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EX-32 - EXHIBIT 32 - Cordia Bancorp Incv444727_ex32.htm
EX-31.2 - EXHIBIT 31.2 - Cordia Bancorp Incv444727_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Cordia Bancorp Incv444727_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

 

  i 

 

 

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

 

 1  

 

 

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

 

 2  

 

 

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

 

 3  

 

 

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

 

 4  

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements

 

Note 1.Organization and Summary of Significant Accounting Policies

 

Organization

 

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

 

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

 

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

 

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

 

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

 

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

 

 5  

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

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

 

Basis of Presentation

 

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and prevailing practices within the financial services industry for interim financial information and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements and prevailing practices within the banking industry. Operating results for the three 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.

 

 6  

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

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

 

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.

 

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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.

 

 8  

 

 

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.

 

 9  

 

 

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.

 

 10  

 

 

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 

 

 11  

 

 

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)

 

 12  

 

 

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.

 

 13  

 

 

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 

 

 14  

 

 

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.

 

 15  

 

 

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.

 

 16  

 

 

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 

 

 17  

 

 

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.

 

 18  

 

 

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.

 

 19  

 

 

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.

 

 20  

 

 

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.

 

 21  

 

 

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 

 

 22  

 

 

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.

 

 23  

 

 

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.

 

 24  

 

 

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.

 

 25  

 

 

Cordia Bancorp

Notes to Consolidated Financial Statements (continued)

 

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

 

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

 

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

 

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

 

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

 

 26  

 

 

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).

 

 27  

 

 

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.

 

 28  

 

 

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  $34   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  $48   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%

 

 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 

 

 30  

 

 

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 

 

 31  

 

 

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.

 

 32  

 

 

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)

 

 33  

 

 

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    

 

 34  

 

 

 

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.

 

 35  

 

 

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

 

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

 

 36  

 

 

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 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.

 

 37  

 

 

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.

 

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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.

 

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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.

 

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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.

 

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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 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.

 

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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 

 

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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.

 

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.

 

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.

 

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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.

 

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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%

 

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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: