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EX-32.1 - EXHIBIT 32.1 - Village Bank & Trust Financial Corp.v422733_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Village Bank & Trust Financial Corp.v422733_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Village Bank & Trust Financial Corp.v422733_ex31-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2015

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

 

 

Commission file number: 0-50765

 

VILLAGE BANK AND TRUST FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

Virginia  16-1694602
(State or other jurisdiction of  (I.R.S. Employer
incorporation or organization)  Identification No.)

 

13319 Midlothian Turnpike, Midlothian, Virginia 23113
(Address of principal executive offices) (Zip code)

 

804-897-3900

(Registrant’s telephone number, including area code)

 

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

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

 

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

  

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

 

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

 

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

 

1,417,920 shares of common stock, $4.00 par value, outstanding as of November 3, 2015

 

 

 

 

Village Bank and Trust Financial Corp. and Subsidiary

Form 10-Q

 

TABLE OF CONTENTS

 

Part I – Financial Information    
     
Item 1.  Financial Statements    
     
Consolidated Balance Sheets September 30, 2015 (unaudited) and December 31, 2014   3
     
Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)   4
     
Consolidated Statements of Changes in Comprehensive Income For the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)   5
     
Consolidated Statements of Changes in Shareholders’ Equity For the Nine Months Ended September 30, 2015 and 2014 (unaudited)   6
     
Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2015 and 2014 (unaudited)   7
     
Notes to Consolidated Financial Statements (unaudited)   8
     
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations   38
     
Item 3.  Quantitative and Qualitative Disclosures About Market Risk   60
     
Item 4. Controls and Procedures   60
     
Part II – Other Information    
     
Item 1.  Legal Proceedings   61
     
Item 1A. Risk Factors   61
     
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds   61
     
Item 3.  Defaults Upon Senior Securities   61
     
Item 4.  Mine Safety Disclosures   61
     
Item 5.  Other Information   61
     
Item 6.  Exhibits   62
     
Signatures   63

 

 2 
 

 

Part I – Financial Information

 

ITEM 1 – FINANCIAL STATEMENTS

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Balance Sheets
September 30, 2015 (Unaudited) and December 31, 2014

(dollar amounts in thousands, except per share amounts) 

 

   September 30,   December 31, 
   2015   2014 
Assets          
Cash and due from banks  $12,772   $25,115 
Federal funds sold   13,303    23,988 
Total cash and cash equivalents   26,075    49,103 
Investment securities available for sale   39,595    39,542 
Loans held for sale   12,770    9,914 
Loans          
Outstandings   299,745    286,146 
Allowance for loan losses   (5,496)   (5,729)
Deferred fees and costs   1,294    722 
    295,543    281,139 
Other real estate owned, net of valuation allowance   8,018    12,638 
Assets held for sale   13,821    13,502 
Premises and equipment, net   13,733    14,301 
Bank owned life insurance   7,084    6,947 
Accrued interest receivable   2,085    1,372 
Other assets   4,926    5,546 
           
   $423,650   $434,004 
           
Liabilities and Shareholders' Equity          
Liabilities          
Deposits          
Noninterest bearing demand  $75,978   $77,496 
Interest bearing   293,061    301,364 
Total deposits   369,039    378,860 
Federal Home Loan Bank advances   6,000    14,000 
Long-term debt - trust preferred securities   8,764    8,764 
Other borrowings   338    3,302 
Accrued interest payable   1,302    1,167 
Other liabilities   7,551    8,853 
Total liabilities   392,994    414,946 
           
Shareholders' equity          
Preferred stock, $4 par value, $1,000 liquidation preference,1,000,000 shares  authorized; 5,715 shares issued and outstanding at September 30, 2015 14,738 shares issued and oustanding at December 31, 2014   23    59 
Common stock, $4 par value, 10,000,000 shares authorized; 1,417,920 shares issued and outstanding at September 30, 2015 350,622 shares issued and outstanding at December 31, 2014   5,561    1,339 
Additional paid-in capital   58,501    58,188 
Accumulated deficit   (33,870)   (40,539)
Common stock warrant   732    732 
Stock in directors rabbi trust   (1,034)   (878)
Directors deferred fees obligation   1,034    878 
Accumulated other comprehensive loss   (291)   (721)
Total shareholders' equity   30,656    19,058 
           
   $423,650   $434,004 

 

See accompanying notes to consolidated financial statements.

 

 3 
 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2015 and 2014
(Unaudited)
(dollar amounts in thousands, except per share amounts)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
Interest income                    
Loans  $3,780   $3,814   $11,096   $11,579 
Investment securities   155    304    464    958 
Federal funds sold   10    19    46    64 
Total interest income   3,945    4,137    11,606    12,601 
                     
Interest expense                    
Deposits   621    751    1,877    2,304 
Borrowed funds   82    (22)   307    423 
Total interest expense   703    729    2,184    2,727 
                     
Net interest income   3,242    3,408    9,422    9,874 
Provision for loan losses   -    -    -    100 
Net interest income after provision for loan losses   3,242    3,408    9,422    9,774 
                     
Noninterest income                    
Service charges and fees   632    589    1,906    1,673 
Gain on sale of loans   1,840    1,290    4,797    3,453 
Gain on sale of assets   -    -    -    3 
Gain (loss) on sale of investment securities   -    (14)   7    (14)
Rental income   309    226    800    732 
Other   89    99    266    338 
Total noninterest income   2,870    2,190    7,776    6,185 
                     
