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EX-32.1 - EXHIBIT 32.1 - Village Bank & Trust Financial Corp.v445787_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Village Bank & Trust Financial Corp.v445787_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Village Bank & Trust Financial Corp.v445787_ex31-1.htm
EX-10.1 - EXHIBIT 10.1 - Village Bank & Trust Financial Corp.v445787_ex10-1.htm

  

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2016

 

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

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ______ to ______

 

 

 

Commission file number: 0-50765

 

VILLAGE BANK AND TRUST FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

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

 

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

 

804-897-3900

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

1,424,660 shares of common stock, $4.00 par value, outstanding as of July 21, 2016

 

 

 

 

Village Bank and Trust Financial Corp.

Form 10-Q

 

TABLE OF CONTENTS

 

Part I – Financial Information  
   
Item 1.  Financial Statements  
   
Consolidated Balance Sheets June 30, 2016 (unaudited) and December 31, 2015 3
   
Consolidated Statements of Operations For the Three and Six Months Ended June 30, 2016 and 2015 (unaudited) 4
   
Consolidated Statements of Comprehensive Income and Loss For the Three and Six Months Ended June 30, 2016 and 2015 (unaudited) 5
   
Consolidated Statements of Shareholders’ Equity For the Six Months Ended June 30, 2016 and 2015 (unaudited) 6
   
Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2016 and 2015 (unaudited) 7
   
Notes to Consolidated Financial Statements (unaudited) 8
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 42
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 65
   
Item 4. Controls and Procedures 65
   
Part II – Other Information  
   
Item 1.  Legal Proceedings 66
   
Item 1A. Risk Factors 66
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 66
   
Item 3.  Defaults Upon Senior Securities 66
   
Item 4.  Mine Safety Disclosures 66
   
Item 5.  Other Information 66
   
Item 6.  Exhibits 67
   
Signatures 68

 

 2 

 

 

Part I – Financial Information

 

ITEM 1 – FINANCIAL STATEMENTS

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Balance Sheets
June 30, 2016 (Unaudited) and December 31, 2015
(in thousands, except share data)

 

   June 30,   December 31, 
   2016   2015 
Assets          
Cash and due from banks  $12,638   $17,076 
Federal funds sold   16,323    186 
Total cash and cash equivalents   28,961    17,262 
Investment securities available for sale   21,159    37,919 
Loans held for sale   16,164    14,373 
Loans          
Outstandings   323,219    306,771 
Allowance for loan losses   (3,523)   (3,562)
Deferred fees and costs, net   602    670 
Total loans, net   320,298    303,879 
Other real estate owned, net of valuation allowance   3,941    6,249 
Assets held for sale   841    12,631 
Premises and equipment, net   12,590    13,671 
Bank owned life insurance   7,223    7,130 
Accrued interest receivable   1,962    2,060 
Other assets   6,402    4,767 
           
   $419,541   $419,941 
           
Liabilities and Shareholders' Equity          
Liabilities          
Deposits          
Noninterest bearing demand  $78,122   $78,282 
Interest bearing   289,502    286,566 
Total deposits   367,624    364,848 
Federal Home Loan Bank advances   3,200    6,000 
Long-term debt - trust preferred securities   8,764    8,764 
Other borrowings   316    508 
Accrued interest payable   80    1,346 
Other liabilities   7,843    8,116 
Total liabilities   387,827    389,582 
           
Shareholders' equity          
Preferred stock, $4 par value, $1,000 liquidation preference, 1,000,000 shares authorized; 5,715 shares issued and outstanding at June 30, 2016 and December 31, 2015   23    23 
Common stock, $4 par value - 10,000,000 shares authorized;  1,425,288 shares issued and outstanding at June 30, 2016 1,417,775 shares issued and outstanding and December 31, 2015   5,603    5,562 
Additional paid-in capital   58,623    58,497 
Accumulated deficit   (33,248)   (33,948)
Common stock warrant   732    732 
Stock in directors rabbi trust   (1,034)   (1,034)
Directors deferred fees obligation   1,034    1,034 
Accumulated other comprehensive loss   (19)   (507)
Total shareholders' equity   31,714    30,359 
           
   $419,541   $419,941 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Operations
Three and Six Months Ended June 30, 2016 and 2015
(Unaudited)
(in thousands, except per share data)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
Interest income                    
Loans  $3,804   $3,692   $7,569   $7,316 
Investment securities   69    154    189    309 
Federal funds sold   14    18    28    36 
Total interest income   3,887    3,864    7,786    7,661 
                     
