Cordia Bancorp Inc - FORM 10-Q

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EX-32 - EXHIBIT 32 - Cordia Bancorp Inc	v444727_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Cordia Bancorp Inc	v444727_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Cordia Bancorp Inc	v444727_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 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 ¨

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

YES x NO ¨

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

Large accelerated filer ¨ Accelerated filer ¨ Smaller reporting company x

Non-accelerated filer ¨ (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 ¨ No x

As of August 1, 2016, there were 6,800,690 shares of common stock outstanding, including 1,400,437 shares of non-voting common stock.

PART I

Financial Information
		Page

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	36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56

Item 4.	Controls and Procedures	56

PART II

Other Information

Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	58

Signatures		59

Item 1. Consolidated Financial Statements

Cordia Bancorp

Consolidated Balance Sheets

	(Unaudited)
(dollars in thousands, except per share data)	June 30, 2016			December 31, 2015
Assets
Cash and due from banks	$	4,244		$	6,135
Federal funds sold and interest-bearing deposits with banks		7,548			12,325
Total cash and cash equivalents		11,792			18,460
Securities available for sale, at fair market value		42,910			46,220
Securities held to maturity, at cost (fair value $36,411 and $25,694 at June 30, 2016 and December 31, 2015, respectively)		35,864			25,500
Restricted securities		2,393			2,355
Loans held for sale		-			220
Loans net of allowance for loan losses of $915 and $823, at June 30, 2016 and December 31, 2015, respectively		250,538			245,210
Premises and equipment, net		5,844			5,980
Accrued interest receivable		2,090			2,085
Other real estate owned, net of valuation allowance		1,885			1,870
Other assets		440			590
Total assets	$	353,756		$	348,490

Liabilities and stockholders' equity
Deposits
Non-interest bearing	$	29,293		$	28,969
Savings and interest-bearing demand		114,015			107,057
Time deposits		152,754			154,018
Total deposits		296,062			290,044
Accrued expenses and other liabilities		725			707
FHLB borrowings		30,000			30,000
Total liabilities		326,787			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, 5,397,768 and 5,186,349 shares outstanding (includes 75,312 and 107,460 of nonvested shares) at June 30, 2016 and December 31, 2015, respectively		53			51
Nonvoting common stock - 5,000,000 shares authorized, $0.01 par value, 1,400,437 shares outstanding at June 30, 2016 and December 31, 2014, respectively		14			14
Additional paid-in capital		34,155			33,191
Retained deficit		(7,214	)		(4,827	)
Accumulated other comprehensive loss		(39	)		(690	)
Total stockholders' equity		26,969			27,739
Total liabilities and stockholders' equity	$	353,756		$	348,490

See Notes to the Consolidated Financial Statements

Cordia Bancorp

Consolidated Statements of Operations

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
(dollars in thousands, except per share data)	2016			2015			2016			2015
Interest income
Interest and fees on loans	$	2,590		$	2,327		$	5,218		$	4,510
Investment securities		442			383			840			746
Federal funds sold and deposits with banks		11			5			20			12
Total interest income		3,043			2,715			6,078			5,268
Interest expense
Interest on deposits		607			470			1,153			924
Interest on FHLB borrowings		93			93			188			182
Total interest expense		700			563			1,341			1,106
Net interest income		2,343			2,152			4,737			4,162
Provision for (recovery of) loan losses		49			63			147			(277	)
Net interest income after provision for (recovery of) loan losses		2,294			2,089			4,590			4,439
Non-interest income (loss)
Service charges on deposit accounts		37			30			68			60
Net gain on sale of available for sale securities		-			-			-			114
Realized and unrealized gains (losses) on loans held for sale		(170	)		14			(883	)		35
Other fee income		68			53			136			101
Total non-interest income (loss)		(65	)		97			(679	)		310
Non-interest expense
Salaries and employee benefits		1,010			1,082			2,914			2,362
Professional services		118			100			288			184
Merger related expenses		200			-			200			-
Occupancy		129			159			273			312
Reversal of occupancy fair value discount		-			(225	)		-			(225	)
Data processing and communications		225			206			471			404
FDIC assessment and bank fees		168			92			337			182
Bank franchise taxes		47			49			95			98
Student loan servicing fees and other loan expenses		125			208			292			354
Other real estate expenses		17			45			56			51
Supplies and equipment		68			70			141			143
Insurance		20			19			38			39
Director's fees		58			21			111			47
Marketing and business development		14			31			49			49
Loss on sale of subsidiary		-			-			843			-
Other operating expenses		103			93			191			162
Total non-interest expense		2,302			1,950			6,299			4,162
Net income (loss) before income taxes		(73	)		236			(2,388	)		587
Income taxes		-			-			-			-
Net income (loss)	$	(73	)	$	236		$	(2,388	)	$	587

Basic net income (loss) per common share	$	(0.01	)	$	0.04		$	(0.35	)	$	0.09
Diluted net income (loss) per common share	$	(0.01	)	$	0.04		$	(0.35	)	$	0.09
Weighted average common shares outstanding, basic		6,798,170			6,583,848			6,728,573			6,571,600
Weighted average common shares outstanding, diluted		6,798,170			6,583,848			6,728,573			6,571,600

See Notes to the Consolidated Financial Statements

Cordia Bancorp

Consolidated Statement of Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2016			2015			2016			2015
Net income (loss)	$	(73	)	$	236		$	(2,388	)	$	587

Other comprehensive income (loss)
Unrealized securities gains (losses) arising during period		99			(470	)		630			(52	)
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		10			13			21			25
Total other comprehensive income (loss)		109			(457	)		651			(141	)

Comprehensive income (loss)	$	36		$	(221	)	$	(1,737	)	$	446

See Notes to the Consolidated Financial Statements

Cordia Bancorp

Consolidated Statements of Cash Flows

(Unaudited)

	Six Months Ended June 30,
(dollars in thousands)	2016			2015
Cash flows from operating activities:
Net income (loss)	$	(2,388	)	$	587
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities
Net amortization of premium on investment securities		234			230
Purchase accounting accretion, net		(4	)		(333	)
Depreciation		162			148
Amortization of deferred loan costs and fees		254			183
Provision for (recovery of) loan losses		147			(277	)
Net gain on sale of available for sale securities		-			(114	)
Gain on sale of other real estate owned		(14	)		-
Stock based compensation		967			110
Other real estate owned valuation adjustment		22			16
Originations of loans held for sale		(25,838	)		(1,854	)
Proceeds from the sale of loans held for sale		24,652			1,793
Realized and unrealized (gains) losses on loans held for sale		883			(35	)
Gain on disposal of premises and equipment		(8	)		-
Changes in assets and liabilities:
Decrease (increase) in accrued interest receivable		(5	)		7
Decrease (increase) in other assets		132			(236	)
Increase (decrease) in accrued expenses and other liabilities		22			(125	)
Net cash (used in) provided by operating activities		(782	)		100
Cash flows from investing activities:
Purchase of securities available for sale		-			(23,429	)
Purchase of securities held to maturity		(12,498	)		(7,677	)
(Purchase)of restricted securities, net		(38	)		(239	)
Proceeds from sales, maturities, and paydowns of securities available for sale		3,798			18,239
Proceeds from payments/maturities of securities held to maturity		2,063			1,277
Proceeds from the sale of other real estate owned		132			104
Net increase in loans		(5,343	)		(13,077	)
Improvements to other real estate owned		-			(6	)
Purchase of premises and equipment		(33	)		(1,795	)
Proceeds from the sale of premises and equipment		15			-
Net cash (used in) investing activities		(11,904	)		(26,603	)
Cash flows from financing activities:
Repurchase of common stock		-			(5	)
Net increase in demand savings, interest-bearing checking and money market deposits		7,282			17,787
Net (decrease) increase in time deposits		(1,264	)		1,245
Proceeds from FHLB advances		10,000			5,000
Repayment of FHLB advances		(10,000	)		-
Net cash provided by financing activities		6,018			24,027
Net (decrease) in cash and cash equivalents		(6,668	)		(2,476	)
Cash and cash equivalents, beginning of period		18,460			21,840
Cash and cash equivalents, end of period	$	11,792		$	19,364
Supplemental disclosure of cash flow information
Cash payments for interest	$	1,310		$	1,097
Supplemental disclosure of noninvesting activities
Unrealized gains (losses) on securities available for sale	$	630		$	(166	)
Amortization of unrealized losses transferred to held to maturity	$	21		$	25
Transfer of loans from held for investment to held for sale	$	29,751		$	-
Transfer of loans from held for sale to held for investment	$	(30,274	)	$	-
Loans transferred to other real estate owned	$	155		$	242

See Notes to the Consolidated Financial Statements

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.

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 all of the subsidiary’s outstanding stock 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, 2016, Cordia announced the signing of a definitive merger agreement with First-Citizens Bank & Trust Company (known as First Citizens Bank). The agreement has been approved by the boards of directors of both companies and the transaction is expected to close no later than the fourth quarter of 2016, pending the receipt of all regulatory approvals, the approval of Cordia Bancorp shareholders, and the satisfaction of customary closing conditions. Under the terms of the agreement, cash consideration of $5.15 will be paid to the shareholders of Cordia Bancorp for each of their shares of Cordia Bancorp common stock.

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

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 and six months ended June 30, 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) Requires 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) Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). 4) Eliminates 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.

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.

In March 2016, the FASB issued ASU No. 2016-03, “Intangibles-Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810) and Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance.” The amendments to this ASU make the guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 effective immediately by removing their effective dates. The amendments also include transition provisions that provide that private companies are able to forgo a preferability assessment the first time they elect the accounting alternatives within the scope of this ASU. Any subsequent change to an accounting policy election requires justification that the change is preferable under Topic 250, Accounting Changes and Error Corrections. The amendments in this ASU also extend the transition guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 indefinitely. While this ASU extends transition guidance for Updates 2014-07 and 2014-18, there is no intention to change how transition is applied for those two ASUs. The Company is currently assessing the impact that ASU 2016-03 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.

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

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.

During June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company is currently assessing the impact that ASU 2016-13 will have on its consolidated financial statements.

Note 2.

Business Combination

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

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

Interest income is impacted by the accretion of the fair value discount on the loan portfolio as well as the accretion of the accretable discount on loans acquired with deteriorated credit quality.

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

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

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

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

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

	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2016			2015			2016			2015
Loans	$	7		$	54		$	18		$	75
Premises and equipment		2			2			4			4
Core deposit intangible		(9	)		(9	)		(18	)		(18	)
Building lease obligations		-			248			-			272
Net impact to net income (loss)	$	-		$	295		$	4		$	333

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 80 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 three and six months ended June 30, 2016, 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 109 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 three and six months ended June 30, 2015, because the share award exercise prices exceeded the average market price of the Company’s common stock during all periods presented and, therefore, the effect would have been anti-dilutive. The Company’s losses during the three and six months ended June 39, 2016 also create an anti-dilutive effect.

For the periods ended June 30, 2016 and 2015, 394,125 and 578,125 shares, respectively, of unvested restricted common stock were excluded from the computation of basic and diluted earnings per common share as they are considered more likely-than-not to not to vest based on the performance based thresholds within the restricted share agreements, which must be achieved by October 2016. These agreements do include a change of control provision such that 100% of the remaining 394,125 shares would vest, and be expensed, immediately preceding a change of control. All other vested and non-vested restricted common shares, which carry all rights and privileges of a common share with respect to the stock, including the right to vote, were included in the basic and diluted per common share calculations.

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

The calculation for basic and diluted earnings per common share for the three months and six months ended June 30, 2016 and 2015 are as follows:

	Three months ended June 30,					Six months ended June 30,
(dollars in thousands)	2016			2015		2016			2015

Net income (loss)	$	(73	)	$	236	$	(2,388	)	$	587

Weighted average common shares outstanding, basic		6,798,170			6,583,848		6,728,573			6,571,600

Dilutive effect of stock options		-			-		-			-

Weighted average common shares outstanding, diluted		6,798,170			6,583,848		6,728,573			6,571,600

Basic net income (loss) per common share	$	(0.01	)	$	0.04	$	(0.35	)	$	0.09

Diluted net income (loss) per common share	$	(0.01	)	$	0.04	$	(0.35	)	$	0.09

Note 4.

Securities

Our investment portfolio consists of U.S. agency debt and an agency guaranteed mortgage-backed security. 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 $78.8 million at June 30, 2016 as compared to $71.7 million at December 31, 2015. At June 30, 2016, the securities portfolio consisted of $42.9 million of securities available for sale, at fair value and $35.9 million of securities held to maturity, at amortized cost.

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 June 30, 2016 and December 31, 2015.

	June 30, 2016
	Amortized		Gross Unrealized
(dollars in thousands)	Cost		Gains		Losses			Fair Value
U.S. Government agencies	$	1,944	$	12	$	(6	)	$	1,950
Agency guaranteed mortgage-backed securities		40,789		222		(51	)		40,960
Total	$	42,733	$	234	$	(57	)	$	42,910

	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 amortized cost, gross unrealized gains and losses, and fair value of securities held to maturity at June 30, 2016 and December 31, 2015.

	June 30, 2016
	Amortized		Gross Unrealized
(dollars in thousands)	Cost		Gains		Losses			Fair Value
Agency guaranteed mortgage-backed securities	$	35,864	$	579	$	(32	)	$	36,411
Total	$	35,864	$	579	$	(32	)	$	36,411

	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

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

The amortized cost and fair value of securities available for sale as of June 30, 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 one year within five years	$	-	$	-
Over five years within ten years		1,944		1,950
Over ten years		40,789		40,960
Total	$	42,733	$	42,910

The carry value and fair value of securities held to maturity as of June 30, 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	$	3,599	$	3,815
Over ten years		32,265		32,596
Total	$	35,864	$	36,411

As of June 30, 2016, the portfolio is concentrated in average maturities of over ten years, although all recently purchased securities have effective durations 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 six months ended June 30, 2016. During the six months ended June 30, 2015, the Company sold $13.1 million of available for sale securities, and recognized a gross gain of $114 thousand in noninterest income.

Unrealized losses on investments at June 30, 2016 and December 31, 2015 were as follows:

	June 30, 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	$	-	$	-		$	1,400	$	(6	)	$	1,400	$	(6	)
Agency guaranteed mortgage-backed securities		9,993		(39	)		8,038		(44	)		18,031		(83	)
Total	$	9,993	$	(39	)	$	9,438	$	(50	)	$	19,431	$	(89	)

	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	)

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

As of June 30, 2016, there was a U.S. Government agency security and an agency guaranteed mortgage-backed security with unrealized losses totaling $89 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 $12.9 million and $13.8 million were pledged to secure public funds with the Commonwealth of Virginia at June 30, 2016 and December 31, 2015, respectively. We had $21.5 million and $16.8 million in securities pledged to secure FHLB advances at June 30, 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 no residential loans held for sale as of June 30, 2016 and $220 thousand of residential mortgage loans held for sale as December 31, 2015.

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. Those loans were carried at the lower of cost or fair value and net unrealized losses were recognized through a valuation allowance by charges to operations. The carrying amount of loans held for sale included principal balances, valuation allowances, and direct costs that are deferred at the time of origination. In the second quarter of 2016, the Company transferred the remaining loan balance of $30.3 million to loans held for investment. Included in this transfer was a valuation allowance of $409 thousand. The activity in the valuation allowance is described in the table below:

(dollars in thousands)	2016
Balance at January 1	$	-
Additions		909
Loss on sale of loans		(500	)
Transfer to loans held for investment		(409	)
Balance at June 30	$	-

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.

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

The following table exhibits loans by sub-segment at June 30, 2016 and December 31, 2015:.

(dollars in thousands)	June 30, 2016			December 31, 2015
Commercial Real Estate:
Acquisition, development and construction	$	2,202		$	2,168
Non-owner occupied		64,417			58,044
Owner occupied		40,197			45,690
Commercial and industrial		34,926			34,819
Guaranteed student loans		49,437			53,847
Consumer:
Residential mortgage		17,184			18,140
HELOC		11,957			10,603
Other		31,133			22,722
Total loans		251,453			246,033
Allowance for loan losses		(915	)		(823	)
Total loans, net of allowance for loan losses	$	250,538		$	245,210

Included in the loan balances above are net deferred loan costs of $1.9 million and $1.7 million at June 30, 2016 and December 31, 2015, respectively. Also included in the loan balances above are premiums related to government guaranteed student loans of $775 thousand at June 30, 2016 and $827 thousand at December 31, 2015. Included in the Other Consumer category are refinanced private student loans of $30.3 million and $21.9 million at June 30, 2016 and December 31, 2015, respectively.

