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EX-10.2 - EXHIBIT 10.2 - Cordia Bancorp Incv438309_ex10-2.htm
EX-10.1 - EXHIBIT 10.1 - Cordia Bancorp Incv438309_ex10-1.htm
EX-31.1 - EXHIBIT 31.1 - Cordia Bancorp Incv438309_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Cordia Bancorp Incv438309_ex31-2.htm
EX-32 - EXHIBIT 32 - Cordia Bancorp Incv438309_ex32.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, 2016

 

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 May 5, 2016, there were 6,798,250 shares of common stock outstanding.

 

 

 

  

  Page
PART I
Financial Information  
   
Item 1. Consolidated Balance Sheets (unaudited) 1
  Consolidated Statements of Operations (unaudited) 2
  Consolidated Statements of Comprehensive Income (Loss) (unaudited) 3
  Consolidated Statements of Cash Flows (unaudited) 4
  Notes to Consolidated Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 34
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 50
     
Item 4. Controls and Procedures 50
     
PART II
   
Other Information  
     
Item 1. Legal Proceedings 51
Item 1A. Risk Factors 51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 51
Item 3. Defaults Upon Senior Securities 51
Item 4. Mine Safety Disclosures 51
Item 5. Other Information 51
Item 6. Exhibits 51
     
Signatures   52

 

i 

 

  

Item 1.    Consolidated Financial Statements

 

Cordia Bancorp

Consolidated Balance Sheets

 

   (Unaudited)     
(dollars in thousands, except per share data)  March 31,
2016
   December 31,
2015
 
Assets          
Cash and due from banks  $4,911   $6,135 
Federal funds sold and interest-bearing deposits with banks   12,805    12,325 
Total cash and cash equivalents   17,716    18,460 
Securities available for sale, at fair market value   44,899    46,220 
Securities held to maturity, at cost (fair value $37,675 and $25,694 at March 31, 2016 and December 31, 2015, respectively)   37,227    25,500 
Restricted securities   2,393    2,355 
Loans held for sale   10,646    220 
Loans net of allowance for loan losses of $866 and $823, at March 31, 2016 and December 31, 2015, respectively   224,554    245,210 
Premises and equipment, net   5,919    5,980 
Accrued interest receivable   2,018    2,085 
Other real estate owned, net of valuation allowance   2,017    1,870 
Other assets   429    590 
Total assets  $347,818   $348,490 
           
Liabilities and stockholders' equity          
Deposits          
Non-interest bearing  $26,938   $28,969 
Savings and interest-bearing demand   112,582    107,057 
Time deposits   150,503    154,018 
Total deposits   290,023    290,044 
Accrued expenses and other liabilities   943    707 
FHLB borrowings   30,000    30,000 
Total liabilities   320,966    320,751 
           
Commitments and contingencies          
           
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, 5,394,563 and 5,186,349 shares outstanding  (includes 81,799 and 107,460 of nonvested shares) at March 31, 2016 and December 31, 2015,  respectively respectively   53    51 
Nonvoting common stock - 5,000,000 shares authorized, $0.01 par value, 1,400,437 shares outstanding at March 31, 2016 and December 31, 2014, respectively   14    14 
Additional paid-in capital   34,075    33,191 
Retained deficit   (7,142)   (4,827)
Accumulated other comprehensive loss   (148)   (690)
Total stockholders' equity   26,852    27,739 
Total liabilities and stockholders' equity  $347,818   $348,490 

 

See Notes to the Consolidated Financial Statements

 1

 

 

Cordia Bancorp

Consolidated Statements of Operations

(Unaudited)

 

   Three months ended March 31, 
(dollars in thousands, except per share data)  2016   2015 
Interest income          
Interest and fees on loans  $2,628   $2,183 
Investment securities   398    363 
Federal funds sold and deposits with banks   9    7 
Total interest income   3,035    2,553 
Interest expense          
Interest on deposits   546    454 
Interest on FHLB borrowings   95    89 
Total interest expense   641    543 
Net interest income   2,394    2,010 
Provision for (recovery of) loan losses   98    (340)
Net interest income after (recovery of) provision for loan losses   2,296    2,350 
Non-interest income (loss)          
Service charges on deposit accounts   31    30 
Net gain on sale of available for sale securities   -    114 
Realized and unrealized gains (losses) on loans held for sale   (713)   21 
Other income   68    48 
Total non-interest income (loss)   (614)   213 
Non-interest expense          
Salaries and employee benefits   1,904    1,280 
Professional services   170    84 
Occupancy   144    153 
Data processing and communications   246    198 
FDIC assessment and bank fees   169    90 
Bank franchise taxes   48    49 
Student loan servicing fees and other loan expenses   167    146 
Other real estate expenses, net   39    6 
Supplies and equipment   73    73 
Insurance   18    20 
Director's fees   53    26 
Marketing and business development   35    18 
Loss on sale of subsidiary   843    - 
Other operating expenses   88    69 
Total non-interest expense   3,997    2,212 
Net income (loss) before income taxes   (2,315)   351 
Income taxes   -    - 
Net income (loss)  $(2,315)  $351 
           
Basic net income (loss) per common share  $(0.35)  $0.05 
Diluted net income (loss) per common share  $(0.35)  $0.05 
Weighted average common shares outstanding, basic   6,658,976    6,559,217 
Weighted average common shares outstanding, diluted   6,658,976    6,559,217 

 

See Notes to the Consolidated Financial Statements

 

 2

 

  

Cordia Bancorp

Consolidated Statement of Comprehensive Income (Loss)

(Unaudited)

 

   Three Months Ended March 31, 
(dollars in thousands)  2016   2015 
Net income (loss)  $(2,315)  $351 
           
Other comprehensive income          
Unrealized securities gains (losses) arising during period   531    418 
Less:  Reclassification adjustment for net securities gains included in net income (loss)   -    (114)
Add:  Amortization of unrealized losses for securities transferred from available for sale to held to maturity   11    12 
Total other comprehensive income   542    316 
           
Comprehensive income (loss)  $(1,773)  $667 

 

See Notes to the Consolidated Financial Statements

 

 3

 

 

Cordia Bancorp

Consolidated Statements of Cash Flows

(Unaudited)

 

   Three Months Ended March 31, 
(dollars in thousands)  2016   2015 
Cash flows from operating activities:          
Net income (loss)  $(2,315)  $351 
Adjustments to reconcile net income (loss) to net cash provided by operating activities          
Net amortization of premium on investment securities   104    113 
Purchase accounting accretion, net   (4)   (38)
Depreciation   82    74 
Amortization of deferred loan costs and fees   138    83 
Provision for (recovery of) loan losses   98    (340)
Net gain on available for securities   -    (114)
Stock based compensation   886    55 
Other real estate owned valuation adjustment   8    - 
Originations of loans held for sale   (5,540)   (1,374)
Proceeds from the sale of loans held for sale   24,152    1,278 
Realized and unrealized (gains) losses on loans held for sale   713    (21)
Gain on the disposal of premises and equipment   (8)   - 
Changes in assets and liabilities:          
Decrease in accrued interest receivable   67    54 
Decrease (increase) in other assets   152    (226)
Increase in accrued expenses and other liabilities   238    224 
Net cash provided by operating activities   18,771    119 
Cash flows from investing activities:          
Purchase of securities available for sale   -    (3,080)
Purchase of securities held to maturity   (12,498)   - 
(Purchase) redemptions of restricted securities, net   (38)   (313)
Proceeds from sales, maturities, and paydowns of securities available for sale   1,779    15,481 
Proceeds from payments/maturities of securities held to maturity   751    572 
Net increase in loans   (9,475)   (6,503)
Improvements to other real estate owned   -    (6)
Purchase of premises and equipment   (28)   (42)
Proceeds on the sale of premises and equipment   15    - 
Net cash (used in) provided by investing activities   (19,494)   6,109 
Cash flows from financing activities:          
Net (decrease) increase in demand savings, interest-bearing checking and money market deposits   3,191    (3,343)
Net increase in time deposits   (3,212)   3,365 
Proceeds from FHLB advances   10,000    5,000 
Repayment of FHLB advances   (10,000)   - 
Net cash (used in) provided by investing activities   (21)   5,022 
Net increase (decrease) in cash and cash equivalents   (744)   11,250 
Cash and cash equivalents, beginning of period   18,460    21,840 
Cash and cash equivalents, end of period  $17,716   $33,090 
Supplemental disclosure of cash flow information          
Cash payments for interest  $617   $525 
Supplemental disclosure of noninvesting activities          
Unrealized gains (losses) on securities available for sale  $531   $304 
Amortization of unrealized losses transferred to held to maturity  $11   $12 
Transfer of loans from held for investment to held for sale  $29,751   $- 
Loans transferred to other real estate owned  $155   $- 

 

See Notes to the Consolidated Financial Statements

 4

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements

 

Note 1. Organization and Summary of Significant Accounting Policies

 

Organization

 

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

 

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

 

On March 29, 2013, the Company completed a share exchange with the Bank resulting in the Bank becoming a wholly owned subsidiary of the Company. Under the terms of the Agreement and Plan of Share Exchange between the Company and the Bank, each outstanding share of the Bank’s common stock owned by persons other than the Company were exchanged for 0.664 of a share of the Company’s common stock. Shares of the Company’s common 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.

 

On May 20, 2015, Cordia announced that it had authorized a stock repurchase program to acquire up to $500,000 of the Company’s outstanding common stock. Repurchase will be conducted through open market purchases or through privately negotiated transactions and will be made from time to time depending on market conditions and other factors. As of March 31, 2016, the Company had repurchased 21,200 shares.

 

In the fourth quarter of 2014 the Bank launched CordiaGrad, a private student loan refinancing program aimed at high-achieving graduates with student loans. On March 1, 2016, in order for Cordia to strategically focus on its core business of community banking, the Bank transferred certain assets and marketing arrangements related to CordiaGrad to a newly formed subsidiary and subsequently sold it to Jack C. Zoeller for nominal consideration in return for Mr. Zoeller’s resignation as Cordia’s President and Chief Executive Officer, resignation from the board of both Cordia and the Bank and his agreement to relinquish all of his rights under his employment agreement with Cordia, including all salary and benefits. Mr. Zoeller’s unvested restricted stock and stock options vested in connection with the agreement. No loans were sold as part of the transaction and, as part of the transaction, the Bank agreed to provide certain transition and loan origination services to the new entity acquired by Mr. Zoeller through June 30, 2016.

 

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.

 

 5

 

  

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

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, 2016 are not necessarily indicative of the results that may be expected for any future periods or for the year ending December 31, 2016. 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 2015 Annual Report on Form 10-K as filed with the Securities and Exchange Commission (“SEC”) on March 23, 2016.

 

Principles of Consolidation

 

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

 

Summary of Significant Accounting Policies

 

We provide a summary of our significant accounting policies in our 2015 Form 10-K under “Note 1 – Organization and Summary of Significant Accounting Policies”. There have been no significant changes to these policies during 2016.

 

Recent Accounting Pronouncements

 

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 January 2016, the FASB issued ASU 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in ASU 2016-01, among other things: 1) require equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 3) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables); 4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently assessing the impact that ASU 2016-01 will have on its consolidated financial statements.

 

 6

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently assessing the impact that ASU 2016-02 will have on its consolidated financial statements.

 

During March 2016, the FASB issued ASU No. 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” The amendments in this ASU clarify that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria remain intact. The amendments are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-05 to have a material impact on its consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” The amendments in this ASU eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. In addition, the amendments in this ASU require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Early Adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.

 

During March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company is currently assessing the impact that ASU 2016-09 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.

 

 7

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

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.

 

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

 

   Three Months Ended March 31, 
(dollars in thousands)  2016   2015 
Loans  $11   $21 
Premises and equipment   2    2 
Core deposit intangible   (9)   (9)
Building lease obligations   -    24 
Net impact to net income (loss)  $4   $38 

 

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 125 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 2016 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 144 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 2015 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.

 

For the periods ended March 31, 2016 and 2015, 394,125 and 578,125 shares, respectively, 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.

 

 8

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

The calculation for basic and diluted earnings per common share for the periods ended March 31, 2016 and 2015 are as follows:

 

Three months ended March 31, 2016 and 2015:        
         
(dollars in thousands)  2016   2015 
         
Net income (loss) attributable to Company  $(2,315)  $351 
           
Weighted average common shares outstanding, basic   6,658,976    6,559,217 
           
Dilutive effect of stock options   -    - 
           
Weighted average common shares outstanding, diluted   6,658,976    6,559,217 
           
Basic income (loss) per common share  $(0.35)  $0.05 
           
Diluted income (loss) per common share  $(0.35)  $0.05 

 

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 $82.1 million at March 31, 2016 as compared to $71.7 million at December 31, 2015. At March 31, 2016, the securities portfolio consisted of $44.9 million of securities available for sale, at fair value and $37.2 million of securities held to maturity, at amortized cost.

 

 9

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

The table below presents the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale at March 31, 2016 and December 31, 2015.

 

   March 31, 2016 
   Amortized   Gross Unrealized     
(dollars in thousands)  Cost   Gains   Losses   Fair Value 
U.S. Government agencies  $1,996   $11   $(9)  $1,998 
Agency guaranteed mortgage-backed securities   42,825    173    (97)   42,901 
Total  $44,821   $184   $(106)  $44,899 

 

   December 31, 2015 
   Amortized   Gross Unrealized     
(dollars in thousands)  Cost   Gains   Losses   Fair Value 
U.S. Government agencies  $2,144   $5   $(10)  $2,139 
Agency guaranteed mortgage-backed securities   44,529    3    (451)   44,081 
Total  $46,673   $8   $(461)  $46,220 

 

The table below presents the carry value, gross unrealized gains and losses, and fair value of securities held to maturity at March 31, 2016 and December 31, 2015.

 

   March 31, 2016 
   Amortized   Gross Unrealized     
(dollars in thousands)  Cost   Gains   Losses   Fair Value 
Agency guaranteed mortgage-backed securities  $37,227   $486   $(38)  $37,675 
Total  $37,227   $486   $(38)  $37,675 

 

   December 31, 2015 
   Amortized   Gross Unrealized     
(dollars in thousands)  Cost   Gains   Losses   Fair Value 
Agency guaranteed mortgage-backed securities  $25,500   $230   $(36)  $25,694 
Total  $25,500   $230   $(36)  $25,694 

 

 10

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

The amortized cost and fair value of securities available for sale as of March 31, 2016, 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 five years within ten years  $1,996   $1,998 
Over ten years   42,825    42,901 
Total  $44,821   $44,899 

 

The carry value and fair value of securities held to maturity as of March 31, 2016, 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 five years within ten years  $3,616   $3,779 
Over ten years   33,611    33,896 
Total  $37,227   $37,675 

 

As of March 31, 2016, the portfolio is concentrated in average maturities of over ten years, although all recently purchased securities have effective duration much shorter than ten years. The portfolio is available to support liquidity needs of the Company. The Company did not sell available for sale securities during the three months ended March 31, 2016. During the three months ended March 31, 2015, the Company sold $13.1 million available for sale securities and recognized a gross gain of $114 thousand in noninterest income.