Interest expense                    
Deposits   595    620    1,194    1,256 
Borrowed funds   63    103    104    225 
Total interest expense   658    723    1,298    1,481 
                     
Net interest income   3,229    3,141    6,488    6,180 
Provision for loan losses   -    -    -    - 
Net interest income after provision for loan losses   3,229    3,141    6,488    6,180 
                     
Noninterest income                    
Service charges and fees   649    683    1,185    1,275 
Gain on sale of loans   1,441    1,728    2,587    2,957 
Gain on sale of asset held for sale   504    -    504    - 
Gain on sale of investment securities   38    -    147    7 
Rental income   262    250    582    490 
Other   92    75    177    177 
Total noninterest income   2,986    2,736    5,182    4,906 
                     
Noninterest expense                    
Salaries and benefits   2,759    2,711    5,418    5,379 
Commissions   381    443    630    735 
Occupancy   415    409    864    887 
Equipment   193    212    376    398 
Write down of assets held for sale   220    687    220    687 
Supplies   72    65    151    134 
Professional and outside services   758    649    1,476    1,296 
Advertising and marketing   78    101    163    173 
Foreclosed assets, net   70    (218)   171    (86)
FDIC insurance premium   135    234    197    468 
Other operating expense   475    500    943    936 
Total noninterest expense   5,556    5,793    10,609    11,007 
                     
Income before income tax expense   659    84    1,061    79 
Income tax expense   -    -    -    - 
                     
Net income   659    84    1,061    79 
                     
Preferred stock dividends and amortization of discount   (183)   (167)   (361)   (330)
Preferred stock principal forgiveness   -    -    -    4,404 
Preferred stock dividend forgiveness   -    -    -    2,215 
Net income (loss) available to common shareholders  $476   $(83)  $700   $6,368 
                     
Earnings (loss) per share, basic  $0.34   $(0.06)  $0.50   $7.00 
Earnings (loss) per share, diluted  $0.34   $(0.06)  $0.50   $6.92 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Comprehensive Income  (Loss)
Three and Six Months Ended June 30, 2016 and 2015
(Unaudited)
(in thousands)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2016   2015   2016   2015 
                 
Net income  $659   $84   $1,061   $79 
Other comprehensive income (loss)                    
Unrealized holding gains (losses) arising during the period   86    (551)   880    106 
Tax effect   29    (187)   299    37 
Net change in unrealized holding gains (losses) on securities available for sale, net of tax   57    (364)   581    69 
                     
Reclassification adjustment                    
Reclassification adjustment for gains realized in income   (38)   -    (147)   (7)
Tax effect   (13)   -    (50)   (2)
Reclassification for gains included in net income, net of tax   (25)   -    (97)   (5)
                     
Minimum pension adjustment   3    3    6    6 
Tax effect   1    1    2    2 
Minimum pension adjustment, net of tax   2    2    4    4 
                     
Total other comprehensive income (loss)   34    (362)   488    69 
                     
Total comprehensive income (loss)  $693   $(278)  $1,549   $148 

 

See accompanying notes to consolidated financial statements.

 

 5 

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Shareholders' Equity
Six Months Ended June 30, 2016 and 2015
(Unaudited)
(in thousands)

 

                           Directors   Accumulated     
           Additional           Stock in   Deferred   Other     
   Preferred   Common   Paid-in   Accumulated       Directors   Fees   Comprehensive     
   Stock   Stock   Capital   Deficit   Warrant   Rabbi Trust   Obligation   Income (Loss)   Total 
                                     
Balance, December 31, 2015  $23   $5,562   $58,497   $(33,948)  $732   $(1,034)  $1,034   $(507)  $30,359 
Preferred stock dividend   -    -    -    (361)   -    -    -    -    (361)
Issuance of common stock   -    41    (41)   -    -    -    -    -    - 
Stock based compensation   -    -    167    -    -    -    -    -    167 
Minimum pension adjustment  (net of income taxes of $2)   -    -    -    -    -    -    -    4    4 
Net income   -    -    -    1,061    -    -    -    -    1,061 
Change in unrealized gain (loss) on investment securities  available-for-sale, net of reclassification and tax effect   -    -    -    -    -    -    -    484    484 
                                              
Balance, June 30, 2016  $23   $5,603   $58,623   $(33,248)  $732   $(1,034)  $1,034   $(19)  $31,714 
                                              