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 $4.9 million and $6.9 million at June 30, 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)	June 30, 2016		December 31, 2015
Contract principal balance	$	4,310	$	4,779
Accretable yield		-		(1	)
Carrying value of loans	$	4,310	$	4,778

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 and nonaccretable discount during the six months ended June 30, 2016 and 2015 is as follows:

	2016					2015
(dollars in thousands)	Accretable Yield			Nonaccretable Discount		Accretable Yield			Nonaccretable Discount
Beginning balance	$	1		$	-	$	42		$	5
Charge-offs related to loans covered by ASC 310-30		-			-		-			-
Transfers		-			-		5			(5	)
Accretion		(1	)				(41	)
Ending balance	$	-		$	-	$	6		$	-

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 and 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.

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

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

Grade 1 - Highest Quality	Loans to persons and businesses with unquestionable financial strength and character that carry extremely low probabilities of default. Balance sheets and cash flow are extremely strong relative to the magnitude of debt. This rating would be analogous to the highest investment grade ratings.

Grade 2 - Above Average Quality	Loans to persons and business entities with unquestioned character that carry low probabilities of default. Borrowers have strong, stable earnings and financial condition.

Grade 3 - Satisfactory	Loans to persons and businesses with acceptable financial condition that carry average probabilities of default. Borrower’s exhibit adequate cash flow to service debt and have acceptable levels of leverage.

Grade 4 - Pass	Loans to persons and businesses with a lack of stability in the primary source of repayment or temporary weakness in their balance sheet or earnings. These loans carry above average probabilities of default. These borrowers generally have higher leverage and less liquidity than loans rated 3-Satisfactory.

Grade 5- Special Mention	Loans to borrowers that exhibit potential credit weakness or a downward trend that warrant additional supervision. While potentially weak, the loan is currently marginally acceptable and no loss of principal or interest is envisioned.

Grade 6 – Substandard	Borrowers with one or more well defined weaknesses that jeopardize the orderly liquidation of the debt. Normal repayment from the borrower is in jeopardy, although no loss of principal is envisioned. Possibility of loss or protracted workout exists if immediate corrective action is not taken.

Grade 7 – Doubtful	Loans with all the weaknesses inherent in a Substandard classification, with the added provision that the weaknesses make collection of debt in full highly questionable and improbable, based on currently existing facts, conditions, and values. Serious problems exist to the point where a partial loss of principal is likely.

Grade 8 – Loss	Borrower is deemed incapable of repayment of the entire principal. A charge-off is required for the portion of principal management has deemed it will not be repaid.

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

The following is the distribution of loans by credit quality and segment as of June 30, 2016 and December 31, 2015:

June 30, 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		-		7,689		2,505		2,437		49,437		-		1,976		286		64,330
3 Satisfactory		1,328		32,974		16,150		25,893		-		11,548		6,246		30,797		124,936
4 Pass		212		22,422		19,217		6,076		-		5,438		2,785		50		56,200
5 Special mention		-		-		-		520		-		25		360		-		905
6 Substandard		121		-		381		-		-		38		232		-		772
7 Doubtful		-		-		-		-		-		-		-		-		-
		1,661		63,085		38,253		34,926		49,437		17,049		11,599		31,133		247,143
Loans acquired with deteriorated credit quality		541		1,332		1,944		-		-		135		358		-		4,310
Total loans	$	2,202	$	64,417	$	40,197	$	34,926	$	49,437	$	17,184	$	11,957	$	31,133	$	251,453

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

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 June 30, 2016 and December 31, 2015 is as follows:

	Commercial Real Estate										Consumer
At June 30, 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	$	-	$	-	$	-	$	-	$	1,856	$	-	$	-	$	-	$	1,856
60 - 89 days		-		-		-		-		2,203		-		-		-		2,203
> 90 days		121		-		878		-		6,199		-		64		-		7,262
Total past due		121		-		878		-		10,258		-		64		-		11,321
Current		2,081		64,417		39,319		34,926		39,179		17,184		11,893		31,133		240,132
Total loans	$	2,202	$	64,417	$	40,197	$	34,926	$	49,437	$	17,184	$	11,957	$	31,133	$	251,453
> 90 days still accruing	$	-	$	-	$	-	$	-	$	6,199	$	-	$	-	$	-	$	6,199

	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.

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

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.

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

(dollars in thousands)	June 30, 2016		December 31, 2015
Commercial Real Estate:
Acquisition, development and construction	$	121	$	152
Owner occupied		1,259		1,388
Commercial and industrial		-		5
Consumer:
Residential mortgage		-		-
HELOC		284		289
Total non-accrual loans	$	1,664	$	1,834

Non-accrual troubled debt restructurings included above	$	381	$	-
Non-accrual purchased credit impaired loans included above	$	1,010	$	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.

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

Certain loans were identified and individually evaluated for impairment at June 30, 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 June 30, 2016.

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

The following information is a summary of related impaired loans, excluding loans acquired with deteriorating credit quality, presented by portfolio class as of June 30, 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	$	-	$	125	$	-
Non-owner occupied		-		-		-		-		-
Owner occupied		381		389		-		223		-
Commercial and industrial		-		-		-		-		-
Consumer:								-
Residential mortgage		38		38		-		39		1
HELOC		168		168		-		171		2
Other		-		-		-		-		-
	$	708	$	716	$	-	$	558	$	3
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		30		66		-
Other		-		-		-		-		-
	$	64	$	64	$	30	$	66	$	-
Total:
Commercial Real Estate:
Acquisition, development and construction	$	121	$	121	$	-	$	125	$	-
Non-owner occupied		-		-		-		-		-
Owner occupied		381		389		-		223		-
Commercial and industrial		-		-		-		-		-
Consumer:
Residential mortgage		38		38		-		39		1
HELOC		232		232		30		237		2
Other		-		-		-		-		-
Total	$	772	$	780	$	30	$	624	$	3

⁽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.

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

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

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

Activity in the ALLL for the six months ended June 30, 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		-			-		-		-		(13	)		-		-		(71	)		(84	)
Recoveries		-			-		-		25		-			1		3		-			29
Net (charge-offs) recoveries		-			-		-		25		(13	)		1		3		(71	)		(55	)

Provision (recovery)		(53	)		130		110		33		11			15		43		(142	)		147
Ending balance, June 30, 2016		36			287		192		170		45			75		107		3			915

	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		(127	)		-		-			(109	)		(106	)		-			(20	)		(2	)		(364	)
Recoveries		-					234			302			-			3			3			-			542
Net (charge-offs) recoveries		(127	)		-		234			193			(106	)		3			(17	)		(2	)		178

Provision (recovery)		43			219		(295	)		(295	)		70			(51	)		(1	)		33			(277	)
Ending balance, June 30, 2015	$	62		$	316	$	88		$	255		$	108		$	50		$	58		$	53		$	990

A summary of the ALLL by portfolio segment and impairment evaluation methodology as of June 30, 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	$	-	$	-	$	-	$	-	$	-	$	-	$	30	$	-	$	30
Collectively evaluated for impairment		36		287		121		170		45		75		77		3		814
Loans acquired with deteriorated credit quality		-		-		71		-		-		-		-		-		71
Ending balance, June 30, 2016	$	36	$	287	$	192	$	170	$	45	$	75	$	107	$	3	$	915

Gross loan balances
Individually evaluated for impairment	$	121	$	-	$	381	$	-	$	-	$	38	$	232	$	-	$	772
Collectively evaluated for impairment		1,540		63,085		37,872		34,926		49,437		17,011		11,367		31,133		246,372
Loans acquired with deteriorated credit quality		541		1,332		1,944		-		-		135		358		-		4,310
Ending balance, June 30, 2016	$	2,202	$	64,417	$	40,197	$	34,926	$	49,437	$	17,184	$	11,957	$	31,133	$	251,453

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

	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	$	5	$	-	$	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.