Noninterest expense                    
Salaries and benefits   2,892    2,659    8,271    8,108 
Commissions   499    338    1,234    907 
Occupancy   412    397    1,298    1,272 
Equipment   189    146    587    529 
Write down of assets held for sale   -    -    687    - 
Supplies   70    77    204    243 
Professional and outside services   856    615    2,153    1,896 
Advertising and marketing   73    81    246    220 
Loss (gain) on sale and write down of OREO, net   (49)   364    (135)   1,051 
Other operating expense   699    787    2,103    2,434 
Total noninterest expense   5,641    5,464    16,648    16,660 
                     
Net income (loss) before income tax expense (benefit)   471    134    550    (701)
Income tax expense (benefit)   -    -    -    - 
                     
Net income (loss)   471    134    550    (701)
                     
Preferred stock dividends and amortization of discount   (170)   (545)   (500)   (1,062)
Preferred stock principal forgiveness   -    -    4,404    - 
Preferred stock dividend forgiveness   -    -    2,215    - 
Net income (loss) available to common shareholders  $301   $(411)  $6,669   $(1,763)
                     
Earnings (loss) per share, basic  $0.21   $(1.23)  $6.17   $(5.28)
Earnings (loss) per share, diluted  $0.21   $(1.23)  $6.14   $(5.28)

 

See accompanying notes to consolidated financial statements.

 

 4 
 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Changes in Comprehensive Income (Loss)
Three and Nine Months Ended September 30, 2015 and 2014
(Unaudited)
(dollar amounts in thousands)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2015   2014   2015   2014 
                 
Net income (loss)  $471   $134   $550   $(701)
Other comprehensive income (loss)                    
Unrealized holding gains (losses) arising during the period   544    84    650    3,234 
Tax effect   185    28    221    1,099 
Net change in unrealized holding gains (losses) on securities available for sale, net of tax   359    56    429    2,135 
                     
Reclassification adjustment                    
Reclassification adjustment for gains realized in income   -    14    (7)   14 
Tax effect   -    5    (2)   5 
Reclassification for gains included in net income, net of tax   -    9    (5)   9 
                     
Minimum pension adjustment   3    3    9    9 
Tax effect   1    1    3    3 
Minimum pension adjustment, net of tax   2    2    6    6 
                     
Total other comprehensive income   361    67    430    2,150 
                     
Total comprehensive income  $832   $201   $980   $1,449 

 

See accompanying notes to consolidated financial statements.

  

 5 
 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Changes in Shareholders' Equity
Nine Months Ended September 30, 2015 and 2014
(Unaudited)
(dollar amounts in thousands)

 

                               Directors   Accumulated     
           Additional           Discount on   Stock in   Deferred   Other     
   Preferred   Common   Paid-in   Accumulated       Preferred   Directors   Fees   Comprehensive     
   Stock   Stock   Capital   Deficit   Warrant   Stock   Rabbi Trust   Obligation   Income (loss)   Total 
                                         
Balance, December 31, 2014  $59   $1,339   $58,188   $(40,539)  $732   $-   $(878)  $878   $(721)  $19,058 
Preferred stock dividend   -    -    -    (500)   -    -    -    -    -    (500)
Restricted stock issuance   -    15    (93)   -    -    -    (156)   156    -    (78)
Issuance of common stock, net of offering expense of $1,200   -    2,875    5,842    -    -    -    -    -    -    8,717 
Preferred stock exchanged for commmon stock   (18)   1,332    (1,314)   -    -    -    -    -    -    - 
Preferred stock principal forgiveness   (18)   -    (4,386)   4,404    -    -    -    -    -    - 
Preferred stock dividend forgiveness   -    -    -    2,215    -    -    -    -    -    2,215 
Stock based compensation   -    -    264    -    -    -    -    -    -    264 
Minimum pension adjustment (net of income taxes of $3)   -    -    -    -    -    -    -    -    6    6 
Net income   -    -    -    550    -    -    -    -    -    550 
Change in unrealized gain (loss) on investment securities available-for-sale, net of reclassification and tax effect   -    -    -    -    -    -    -    -    424    424 
                                                   
Balance, September 30, 2015  $23   $5,561   $58,501   $(33,870)  $732   $-   $(1,034)  $1,034   $(291)  $30,656 
                                                   
Balance, December 31, 2013  $59   $21,353   $38,054   $(38,066)  $732   $(50)  $(878)  $878   $(3,838)  $18,244 
Amortization of preferred stock discount   -    -    -    (50)   -    50    -    -    -    - 
Preferred stock dividend   -    -    -    (1,012)   -    -    -    -    -    (1,012)
Reverse stock split   -    (20,019)   20,019    -    -    -    -    -    -    - 
Issuance of common stock   -    3    (11)   -    -    -    -    -    -    (8)
Stock based compensation   -    -    62    -    -    -    -    -    -    62 
Minimum pension adjustment (net of income taxes of $3)   -    -    -    -    -    -    -    -    6    6 
Net loss   -    -    -    (701)   -    -    -    -    -    (701)
Change in unrealized gain (loss) on investment securities available-for-sale, net of reclassification and tax effect   -    -    -    -    -    -    -    -    2,144    2,144 
                                                   
Balance, September 30, 2014  $59   $1,337   $58,124   $(39,829)  $732   $-   $(878)  $878   $(1,688)  $18,735 

 

See accompanying notes to consolidated financial statements.