 

Unrealized losses on investments at March 31, 2016 and December 31, 2015 were as follows:

 

   March 31, 2016 
   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  $-   $-   $1,448   $(9)  $1,448   $(9)
Agency guaranteed mortgage-backed securities   19,347    (101)   3,233    (34)   22,580    (135)
Total  $19,347   $(101)  $4,681   $(43)  $24,028   $(144)

 

   December 31, 2015 
(dollars in thousands)  Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
U.S. Government agencies  $-   $-   $1,521   $(10)  $1,521   $(10)
Agency guaranteed mortgage-backed securities   43,021    (429)   3,315    (58)   46,336    (487)
Total  $43,021   $(429)  $4,836   $(68)  $47,857   $(497)

 

 11

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

As of March 31, 2016, there were U.S. Government agency securities and agency guaranteed mortgage-backed securities with unrealized losses totaling $144 thousand. As of December 31, 2015, there were U.S. Government agency securities and agency guaranteed mortgage-backed securities with unrealized losses totaling $497 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.

 

Investment securities with combined market values of $13.4 million and $13.8 million were pledged to secure public funds with the State of Virginia at March 31, 2016 and December 31, 2015, respectively. We had $22.6 million in securities and $16.8 million in securities pledged to secure FHLB advances at March 31, 2016 and December 31, 2015, respectively.

 

Note 5. Loans Held for Sale

 

Secondary market mortgage loans are designated as held for sale at the time of their origination. These loans are pre-sold with servicing released and the Company does not retain any interest after the loans are sold. These loans consist primarily of fixed-rate, single-family residential mortgage loans which meet the underwriting characteristics of certain government–sponsored enterprises (conforming loans). In addition, the Company requires a firm purchase commitment from a permanent investor before a loan can be committed, thus limiting interest rate risk. Loans held for sale are carried at the lower of cost or fair value. Gains on sales of loans are recognized at the loan closing date and are included in noninterest income. The Company had $173 thousand and $220 thousand of residential mortgage loans held for sale as of March 31, 2016 and December 31, 2015, respectively.

 

In the first quarter of 2016, the Company transferred $29.8 million of refinanced private student loans from loans held for investment to loans held for sale. $24.0 million of these loans were subsequently sold in the first quarter of 2016, servicing released. These loans are carried at the lower of cost or fair value and net unrealized losses are recognized through a valuation allowance by charges to operations. The carrying amount of loans held for sale includes principal balances, valuation allowances, and direct costs that are deferred at the time of origination. The Company had $10.5 million of these loans at March 31, 2016. The refinanced private student loans had a valuation allowance of $206 thousand at March 31, 2016. The activity in the valuation allowance is described in the table below:

 

(dollars in thousands)  2016 
Balance at January 1  $- 
Additions   706 
Loss on sale of loans   (500)
Balance at March 31  $206 

 

Note 6. 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.

 

 12

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

The following table exhibits loans by sub-segment at March 31, 2016 and December 31, 2015.

 

(dollars in thousands)  March 31, 2016   December 31, 2015 
Commercial Real Estate:          
Acquisition, development and construction  $2,209   $2,168 
Non-owner occupied   66,269    58,044 
Owner occupied   42,425    45,690 
Commercial and industrial   32,881    34,819 
Guaranteed student loans   51,693    53,847 
Consumer:          
Residential mortgage   17,960    18,140 
HELOC   11,208    10,603 
Other   775    22,722 
Total loans   225,420    246,033 
Allowance for loan losses   (866)   (823)
Total loans, net of allowance for loan losses  $224,554   $245,210 

 

Included in the loan balances above are net deferred loan costs of $1.3 million and $1.7 million at March 31, 2016 and December 31, 2015, respectively. Also included in the loan balances above are premiums related to guaranteed student loans of $801 thousand at March 31, 2016 and $827 thousand at December 31, 2015.

 

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 $6.1 million and $6.9 million at March 31, 2016 and December 31, 2015, 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, 2016   December 31, 2015 
Contract principal balance  $4,373   $4,779 
Accretable yield   -    (1)
Carrying value of loans  $4,373   $4,778 

 

 13

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

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. In December 2010, due to the high level of uncertainty regarding the timing and amount of these cash flows, management initially considered the entire discount to be nonaccretable. However, due to improvement in the status of some credits, the majority of the nonaccretable difference was subsequently transferred to accretable yield and is being amortized as a yield adjustment over the lives of the individual loans. Cash flows received on loans with a nonaccretable difference 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 being applied to income. Any future reductions in carrying value as a result of deteriorating credit quality require an allowance for loan losses related to these loans.

 

A summary of changes to the accretable yield during the three months ended March 31, 2016 and 2015 is as follows:

 

   2016   2015 
(dollars in thousands)  Accretable
Yield
   Accretable
Yield
 
Beginning balance  $1   $42 
Charge-offs related to loans covered by ASC 310-30   -    - 
Transfers   -    - 
Accretion   (1)   (4)
Ending balance  $-   $38 

 

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

 

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.

 

 14

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

On a quarterly basis, the process of estimating the allowance for loan loss 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.

 

 15

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

The following is the distribution of loans by credit quality and segment as of March 31, 2016 and December 31, 2015:

 

March 31, 2016 (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   -    7,731    3,199    2,415    51,693    -    1,606    372    67,016 
3 Satisfactory   1,310    29,583    17,015    23,690    -    12,274    5,868    354    90,094 
4 Pass   227    27,600    19,849    6,241    -    5,485    2,872    49    62,323 
5 Special mention   -    -    -    534    -    26    268    -    828 
6 Substandard   121    -    390    1    -    39    235    -    786 
7 Doubtful   -    -    -    -    -    -    -    -    - 
    1,658    64,914    40,453    32,881    51,693    17,824    10,849    775    221,047 
Loans acquired with deteriorated credit quality   551    1,355    1,972    -    -    136    359    -    4,373 
Total loans  $2,209   $66,269   $42,425   $32,881   $51,693   $17,960   $11,208   $775   $225,420 

 

December 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   -    7,772    3,285    1,876    53,847    -    1,063    396    68,239 
3 Satisfactory   989    27,397    20,355    26,289    -    11,959    5,893    22,258    115,140 
4 Pass   472    19,988    19,550    6,102    -    5,976    2,779    68    54,935 
5 Special mention   -    1,510    -    547    -    27    269    -    2,353 
6 Substandard   152    -    151    5    -    41    239    -    588 
7 Doubtful   -    -    -    -    -    -    -    -    - 
    1,613    56,667    43,341    34,819    53,847    18,003    10,243    22,722    241,255 
Loans acquired with deteriorated credit quality   555    1,377    2,349    -    -    137    360    -    4,778 
Total loans  $2,168   $58,044   $45,690   $34,819   $53,847   $18,140   $10,603   $22,722   $246,033 

 

 16

 

 

Cordia Bancorp

Notes to 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, 2016 and December 31, 2015 is as follows:

 

