquisition accounting adjustments, interest income on loans was $2.5 million for the 2015 quarter vs. $2.3 million for the 2014 quarter.

 

Interest expense for the 2015 quarter was $543 thousand, compared to $467 thousand for the 2014 quarter. This increase of $76 thousand was due primarily to an increase in time deposits and FHLB borrowings offset by a ten basis point reduction in the average cost of interest bearing liabilities. The average balance of interest-bearing transaction and savings accounts increased 35%, while the average balance of non-interest-bearing accounts increased 33%.

 

Net interest margin was 2.69% for the 2015 quarter and 3.39% for the 2014 quarter. Excluding the accretion of acquisition accounting adjustments, net interest margin was 2.67% for the 2015 quarter and 3.22% for the 2014 quarter. The decline in net interest margin from the prior year was primarily the result of an 80 basis point decline in the yield of interest earning assets. This decline is due primarily to lower accretion of acquisition accounting adjustments in the first quarter of 2015 and secondarily to lower yields on loans and investments.

 

36
 

 

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. These tables include acquisition accounting adjustments and therefore do not directly represent contractual rates paid or received.  

 

For the quarters ended                        
March 31, (dollars in thousands)  2015   2014 
         
   Average Balance   Interest   Yield/Rate   Average Balance   Interest   Yield/Rate 
Earning Assets:                              
Loans held for investment (1)  $212,566   $2,181    4.16%  $176,161   $2,149    4.95%
Loans held for sale   224    2    3.62%   -    -    - 
Securities available for sale   71,198    363    2.07%   39,747    207    2.11%
Federal Funds and deposits with Banks   18,493    7    1.50%   11,060    6    0.22%
Total earning assets   302,481    2,553    3.42%   226,968    2,362    4.22%
Allowance for loan losses   (1,087)             (1,484)          
Other assets   20,061              16,176           
Total  $321,455             $241,660           
Interest-bearing liabilities:                              
Demand deposits  $13,684   $10    0.30%  $12,750   $11    0.35%
Savings and money market deposits   69,351    54    0.32%   48,906    43    0.36%
Time deposits   152,353    390    1.04%   132,290    372    1.14%
FHLB borrowings   28,778    89    1.25%   10,111    41    1.64%
Total interest-bearing liabilities   264,166    543    0.83%   204,057    467    0.93%
Non-interest-bearing demand deposits   29,046              21,775           
Other liabilities   890              2,496           
Stockholders' equity   27,353              13,332           
Total  $321,455             $241,660           
                               
Net interest income       $2,010             $1,895      
Net interest rate spread (2)             2.59%             3.29%
Net interest margin (3)             2.69%             3.39%

 

(1)Non-accrual loans are included in average balances outstanding, with no related interest income during non-accrual period.
(2)Represents the difference between the yield on earnings assets and cost of funds.
(3)Represents net interest income divided by average interest-earning assets.

 

Recovery of/Provision for Loan Losses

 

A $340 thousand recovery of loan losses for the 2015 quarter was recorded compared to a provision of $20 thousand for the 2014 quarter. Loan growth offset by a decline in our historical loss percentage resulted in the Company’s estimated allowance remaining relatively unchanged from December 31, 2014. This, coupled with a large recovery that left net charge-offs/(recoveries) for the 2015 quarter at $(353) thousand, was the cause for the recovery of loan loss provision.

 

Non-interest Income

 

Noninterest income for the 2015 quarter was $213 thousand, compared to $123 thousand for the 2014 quarter. The increase was primarily the result of an increase in the net gain on the sale of available for sale securities of $50 thousand and a $21 thousand gain on the sale of loans held for sale included in other income in 2015.

 

37
 

  

The following table sets forth the principal components of non-interest income for the quarters ended March 31, 2015 and 2014

 

For the quarters ended March 31, (dollars in thousands)  2015   2014 
Service charges on deposit accounts  $30   $26 
Net gain on sale of "AFS" securities   114    64 
Other income   69    33 
Total non-interest income  $213   $123 

 

Non-interest Expense

 

Noninterest expense decreased $70 thousand, or 3.1%, from $2.3 million for the 2014 quarter to $2.2 million for the 2015 quarter. The decrease was due primarily to a decrease of $126 thousand in salaries and benefits, offset in part by increases of $56 thousand in data processing and communications and $20 thousand in loan expenses. The decrease in salaries and benefits was primarily due to a one-time accrual of incentive compensation in the 2014 quarter, offset by an increase in staff to support two new retail branches and the new CordiaGrad student loan program.

 

The following table sets forth the primary components of non-interest expense for the quarters ended March 31, 2015 and 2014:

 

For the quarters ended March 31, (dollars in thousands)  2015   2014 
Salaries and employee benefits  $1,280   $1,406 
Professional services   84    106 
Occupancy   153    151 
Data processing and communications   198    142 
FDIC assessment and bank fees   90    94 
Bank franchise raxes   49    29 
Student loan servicing fess and other loan expenses   146    126 
Other real estate expenses   6    5 
Supplies and equipment   73    75 
Insurance   20    41 
Director's fees   26    16 
Marketing and business development   18    6 
Other operating expenses   69    85 
Total non-interest expense  $2,212   $2,282 

 

Income Tax Expense

 

Under the provisions of the Internal Revenue Code, the Company has approximately $18.7 million of net operating loss carryforwards (net of Section 382 limitation), which will expire if unused beginning in 2024. As of March 31, 2015, deferred tax assets of $6.0 million have been fully reserved with a valuation allowance. It is estimated that all of the valuation allowance is available to be reversed if it is more-likely-than-not that sufficient taxable income will be generated in the future. 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.