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 quarters ended June 30, 2016 and 2015, no loans were modified in a troubled debt restructuring. The principal balance outstanding relating to the loan at June 30, 2016, was $381 thousand. During the three months ended June 30, 2016 and 2015, no defaults occurred on loans modified as TDRs in the preceding twelve months. During the six months ended June 30, 2016, one loan was modified in a troubled debt restructuring. During the six months ended June 30, 2015, no loans were modified in troubled debt restructurings. During the six months ended June 30, 2016 and 2015, no defaults occurred on loans modified as TDRs in the preceding twelve months.

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

Three Months Ended June 30, 2016

2016 (dollars in thousands)

Number of loans

Rate
modification

Term extension

Pre-modification
recorded
investment

Post-modification
recorded
investment

Commercial real estate

Total

	Six Months Ended June 30, 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 three and six months ending June 30, 2016 activity in this account is as follows:

(dollars in thousands)
Balance at March 31, 2016	$	59
Amortization		(9	)
Balance at June 30, 2016	$	50

(dollars in thousands)
Balance at December 31, 2015	$	68
Amortization		(18	)
Balance at June 30, 2016	$	50

Amortization expense is expected to be approximately $35 thousand in 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.

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.

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 June 30, 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.

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 1

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

Level 2

Valuation 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 3

Valuation 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.

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

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

			Fair Value Measurements at June 30, 2016
(dollars in thousands)	Carrying amount		Level 1		Level 2		Level 3		Fair Value
Assets:
Cash and cash equivalents	$	11,792	$	11,792	$	-	$	-	$	11,792
Securities available for sale		42,910		-		42,910		-		42,910
Securities held to maturity		35,864		-		36,411		-		36,411
Restricted securities		2,393		-		2,393		-		2,393
Loans held for sale		-		-		-		-		-
Net loans held for investment		250,538		-		-		249,654		249,654
Interest receivable		2,090				2,090				2,090
Liabilities:		-
Demand deposits		29,293		-		29,293		-		29,293
Savings and interest-bearing demand deposits		114,015		-		114,015		-		114,015
Time deposits		152,754		-		153,813		-		153,813
FHLB Borrowings		30,000		-		29,970		-		29,970
Interest payable		228		-		228		-		228

			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).

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:

			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)
June 30, 2016

U. S. Government Agencies	$	1,950	$	-	$	1,950	$	-
Agency Guaranteed Mortgage-backed securities		40,960		-		40,960		-

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.

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)
June 30, 2016
Impaired loans		34		-		-		34
OREO		1,885		-		-		1,885

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 June 30, 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 June 30, 2016 and December 31, 2015:

June 30, 2016

(dollars in thousands)

Quantitative Information About Level 3 Fair Value Measurements

Description

Fair Value

Valuation Technique

Unobservable input

Range
(Weighted
Average)

Impaired loans

Appraisals

Discount to reflect current market condition and estimated selling costs

0-15

Other real estate owned

1,885

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

Appraisals

Discount to reflect current market condition and estimated selling costs

0-10

Other real estate owned

1,870

Discounted appraised values

Discount for lack of marketability

6-29

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 Company’s 2005 annual meeting of shareholders, 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 2005 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 2005 Plan covers employees as determined by the Bank’s Board of Directors from time to time. Options under the 2005 Plan were granted in the form of incentive stock options.

At the Company’s 2011 annual meeting of shareholders, 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 June 30, 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.

A summary of the Company’s option activity as of June 30, 2016 and changes during the period then ended are presented in the following table:

			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		44,678	$	5.14		-		1.80		-
Expired		-		-		-		-		-

As of 6/30/2016
Outstanding		80,008	$	7.40		7.17	$	2.51	$	44,243
Vested		39,432	$	10.69		5.91	$	3.56	$	7,092
Nonvested		40,576	$	4.21		8.39	$	1.48	$	37,152

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

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

The remaining unrecognized compensation expense for the options granted totaled $22 thousand and $54 thousand at June 30, 2016 and 2015, respectively.

								Wgt. Avg.
Outstanding as of June 30, 2016						Wgt. Avg.		Remaining
				Stock Options		Exercise		Contractual
Range of Exercise Prices				Outstanding		Price		Life
$	3.82	$	58.73		80,008	$	7.40		7.17
Total					80,008	$	7.40		7.17

Exercisable:						Wgt. Avg.
				Stock Options		Exercise
Range of Exercise Prices				Exercisable		Price
$	3.82	$	58.73		39,432	$	10.69
Total					39,432	$	10.69

Assumptions:

The fair value of each option granted is estimated on the date of grant using the "Black-Scholes Option Pricing" method with the follwing assumptions. No options granted in 2016.

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

Total intrinsic value of options exercised:	$	-
Total fair value of shares vested during the period:	$	28,478
Weighted-average period over which nonvested awards are expected to be recognized:		0.62 years

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

A summary of the Company’s restricted stock activity as of June 30, 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		27,419	$	3.87
Vested		59,567	$	4.04
Forfeited		-		-

As of 6/30/2016
Nonvested		75,312	$	3.99

Total fair value of shares vested during the period:		$	240,891
Weighted-average period over which nonvested awards are expected to be recognized:			1.33 years

The fair value of restricted stock granted during the six months ended June 30, 2016 was $106 thousand.

The remaining unrecognized compensation expense for the shares granted totaled $314 thousand and $444 thousand as of June 30, 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 341,125 shares are considered at June 30, 2016, more likely-than-not to not to vest based on the performance based thresholds within the restricted share agreements, which must be achieved by October 2016. These agreements do include a change of control provision such that 100% of restricted shares would vest, and be expensed, immediately preceding a change of control.

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

Stock Compensation	Three Months Ended June 30,				Six Months Ended June 30,
(in thousands)	2016		2015		2016		2015

Stock options	$	43	$	12	$	61	$	24
Restricted stock		38		43		188		86
Founders shares		-		-		718		-
Total	$	81	$	55	$	967	$	110

For the six months ended June 30, 2016, $800 thousand of the total $967 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.

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

Note 10. Accumulated other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2016 and 2015 are summarized as follows:

	Three Months Ended
	June 30, 2016								June 30, 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	$	78	$	(226	)	$	(148	)	$	122		$	(274	)	$	(152	)

Unrealized holding gains (losses) on availabe for sale securities		99		-			99			(470	)		-			(470	)
Amortization of unrealized losses transferred from AFS to HTM		-		10			10			-			13			13
Net current period other comprehensive income		99		10			109			(470	)		13			(457	)

Ending balance	$	177	$	(216	)	$	(39	)	$	(348	)	$	(261	)	$	(609	)

	Six Months Ended
	June 30, 2016									June 30, 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 gains (losses) on available for sale securities		630			-			630			(166	)		-			(166	)
Amortization of unrealized losses transferred from AFS to HTM		-			21			21			-			25			25
Net current period other comprehensive income		630			21			651			(166	)		25			(141	)

Ending balance	$	177		$	(216	)	$	(39	)	$	(348	)	$	(261	)	$	(609	)

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

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

	Six Months Ended June 30,				Affected Line Item on
	2016		2015		Consolidated Statement of Operations

Realized gains on sales of available for sale securities		-		114	Net gain on sale of available-for-sale securities
Total reclassifications	$	-	$	114

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 business combinations;

	•	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.

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 $10.3 million 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 $724 thousand at June 30, 2016, consisting primarily of $701 thousand of cash and $23 thousand of prepaid expenses.

BVA is a state chartered bank headquartered in Midlothian, Virginia with total assets of approximately $353.8 million at June 30, 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 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.

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.

On May 20, 2016, Cordia announced the signing of a definitive merger agreement with First-Citizens Bank & Trust Company (known as First Citizens Bank). The agreement has been approved by the boards of directors of both companies and the transaction is expected to close no later than the fourth quarter of 2016, pending the receipt of all required regulatory approvals, the approval of Cordia Bancorp shareholders, and the satisfaction of customary closing conditions. Under the terms of the agreement, cash consideration of $5.15 will be paid to the shareholders of Cordia Bancorp for each of their shares of Cordia Bancorp common stock.