   Commercial Real Estate           Consumer     
At March 31, 2016 ( in thousands)  Acq-Dev
Construction
   Non-owner
Occupied
   Owner
Occupied
   Commercial
and Industrial
   Guaranteed
Student
Loans
   Residential
Mortgage
   HELOC   Other   Total 
30 - 59 days  $-   $-   $-   $-   $2,619   $-   $-   $-   $2,619 
60 - 89 days   -    -    -         1,965    -    64    -    2,029 
> 90 days   121    -    886    -    6,866    -    -    -    7,873 
Total past due   121    -    886    -    11,450    -    64    -    12,521 
Current   2,088    66,269    41,539    32,881    40,243    17,960    11,144    775    212,899 
Total loans  $2,209   $66,269   $42,425   $32,881   $51,693   $17,960   $11,208   $775   $225,420 
> 90 days still accruing  $-   $-   $-   $-   $6,866   $-   $-   $-   $6,866 

 

   Commercial Real Estate           Consumer     
At December 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  $-   $-   $-   $-   $3,178   $-   $-   $73   $3,251 
60 - 89 days   -    -    -    -    2,413    -    -    -    2,413 
> 90 days   152    -    1,388    -    9,645    -    -    -    11,185 
Total past due   152    -    1,388    -    15,236    -    -    73    16,849 
Current   2,016    58,044    44,302    34,819    38,611    18,140    10,603    22,649    229,184 
Total loans  $2,168   $58,044   $45,690   $34,819   $53,847   $18,140   $10,603   $22,722   $246,033 
> 90 days still accruing  $-   $-   $-   $-   $9,645   $-   $-   $-   $9,645 

 

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 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.

 

 17

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

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

 

(dollars in thousands)  March 31,
2016
   December 31,
2015
 
Commercial Real Estate:          
Acquisition, development and construction  $121   $152 
Non-owner occupied        - 
Owner occupied   1,275    1,388 
Commercial and industrial   1    5 
Guaranteed Student Loans        - 
Consumer:          
Residential mortgage   -    - 
HELOC   286    289 
Total non-accrual loans  $1,683   $1,834 
           
Non-accrual troubled debt restructurings included above  $390   $- 
Non-accrual purchased credit impaired loans included above  $1,017   $1,370 

 

Impaired Loans

 

All loans that are rated Substandard or worse or are expected to be downgraded to Substandard, require additional analysis to determine if the loan is impaired. 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, 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. 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 allowance for loan loss as a specific reserve.

 

Government Guaranteed Student loans with a past due balance greater than 90 days are not placed on non-accrual and are not considered impaired.  When a loan reaches 120 days past due, the non-guaranteed portion of the loan is charged-off. The guarantor’s payment covers approximately 98% of principal and accrued interest. A component of the general loan loss reserve covers potential losses within the 2% of the non-guaranteed portion of the loans that are less than 120 days past due.

 

 18

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

Certain loans were identified and individually evaluated for impairment at March 31, 2016 and December 31, 2015. 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 one loan experienced collateral deterioration and a supplemental specific reserve was added. There were no consumer mortgage loans collateralized by residential real estate in the process of foreclosure as of March 31, 2016.

 

The results of those analyses are presented in the following tables.

 

The following is a summary of related impaired loans, excluding acquired impaired loans, presented by portfolio class as of March 31, 2016:

 

(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  $121   $121   $-   $129   $- 
Non-owner occupied   -    -    -    -    - 
Owner occupied   390    390    -    60    - 
Commercial and industrial   1    1    -    3    - 
Consumer:                  -      
Residential mortgage   39    39    -    40    1 
HELOC   171    171    -    173    1 
Other   -    -    -    -    - 
   $722   $722   $-   $405   $2 
With an allowance recorded:                         
Commercial Real Estate:                         
Acquisition, development and construction  $-   $-   $-   $-   $- 
Non-owner occupied   -    -    -    -    - 
Owner occupied   -    -    -    -    - 
Commercial and industrial   -    -    -    -    - 
Consumer:                         
Residential mortgage   -    -    -    -    - 
HELOC   64    64    16    64    - 
Other   -    -    -    -    - 
   $64   $64   $16   $64   $- 
Total:                         
Commercial Real Estate:                         
Acquisition, development and construction  $121   $121   $-   $129   $- 
Non-owner occupied   -    -    -    -    - 
Owner occupied   390    390    -    60    - 
Commercial and industrial   1    1    -    3    - 
Consumer:   -    -    -    -    - 
Residential mortgage   39    39    -    40    1 
HELOC   235    235    16    64    1 
Other   -    -    -    -    - 
Total  $786   $786   $16   $296   $2 

 

 19

 

  

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

The following is a summary of related impaired loans, excluding acquired impaired loans, presented by portfolio class as of December 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  $152   $152   $-   $188   $- 
Non-owner occupied   -    -    -    -    - 
Owner occupied   151    152    -    156    - 
Commercial and industrial   5    5    -    13    - 
Consumer:                         
Residential mortgage   41    41    -    44    3 
HELOC   175    175    -    185    3 
Other   -    -    -         - 
   $524   $525   $-   $586   $6 
With an allowance recorded:                         
Commercial Real Estate:                         
Acquisition, development and construction  $-   $-   $-   $-   $- 
Non-owner occupied   -    -    -    -    - 
Owner occupied   -    -    -    -    - 
Commercial and industrial   -    -    -    -    - 
Consumer:                         
Residential mortgage   -    -    -    -    - 
HELOC   64    64    16    66    - 
Other   -    -    -    -    - 
   $64   $64   $16   $66   $- 
Total:                         
Commercial Real Estate:                         
Acquisition, development and construction  $152   $152   $-   $188   $- 
Non-owner occupied   -    -    -    -    - 
Owner occupied   151    152    -    156    - 
Commercial and industrial   5    5    -    13    - 
Consumer:   -    -    -    -    - 
Residential mortgage   41    41    -    44    3 
HELOC   239    239    16    251    3 
Other   -    -    -    -    - 
Total  $588   $589   $16   $652   $6 

 

(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.

 

 20

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

Activity in the ALLL for the three months ended March 31, 2016 and 2015 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, 2015  $89   $157   $82   $112   $47   $59   $61   $216   $823 
                                              
Charge-offs   -    -    -    -    -    -    -    (71)   (71)
Recoveries   -    -    -    13    1    1    1    -    16 
Net (charge-offs) recoveries   -    -    -    13    1    1    1    (71)   (55)
                                              
Provision (recovery)   (44)   149    55    44    (1)   18    20    (143)   98 
Ending balance, March 31, 2016  $45   $306   $137   $169   $47   $78   $82   $2   $866 

 

   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 

 

 21

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

A summary of the ALLL by portfolio segment and impairment evaluation methodology as of March 31, 2016 and December 31, 2015 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  $-   $-   $-   $-   $-   $-   $16   $-   $16 
Collectively evaluated for impairment   45    306    137    169    47    78    66    2    850 
Loans acquired with deteriorated credit quality   -    -    -    -    -    -    -    -    - 
Ending balance, March 31, 2016  $45   $306   $137   $169   $47   $78   $82   $2   $866 
                                              
Gross loan balances                                             
Individually evaluated for impairment  $121   $-   $390   $1   $-   $39   $235   $-   $786 
Collectively evaluated for impairment   1,537    64,914    40,063    32,880    51,693    17,785    10,614    775    220,261 
Loans acquired with deteriorated credit quality   551    1,355    1,972    -    -    136    359    -    4,373 
Ending balance, March 31, 2016  $2,209   $66,269   $42,425   $32,881   $51,693   $17,960   $11,208   $775   $225,420 

 

   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  $-   $-   $-   $-   $-   $-   $16   $-   $16 
Collectively evaluated for impairment   89    157    82    112    47    59    45    216    807 
Loans acquired with deteriorated credit quality   -    -    -    -    -    -    -    -    - 
Ending balance, December 31, 2015  $89   $157   $82   $112   $47   $59   $61   $216   $823 
                                              
Gross loan balances                                             
Individually evaluated for impairment  $152   $-   $151   $-   $-   $41   $239   $-   $588 
Collectively evaluated for impairment   1,461    56,667    43,190    34,814    53,847    17,962    10,004    22,722    240,667 
Loans acquired with deteriorated credit quality   555    1,377    2,349    -    -    137    360    -    4,778 
Ending balance, December 31, 2015  $2,168   $58,044   $45,690   $34,819   $53,847   $18,140   $10,603   $22,722   $246,033 

 

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.