 

38
 

 

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 March 31, 2015, total loans held for investment (net of reserves) were $218.7 million versus $211.9 million at December 31, 2014

 

The following table sets forth the composition of the loan portfolio by category at the dates indicated.

 

   At March 31,  At December 31,
   2015  2014
(dollars in thousands)  Amount  Percent  Amount  Percent
Commercial Real Estate:                    
Acquisition, development and construction  $2,083    0.9%  $2,159    1.0%
Non-owner occupied   58,323    26.5%   51,512    24.2%
Owner occupied   49,328    22.5%   49,582    23.3%
Commercial and industrial   24,057    10.9%   24,153    11.3%
Guaranteed Student Loans   61,441    28.0%   64,870    30.5%
Consumer:                    
Residential mortgage   11,563    5.3%   8,377    3.9%
HELOC   11,158    5.1%   11,074    5.2%
Other   1,800    0.8%   1,232    0.6%
Total loans   219,753    100.0%   212,959    100.0%
Allowance for loan losses   (1,102)        (1,089)     
Total loans, net of allowance for loan losses  $218,651        $211,870      

 

The largest component of the loan portfolio is comprised of various types of commercial real estate loans. At March 31, 2015, commercial real estate loans totaled $109.7 million or 49.9% of the total portfolio. Guaranteed student loans totaled $61.4 million, commercial and industrial loans totaled $24.1 million and consumer loans, which were comprised principally of residential mortgage and home equity loans, totaled $24.5 million. Residential mortgage loans consisted of first and second mortgages on single family residential dwellings. .

 

Allowance for Loan Losses

 

At March 31, 2015, our ALLL was $1.1 million, or 0.50% of total loans and 52.3% of non-performing loans. During the quarter ended March 31, 2015, we recorded $353 thousand of net recoveries and a reversal of $340 thousand. Excluding the guaranteed portion of student loan portfolio, ALLL was 0.69% of total loans outstanding less guaranteed student loans. 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. 

 

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.

 

39
 

 

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.

 

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.

 

40
 

 

Changes affecting the ALLL for the three months ended March 31, 2015 and the year ended December 31, 2014, are summarized in the following table.

 

(dollars in thousands)  Quarter Ended
March 31, 2015
  Year Ended
December 31, 2014
Allowance for loan losses at beginning of period  $1,089   $1,489 
           
Provision for (recovery of) loan losses   (340)   305 
           
Charge-offs:          
Commercial real estate   (109)   (120)
Commercial and industrial   -    (485)
Guaranteed Student Loans   -    (359)
Consumer   (47)   - 
Total charge-offs   (156)   (964)
           
Recoveries:          
Commercial real estate   234    139 
Commercial and industrial   271    91 
Guaranteed Student Loans   -    - 
Consumer   4    29 
Total recoveries   509    259 
Net recoveries/(charge-offs)   353    (705)
Allowance for loan losses at end of period  $1,102   $1,089 
           
Allowance for loan losses to non-performing loans   52.3%   49.0%
Allowance for loan losses to total loans outstanding at end of period   0.50%   0.51%
Net recoveries/(charge-offs) to average loans during the period   0.17%   -0.36%

 

The increase in the ALLL to non-performing loan ratio at March 31, 2015 from December 31, 2014 is due to the net recovery in the 2015 quarter and the continued reduction of non-accrual loans from $2.2 million at December 31, 2014 to $2.1 million at March 31, 2015.

 

Included in the above table is the activity related to the portion of the 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:

 

41
 

 

(dollars in thousands) 

Quarter Ended

March 31, 2015

 

Year Ended

December 31, 2014

Allowance for loan losses at beginning of period  $90   $234 
Provision for loan losses   37    (7)
           
Charge-offs:          
Commercial real estate   -    (120)
Commercial and industrial   -    (17)
Consumer   -    - 
Total charge-offs   -    (137)
           
Recoveries:   -    - 
           
Net charge-offs   -    (137)
Allowance for loan losses at end of period  $127   $90 

  

The following table represents the allocation of the ALLL at the dates indicated. Notwithstanding these allocations, the entire allowance is available to absorb loan losses in any loan category.

 

   At March 31, 2015  At December 31, 2014
(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
Commercial real estate  $553    50%   50%  $392    36%   49%
Commercial and industrial   244    22%   11%   357    33%   11%
Guaranteed Student Loans   130    12%   28%   144    13%   30%
Consumer   175    16%   11%   196    18%   10%
Total allowance for loan losses  $1,102    100%   100%  $1,089    100%   100%

 

Asset Quality

 

Risk Rating Process

 

On a quarterly basis, the process of estimating the ALLL 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 5 of the Notes to the Condensed Consolidated Financial Statements for more detail.