 

 6 
 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2015 and 2014
(Unaudited)
(dollars in thousands)

 

   2015   2014 
         
Cash Flows from Operating Activities          
Net income (loss)  $550   $(701)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
          
Depreciation and amortization   649    482 
Deferred income taxes   201    (324)
Valuation allowance deferred income taxes   (201)   324 
Provision for loan losses   -    100 
Write-down of other real estate owned   216    751 
Valuation allowance other real estate owned   73    (495)
Write-down of assets held for sale   687    - 
(Gain) loss on securities sold   (7)   14 
Gain on loans sold   (4,797)   (3,453)
(Gain) loss on sale and disposal of premises and equipment   12    (3)
Gain on sale of other real estate owned   (666)   (199)
Stock compensation expense   264    62 
Proceeds from sale of mortgage loans   166,176    128,465 
Origination of mortgage loans for sale   (164,235)   (123,939)
Amortization of premiums and accretion of discounts on securities, net   216    304 
Increase in interest receivable   (713)   (81)
Increase in bank owned life insurance   (137)   (137)
Decrease (increase) in other assets   (835)   205 
Increase in interest payable   135    27 
Increase in other liabilities   1,010    2,142 
Net cash (used in) provided by operating activities   (1,402)   3,544 
           
Cash Flows from Investing Activities          
Purchases of available for sale securities   (6,748)   - 
Proceeds from the sale or calls of available for sale securities   7,129    5,162 
Net decrease (increase) in loans   (14,747)   4,401 
Proceeds from sale of other real estate owned   5,340    8,057 
Purchases of premises and equipment   (780)   (1,708)
Proceeds from sale of premises and equipment   -    17 
Net cash (used in) provided by investing activities   (9,806)   15,929 
           
Cash Flows from Financing Activities          
Issuance of common stock   -    (8)
Net proceeds from sale of common stock, net of expenses of $990   8,965    - 
Net decrease in deposits   (9,821)   (9,964)
Net decrease in Federal Home Loan Bank Advances   (8,000)   (4,000)
Net increase (decrease) in other borrowings   (2,964)   (878)
Net cash used in financing activities   (11,820)   (14,850)
           
Net increase (decrease) in cash and cash equivalents   (23,028)   4,623 
Cash and cash equivalents, beginning of period   49,103    40,209 
           
Cash and cash equivalents, end of period  $26,075   $44,832 
           
Supplemental Disclosure of Cash Flow Information          
Cash payments for interest  $2,049   $2,536 
Supplemental Schedule of Non Cash Activities          
Real estate owned assets acquired in settlement of loans  $329   $5,375 
Assets moved to held for sale  $831   $- 
Dividends on preferred stock accrued  $500   $1,012 
Non-Cash conversion of preferred shares  $4,619   $- 
Forgiveness of principal and accrued dividends  $6,619   $- 

 

See accompanying notes to consolidated financial statements.

 

 7 
 

 

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three and Nine Months Ended September 30, 2015 and 2014

(Unaudited)

 

Note 1 - Principles of presentation

 

Village Bank and Trust Financial Corp. (the “Company”) is the holding company of Village Bank (the “Bank”). The consolidated financial statements include the accounts of the Company, the Bank and the Bank’s subsidiary. All material intercompany balances and transactions have been eliminated in consolidation.

 

On August 6, 2014, the Company filed Articles of Amendment to its Articles of Incorporation with the Virginia State Corporation Commission to effect a reverse stock split of its outstanding common stock which became effective on August 8, 2014. As a result of the reverse split, every sixteen shares of the Company’s issued and outstanding common stock were consolidated into one issued and outstanding share of common stock. The computations of basic and diluted earnings (loss) per share have been adjusted retroactively to reflect the reverse stock split.

 

In the opinion of management, the accompanying condensed consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the nine month period ended September 30, 2015 is not necessarily indicative of the results to be expected for the full year ending December 31, 2015. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission (“SEC”).

 

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of September 30, 2015 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

Note 2 - Use of estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and statements of operations for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the allowance for loan losses and its related provision, the valuation allowance on the deferred tax asset, and the estimate of the fair value of assets held for sale.

 

 8 
 

 

Note 3 - Earnings (loss) per common share

 

The following table presents the basic and diluted earnings (loss) per common share computation (in thousands, except per share data):

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
Numerator                    
Net income (loss) - basic and diluted  $471   $134   $550   $(701)
Preferred stock dividend and accretion   (170)   (545)   (500)   (1,062)
Preferred stock principal forgiveness   -    -    4,404    - 
Preferred stock dividend forgiveness   -    -    2,215    - 
Net income (loss) available to common  shareholders  $301   $(411)  $6,669   $(1,763)
                     
Denominator                    
Weighted average shares outstanding - basic   1,418    334    1,081    334 
Dilutive effect of common stock options and  restricted stock awards   5    -    5    - 
                     
Weighted average shares outstanding - diluted   1,423    334    1,086    334 
                     
Earnings (loss) per share - basic  $0.21   $(1.23)  $6.17   $(5.28)
Earnings (loss) per share - diluted  $0.21   $(1.23)  $6.14   $(5.28)

 

Outstanding options and warrants to purchase common stock were considered in the computation of diluted earnings (loss) per share for the periods presented.

 

Stock options for 4,505 and 14,802 shares of common stock were not included in computing diluted earnings (loss) per share for the three and nine months ended September 30, 2015 and 2014, respectively, because their effects were anti-dilutive. Warrants for 31,190 shares of common stock were not included in computing earnings (loss) per share in 2015 and 2014 because their effects were also anti-dilutive.