Balance, December 31, 2014  $59   $1,339   $58,188   $(40,539)  $732   $(878)  $878   $(721)  $19,058 
Preferred stock dividend   -    -    -    (330)   -    -    -    -    (330)
Restricted stock issuance   -    7    (85)   -    -    (156)   156    -    (78)
Issuance of common stock, net of offering expense of $1,200   -    2,875    5,842    -    -    -    -    -    8,717 
Preferred stock exchanged for  common stock   (18)   1,332    (1,314)   -    -    -    -    -    - 
Preferred stock principal forgiveness   (18)   -    (4,386)   4,404    -    -    -    -    - 
Preferred stock dividend forgiveness   -    -    -    2,215    -    -    -    -    2,215 
Stock based compensation   -    -    172    -    -    -    -    -    172 
Minimum pension adjustment  (net of income taxes of $2)   -    -    -    -    -    -    -    4    4 
Net income   -    -    -    79    -    -    -    -    79 
Change in unrealized gain (loss) on investment securities available-for-sale, net of  reclassification and tax effect   -    -    -    -    -    -    -    65    65 
                                              
Balance, June 30, 2015  $23   $5,553   $58,417   $(34,171)  $732   $(1,034)  $1,034   $(652)  $29,902 

 

See accompanying notes to consolidated financial statements.

 

 6 

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2016 and 2015
(Unaudited)
(in thousands)

 

   2016   2015 
         
Cash Flows from Operating Activities          
Net income  $1,061   $79 
Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities:          
Depreciation and amortization   412    445 
Deferred income taxes   340    52 
Valuation allowance (recovery) deferred income taxes   (340)   (52)
Write-down of other real estate owned   383    158 
Valuation allowance other real estate owned   (294)   (293)
Write-down of assets held for sale   220    687 
Gain on securities sold   (147)   (7)
Gain on loans sold   (2,587)   (2,957)
Gain on sale of assets held for sale   (504)   - 
Loss on sale and disposal of premises and equipment   2    12 
Gain on sale of other real estate owned   (55)   (451)
Stock compensation expense   167    172 
Proceeds from sale of mortgage loans   87,942    101,559 
Origination of mortgage loans for sale   (87,146)   (109,350)
Amortization of premiums and accretion of discounts on securities, net   88    142 
Decrease (increase) in interest receivable   98    (669)
Increase in bank owned life insurance   (93)   (91)
Decrease (increase) in other assets   (997)   (822)
Increase (decrease) in interest payable   (1,266)   87 
Increase (decrease) in other liabilities   (634)   134 
Net cash (used in) provided by operating activities   (3,350)   (11,165)
           
Cash Flows from Investing Activities          
Purchases of available for sale securities   -    (6,748)
Proceeds from the sale or calls of available for sale securities   17,551    6,834 
Proceeds from the sale of assets held for sale   7,338    - 
Net increase in loans   (12,052)   (15,970)
Proceeds from sale of other real estate owned   2,819    4,606 
Purchases of premises and equipment   (391)   (561)
Net cash (used in) provided by investing activities   15,265    (11,839)
           
Cash Flows from Financing Activities          
Net proceeds from sale of common stock, net of expenses of $990   -    8,965 
Net increase (decrease) in deposits   2,776    (8,449)
Net decrease in Federal Home Loan Bank Advances   (2,800)   (7,000)
Net increase (decrease) in other borrowings   (192)   355 
Net cash used in financing activities   (216)   (6,129)
           
Net increase (decrease) in cash and cash equivalents   11,699    (29,133)
Cash and cash equivalents, beginning of period   17,262    49,103 
           
Cash and cash equivalents, end of period  $28,961   $19,970 
           
Supplemental Disclosure of Cash Flow Information          
Cash payments for interest  $2,552   $1,395 
Supplemental Schedule of Non Cash Activities          
Real estate owned assets acquired in settlement of loans  $268   $279 
Assets moved to held for sale  $-   $831 
Bank financed sale of asset held for sale  $4,912   $- 
Dividends on preferred stock accrued  $361   $330 
Non-Cash conversion of preferred shares  $-   $4,619 
Forgiveness of principal and accrued dividends  $-   $6,619 

 

See accompanying notes to consolidated financial statements.