 

42
 

 

The following is the distribution of loans by credit quality and class as of March 31, 2015 and December 31, 2014:

 

March 31, 2015 (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   -    2,196    2,742    2,047    61,441    11    1,161    311    69,909 
3 Satisfactory   407    33,795    24,231    16,342    -    6,687    6,418    1,402    89,282 
4 Pass   456    20,773    19,603    5,136    -    4,607    2,632    87    53,294 
5 Special mention   79    121    -    60    -    28    318    -    606 
6 Substandard   188    -    -    26    -    46    266    -    526 
7 Doubtful   -    -    -    -    -    -    -    -    - 
    1,130    56,885    46,576    23,611    61,441    11,379    10,795    1,800    213,617 
Loans acquired with deteriorating credit quality   953    1,438    2,752    446    -    184    363    -    6,136 
Total loans  $2,083   $58,323   $49,328   $24,057   $61,441   $11,563   $11,158   $1,800   $219,753 

 

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 

 

 

As shown in the tables above, substandard and doubtful loans were $526 thousand at March 31, 2015, or 0.2% of the total loan portfolio. This compares to $677 thousand, or 0.3% of the total loan portfolio at December 31, 2014. Special mention loans increased $21 thousand from $585 thousand at December 31, 2014 to $606 million at March 31, 2015 and loans graded “pass” or better increased $7.9 million from $204.6 million at December 31, 2014 to $212.5 million at March 31, 2015.

 

The Bank has continued to employ its third party loan review firm for annual reviews and periodic special assignments.  The most recent evaluation 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 ALLL reserve and methodology.

 

43
 

 

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 $3.8 million or 1.16% of total assets at March 31, 2015 and are comprised of non-accrual loans of $2.1 million and repossessed collateral of $1.6 million. The balance of nonperforming assets at December 31, 2014 was $3.9 million or 1.21% of total assets. The decrease at March 31, 2015 from December 31, 2014 was primarily a result of 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.

44
 

 

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

 

(dollars in thousands) 

Quarter ended

March 31, 2015

 

Year ended

December 31, 2014

Non-accrual troubled debt restructurings  $-   $- 
Other non-accrual loans   2,108    2,221 
Total non-accrual loans   2,108    2,221 
Other real estate owned   1,647    1,641 
Total non-performing assets  $3,755   $3,862 
           
Total non-accrual loans to total loans   0.96%   1.04%
Total non-performing loans to total assets   0.65%   0.70%
Total non-performing assets to total assets   1.16%   1.21%
           
Accruing troubled debt restructings  $371   $1,260 

 

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.

 

(dollars in thousands)  March 31, 2015  December 31, 2014
Contract principal balance  $6,179   $7,178 
Accretable discount   (38)   (42)
Nonaccretable discount   (5)   (5)
Book value of loans  $6,136   $7,131 

 

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 $61.5 million at March 31, 2015 as compared to $74.2 million at December 31, 2014. At March 31, 2015, the securities portfolio consisted of $41.4 million of securities available for sale and $20.1 million of securities held to maturity.

 

45
 

 

The table below presents the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale at March 31, 2015 and December 31, 2014.

 

   March 31, 2015
   Amortized  Gross Unrealized   
(dollars in thousands)  Cost  Gains  Losses  Fair Value
U.S. Government agencies  $3,448   $12   $(13)  $3,447 
Agency guaranteed mortgage-backed securities   37,840    185    (61)   37,964 
Total  $41,288   $197   $(74)  $41,411 

 

   December 31, 2014
   Amortized  Gross Unrealized   
(dollars in thousands)  Cost  Gains  Losses  Fair Value
U.S. Government agencies  $3,735   $1   $(17)  $3,719 
Agency guaranteed mortgage-backed securities   49,930    21    (187)   49,764 
Total  $53,665   $22   $(204)  $53,483 

 

The table below presents the carry value, gross unrealized gains and losses, and fair value of securities held to maturity at March 31, 2015 and December 31, 2014.

 

   March 31, 2015
   Carry  Gross Unrealized   
(dollars in thousands)  Value  Gains  Losses  Fair Value
Agency guaranteed mortgage-backed securities  $20,132   $515   $-   $20,647 

 

   December 31, 2014
   Carry  Gross Unrealized   
(dollars in thousands)  Value  Gains  Losses  Fair Value
Agency guaranteed mortgage-backed securities  $20,716   $333   $(2)  $21,047 

 

Deposits and Other Interest-Bearing Liabilities

 

At March 31, 2015 and December 31, 2014, total deposits were $265.6 million. 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 $233.1 million at March 31, 2014, or 87.8% of total deposits, compared to $234.8 million at December 31, 2014, or 88.4% 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. At March 31, 2015 and December 31, 2014, our money market deposits included insured brokered deposits of $21.1 million. Our loan-to-deposit ratio was 82.7% at March 31, 2015 and 80.2% at December 31, 2014.

 

46
 

 

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

 

   March 31, 2015  December 31, 2014
(dollars in thousands)