 

 9 
 

 

Note 4 – Investment securities available for sale

 

At September 30, 2015 and December 31, 2014, all of our securities were classified as available-for-sale. The following table presents the composition of our investment portfolio at the dates indicated (dollars in thousands):

 

           Gross   Gross   Estimated     
   Par   Amortized   Unrealized   Unrealized   Fair   Average 
   Value   Cost   Gains   Losses   Value   Yield 
September 30, 2015                              
US Government Agencies                              
One to five years  $12,000   $12,318   $-   $(32)  $12,286    0.91%
Five to ten years   18,500    19,737    -    (240)   19,497    2.32%
More than ten years   3,349    3,357    -    (9)   3,348    0.84%
    33,849    35,412    -    (281)   35,131    1.49%
Mortgage-backed securities                              
One to five years   1,896    1,947    1    (9)   1,939    1.27%
More than ten years   1,253    1,311    1    (6)   1,306    1.28%
    3,149    3,258    2    (15)   3,245    1.31%
Municipals                              
More than ten years   1,130    1,258    -    (39)   1,219    3.72%
    1,130    1,258    -    (39)   1,219    3.72%
                               
Total investment securities  $38,128   $39,928   $2   $(335)  $39,595    1.54%
                               
December 31, 2014                              
US Government Agencies                              
One to Five years  $10,000   $10,324   $-   $(225)  $10,099    1.10%
Five to ten years   22,500    23,895    -    (647)   23,248    1.98%
    32,500    34,219    -    (872)   33,347    1.71%
Mortgage-backed securities                              
More than ten years   471    484    2    (2)   484    0.31%
Municipals                              
Five to ten years   1,000    1,131    -    (20)   1,111    2.50%
More than ten years   4,130    4,684    2    (86)   4,600    2.89%
    5,130    5,815    2    (106)   5,711    2.82%
                               
Total investment securities  $38,101   $40,518   $4   $(980)  $39,542    1.85%

 

Investment securities available for sale that have an unrealized loss position at September 30, 2015 and December 31, 2014 are detailed below (in thousands):

 

   Securities in a loss   Securities in a loss         
   position for less than   position for more than         
   12 Months   12 Months   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
September 30, 2015                              
US Government Agencies  $18,782   $(219)  $16,349   $(62)  $35,131   $(281)
Municipals   711    (11)   507    (28)   1,218    (39)
Mortgage-backed securities   2,152    (15)   -    -    2,152    (15)
                               
   $21,645   $(245)  $16,856   $(90)  $38,501   $(335)
                               
December 31, 2014                              
US Government Agencies  $-   $-   $33,347   $(872)  $33,347   $(872)
Municipals   -    -    5,497    (106)   5,497    (106)
Mortgage-backed securities   -    -    363    (2)   363    (2)
                               
   $-   $-   $39,207   $(980)  $39,207   $(980)

 

 10 
 

 

Management does not believe that any individual unrealized loss as of September 30, 2015 and December 31, 2014 is other than a temporary impairment. These unrealized losses are primarily attributable to changes in interest rates. As of September 30, 2015, management does not have the intent to sell any of the securities classified as available for sale and management believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. Approximately $6 million of these securities are pledged against current and potential fundings.

 

Note 5 – Loans and allowance for loan losses

 

The following table presents the composition of our loan portfolio (excluding mortgage loans held for sale) at the dates indicated (dollars in thousands):

 

   September 30, 2015   December 31, 2014 
   Amount   %   Amount   % 
Construction and land development                    
Residential  $5,188    1.73%  $4,315    1.51%
Commercial   26,220    8.76%   25,152    8.80%
    31,408    10.49%   29,467    10.31%
Commercial real estate                    
Owner occupied   68,437    22.84%   58,804    20.55%
Non-owner occupied   38,132    12.72%   38,892    13.59%
Multifamily   8,195    2.73%   11,438    4.00%
Farmland   394    0.13%   434    0.15%
    115,158    38.42%   109,568    38.29%
Consumer real estate                    
Home equity lines   20,024    6.68%   20,082    7.02%
Secured by 1-4 family residential                    
First deed of trust   58,470    19.51%   61,837    21.61%
Second deed of trust   7,249    2.42%   7,854    2.74%
    85,743    28.61%   89,773    31.37%
Commercial and industrial loans
(except those secured by real estate)
   19,457    6.49%   22,165    7.75%
Guaranteed student loans   46,355    15.46%   33,562    11.73%
Consumer and other    1,624    0.53%   1,611    0.55%
                     
Total loans   299,745    100.00%   286,146    100.00%
Deferred loan cost, net   1,294         722      
Less: allowance for loan losses   (5,496)        (5,729)     
                     
   $295,543        $281,139      

 

The Company assigns risk rating classifications to its loans. These risk ratings are divided into the following groups:

 

·Risk rated 1 to 4 loans are considered of sufficient quality to preclude an adverse rating. These assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral;
·Risk rated 5 loans are defined as having potential weaknesses that deserve management’s close attention;
·Risk rated 6 loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any;

 

 11 
 

 

·Risk rated 7 loans have all the weaknesses inherent in substandard loans, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable; and
·Loans rated 6 or 7 are considered “Classified” loans for regulatory classification purposes.