 

 22

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

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

 

During the quarter ended March 31, 2016, one loan was modified in a troubled debt restructuring. During the quarter ended March 31, 2015, no loans were modified in troubled debt restructurings. The principal balance outstanding relating to the loan at March 31, 2016, was $390 thousand. During the three months ended March 31, 2016 and 2015, no defaults occurred on loans modified as TDR’s in the preceding twelve months.

 

   Three Months Ended March 31, 2016 
2016 (dollars in thousands)  Number of loans   Rate
modification
   Term extension   Pre-modification
recorded
investment
   Post-modification
recorded
investment
 
Commercial real estate  $1   $-   $353   $353   $390 
Total  $1   $-   $353   $353   $390 

 

Note 7.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 2016 and 2015 activity in this account is as follows:

 

(dollars in thousands)  2016   2015 
Balance at January 1  $68   $104 
Amortization   (9)   (9)
Balance at March 31  $59   $95 

 

Amortization expense is expected to be approximately $35 thousand per year through 2016 and $33 thousand in 2017.

 

Note 8.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.

 

 23

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

Financial Instruments with Book Value Equal to Fair Value

 

The book values of cash and due from banks, federal funds sold and purchased, loans held for sale, 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.

 

Loans Held for Sale

 

The residential mortgage loans’ 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.

 

The refinanced private student loans fair value is based upon a recent loan sale observed by the Company in what is considered to be its principal market.

 

Loans Held for Investments

 

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, 2016 and December 31, 2015, 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.

 

 24

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

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.

 

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.

 

 25

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

The following table presents estimated fair values of the Company’s financial statements in accordance with authoritative accounting guidance:

 

       Fair Value Measurements at March 31, 2016 
(dollars in thousands)  Carrying amount   Level 1   Level 2   Level 3   Fair Value 
Assets:                         
Cash and cash equivalents  $17,716   $17,716   $-   $-   $17,716 
Securities available for sale   44,899    -    44,899    -    44,899 
Securities held to maturity   37,227    -    37,675    -    37,675 
Restricted securities   2,393    -    2,393    -    2,393 
Loans held for sale   10,646    -    10,646    -    10,646 
Net loans held for investment   224,554    -    -    223,352    223,352 
Interest receivable   2,018         2,018         2,018 
Liabilities:                         
Demand deposits   26,938    -    26,938    -    26,938 
Savings and interest-bearing demand deposits   112,582    -    112,582    -    112,582 
Time deposits   150,503    -    149,284    -    149,284 
FHLB Borrowings   30,000    -    29,953    -    29,953 
Interest payable   221    -    221    -    221 

 

       Fair Value Measurements at December 31, 2015 
(dollars in thousands)  Carrying amount   Level 1   Level 2   Level 3   Fair Value 
Assets:                         
Cash and cash equivalents  $18,460   $18,460   $-   $-   $18,460 
Securities available for sale   46,220    -    46,220    -    46,220 
Securities held to maturity   25,500    -    25,694    -    25,694 
Restricted securities   2,355    -    2,355    -    2,355 
Loans held for sale   220    -    220    -    220 
Net loans held for investment   245,210    -    -    244,776    244,776 
Interest receivable   2,085    -    2,085    -    2,085 
Liabilities:                         
Demand deposits   28,969    -    28,969    -    28,969 
Savings and interest-bearing demand deposits   107,057    -    107,057    -    107,057 
Time deposits   154,018    -    154,027    -    154,027 
FHLB Borrowings   30,000    -    29,878    -    29,878 
Interest payable   197    -    197    -    197 

 

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 Consolidated Financial Statements (continued)

 

The following table presents the balances of financial assets measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015:

 

       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, 2016                    
                     
U. S. Government Agencies  $1,998   $-   $1,998   $- 
Agency Guaranteed Mortgage-backed securities   42,901    -    42,901    - 
Loans held for sale   10,646    -    10,646    - 
                     
December 31, 2015                    
                     
U. S. Government Agencies  $2,139   $-   $2,139   $- 
Agency Guaranteed Mortgage-backed securities   44,081    -    44,081    - 
Loans held for sale   220    -    220    - 

 

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 a 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 based on income valuation approach 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’s 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 Allowance for Loan Losses 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 allowance for loan losses. 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 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, 2016                    
Impaired loans  $48   $-   $-   $48 
OREO   2,017    -    -    2,017 
                     
December 31, 2015                    
Impaired loans  $48   $-   $-   $48 
OREO   1,870    -    -    1,870 

 

There were no outstanding or in-process residential mortgage OREO properties as of March 31, 2016 or December 31, 2015.

 

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, 2016 and December 31, 2015

 

   March 31, 2016
(dollars in thousands)  Quantitative Information About Level 3 Fair Value Measurements
Description  Fair Value   Valuation Technique  Unobservable input  Range
(Weighted
Average)
              
Impaired loans  $48   Appraisals   Discount to reflect current market condition and estimated selling costs  0-10%
Other real estate owned  $2,017   Discounted appraised value  Discount for lack of marketability  6-29%

 

   December 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  $48   Appraisals   Discount to reflect current market condition and estimated selling costs  0-10%
Other real estate owned  $1,870   Discounted appraised value   Discount for lack of marketability  6-29%
               

 

 28

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

Note 9.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, 2016, there were 565,346 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.

 

Effective upon Cordia’s acquisition of the Bank on March 29, 2013, the 2005 and 2011 Plans were assumed by Cordia.

 

 29

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

A summary of the Company’s option activity as of March 31, 2016 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 12/31/2015  Stock Options   Price   Life   Fair Value   Value 
Outstanding   124,686   $6.59    -   $2.25   $- 
Vested   63,567   $8.71    -   $2.94   $- 
Nonvested   61,119   $4.39    -   $1.54   $- 
                          
Period Activity                         
Issued   -   $-    -   $-   $- 
Exercised   -   $-    -   $-   $- 
Forfeited   -   $-    -   $-   $- 
Expired   -   $-    -   $-   $- 
                          
As of 3/31/2016                         
Outstanding   124,686   $6.59    7.29   $2.25   $2,260 
Vested   79,985   $7.93    6.56   $2.68   $35 
Nonvested   44,701   $4.20    8.61   $1.48   $2,224 

 

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, which was the case at March 31, 2016.

 

The remaining unrecognized compensation expense for the options granted totaled $28 thousand and $91 thousand at March 31, 2016 and 2015, respectively.

 

Outstanding as of March 31, 2016

 

               Wgt. Avg. 
       Wgt. Avg.   Remaining 
       Stock Options   Exercise   Contractual 
Range of Exercise Prices  Outstanding   Price   Life 
  $      3.82  $61.00    124,686   $6.59    7.29 
Total        124,686   $6.59    7.29 

 

Exercisable:

 

             Wgt. Avg.      
         Stock Options    Exercise      
Range of Exercise Prices   Exercisable    Price      
  $      3.82  $61.00    79,985   $7.93      
Total        79,985   $7.93      

 

 30

 

 

Cordia Bancorp

Notes to 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 following assumptions.