Results of Operations – Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Net Income (Loss)

Consolidated net loss was $73 thousand for the quarter ended June 30, 2016 (the “2016 quarter”) compared to consolidated net income of $236 thousand for the quarter ended June 30, 2015 (the “2015 quarter”). Net interest income before provision increased in the 2016 quarter by $191 thousand from the 2015 quarter. The provision for loan losses was $14 thousand lower in the 2016 quarter. Noninterest income decreased in the 2016 quarter by $162 thousand, while noninterest expense increased $352 thousand compared to the 2015 quarter. Noninterest income in the 2016 quarter included net realized and unrealized losses on loans held for sale of $170 thousand. Noninterest expense in the 2015 quarter included the favorable reversal of the fair value discount related to the purchase of a Bank property and the termination of the related lease. This fair value discount was established when Cordia purchased BVA as a result of an existing lease being deemed unfavorable when compared to market rates for commercial real estate at that time. This $400 thousand fair value discount was allocated based on relative fair values of the purchased property and the remaining portion of the unfavorable portion of the lease, with $225 thousand recorded as a reduction to noninterest expense and $175 thousand recorded as a reduction to the basis of the bank property purchased. Before terminating the lease, this discount was being accreted as a reduction to the monthly rent expense.

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 8.9% or $191 thousand to $2.3 million for the 2016 quarter from $2.2 million for the 2015 quarter.

Interest income increased $328 thousand to $3.0 million during the 2016 quarter from $2.7 million for the 2015 quarter, due primarily to a 7.8% increase in total average earning assets, and a 14 basis point increase in the average yield on these assets.

Interest expense for the 2016 quarter was $700 thousand, compared to $563 thousand for the 2015 quarter. This increase of $137 thousand was due primarily to an increase in savings and money market and time deposits. The average balance of interest-bearing transaction accounts and savings accounts liabilities increased 31.6%, while the average balance of non-interest-bearing accounts increased 0.7%.

Net interest margin was 2.81% for the 2016 quarter and 2.79% for the 2015 quarter. Excluding the accretion of acquisition accounting adjustments, net interest margin was 2.80% for the 2016 quarter and 2.71% for the 2015 quarter.

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 three months ended June 30,
(dollars in thousands)	2016								2015
	Average Balance			Interest		Yield/Rate			Average Balance			Interest		Yield/Rate
Earning Assets:
Loans held for investment ⁽¹⁾	$	223,274		$	2,351		4.24	%	$	223,286		$	2,326		4.19	%
Loans held for sale		19,820			239		4.85	%		93			1
Securities		82,913			442		2.14	%		72,391			383		2.13	%
Federal Funds and deposits with Banks		8,979			11		0.49	%		14,910			5		0.13	%
Total earning assets		334,986			3,043		3.65	%		310,680			2,715		3.51	%
Allowance for loan losses		(870	)							(1,082	)
Other assets		18,616								17,841
Total	$	352,732							$	327,439
Interest-bearing liabilities:
Demand deposits	$	22,865		$	24		0.42	%	$	13,159		$	9		0.28	%
Savings and money market deposits		90,279			96		0.43	%		72,838			55		0.30	%
Time deposits		153,250			487		1.28	%		152,718			406		1.07	%
FHLB borrowings		30,000			93		1.25	%		31,346			93		1.19	%
Total interest-bearing liabilities		296,394			700		0.95	%		270,061			563		0.84	%
Non-interest-bearing demand deposits		28,802								28,641
Other liabilities		750								902
Stockholders' equity		26,786								27,835
Total	$	352,732							$	327,439

Net interest income				$	2,343							$	2,152
Net interest rate spread⁽²⁾							2.70	%							2.67	%
Net interest margin ⁽³⁾							2.81	%							2.79	%

⁽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 Loan Losses

A provision of $49 thousand was recorded for the 2016 quarter compared to a provision of $63 thousand for the 2015 quarter. Loan growth offset by a decline in our historical loss percentage was the cause for the reduction of the allowance for loan losses from $990 thousand at June 30, 2015 to $915 thousand at June 30, 2016.

Non-interest Income (Loss)

Noninterest income (loss) for the 2016 quarter was a loss of $65 thousand, compared to $97 thousand income for the 2015 quarter. The change was due to the valuation loss on loans held for sale in the 2016 quarter primarily in connection with the sale of the CordiaGrad business.

The following table sets forth the principal components of non-interest income (loss) for the quarters ended June 30, 2016 and 2015

For the quarters ended June 30, (dollars in thousands)	2016			2015
Service charges on deposit accounts	$	37		$	30
Net gain on slae of "AFS" securities		-			-
Realized and unrealized gains (losses) on loans held for sale		(170	)		14
Other income		68			53
Total non-interest income (loss)	$	(65	)	$	97

Non-interest Expense

Noninterest expense increased $352 thousand, or 18.1%, to $2.3 million for the 2016 quarter from $2.0 million for the 2015 quarter. The increase was due primarily to a favorable reversal in the 2015 quarter of the fair value discount related to the purchase of a Bank property and the termination of the related lease. This fair value discount was established when Cordia purchased BVA as a result of an existing lease being deemed unfavorable when compared to market rates for commercial real estate at that time. This $400 thousand fair value discount was allocated based on relative fair values of the purchased property and the remaining portion of the unfavorable portion of the lease, with $225 thousand recorded as a reduction to noninterest expense and $175 thousand recorded as a reduction to the basis of the Bank property purchased. Also contributing to the increase was $200 thousand of merger related expenses incurred in the second quarter of 2016 in connection with our proposed business combination with First Citizens Bank.

The following table sets forth the primary components of non-interest expense for the quarters ended June 30, 2016 and 2015

For the quarters ended June 30, (dollars in thousands)	2016		2015
Salaries and employee benefits	$	1,010	$	1,082
Professional services		118		100
Merger related expenses		200		-
Occupancy		129		159
Reversal of occupancy fair value discount		-		(225	)
Data processing and communications		225		206
FDIC assessment and bank fees		168		92
Bank franchise raxes		47		49
Student loan servicing fees and other loan expenses		125		208
Other real estate expenses		17		45
Supplies and equipment		68		70
Insurance		20		19
Director's fees		58		21
Marketing and business development		14		31
Other operating expenses		103		93
Total non-interest expense	$	2,302	$	1,950

Income Tax Expense

Under the provisions of the Internal Revenue Code, the Company has approximately $20.6 million of net operating loss carryforwards, which will expire if unused beginning in 2024 through 2034. As of June 30, 2016, deferred tax assets of $6.6 million have been fully reserved with a valuation allowance. It is estimated that all of the valuation allowance is available to be reversed if it is deemed 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 of 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. Deferred tax assets related to net operating losses in excess of the amount realizable during the 20 year carryforward period have been written off.

Results of Operations – Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Net Income (Loss)

Consolidated net loss was $2.4 million for the six months ended June 30, 2016 (the “2016 period”) compared to consolidated net income of $587 thousand for the six months ended June 30, 2015 (the “2015 period”). Net interest income before provision increased in the 2016 period by $575 thousand from the 2015 period. The 2015 period included a recovery of the allowance for loan losses of $277 thousand compared to a provision of $147 thousand in the 2016 period. Noninterest income (loss) decreased in the 2016 period by $989 thousand due to the loss in the 2016 period 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. Noninterest expense increased $2.1 million compared to the 2015 period. 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. Noninterest expense in the 2015 period included the favorable reversal of the fair value discount related to the purchase of a Bank property and the termination of the related lease. This fair value discount was established when Cordia purchased BVA as a result of an existing lease being deemed unfavorable when compared to market rates for commercial real estate at that time. This $400 thousand fair value discount was allocated based on relative fair values of the purchased property and the remaining portion of the unfavorable portion of the lease, with $225 thousand recorded as a reduction to noninterest expense and $175 thousand recorded as a reduction to the basis of the Bank property purchased.

Net Interest Income

Net interest income before the recovery of/provision for loan losses increased 13.8% or $575 thousand to $4.7 million for the 2016 period from $4.2 million for the 2015 period.

Interest income increased $810 thousand to $6.1 million during the 2016 period from $5.3 million for the 2015 period, due primarily to a 9.1% increase in total average earning assets and 19 basis point increase in the average yield on these assets. Excluding the accretion of acquisition accounting adjustments, interest income on loans was $5.2 million for the 2016 period compared to. $4.4 million for the 2015 period. Interest expense for the 2016 period was $1.3 million, compared to $1.1 million for the 2015 period. This increase of $235 thousand was due primarily to an increase in saving and money market accounts and an 8 basis point increase in the average cost of interest bearing liabilities. The average balance of interest-bearing transaction and savings accounts increased 32.1%, while the average balance of non-interest-bearing accounts decreased 3.4%.