 

The following tables provide information on the risk rating of loans at the dates indicated (in thousands):

 

   Risk Rated   Risk Rated   Risk Rated   Risk Rated   Total 
   1-4   5   6   7   Loans 
September 30, 2015                         
Construction and land development                         
Residential  $5,188   $-   $-   $-   $5,188 
Commercial   24,165    581    1,474    -    26,220 
    29,353    581    1,474    -    31,408 
Commercial real estate                         
Owner occupied   62,315    2,882    3,240    -    68,437 
Non-owner occupied   36,020    2,015    97    -    38,132 
Multifamily   7,993    202    -    -    8,195 
Farmland   394    -    -    -    394 
    106,722    5,099    3,337    -    115,158 
Consumer real estate                         
Home equity lines   18,909    237    878    -    20,024 
Secured by 1-4 family residential                         
First deed of trust   52,409    2,919    3,142    -    58,470 
Second deed of trust   6,404    26    819    -    7,249 
    77,722    3,182    4,839    -    85,743 
Commercial and industrial loans
(except those secured by real estate)
   18,049    386    1,022    -    19,457 
Guaranteed student loans   46,355    -    -    -    46,355 
Consumer and other   1,534    66    24    -    1,624 
                          
Total loans  $279,735   $9,314   $10,696   $-   $299,745 

 

 12 
 

  

   Risk Rated   Risk Rated   Risk Rated   Risk Rated   Total 
   1-4   5   6   7   Loans 
December 31, 2014                         
Construction and land development                         
Residential  $3,946   $205   $164   $-   $4,315 
Commercial   20,641    1,622    2,889    -    25,152 
    24,587    1,827    3,053    -    29,467 
Commercial real estate                         
Owner occupied   47,175    5,234    6,395    -    58,804 
Non-owner occupied   36,439    1,811    642    -    38,892 
Multifamily   10,703    735    -    -    11,438 
Farmland   413    -    21    -    434 
    94,730    7,780    7,058    -    109,568 
Consumer real estate                         
Home equity lines   18,107    465    1,510    -    20,082 
Secured by 1-4 family residential                         
First deed of trust   52,513    4,763    4,561    -    61,837 
Second deed of trust   6,456    434    964    -    7,854 
    77,076    5,662    7,035    -    89,773 
Commercial and industrial loans
(except those secured by real estate)
   19,026    2,297    390    452    22,165 
Guaranteed student loans   33,562    -    -    -    33,562 
Consumer and other   1,488    74    49    -    1,611 
                          
Total loans  $250,469   $17,640   $17,585   $452   $286,146 

 

The following table presents the aging of the recorded investment in past due loans and leases as of the dates indicated (in thousands):

 

                           Recorded 
           Greater               Investment > 
   30-59 Days   60-89 Days   Than   Total Past       Total   90 Days and 
   Past Due   Past Due   90 Days   Due   Current   Loans   Accruing 
September 30, 2015                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $5,188   $5,188   $- 
Commercial   -    -    -    -    26,220    26,220    - 
    -    -    -    -    31,408    31,408    - 
Commercial real estate                                   
Owner occupied   157    -    -    157    68,280    68,437    - 
Non-owner occupied   -    -    -    -    38,132    38,132    - 
Multifamily   -    -    -    -    8,195    8,195    - 
Farmland   -    -    -    -    394    394    - 
    157    -    -    157    115,001    115,158    - 
Consumer real estate                                   
Home equity lines   27    49    -    76    19,948    20,024    - 
Secured by 1-4 family residential                                   
First deed of trust   -    263    -    263    58,207    58,470    - 
Second deed of trust   -    -    -    -    7,249    7,249    - 
    27    312    -    339    85,404    85,743    - 
Commercial and industrial loans
(except those secured by real estate)
   -    -    -    -    19,457    19,457    - 
Guaranteed student loans   1,750    1,092    9,117    11,959    34,396    46,355    9,117 
Consumer and other   -    -    -    -    1,624    1,624    - 
                                    
Total loans  $1,934   $1,404   $9,117   $12,455   $287,290   $299,745   $9,117 

  

 13 
 

 

                           Recorded 
           Greater               Investment > 
   30-59 Days   60-89 Days   Than   Total Past       Total   90 Days and 
   Past Due   Past Due   90 Days   Due   Current   Loans   Accruing 
December 31, 2014                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $4,315   $4,315   $- 
Commercial   92    391    -    483    24,669    25,152    - 
    92    391    -    483    28,984    29,467    - 
Commercial real estate                                   
Owner occupied   715    -    -    715    58,089    58,804    - 
Non-owner occupied   -    -    -    -    38,892    38,892    - 
Multifamily   -    -    -    -    11,438    11,438    - 
Farmland   -    -    -    -    434    434    - 
    715    -    -    715    108,853    109,568    - 
Consumer real estate                                   
Home equity lines   31    139    -    170    19,912    20,082    - 
Secured by 1-4 family residential                                   
First deed of trust   -    153    -    153    61,684    61,837    - 
Second deed of trust   56    -    -    56    7,798    7,854    - 
    87    292    -    379    89,394    89,773    - 
Commercial and industrial loans
(except those secured by real estate)
   -    47    -    47    22,118    22,165    - 
Guaranteed student loans   671    392    720    1,783    31,779    33,562    720 
Consumer and other   -    8    -    8    1,603    1,611    - 
                                    
Total loans  $1,565   $1,130   $720   $3,415   $282,731   $286,146   $720 

 

Loans greater than 90 days past due are student loans that are guaranteed by the Department of Education which covers approximately 98% of the principal and interest. Accordingly, these loans will not be placed on nonaccrual status.