 

   Three Months   Year Ended 
   Ended
March 31, 2016
   December 31,
2015
 
Expected dividend rate   0.00%   0.00%
Expected volatility   0.00%   30.00%
Expected term in years   0    7 
Risk free rate   0.00%   2.01%

 

Total intrinsic value of options exercised: $                -   
Total fair value of shares vested:        27,886
Weighted-average period over which nonvested awards are expected to be recognized: 0.87 years

 

A summary of the Company’s restricted stock activity as of March 31, 2016 and changes during the period then ended are presented in the following table:

 

       Wgt. Avg. 
       Grant Date 
As of 12/31/2015  Restricted Stock   Fair Value 
Nonvested   107,460   $4.05 
           
Period Activity          
Issued   24,214   $3.86 
Vested   49,875   $4.07 
Forfeited   -    - 
           
As of 3/31/2016          
Nonvested   81,799   $3.99 
           
           
Total fair value of shares vested:       $202,869 
Weighted-average period over which nonvested awards are expected to be recognized:        1.47 years 

 

The fair value of restricted stock granted during the quarter ended March 31, 2016 was $93 thousand.

 

The remaining unrecognized compensation expense for the shares granted totaled $314 thousand and $493 thousand as of March 31, 2016 and 2015, respectively.

 

578,125 of restricted shares of common stock were granted to founding investors of Cordia predominantly during 2009 and 2010. 184,000 thousand of these shares vested in connection with the Bank’s sale of its CordiaGrad business on March 1, 2016. The remaining 394,125 shares are considered at March 31, 2016, more-likely-than-not to not vest due to significant performance based thresholds, which must be achieved by October 2016.

 

 31

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

Stock-based compensation expense for the first quarter of 2016 and the first quarter of 2015 was as follows:

 

Stock Compensation  Three Months Ended March 31, 
(in thousands)  2016   2015 
         
Employee stock options  $18   $12 
Restricted stock options   150    43 
Founders shares   718    - 
Total  $886   $55 

 

For the three months ended March 31, 2016, $800 thousand of the total $886 thousand of stock compensation is related to the vesting of Mr. Zoeller’s unvested restricted stock and stock options in connection with the sale of the CordiaGrad business.

 

Cordia does not have any benefit plans or incentive compensation plans beyond those maintained by the Bank.

 

Note 10. Accumulated other Comprehensive Income (Loss)

 

The changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2016 and 2015 are summarized as follows:

 

   Three Months Ended 
   March 31, 2016   March 31, 2015 
   Unrealized
Gain (Loss)
on Available-
for-Sale
Securities
   Unrealized
losses
transferred to
Held-to-
Maturity
Securities
   Total   Unrealized
Gain (Loss) on
Available-for-
Sale Securities
   Unrealized
losses
transferred
to  Held-to-
Maturity
Securities
   Total 
                         
Beginning balance  $(453)  $(237)  $(690)  $(182)  $(286)  $(468)
                               
Unrealized holding losses on available for sale securities   531    -    531    304    -    304 
Amortization of unrealized losses transferred from AFS to HTM reclassification adjustment   -    11    11    -    12    12 
Net current period other comprehensive income   531    11    542    304    12    316 
                               
Ending balance  $78   $(226)  $(148)  $122   $(274)  $(152)

 

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
   2016   2015   Consolidated Statement of Operations
            
Amortization of unrealized losses transferred to held to maturity  $11   $12   Interest income - investment securities
Realized gains on sales of available for sale securities   -    114   Net gain on sale of available-for-sale securities
Total reclassifications  $11   $126    

 

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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.

 

 

 33

 

 

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 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 $839 thousand at March 31, 2016, consisting primarily of $807 thousand of cash and $32 thousand of prepaid expenses.

 

BVA is a state chartered bank headquartered in Midlothian, Virginia with total assets of approximately $347.8 million at March 31, 2016. 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

 

During the past four years, the Company has spent much time restructuring the balance sheet as we worked through asset quality issues, recruited new staff, and reorganized our lending and deposit activities while addressing the requirements of BVA’s prior written agreement with the Federal Reserve and Virginia Bureau of Financial Institutions, which was terminated by the regulators in August 2013. In March 2013, the Company completed its Plan of Share Exchange with Bank of Virginia, effectively combining the two stockholder bases.

 

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.

 

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.

 

 34

 

 

In the fourth quarter of 2014 the Bank launched CordiaGrad, a private student loan refinancing program aimed at high-achieving graduates with student loans. On March 1, 2016, in order for Cordia to strategically focus on its core business of community banking, the Bank transferred certain assets and marketing arrangements related to CordiaGrad to a newly formed subsidiary and subsequently sold it to Jack C. Zoeller for nominal consideration in return for Mr. Zoeller’s resignation as Cordia’s President and Chief Executive Officer, resignation from the board of both Cordia and the Bank and his agreement to relinquish all of his rights under his employment agreement with Cordia, including all salary and benefits. Mr. Zoeller’s unvested restricted stock and stock options vested in connection with the agreement. No loans were sold as part of the transaction and, as part of the transaction, the Bank agreed to provide certain transition and loan origination services to the new entity acquired by Mr. Zoeller through June 30, 2016.

 

On May 20, 2015, Cordia announced that it had authorized a stock repurchase program to acquire up to $500,000 of the Company’s outstanding common stock. Repurchases will be conducted through open market purchases or through privately negotiated transactions and will be made from time to time depending on market conditions and other factors. As of March 31, 2016, the Company had repurchased 21,200 shares. No shares were repurchased in the first quarter of 2016.

 

On August 5, 2015, Cordia announced the hiring of O.R. (Ed) Barham, Jr. as President and Chief Executive Officer of the Bank of Virginia. Mr. Barham manages the Bank’s operations and is based in Richmond, Virginia. In connection with his hiring, Mr. Barham was also appointed to the Bank’s board of directors. Effective March 1, 2016, following Jack C. Zoeller’s resignation as President and Chief Executive Office of Cordia, Mr. Barham was appointed as a director and President and Chief Executive Officer of Cordia and as Chairman of the Board of Directors of the Bank.

 

In November 2015, Cordia announced the hiring of Steve Lewis as Chief Information Officer of the Bank of Virginia. Mr. Lewis has been designated as a member of the Senior Management Team and will be responsible for the information technology function. He is based in Richmond, Virginia and reports to Mark Severson, Executive Vice President and Chief Financial Officer of Cordia and Bank of Virginia.

  

Results of Operations

 

Net Income (Loss)

 

Consolidated net loss was $2.3 million for the quarter ended March 31, 2016 (the “2016 quarter”) compared to consolidated net income of $351 thousand for the quarter ended March 31, 2015 (the “2015 quarter”). Net interest income increased in the 2016 quarter by $384 thousand from the 2015 quarter. A $98 thousand provision for loan losses for the 2016 quarter was recorded compared to a recovery of $340 thousand for the 2015 quarter. Noninterest loss in the 2016 quarter was $614 thousand, impacted by losses on loans held for sale of $713 thousand. Noninterest expense increased to $4.0 million in the 2016 quarter compared to $2.2 million in the 2015 quarter. The significant increase in noninterest expense is the result of the loss on the sale of the Bank’s CordiaGrad business of $843 thousand and stock compensation related to the sale of the CordiaGrad business of $800 thousand.