Net interest margin was 2.85% for the 2016 period and 2.73% for the 2015 period. Excluding the accretion of acquisition accounting adjustments, net interest margin was 2.83% for the 2016 period and 2.68% for the 2015 period with the 15 basis point increase primarily the result of a 19 basis point increase in the yield on interest earning assets offset by an increase of 8 basis points in the cost of deposits.

Average Balances and Yields

	For the six months ended June 30,
(dollars in thousands)	2016								2015
	Average Balance			Interest		Yield/Rate			Average Balance			Interest		Yield/Rate
Earning Assets:
Loans held for investment ⁽¹⁾	$	235,369		$	4,816		4.11	%	$	217,956		$	4,507		4.16	%
Loans held for sale		12,647			402		6.39	%		158			3
Securities		78,236			840		2.16	%		71,797			746		2.09	%
Federal Funds and deposits with Banks		8,315			20		0.48	%		16,692			12		0.14	%
Total earning assets		334,567			6,078		3.65	%		306,603			5,268		3.46	%
Allowance for loan losses		(812	)							(1,085	)
Other assets		18,324								18,946
Total	$	352,079							$	324,464
Interest-bearing liabilities:
Demand deposits	$	21,576		$	42		0.39	%	$	13,420		$	19		0.28	%
Savings and money market deposits		90,103			187		0.42	%		71,105			109		0.31	%
Time deposits		153,963			924		1.21	%		152,536			796		1.05	%
FHLB borrowings		30,565			188		1.24	%		30,069			182		1.22	%
Total interest-bearing liabilities		296,207			1,341		0.91	%		267,130			1,106		0.83	%
Non-interest-bearing demand deposits		27,865								28,842
Other liabilities		732								897
Stockholders' equity		27,275								27,595
Total	$	352,079							$	324,464

Net interest income				$	4,737							$	4,162
Net interest rate spread⁽²⁾							2.74	%							2.63	%
Net interest margin ⁽³⁾							2.85	%							2.73	%

⁽¹⁾ Non-accrual loans are included in average balances outstanding, with no related interest income during non-accrual period.

⁽²⁾ Represents the difference between the yield on earnings assets and cost of funds.

⁽³⁾ Represents net interest income divided by average interest-earning assets.

Recovery of/Provision for Loan Losses

A $147 thousand provision for loan losses for the 2016 period was recorded compared to a recovery of $277 thousand for the 2015 period. The change in the recovery/provision for loan losses was driven by net recoveries of $178 thousand in the 2015 period as compared to net charge-offs of $55 thousand in the 2016 period.

Non-interest Income

Non-interest income (loss) for the 2016 period was a loss of $679 thousand, compared to income of $310 thousand for the 2015 period. The decrease was primarily the result of an $883 thousand loss on loans held for sale primarily in connection with the sale of the CordiaGrad business. The 2015 period included $114 thousand net gain on the sale of available for sale securities versus no sales of available for sale securities in 2016.

The following table sets forth the principal components of non-interest income (loss) for the six months ended June 30, 2016 and 2015.

For the six months ended June 30, (dollars in thousands)	2016			2015
Service charges on deposit accounts	$	68		$	60
Net gain on sale of "AFS" securities		-			114
Realized and unrealized gains (losses) on loans held for sale		(883	)		35
Other income		136			101
Total non-interest income (loss)	$	(679	)	$	310

Non-interest Expense

Noninterest expense increased $2.1 million, or 51.3%, to $6.3 million for the 2016 period from $4.2 million for the 2015 period. The increase was due primarily to (1) an increase of $552 thousand in salaries and benefits due primarily to an $800 thousand stock compensation expense related to the sale of the Bank’s CordiaGrad business, (2) an $843 thousand loss on the sale of the CordiaGrad business and (3) merger related expenses of $200 thousand incurred in the 2016 period in connection with our proposed business combination with First Citizens Bank. The 2015 period includes the fair value discount related to the purchase of a Bank property and the termination of the related lease. This fair value discount was established when Cordia purchased BVA as a result of an existing lease being deemed unfavorable when compared to market rates for commercial real estate at that time. This $400 thousand fair value discount was allocated based on relative fair values of the purchased property and the remaining portion of the unfavorable portion of the lease, with $225 thousand recorded as a reduction to noninterest expense and $175 thousand recorded as a reduction to the basis of the Bank property purchased.

The following table sets forth the primary components of non-interest expense for the six months ended June 30, 2016 and 2015:

For the six months ended June 30, (dollars in thousands)	2016		2015
Salaries and employee benefits	$	2,914	$	2,362
Professional services		288		184
Merger related expenses		200		-
Occupancy		273		312
Reversal of occupancy fair value discount		-		(225	)
Data processing and communications		471		404
FDIC assessment and bank fees		337		182
Bank franchise raxes		95		98
Student loan servicing fees and other loan expenses		292		354
Other real estate expenses		56		51
Supplies and equipment		141		143
Insurance		38		39
Director's fees		111		47
Marketing and business development		49		49
Loss on sale of subsidiary		843		-
Other operating expenses		191		162
Total non-interest expense	$	6,299	$	4,162

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 no residential loans held for sale as of June 30, 2016 and $220 thousand of residential mortgage loans held for sale as December 31, 2015.

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 June 30, 2016, total loans held for investment (net of reserves) were $250.5 million as compared to $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 June 30,						At December 31,
	2016						2015
(dollars in thousands)	Amount			Percent			Amount			Percent
Commercial Real Estate:
Acquisition, development and construction	$	2,202			0.9	%	$	2,168			0.9	%
Non-owner occupied		64,417			25.5	%		58,044			23.6	%
Owner occupied		40,197			16.0	%		45,690			18.6	%
Commercial and industrial		34,926			13.9	%		34,819			14.1	%
Guaranteed Student Loans		49,437			19.7	%		53,847			21.9	%
Consumer:
Residential mortgage		17,184			6.8	%		18,140			7.4	%
HELOC		11,957			4.8	%		10,603			4.3	%
Other		31,133			12.4	%		22,722			9.2	%
Total loans		251,453			100.0	%		246,033			100.0	%
Allowance for loan losses		(915	)					(823	)
Total loans, net of allowance for loan losses	$	250,538					$	245,210

The largest component of the loan portfolio is comprised of various types of commercial real estate loans. At June 30, 2016, commercial real estate loans totaled $106.8 million or 42.4% of the total portfolio. Guaranteed student loans totaled $49.4 million, commercial and industrial loans totaled $34.9 million and consumer loans, which were comprised principally of residential mortgage and home equity loans, totaled $60.3 million, of which single family residential mortgage loans totaled $17.1 million, home equity lines totaled $12.0 million and refinanced private student loans totaled $30.3 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.

Allowance for Loan Losses

At June 30, 2016, our allowance for loan losses (“ALLL”) was $915 thousand, or 0.36% of total loans outstanding and 55.0% of non-performing loans. ALLL was 0.47% of total loans outstanding less guaranteed student loans, purchased credit impaired loans and purchased portfolio. On June 30, 2016 a $409 thousand valuation allowance was transferred with the held for sale refinanced private student loans to held for investment. ALLL plus the valuation allowance was 0.64% of total loans outstanding less guaranteed student loans, purchased credit impaired loans, the purchased portfolio and the valuation allowance.

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 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.

Changes affecting the ALLL for the six months ended June 30, 2016 and the year ended December 31, 2015, are summarized in the following table.