 

Loans are considered impaired when, based on current information and events it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by management. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Impaired loans are set forth in the following table as of the dates indicated (in thousands):

 

 14 
 

 

   September 30, 2015 
       Unpaid     
   Recorded   Principal   Related 
   Investment   Balance   Allowance 
With no related allowance recorded               
Construction and land development               
Commercial  $1,403   $1,655   $- 
Commercial real estate               
Owner occupied   1,594    1,594      
Non-owner occupied   2,100    2,677    - 
Multifamily   -    -    - 
Farmland   -    -    - 
    3,694    4,271    - 
Consumer real estate               
Home equity lines   1,407    1,407    - 
Secured by 1-4 family residential               
First deed of trust   5,005    5,009    - 
Second deed of trust   1,115    1,386    - 
    7,527    7,802    - 
                
Commercial and industrial loans
(except those secured by real estate)
   454    454    - 
Consumer and other   -    -    - 
    13,078    14,182    - 
                
With an allowance recorded               
Construction and land development               
Commercial   575    575    26 
Commercial real estate               
Owner occupied   5,550    5,515    366 
Non-Owner occupied   456    456    38 
    6,006    5,971    404 
Consumer real estate               
Home equity lines   89    89    9 
Secured by 1-4 family residential               
First deed of trust   1,350    1,350    215 
Second deed of trust   356    356    147 
    1,795    1,795    371 
Commercial and industrial loans
(except those secured by real estate)
   136    232    17 
    8,512    8,573    818 
                
Total               
Construction and land development               
Commercial   1,978    2,230    26 
    1,978    2,230    26 
Commercial real estate               
Owner occupied   7,144    7,109    366 
Non-owner occupied   2,556    3,133    38 
    9,700    10,242    404 
Consumer real estate               
Home equity lines   1,496    1,496    9 
Secured by 1-4 family residential,               
First deed of trust   6,355    6,359    215 
Second deed of trust   1,471    1,742    147 
    9,322    9,597    371 
Commercial and industrial loans
(except those secured by real estate)
   590    686    17 
Consumer and other   -    -    - 
   $21,590   $22,755   $818 

 

 15 
 

 

   December 31, 2014 
       Unpaid     
   Recorded   Principal   Related 
   Investment   Balance   Allowance 
With no related allowance recorded               
Construction and land development               
Residential  $164   $164   $- 
Commercial   3,379    3,379    - 
    3,543    3,543    - 
Commercial real estate               
Owner occupied   1,686    1,686      
Non-owner occupied   6,593    6,593    - 
Multifamily   2,322    2,322    - 
Farmland   21    450    - 
    10,622    11,051    - 
Consumer real estate               
Home equity lines   800    800    - 
Secured by 1-4 family residential               
First deed of trust   6,485    6,493    - 
Second deed of trust   1,103    1,373    - 
    8,388    8,666    - 
Commercial and industrial loans
(except those secured by real estate)
   263    365    - 
Consumer and other   23    36    - 
    22,839    23,661    - 
                
With an allowance recorded               
Construction and land development               
Commercial   589    589    26 
Commercial real estate               
Owner occupied   6,625    6,640    905 
                
Consumer real estate               
Secured by 1-4 family residential               
First deed of trust   1,415    1,415    200 
Second deed of trust   257    257    142 
    1,672    1,672    342 
Commercial and industrial loans
(except those secured by real estate)
   555    555    239 
    9,441    9,456    1,512 
                
Total               
Construction and land development               
Residential   164    164    - 
Commercial   3,968    3,968    26 
    4,132    4,132    26 
Commercial real estate               
Owner occupied   8,311    8,326    905 
Non-owner occupied   6,593    6,593    - 
Multifamily   2,322    2,322    - 
Farmland   21    450    - 
    17,247    17,691    905 
Consumer real estate               
Home equity lines   800    800    - 
Secured by 1-4 family residential,               
First deed of trust   7,900    7,908    200 
Second deed of trust   1,360    1,630    142 
    10,060    10,338    342 
Commercial and industrial loans
(except those secured by real estate)
   818    920    239 
Consumer and other   23    36    - 
   $32,280   $33,117   $1,512 

 

 16 
 

 

The following is a summary of average recorded investment in impaired loans with and without a valuation allowance and interest income recognized on those loans for the periods indicated (in thousands):

 

   For the Three Months   For the Nine Months 
   Ended September 30, 2015   Ended September 30, 2015 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                    
Construction and land development                    
Residential  $-   $-   $76   $- 
Commercial   2,191    -    2,579    66 
    2,191    -    2,655    66 
Commercial real estate                    
Owner occupied   1,364    14    1,409    45 
Non-owner occupied   4,971    -    5,947    157 
Multifamily   -    -    319    6 
Farmland   -    -    5    - 
    6,335    14    7,680    208 
Consumer real estate                    
Home equity lines   1,178    -    617    4 
Secured by 1-4 family residential                    
First deed of trust   5,665    -    6,120    173 
Second deed of trust   1,118    13    1,162    43 
    7,961    13    7,899    220 
Commercial and industrial loans
(except those secured by real estate)
   185    22    181    26 
Consumer and other   -    -    13    1 
    16,672    49    18,428    521 
                     