 

 7 

 

 

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three and Six Months Ended June 30, 2016 and 2015

(Unaudited)

 

Note 1 - Principles of presentation

 

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

 

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

 

In the opinion of management, the accompanying condensed consolidated financial statements of the Company have been prepared on the accrual basis in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, all adjustments that are, in the opinion of management, necessary for a fair presentation have been included. The results of operations for the six month period ended June 30, 2016 is not necessarily indicative of the results to be expected for the full year ending December 31, 2016. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 as filed with the Securities and Exchange Commission (“SEC”).

 

The Company has evaluated events and transactions occurring subsequent to the consolidated balance sheet date of June 30, 2016 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

Note 2 - Use of estimates

 

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

 

 8 

 

 

Note 3 - Earnings per common share

 

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2016   2015   2016   2015 
Numerator                    
Net income - basic and diluted  $659   $84   $1,061   $79 
Preferred stock dividend and accretion   (183)   (167)   (361)   (330)
Preferred stock principal forgiveness   -    -    -    4,404 
Preferred stock dividend forgiveness   -    -    -    2,215 
Net income available to common  shareholders  $476   $(83)  $700   $6,368 
                     
Denominator                    
Weighted average shares outstanding - basic   1,422    1,388    1,420    909 
Dilutive effect of common stock options and restricted stock awards   -    -    -    11 
                     
Weighted average shares outstanding - diluted   1,422    1,388    1,420    920 
                     
Earnings(loss) per share - basic  $0.34   $(0.06)  $0.50   $7.00 
Earnings(loss) per share - diluted  $0.34   $(0.06)  $0.50   $6.92 

 

Outstanding options and warrants to purchase common stock were considered in the computation of diluted earnings (loss) per share for the periods presented. Stock options for 2,616 were not included in computing diluted earnings per share for the three and six months ended June 30, 2016 and stock options for 4,505 and 6,519 shares were not included in computing diluted earnings per share for the three and six months ended and 2015, respectively, because their effects were anti-dilutive.

 

 9 

 

 

Note 4 – Investment securities available for sale

 

At June 30, 2016 and December 31, 2015, all of our securities were classified as available for sale. The following table presents the composition of our investment portfolio at the dates indicated (dollars in thousands):

 

           Gross   Gross   Estimated     
   Par   Amortized   Unrealized   Unrealized   Fair   Average 
   Value   Cost   Gains   Losses   Value   Yield 
June 30, 2016                              
US Government Agencies                              
One to five years  $13,000   $13,243   $62   $(2)  $13,303    0.99%
Five to ten years   2,000    2,075    20    -    2,095    1.63%
More than ten years   3,130    3,136    -    (19)   3,117    1.10%
    18,130    18,454    82    (21)   18,515    1.20%
Mortgage-backed securities                              
One to five years   1,596    1,635    7    (3)   1,639    1.25%
More than ten years   959    1,003    2    -    1,005    1.27%
    2,555    2,638    9    (3)   2,644    1.28%
                               
Total investment securities  $20,685   $21,092   $91   $(24)  $21,159    1.21%
                               
December 31, 2015                              
US Government Agencies                              
One to five years  $11,000   $11,270   $-   $(157)  $11,113    0.91%
Five to ten years   18,500    19,697    -    (403)   19,294    2.32%
More than ten years   3,312    3,319    -    (13)   3,306    0.85%
    32,812    34,286    -    (573)   33,713    1.51%
Mortgage-backed securities                              
One to five years   1,794    1,841    -    (28)   1,813    1.30%
More than ten years   1,149    1,202    1    (15)   1,188    1.34%
    2,943    3,043    1    (43)   3,001    1.35%
Municipals                              
More than ten years   1,130    1,255    -    (50)   1,205    3.72%
    1,130    1,255    -    (50)   1,205    3.72%
                               
Total investment securities  $36,885   $38,584   $1   $(666)  $37,919    1.57%

 

Investment securities with book values of approximately $5,167,000 and $5,968,000 at June 30, 2016 and December 31, 2015, respectively, were pledged to secure deposit repurchase agreements and FHLB advances.

 

Gross realized gains and losses pertaining to available for sale securities are detailed as follows for the periods indicated (dollars in thousands):

 

   Three Months   Six Months 
   Ended June 30,   Ended June 30, 
   2016   2015   2016   2015 
                 
Gross realized gains  $38   $-   $147   $13 
Gross realized losses   -    -    -    (6)
                     
   $38   $-   $147   $7 

 

The Company sold approximately $6 million and $17 million of investment securities for the three and six months ended June 30, 2016 resulting in a net gain of $38,000 and $147,000, respectively. The Company sold approximately $7 million of investment securities available for sale at a net gain of $7,000 for the six months ended June 30, 2015, no investment securities were sold during the three months ended June 30, 2015. The sale of these securities, which had fixed interest rates, allowed the Company to decrease its exposure to the anticipated upward movement in interest rates that would result in unrealized losses being recognized in shareholders’ equity.