(dollars in thousands)	Six Months Ended June 30, 2016			Year Ended December 31, 2015
Allowance for loan losses at beginning of period	$	823		$	1,089

Provision for (recovery of) loan losses		147			(293	)

Charge-offs:
Commercial real estate		-			(127	)
Commercial and industrial		-			(109	)
Guaranteed Student Loans		(13	)		(331	)
Consumer		(71	)		(22	)
Total charge-offs		(84	)		(589	)

Recoveries:
Commercial real estate		-			241
Commercial and industrial		25			361
Guaranteed Student Loans		-			-
Consumer		4			14
Total recoveries		29			616
Net recoveries/(charge-offs)		(55	)		27
Allowance for loan losses at end of period	$	915		$	823

Allowance for loan losses to non-performing loans		55.0	%		44.9	%
Allowance for loan losses to total loans outstanding at end of period		0.36	%		0.33	%
Allowance for loan losses to total loans less guaranteed student loans, purchased credit impaired loans and purchased portfolio		0.47	%		0.45	%
Allowance for loan losses plus valuation allowance to total loans less guaranteed student loans, purchased credit impaired loans, purchased portfolio and the valuation allowance		0.64	%		0.45	%
Net recoveries/(charge-offs) to average loans during the period		-0.02	%		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 six months ended June 30, 2016. Activity related only to that portion of the ALLL is as follows:

(dollars in thousands)	Six Months Ended June 30, 2016		Year Ended December 31, 2015
Allowance for loan losses at beginning of period	$	-	$	90
Provision for loan losses		71		(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 charge-offs		-		475
Net charge-offs		-		348
Allowance for loan losses at end of period	$	71	$	-

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 June 30, 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	$	515		56	%		42	%	$	328		40	%		43	%
Commercial and industrial		170		19	%		14	%		112		13	%		14	%
Guaranteed Student Loans		45		5	%		20	%		47		6	%		22	%
Consumer		185		20	%		24	%		336		41	%		21	%
Total allowance for loan losses	$	915		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 6 of the Notes to the Condensed Consolidated Financial Statements for more detail.

The following is the distribution of loans by credit quality and class as of June 30, 2016 and December 31, 2015:

June 30, 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		-		7,689		2,505		2,437		49,437		-		1,976		286		64,330
3 Satisfactory		1,328		32,974		16,150		25,893		-		11,548		6,246		30,797		124,936
4 Pass		212		22,422		19,217		6,076		-		5,438		2,785		50		56,200
5 Special mention		-		-		-		520		-		25		360		-		905
6 Substandard		121		-		381		-		-		38		232		-		772
7 Doubtful		-		-		-		-		-		-		-		-		-
		1,661		63,085		38,253		34,926		49,437		17,049		11,599		31,133		247,143
Loans acquired with deteriorating credit quality		541		1,332		1,944		-		-		135		358		-		4,310
Total loans	$	2,202	$	64,417	$	40,197	$	34,926	$	49,437	$	17,184	$	11,957	$	31,133	$	251,453

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 $772 thousand at June 30, 2016, or 0.3% 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 $1.4 million from $2.4 million at December 31, 2015 to $905 thousand at June 30, 2016 and loans graded “pass” or better increased $7.2 million from $238.3 million at December 31, 2015 to $245.5 million at June 30, 2016. Loans acquired by Cordia in December 2010 with deteriorating credit quality have declined $468 thousand from $4.8 million at December 31, 2015 to $4.3 million at June 30, 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. 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.

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 borrower's financial condition and the prospects for full payment.

Nonperforming assets totaled $3.5 million, or 1.0% of total assets, at June 30, 2016 and were comprised of non-accrual loans of $1.6 million and real estate owned of $1.9 million. The balance of nonperforming assets at December 31, 2015 was $3.7 million or 1.1% of total assets.

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

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

(dollars in thousands)	Quarter ended June 30, 2016			Year ended December 31, 2015
Non-accrual troubled debt restructurings	$	381		$	-
Other non-accrual loans		1,283			1,834
Total non-accrual loans		1,664			1,834
Other real estate owned		1,885			1,870
Total non-performing assets	$	3,549		$	3,704

Total non-accrual loans to total loans		0.66	%		0.75	%
Total non-performing loans to total assets		0.47	%		0.53	%
Total non-performing assets to total assets		1.00	%		1.06	%

Accruing troubled debt restructurings	$	-		$	-

Total loans	$	251,453		$	246,033
Total assets	$	353,756		$	348,490

Loans With Deteriorated Credit Quality

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

(dollars in thousands)	June 30, 2016		December 31, 2015
Contract principal balance	$	4,310	$	4,779
Accretable discount		-		(1	)
Nonaccretable discount		-		-
Book value of loans	$	4,310	$	4,778

Investment Securities

Our investment portfolio consists of U.S. agency debt and agency guaranteed mortgage-backed securities. Our investment security portfolio includes securities classified as available for sale as well as securities classified as held to maturity. The total securities portfolio (excluding restricted securities) was $78.8 million at June 30, 2016 as compared to $71.7 million at December 31, 2015. At June 30, 2016, the securities portfolio consisted of $42.9 million of securities available for sale and $35.9 million of securities held to maturity.

The table below presents the amortized cost, gross unrealized gains and losses, and fair value of securities available for sale at June 30, 2016 and December 31, 2015.

	June 30, 2016
	Amortized		Gross Unrealized
(dollars in thousands)	Cost		Gains		Losses			Fair Value
U.S. Government agencies	$	1,944	$	12	$	(6	)	$	1,950
Agency guaranteed mortgage-backed securities		40,789		222		(51	)		40,960
Total	$	42,733	$	234	$	(57	)	$	42,910

	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 June 30, 2016 and December 31, 2015.

	June 30, 2016
	Amortized		Gross Unrealized
(dollars in thousands)	Cost		Gains		Losses			Fair Value
Agency guaranteed mortgage-backed securities	$	35,864	$	579	$	(32	)	$	36,411

	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

Deposits and Other Interest-Bearing Liabilities

At June 30, 2016 and December 31, 2015, total deposits were $296.1 million and $290.0 million, respectively. Core deposits, which by FDIC guidelines exclude certificates of deposit of $250,000 or more and insured brokered deposits, provide a relatively stable funding source for our loan portfolio and other earning assets. Our core deposits were $231.9 million at June 30, 2016, or 78.3% of total deposits, compared to $201.8 million at December 31, 2015, or 69.6% of total deposits. Deposits, including core deposits, have been the primary source of funding and have enabled us to successfully meet both our short-term and long-term liquidity needs. During the six months ended June 30, 2016, transaction accounts increased $3.9 million, or 8.1%, while money market and savings deposits increased $3.4 million, or 3.8%. Time deposits decreased by $1.3 million during the first six months of 2016. Our loan-to-deposit ratio was 84.9% at both June 30, 2016 and December 31, 2015.

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

	June 30, 2016					December 31, 2015
(dollars in thousands)	Amount		Percent			Amount		Percent
Non-interest bearing demand accounts	$	29,293		10	%	$	28,969		11	%
NOW accounts		22,598		8	%		19,012		7	%
Savings and money market accounts		91,417		31	%		88,045		30	%
Times deposits - less than $100,000		51,749		17	%		48,032		16	%
Times deposits - $100,000 or more		101,005		34	%		105,986		36	%
Total	$	296,062		100	%	$	290,044		100	%

At June 30, 2016, 32.8% of our time deposits over $100,000 had maturities within twelve months. Large certificate of deposit customers tend to be more sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes in comparison to core deposits.

The maturity distribution of our time deposits of $100,000 or more and other time deposits at June 30, 2016, is set forth in the following table:

	June 30, 2016
(dollars in thousands)	Time deposits of less than $100K		Time deposits of $100K and greater		Total
Months to maturity:
Three months or less	$	6,986	$	10,953	$	17,939
Over three months to twelve months		18,599		22,139		40,738
Over twelve months to three years		15,610		49,403		65,013
Over three years		10,554		18,510		29,064
Total	$	51,749	$	101,005	$	152,754

Management monitors maturity trends in time deposits as part of its overall asset liability management strategy.

Liquidity and Capital Resources

Liquidity

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

BVA’s deposit base was $296.1 million and $290.0 million at June 30, 2016 and December 31, 2015, respectively. Savings and money market accounts grew 3.8% from $88.0 million at December 31, 2015 to $91.4 million at June 30, 2016. Time deposits in excess of $100,000 declined 4.7% from $106.0 million at December 31, 2015 to $101.0 million at June 30, 2016.

Development of several sources of funding beyond core deposit growth ensures maximum liquidity access without dependence on higher cost sources of funds.

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

Borrowings

As of June 30, 2016, BVA had a total of $22.5 million committed repo lines with correspondent banks through which borrowings could be made against the pledge of marketable securities subject to mark-to-market valuations and standard collateral borrowing ratios. These lines were unused in 2015 and during the six months ended June 30, 2016 and remain fully available. BVA also maintains $4.5 million in unsecured lines of credit with other correspondent banks that were available for direct borrowings or Federal Funds purchased.