With an allowance recorded                    
Construction and land development                    
Commercial   529    6    578    17 
Commercial real estate                    
Owner occupied   5,544    53    6,197    169 
Non-Owner occupied   459    6    262    18 
    6,003    59    6,459    187 
Consumer real estate                    
Home equity line   89    -    45    - 
Secured by 1-4 family residential                    
First deed of trust   1,387    -    1,306    - 
Second deed of trust   284    -    262    - 
    1,760    -    1,613    - 
Commercial and industrial loans
(except those secured by real estate)
   226    4    378    20 
    8,518    69    9,028    224 
                     
Total                    
Construction and land development                    
Residential   -    -    76    - 
Commercial   2,720    6    3,157    83 
    2,720    6    3,233    83 
Commercial real estate                    
Owner occupied   6,908    67    7,606    214 
Non-owner occupied   5,430    6    6,209    175 
Multifamily   -    -    319    6 
Farmland   -    -    5    - 
    12,338    73    14,139    395 
Consumer real estate                    
Home equity lines   1,267    -    662    4 
Secured by 1-4 family residential,                    
First deed of trust   7,052    -    7,426    173 
Second deed of trust   1,402    13    1,424    43 
    9,721    13    9,512    220 
Commercial and industrial loans
(except those secured by real estate)
   411    26    559    46 
Consumer and other   -    -    13    1 
   $25,190   $118   $27,456   $745 

 

 17 
 

 

   For the Three Months   For the Nine Months 
   Ended September 30, 2014   Ended September 30, 2014 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                    
Construction and land development                    
Residential  $133    -   $206    2 
Commercial   3,584    52    3,841    150 
    3,717    52    4,047    152 
Commercial real estate                    
Owner occupied   2,654    70    3,161    135 
Non-owner occupied   9,557    120    9,994    335 
Multifamily   2,340    35    2,353    106 
Farmland   21    -    21    - 
    14,572    225    15,529    576 
Consumer real estate                    
Home equity lines   950    3    960    19 
Secured by 1-4 family residential                    
First deed of trust   7,259    75    7,175    268 
Second deed of trust   1,147    9    1,066    42 
    9,356    87    9,201    329 
Commercial and industrial loans                    
(except those secured by real estate)   746    7    751    30 
Consumer and other   17    -    19    1 
   $28,408   $371   $29,547   $1,088 
                     
With an allowance recorded                    
Construction and land development                    
Commercial   598    8    603    23 
Commercial real estate                    
Owner occupied   2,801    62    4,446    154 
Non-Owner occupied   1,946    9    217    9 
    4,747    71    4,663    163 
Consumer real estate                    
Secured by 1-4 family residential                    
First deed of trust   1,870    22    1,944    24 
Second deed of trust   260    5    264    8 
    2,130    27    2,208    32 
Commercial and industrial loans
(except those secured by real estate)
   110    -    115    - 
   $7,585   $106   $7,589   $218 
                     
Total                    
Construction and land development                    
Residential   133    -    206    2 
Commercial   4,182    60    4,444    173 
    4,315    60    4,650    175 
Commercial real estate                    
Owner occupied   5,455    132    7,607    289 
Non-owner occupied   11,503    129    10,211    344 
Multifamily   2,340    35    2,353    106 
Farmland   21    -    21    - 
    19,319    296    20,192    739 
Consumer real estate                    
Home equity lines   950    3    960    19 
Secured by 1-4 family residential,                    
First deed of trust   9,129    97    9,119    292 
Second deed of trust   1,407    14    1,330    50 
    11,486    114    11,409    361 
Commercial and industrial loans
(except those secured by real estate)
   856    7    866    30 
Consumer and other   17    -    19    1 
   $35,993   $477   $37,136   $1,306 

 

 18 
 

 

Included in impaired loans are loans classified as troubled debt restructurings (“TDRs”). A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. For loans classified as impaired TDRs, the Company further evaluates the loans as performing or nonperforming. If, at the time of restructure, the loan is not considered nonaccrual, it will be classified as performing. TDRs originally classified as nonperforming are able to be reclassified as performing if, subsequent to restructure, they experience six months of payment performance according to the restructured terms. The following is a summary of performing and nonaccrual TDRs and the related specific valuation allowance by portfolio segment as of the dates indicated (dollars in thousands):

 

               Valuation 
   Total   Performing   Nonaccrual   Allowance 
September 30, 2015                    
Construction and land development                    
Commercial  $1,723   $1,705   $19   $- 
    1,723    1,705    19    - 
Commercial real estate                    
Owner occupied   5,773    5,489    284    59 
Non-owner occupied   2,556    2,556    -    - 
    8,329    8,045    284    59 
Consumer real estate                    
Home equity lines   89    -    89    9 
Secured by 1-4 family residential                    
First deed of trust   4,610    3,742    868    107 
Second deed of trust   739    644    95    - 
    5,438    4,386    1,052    116 
Commercial and industrial loans
(except those secured by real estate)
   131    -    131    17 
Consumer and other    -    -    -    - 
   $15,621   $14,135   $1,486   $192 
                     
Number of loans   67    48    19    10 

 

 19 
 

 

               Specific 
               Valuation 
   Total   Performing   Nonaccrual   Allowance 
December 31, 2014                    
Construction and land development                    
Residential   7    -    7    - 
Commercial   3,895    3,751    144    17 
    3,902    3,751    151    17 
Commercial real estate                    
Owner occupied   6,317    5,149    1,168    325 
Non-owner occupied   6,593    6,593    -    - 
Multifamily   2,322    2,322    -    - 
    15,232    14,065    1,168    325 
Consumer real estate                    
Secured by 1-4 family residential   -    -    -    - 
First deeds of trust   6,990    5,494    1,496    200 
Second deeds of trust   762    658    104    5 
    7,752    6,152    1,600    205 
                     