 

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 19.1% or $384 thousand to $2.4 million for the 2016 quarter from $2.0 million for the 2015 quarter.

 

Interest income increased $482 thousand to $3.0 million during the 2016 quarter from $2.6 million for the 2015 quarter. This increase was due primarily to a 10.5% increase in total average earning assets and a 23 basis point increase in average yield on these assets. Excluding the accretion of acquisition accounting adjustments, interest income on loans was $3.0 million for the 2016 quarter is compared to $2.5 million for the 2015 quarter.

 

Interest expense for the 2016 quarter was $641 thousand, compared to $543 thousand for the 2015 quarter. This increase of $98 thousand was due primarily to an increase in time deposits and FHLB borrowings and a 4 basis point increase in the average cost of interest bearing liabilities. The average balance of interest-bearing transaction and savings accounts increased 32.7%, while the average balance of non-interest-bearing accounts decreased 7.2%.

 

 35

 

 

Net interest margin was 2.88% for the 2016 quarter and 2.69% for the 2015 quarter. Excluding the accretion of acquisition accounting adjustments, net interest margin was 2.87% for the 2016 quarter and 2.64% for the 2015 quarter. The decline in net interest margin from the prior year was primarily the result of a 23 basis point increase in the yield of interest earning assets.

 

Average Balances and Yields

 

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

 

                        
For the quarters ended  2016   2015 
March 31, (dollars in thousands)  Average Balance   Interest   Yield/Rate   Average Balance   Interest   Yield/Rate 
Earning Assets:                              
Loans held for investment (1)  $252,849   $2,627    4.18%  $212,566   $2,181    4.16%
Loans held for sale   95    1    4.23%   224    2    3.62%
Securities available for sale   73,562    398    2.18%   71,198    363    2.07%
Federal Funds and deposits with Banks   7,652    9    0.47%   18,493    7    1.50%
Total earning assets   334,158    3,035    3.65%   302,481    2,553    3.42%
Allowance for loan losses   (755)             (1,087)          
Other assets   18,047              20,061           
Total  $351,450             $321,455           
Interest-bearing liabilities:                              
Demand deposits  $20,288   $18    0.36%  $13,684   $10    0.30%
Savings and money market deposits   89,927    91    0.41%   69,351    54    0.32%
Time deposits   154,676    437    1.14%   152,353    390    1.04%
FHLB borrowings   31,129    95    1.21%   28,778    89    1.25%
Total interest-bearing liabilities   296,020    641    0.87%   264,166    543    0.83%
Non-interest-bearing demand deposits   26,956              29,046           
Other liabilities   711              890           
Stockholders' equity   27,763              27,353           
Total  $351,450             $321,455           
                               
Net interest income       $2,394             $2,010      
Net interest rate spread (2)             2.78%             2.59%
Net interest margin (3)             2.88%             2.69%

 

(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.

 

Provision for/Recovery of Loan Losses

 

A $98 thousand provision for loan losses for the 2016 quarter was recorded compared to a recovery of $340 thousand for the 2015 quarter. This provision is primarily the result of an increase in the range of loss allocation for the environmental factors in the ALLL, offset in part by the reversal of the one percent reserve against the CordiaGrad loans which were transferred to held for sale.

 

 36

 

  

Non-interest Income

 

Noninterest income for the 2016 quarter was a loss of $614 thousand, compared to income of $213 thousand for the 2015 quarter. The decrease was primarily the result of a $713 thousand loss on loans held for sale primarily in connection with the sale of the CordiaGrad business and a $114 net gain on the sale of available for sale securities for the 2015 period compared to no sales of securities in the 2016 period.

 

The following table sets forth the principal components of non-interest income for the quarters ended March 31, 2016 and 2015

 

For the quarters ended March 31, (dollars in thousands)  2016   2015 
Service charges on deposit accounts  $31   $30 
Net gain on sale of "AFS" securities   -    114 
Realized and unrealized gains (losses) on loans held for sale   (713)   21 
Other income   68    48 
Total non-interest income  $(614)  $213 

 

Non-interest Expense

 

Noninterest expense increased $1.8 million from $2.2 million for the 2015 quarter to $4.0 million for the 2016 quarter. The increase was due primarily to (1) an increase of $624 thousand in salaries and benefits due primarily to an $800 thousand stock compensation expense related to the sale of the Bank’s CordiaGrad business and (2) an $843 thousand loss on the sale of the CordiaGrad business.

 

The following table sets forth the primary components of non-interest expense for the quarters ended March 31, 2016 and 2015:

 

For the quarters ended March 31, (dollars in thousands)  2016   2015 
Salaries and employee benefits  $1,904   $1,280 
Professional services   170    84 
Occupancy   144    153 
Data processing and communications   246    198 
FDIC assessment and bank fees   169    90 
Bank franchise raxes   48    49 
Student loan servicing fess and other loan expenses   167    146 
Other real estate expenses   39    6 
Supplies and equipment   73    73 
Insurance   18    20 
Director's fees   53    26 
Marketing and business development   35    18 
Loss on sale of subsidiary   843    - 
Other operating expenses   88    69 
Total non-interest expense  $3,997   $2,212 

 

Income Tax Expense

 

Under the provisions of the Internal Revenue Code, the Company has approximately $20.3 million of net operating loss carryforwards, which will expire if unused beginning in 2024 through 2034. As of March 31, 2016, net deferred tax assets (“DTA”) of $6.7 million have been fully reserved with a valuation allowance. It is estimated that all of the valuation allowance is available to be reversed if and when it is deemed to be more-likely-than-not that all of the deferred tax asset will be realized. Of the net operating losses that occurred prior to the change in control of BVA in December 2010 and Cordia in April 2014, the amount of the loss carryforward available to offset taxable income is limited to approximately $254,000 per year for twenty years for BVA and zero for Cordia. DTAs related to net operating losses in excess of the amount realizable during the 20 year carryforward period have been written off.

 

 37

 

  

Financial Condition

 

Loans Held for Sale

 

Gains on sales of loans are recognized at the loan closing date and are included in noninterest income. The Company had $173 thousand and $220 thousand of residential mortgage loans held for sale as of March 31, 2016 and December 31, 2015, respectively.

 

In the first quarter of 2016, the Company transferred $29.8 million of refinanced private student loans from loans held for investment to loans held for sale. $24.0 million of these loans were subsequently sold in the first quarter of 2016, servicing released. These loans are carried at the lower of cost or fair value and net unrealized losses are recognized through a valuation allowance by charges to operations. The carrying amount of loans held for sale includes principal balances, valuation allowances, and direct costs that are deferred at the time of origination. The Company had $10.5 million of these loans at March 31, 2016. The refinanced private student loans had a valuation allowance of $206 thousand at March 31, 2016.

 

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, 2016, total loans held for investment (net of reserves) were $224.6 million versus $245.2 million at December 31, 2015.

.