BVA is a member of the Federal Home Loan Bank of Atlanta (FHLB), which provides access to additional lines of credit and other products offered by the FHLB. These borrowings are largely secured by BVA’s loan portfolio. The FHLB maintains a blanket security agreement on qualifying collateral. As of June 30, 2016 and December 31, 2015, BVA had $30.0 million in secured borrowings outstanding with the FHLB against pledged eligible mortgage loan collateral and investment securities, at average interest rates of 1.24% for both dates. As of June 30, 2016, BVA had a total credit availability of $39.6 million at the FHLB which could be accessed through pledging a combination of eligible mortgage loan collateral and investment securities. The FHLB offers a variety of floating and fixed rate loans at terms ranging from overnight to 20 years; therefore, BVA can match borrowings to loan programs mitigating interest rate risk.

Liquidity Contingency Plan

Historically BVA has maintained both a retail branch-based and an asset-based liquidity strategy. BVA strives to follow regulatory guidance in the management of liquidity risk and has established a Board-approved Contingency Funding Plan (CFP) that prescribes liquidity risk limits and guidelines and includes pro forma cash flow analyses of BVA’s sources and uses of funds under various liquidity scenarios. BVA’s CFP includes funding alternatives that can be implemented if access to normal funding sources is reduced.

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

Capital

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

Quantitative measures established by regulation to ensure capital adequacy require financial institutions to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). At June 30, 2016 and December 31, 2015, BVA met all capital adequacy requirements to which it was subject. BVA is also required to maintain capital at a minimum level as a proportion of quarterly average assets, which is known as the leverage ratio. The minimum levels to be considered well-capitalized are 5% for tier 1 leverage ratio, 6.5% for common equity tier 1 capital ratio, 8% for tier 1 risk-based capital ratio, and 10% for total risk-based capital ratio.

On January 1, 2016, the Bank became subject to an institution-specific capital buffer necessary to avoid limitations on distributions and discretionary bonus payments. The buffer must be composed solely of Common equity tier 1 capital. Under the phase-in provisions, in 2016 we must maintain a capital conservation buffer greater than 0.625 percent.

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

	Minimum Requirements
(dollars in thousands)	Well Capitalized			Adequately Capitalized			June 30, 2016			December 31, 2015
Tier 1 capital							$	26,253		$	27,457
Tier 2 capital								915			823
Total qualifying capital							$	27,168		$	28,280
Total risk-adjusted assets							$	222,677		$	210,519

Tier 1 leverage ratio		5.625	%		4.625	%		7.44	%		7.82	%
Common equity tier 1 capital ratio		7.125	%		5.125	%		11.79	%		13.04	%
Tier 1 risk-based capital ratio		8.625	%		6.625	%		11.79	%		13.04	%
Total risk-based capital ratio		10.625	%		8.625	%		12.20	%		13.43	%

Cordia is considered a small bank holding company, based on its asset size under $1 billion. Accordingly it is exempt from Federal regulatory guidelines related to leverage ratios and risk-based capital.

Interest Rate Sensitivity

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

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

Application of a 200 basis point rate increase would result in a 5.3% increase in net interest income at June 30, 2016, as compared to a 2.6% increase at December 31, 2015. A 200 basis point rate increase would result in the depreciation of the Bank’s equity value by 5.5% at June 30, 2016, compared to 9.2% depreciation at December 31, 2015.

Off-Balance Sheet Risk/Commitments and Contingencies

Through our operations, we have made contractual commitments to extend credit in the ordinary course of our business activities. These commitments are legally binding agreements to lend money to our customers at predetermined interest rates for a specified period of time. At June 30, 2016, we had issued commitments to extend credit of $19.8 million through various types of commercial lending arrangements. The majority of these commitments to extend credit had variable rates.

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

Critical Accounting Policies

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

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

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

Business Combinations

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

Acquired Loans with Specific Credit-Related Deterioration.

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

Allowance for Loan Losses

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

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

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

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

Impact of Inflation

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The information required by this Item 3 is incorporated by reference to information appearing in the MD&A Section of this Quarterly Report on Form 10-Q, more specifically in the sections entitled “Interest Rate Sensitivity” and “Liquidity Contingency Plan”.

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal accounting officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that the company files or submits under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15 (f) under the Exchange Act). There have been no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceeding

Periodically, there have been various claims and lawsuits against us incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission on March 23, 2016. Except as set forth below, as of June 30, 2016, the risk factors of the Company have not materially changed from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2015.

We will be subject to business uncertainties while our previously announced merger with First-Citizens Bank & Trust Company is pending, which could adversely affect our business.

Uncertainty about the effect of our proposed merger with First-Citizens Bank & Trust Company on employees and customers may have an adverse effect on us, and, consequently, the combined company. Although we intend to take steps to reduce any adverse effects, these uncertainties may impair our ability to attract, retain and motivate key personnel until the merger is consummated and for a period of time thereafter, and could cause customers and others that deal with us to seek to change their existing business relationships with us. Our employee retention may be particularly challenging during the pendency of the merger, as employees may experience uncertainty about their roles with the combined company following the merger.

Completion of our previously announced merger with First-Citizens Bank & Trust Company is subject to certain conditions, and if these conditions are not satisfied or waived, the Merger will not be completed.

The obligations of First-Citizens Bank & Trust Company and us to complete the merger are subject to satisfaction or waiver (if permitted) of a number of conditions. The satisfaction of all the required conditions could delay the completion of the merger for a significant period of time or prevent it from occurring. Any delay in completing the merger could cause the combined company not to realize some or all of the benefits that the combined company expects to achieve if the merger is successfully completed within its expected timeframe. Further, there can be no assurance that the conditions to the closing of the merger will be satisfied or waived or that the merger will be completed.

Failure to complete our previously announced merger with First-Citizens Bank & Trust Company could negatively impact our stock price and our future business and financial results.

If our proposed merger with First-Citizens Bank & Trust Company is not completed for any reason, including as a result of our stockholders failing to approve the merger or other transactions contemplated by the related merger agreement, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the merger, we would be subject to a number of risks, including the following:

•

We may be required, under certain circumstances, to pay a termination fee to First-Citizens Bank & Trust Company;

•

We are subject to certain restrictions on the conduct of our business prior to completing the merger, which may adversely affect our abilities to execute certain of our business strategies;

•

We may experience negative reactions from the financial markets, including negative impacts on our stock prices or from our customers, regulators, and employees;

•

We have incurred and will continue to incur certain costs and fees associated with the merger and other transactions contemplated by the merger agreement;

•

Matters relating to the merger (including integration planning) may require substantial commitments of time and resources by our management, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to us as an independent company.

In addition, we could be subject to litigation related to any failure to complete the merger or related to any enforcement proceeding commenced against us to perform our obligations under the merger agreement. If the merger is not completed, these risks may materialize and may adversely affect our business, financial condition, financial results and stock price.

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

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 were conducted through open market purchases or through privately negotiated transactions and made from time to time depending on market conditions and other factors. As of June 30, 2016, the Company had repurchased 21,200 shares.

Cordia did not repurchase any shares of its common stock during the second quarter of 2016.

Item 3. Defaults Upon Senior Securities

Not Applicable

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Exhibit

2.1		Agreement and Plan of Merger, dated as of May 19, 2016, by and among Cordia Bancorp Inc., Bank of Virginia, First-Citizens Bank & Trust Company and FC Merger Subsidiary I, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 20, 2016)
10.1		Form of Support Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 20, 2016)
31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/15d-14(a) Certification of Acting Chief Financial Officer and Principal Financial Officer
32		Section 1350 Certification
101.1		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, formatted in XBRL(Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements, tagged as blocks of text.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CORDIA BANCORP INC.

August 4, 2016	/s/ O.R. (Ed) Barham, Jr.
	O.R. (Ed) Barham, Jr.
	President and Chief Executive Officer

August 4, 2016	/s/ Mark Severson
	Mark Severson
	Chief Financial Officer

Cordia Bancorp Inc - FORM 10-Q - August 4, 2016

Attached files

Cordia Bancorp Inc Reports