Commercial and industrial loans
(except those secured by real estate)
   239    -    239    12 
Consumer and other   16    -    16    - 
   $27,141   $23,967   $3,174   $559 
                     
Number of loans   107    77    30    21 

 

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

 

   Nine Months Ended September 30, 2015   Nine Months Ended September 30, 2014 
       Pre-   Post-       Pre-   Post- 
       Modification   Modification       Modification   Modification 
   Number of   Recorded   Recorded   Number of   Recorded   Recorded 
   Loans   Balance   Balance   Loans   Balance   Balance 
                         
Construction and land development                              
Commercial   -   $-   $-    1   $45   $45 
    -    -    -    1    45    45 
Commercial real estate                              
Owner occupied   -    -    -    2    743    743 
Non-owner occupied   -    -    -    -    -    - 
    -    -    -    2    743    743 
Consumer real estate                              
Home equity lines   1    89    89    -    -    - 
Secured by 1-4 family residential                              
First deed of trust   -    -    -    7    729    729 
Second deed of trust   -    -    -    2    105    105 
    1    89    89    9    834    834 
                               
    1   $89   $89    12   $1,622   $1,622 

 

 20 
 

 

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

 

   Nine Months Ended September 30, 2015   Nine Months Ended September 30, 2014 
   Number of   Recorded   Number of   Recorded 
   Loans   Balance   Loans   Balance 
                 
Construction and land development                    
Commercial   1   $19    1   $45 
    1    19    1    45 
Commercial real estate                    
Owner occupied   1    157    1    334 
Non-owner occupied   -    -    -    - 
    1    157    1    334 
Consumer real estate                    
Home equity lines   -    -    -    - 
Secured by 1-4 family residential                    
First deed of trust   11    897    5    541 
Second deed of trust   -    -    2    105 
    11    897    7    646 
                     
Commercial and industrial
(except those secured by real estate)
   1    131    -    - 
    14   $1,204    9   $1,025 

 

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

 

   Beginning   Provision for           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Three Months Ended September 30, 2015                         
Construction and land development                         
Residential  $92   $(9)  $-   $-   $83 
Commercial   369    113    (67)   -    415 
    461    104    (67)   -    498 
Commercial real estate                         
Owner occupied   1,686    (150)   -    33    1,569 
Non-owner occupied   639    51    -    2    692 
Multifamily   110    2    -    -    112 
Farmland   127    (48)   -    -    79 
    2,562    (145)   -    35    2,452 
Consumer real estate                         
Home equity lines   441    59    (14)   1    487 
Secured by 1-4 family residential                         
First deed of trust   1,192    72    (37)   5    1,232 
Second deed of trust   250    (17)   -    12    245 
    1,883    114    (51)   18    1,964 
Commercial and industrial loans
(except those secured by real estate)
   382    (67)   -    15    330 
Student Loans   253    (21)   (2)   -    230 
Consumer and other   26    15    (21)   2    22 
                          
   $5,567   $-   $(141)  $70   $5,496 

 

 21 
 

 

   Beginning   Provision for           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Three Months Ended September 30, 2014                         
Construction and land development                         
Residential  $141   $-   $-   $-   $141 
Commercial   770    -    -    27    797 
    911    -    -    27    938 
Commercial real estate                         
Owner occupied   1,245    -    -    -    1,245 
Non-owner occupied   (15)   -    -    1    (14)
Multifamily   17    -    -    -    17 
Farmland   409    -    -    -    409 
    1,656    -    -    1    1,657 
Consumer real estate                         
Home equity lines   225    -    (52)   12    185 
Secured by 1-4 family residential                         
First deed of trust   1,744    -    (39)   9    1,714 
Second deed of trust   440    -    -    5    445 
    2,409    -    (91)   26    2,344 
Commercial and industrial loans
(except those secured by real estate)
   678    -    -    13    691 
Consumer and other   27    -    (3)   4    28 
                          
   $5,681   $-   $(94)  $71   $5,658 

  

   Beginning   Provision for           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Nine Months Ended September 30, 2015                         
Construction and land development                         
Residential  $34   $48   $-   $1   $83 
Commercial   202    443    (252)   22    415 
    236    491    (252)   23    498 
Commercial real estate                         
Owner occupied   1,836    (173)   (127)   33    1,569 
Non-owner occupied   607    81    -    4    692 
Multifamily   78    34    -    -    112 
Farmland   130    (51)   -    -    79 
    2,651    (109)   (127)   37    2,452 
Consumer real estate                         
Home equity lines   469    70    (54)   2    487 
Secured by 1-4 family residential                         
First deed of trust   1,345    (384)   (103)   374    1,232 
Second deed of trust   275    -    (55)   25    245 
    2,089    (314)   (212)   401    1,964 
Commercial and industrial loans
(except those secured by real estate)
   506    (87)   (162)   73    330 
Student Loans   217    14    (1)   -    230 
Consumer and other   30    5    (30)   17    22 
                          
   $5,729   $-   $(784)  $551   $5,496 

 

 22 
 

 

   Beginning   Provision for           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Nine Months Ended September 30, 2014                         
Construction and land development                         
Residential  $135   $5   $-   $1   $141 
Commercial   1,274