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

 

   At March 31,   At December 31, 
   2016   2015 
(dollars in thousands)  Amount   Percent   Amount   Percent 
Commercial Real Estate:                    
Acquisition, development and construction  $2,209    1.0%  $2,168    0.9%
Non-owner occupied   66,269    29.4%   58,044    23.6%
Owner occupied   42,425    18.8%   45,690    18.6%
Commercial and industrial   32,881    14.6%   34,819    14.1%
Guaranteed Student Loans   51,693    22.9%   53,847    21.9%
Consumer:                    
Residential mortgage   17,960    8.0%   18,140    7.4%
HELOC   11,208    5.0%   10,603    4.3%
Other   775    0.3%   22,722    9.2%
Total loans   225,420    100.0%   246,033    100.0%
Allowance for loan losses   (866)        (823)     
Total loans, net of allowance for loan losses  $224,554        $245,210      

 

The largest component of the loan portfolio is comprised of various types of commercial real estate loans. At March 31, 2016, commercial real estate loans totaled $110.9 million or 49.2% of the total portfolio. Guaranteed student loans totaled $51.7 million, commercial and industrial loans totaled $32.9 million and consumer loans, which were comprised principally of residential mortgage and home equity loans, totaled $29.9 million, of which single family residential mortgage loans totaled $18.0 million and home equity lines totaled $11.2 million. Residential real estate loans consisted of first and second mortgages on single or multi-family residential dwellings. Our loan portfolio also includes consumer lines of credit and installment loans.

 

 38

 

 

Allowance for Loan Losses

 

At March 31, 2016, our allowance for loan losses (“ALLL”) was $866 thousand, or 0.39% of total loans outstanding and 51.5% of non-performing loans. ALLL was 0.52% of total loans outstanding less guaranteed student loans, purchased credit impaired loans and purchased portfolio. At December 31, 2015, our ALLL was $823 thousand, or 0.33% of total loans outstanding and 44.9% of non-performing loans. ALLL was 0.45% of total loans outstanding less guaranteed student loans, purchased credit impaired loans and purchased portfolio. The Bank continues its our emphasis on highly accurate risk rating processes, early detection of problem loans, accurate assessment of the extent of losses, declining historical loss experience and aggressive management of problem loans through restructures, refinancing to other institutions, or other means of mitigating potential losses

 

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

 

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

 

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.

 

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Changes affecting the ALLL for the three months ended March 31, 2016 and the year ended December 31, 2015, are summarized in the following table.

 

(dollars in thousands) 

Quarter Ended

March 31, 2016

   Year Ended
December 31, 2015
 
Allowance for loan losses at beginning of period  $823   $1,089 
           
Provision for (recovery of) loan losses   98    (293)
           
Charge-offs:          
Commercial real estate   -    (127)
Commercial and industrial   -    (109)
Guaranteed Student Loans   -    (331)
Consumer   (71)   (22)
Total charge-offs   (71)   (589)
           
Recoveries:          
Commercial real estate   -    241 
Commercial and industrial   14    361 
Guaranteed Student Loans   1    - 
Consumer   1    14 
Total recoveries   16    616 
Net recoveries/(charge-offs)   (55)   27 
Allowance for loan losses at end of period  $866   $823 
           
Allowance for loan losses to non-performing loans   51.5%   44.9%
Allowance for loan losses to total loans outstanding at end of period   0.39%   0.33%
Allowance for loan losses to total loans less guaranteed student loans, purchased credit impaired loans and purchased portfolio end of period   0.52%   0.45%
Net recoveries/(charge-offs) to average loans during the period   0.00%   0.01%

 

Included in the table below 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. There was no allowance or activity related to these loans in the quarter ended March 31, 2016. Activity related only to that portion of the ALLL for the year ended December 31, 2015 is shown in the following table.

 

 40

 

  

(dollars in thousands)  Year Ended December
31, 2015
 
Allowance for loan losses at beginning of period  $90 
Provision for loan losses   (438)
      
Charge-offs:     
Commercial real estate   (127)
Commercial and industrial   - 
Consumer   - 
Total charge-offs   (127)
      
Recoveries:     
Commercial real estate   232 
Commercial and industrial   243 
Consumer   - 
Total recoveries   475 
Net charge-offs   348 
Allowance for loan losses at end of period  $- 

 

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, 2016   At December 31, 2015 
(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  $488    56%   49%  $328    40%   43%
Commercial and industrial   169    20%   15%   112    13%   14%
Guaranteed Student Loans   47    5%   23%   47    6%   22%
Consumer   162    19%   13%   336    41%   21%
Total allowance for loan losses  $866    100%   100%  $823    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 Consolidated Financial Statements for more detail.

 

 41

 

  

The following is the distribution of loans by credit quality and class as of March 31, 2016 and December 31, 2015:

 

March 31, 2016 (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   -    7,731    3,199    2,415    51,693    -    1,606    372    67,016 
3 Satisfactory   1,310    29,583    17,015    23,690    -    12,274    5,868    354    90,094 
4 Pass   227    27,600    19,849    6,241    -    5,485    2,872    49    62,323 
5 Special mention   -    -    -    534    -    26    268    -    828 
6 Substandard   121    -    390    1    -    39    235    -    786 
7 Doubtful   -    -    -    -    -    -    -    -    - 
    1,658    64,914    40,453    32,881    51,693    17,824    10,849    775    221,047 
Loans acquired with deteriorating credit quality   551    1,355    1,972    -    -    136    359    -    4,373 
Total loans  $2,209   $66,269   $42,425   $32,881   $51,693   $17,960   $11,208   $775   $225,420 

 

December 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   -    7,772    3,285    1,876    53,847    -    1,063    396    68,239 
3 Satisfactory   989    27,397    20,355    26,289    -    11,959    5,893    22,258    115,140 
4 Pass   472    19,988    19,550    6,102    -    5,976    2,779    68    54,935 
5 Special mention   -    1,510    -    547    -    27    269    -    2,353 
6 Substandard   152    -    151    5    -    41    239    -    588 
7 Doubtful   -    -    -    -    -    -    -    -    - 
    1,613    56,667    43,341    34,819    53,847    18,003    10,243    22,722    241,255 
Loans acquired with deteriorating credit quality   555    1,377    2,349    -    -    137    360    -    4,778 
Total loans  $2,168   $58,044   $45,690   $34,819   $53,847   $18,140   $10,603   $22,722   $246,033 

 

As shown in the tables above, substandard and doubtful loans were $786 thousand at March 31, 2016, or 0.4% of the total loan portfolio. This compares to $588 thousand, or 0.2% of the total loan portfolio at December 31, 2015. Special mention loans decreased $1.5 million from $2.4 million at December 31, 2015 to $828 thousand at March 31, 2016 and loans graded “pass” or better decreased $18.9 million from $238.3 million at December 31, 2015 to $219.4 million at March 31, 2016 with the transfer of the private student loan portfolio to held for sale. Loans acquired by Cordia in December 2010 with deteriorating credit quality have declined $0.4 million from $4.8 million at December 31, 2015 to $4.4 million at March 31, 2016.

 

The Bank has continued to employ a third party loan review firm for annual reviews and periodic special assignments.  The most recent review was completed in May 2015, with another review scheduled to occur during the second quarter of 2016.  The scope of the 2015 loan file review totaled approximately 75% of the Bank’s exposure and included the following:

  

All classified loans or total relationship exposure over $250,000;
   
All special mention loans or total relationship exposures over $500,000;
   
A random sample of pass-rated loans determined by the loan review firm under $500,000;
   
All loans past due as of the review date;
   
All OREO properties;
   
All insider loans, including loans to directors, significant shareholders, and executive management granted since the last review;
   
Any loans that management or the board of directors requested be reviewed;
   
Annual  review of the allowance for loan and lease loss reserve and methodology. 

 

 42

 

  

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.

 

Government guaranteed student loans with a past due balance greater than 90 days are not placed on non-accrual and are not included in the balance of non-performing assets.  When a loan reaches 120 days past due, the non-guaranteed portion of the loan is charged-off. A claim is filed with the guarantor when the loan becomes 270 days past due.   Interest continues to accrue until charge-off.  The guarantor’s payment covers approximately 98% of principal and accrued interest. 

 

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