 

 10 

 

 

Investment securities available for sale that have an unrealized loss position at June 30, 2016 and December 31, 2015 are detailed below (dollars in thousands):

 

   Securities in a loss   Securities in a loss         
   position for less than   position for more than         
   12 Months   12 Months   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
June 30, 2016                              
US Government Agencies  $1,889   $(8)  $3,229   $(13)  $5,118   $(21)
Mortgage-backed securities   -    -    812    (3)   812    (3)
                               
   $1,889   $(8)  $4,041   $(16)  $5,930   $(24)
                               
December 31, 2015                              
US Government Agencies  $18,598   $(329)  $15,115   $(244)  $33,713   $(573)
Municipals   707    (14)   497    (36)   1,204    (50)
Mortgage-backed securities   2,899    (43)   -    -    2,899    (43)
                               
   $22,204   $(386)  $15,612   $(280)  $37,816   $(666)

 

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 the Company will be able to collect all amounts due according to the contractual terms of the investments. Because the decline in market value is attributable to changes in interest rates and not to credit quality, and because it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider these investments to be other than temporarily impaired at June 30, 2016.

 

 11 

 

 

Note 5 – Loans and allowance for loan losses

 

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

 

   June 30, 2016   December 31, 2015 
   Amount   %   Amount   % 
Construction and land development                    
Residential  $5,109    1.58%  $5,202    1.70%
Commercial   24,873    7.70%   25,948    8.45%
    29,982    9.28%   31,150    10.15%
Commercial real estate                    
Owner occupied   78,753    24.36%   69,256    22.58%
Non-owner occupied   46,013    14.24%   38,037    12.40%
Multifamily   8,993    2.78%   8,537    2.78%
Farmland   250    0.08%   388    0.13%
    134,009    41.46%   116,218    37.89%
Consumer real estate                    
Home equity lines   20,694    6.40%   20,333    6.63%
Secured by 1-4 family residential,                    
First deed of trust   55,289    17.11%   56,776    18.51%
Second deed of trust   5,914    1.83%   6,485    2.11%
    81,897    25.34%   83,594    27.25%
                     
Commercial and industrial loans (except those secured by real estate)   28,859    8.93%   20,086    6.55%
Guaranteed student loans   46,781    14.47%   53,989    17.60%
Consumer and other   1,691    0.52%   1,734    0.57%
                     
Total loans   323,219    100.0%   306,771    100.0%
Deferred loan cost, net   602         670      
Less: allowance for loan losses   (3,523)        (3,562)     
                     
   $320,298        $303,879      

 

The Bank purchased portfolios of rehabilitated student loans guaranteed by the Department of Education (“DOE”). The guarantee covers approximately 98% of principal and accrued interest. The loans are serviced by a third-party servicer that specializes in handling the special needs of the DOE student loan programs.

 

Loans pledged as collateral with the Federal Home Loan Bank of Atlanta (“FHLB”) as part of their lending arrangement with the Company totaled $7,713,000 and $7,891,000 at June 30, 2016 and December 31, 2015, respectively.

 

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

 

·Risk rated 1 to 4 loans are considered of sufficient quality to preclude an adverse rating. These assets generally are well protected by the current net worth and paying capacity of the obligor or by the value of the asset or underlying collateral;
·Risk rated 5 loans are defined as having potential weaknesses that deserve management’s close attention;
·Risk rated 6 loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any;
·Risk rated 7 loans have all the weaknesses inherent in substandard loans, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable; and

 

 12 

 

 

·Loans rated 6 or 7 are considered “Classified” loans for regulatory classification purposes.

 

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

 

   Risk Rated   Risk Rated   Risk Rated   Risk Rated   Total 
   1-4   5   6   7   Loans 
June 30, 2016                         
Construction and land development                         
Residential  $5,109   $-   $-   $-   $5,109 
Commercial   22,634    856    1,383    -    24,873 
    27,743    856    1,383    -    29,982 
Commercial real estate                         
Owner occupied   73,872    2,402    2,479    -    78,753 
Non-owner occupied   44,801    1,121    91    -    46,013 
Multifamily   8,798    195    -    -    8,993 
Farmland   250    -    -    -    250 
    127,721    3,718    2,570    -    134,009 
Consumer real estate                         
Home equity lines   19,185    236    1,273    -    20,694 
Secured by 1-4 family residential                         
First deed of trust   49,574    2,947    2,768    -    55,289 
Second deed of trust   5,506    126    282    -    5,914 
    74,265    3,309    4,323    -    81,897 
Commercial and industrial loans (except those secured by real estate)   27,910    436    513    -    28,859 
Guaranteed student loans   46,781    -    -    -    46,781 
Consumer and other   1,626    58    7    -    1,691 
                          
Total loans  $306,046   $8,377   $8,796   $-   $323,219 
                          
December 31, 2015                         
Construction and land development                         
Residential  $5,202   $-   $-   $-   $5,202 
Commercial   24,053    572    1,323    -    25,948 
    29,255    572    1,323    -    31,150 
Commercial real estate                         
Owner occupied   64,261    2,850    2,145    -    69,256 
Non-owner occupied   35,887    2,055    95    -    38,037 
Multifamily   8,337    200    -    -    8,537 
Farmland   388    -    -    -    388 
    108,873    5,105    2,240    -    116,218 
Consumer real estate                         
Home equity lines   18,539    435    1,359    -    20,333 
Secured by 1-4 family residential                         
First deed of trust   51,200    2,710    2,866    -    56,776 
Second deed of trust   5,751    128    606    -    6,485 
    75,490    3,273    4,831    -    83,594 
Commercial and industrial loans (except those secured by real estate)   18,873    373    840    -    20,086 
Guaranteed student loans   53,989    -    -    -    53,989 
Consumer and other   1,649    62    23    -    1,734 
                          
Total loans  $288,129   $9,385   $9,257   $-   $306,771 

 

 13 

 

 

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

 

           Greater               Investment > 
   30-59 Days   60-89 Days   Than   Total Past       Total   90 Days and 
   Past Due   Past Due   90 Days   Due   Current   Loans   Accruing 
June 30, 2016                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $5,109   $5,109   $- 
Commercial   192    -    -    192    24,681    24,873    - 
    192    -    -    192    29,790    29,982    - 
Commercial real estate                                   
Owner occupied   -    -    -    -    78,753    78,753    - 
Non-owner occupied   107    -    -    107    45,906    46,013    - 
Multifamily   -    -    -    -    8,993    8,993    - 
Farmland   -    -    -    -    250    250    - 
    107    -    -    107    133,902    134,009    - 
Consumer real estate                                   
Home equity lines   24    -    -    24    20,670    20,694    - 
Secured by 1-4 family residential                                   
First deed of trust   96    -    -    96    55,193    55,289    - 
Second deed of trust   -    -    -    -    5,914    5,914    - 
    120    -    -    120    81,777    81,897    - 
                                    
Commercial and industrial loans (except those secured by real estate)   -    -    -    -    28,859    28,859    - 
Guaranteed student loans   2,185    1,661    8,412    12,258    34,523    46,781    8,412 
Consumer and other   8    -    -    8    1,683    1,691    - 
                                    
Total loans  $2,612   $1,661   $8,412   $12,685   $310,534   $323,219   $8,412 

 

                           Recorded 
           Greater               Investment > 
   30-59 Days   60-89 Days   Than   Total Past       Total   90 Days and 
   Past Due   Past Due   90 Days   Due   Current   Loans   Accruing 
December 31, 2015                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $5,202   $5,202   $- 
Commercial   -    -    -    -    25,948    25,948    - 
    -    -    -    -    31,150    31,150    - 
Commercial real estate                                   
Owner occupied   327    -    -    327    68,929    69,256    - 
Non-owner occupied   -    110    -    110    37,927    38,037    - 
Multifamily   -    -    -    -    8,537    8,537    - 
Farmland   -    -    -    -    388    388    - 
    327    110    -    437    115,781    116,218    - 
Consumer real estate                                   
Home equity lines   -    -    -    -    20,333    20,333    - 
Secured by 1-4 family residential                                   
First deed of trust   163    292    -    455    56,321    56,776    - 
Second deed of trust   94    -    -    94    6,391    6,485    - 
    257    292    -    549    83,045    83,594    - 
Commercial and industrial loans (except those secured by real estate)   -    -    -    -    20,086    20,086    - 
Guaranteed student loans   7,816    1,252    8,590    17,658    36,331    53,989    8,590 
Consumer and other   10    -    -    10    1,724    1,734    - 
                                    
Total loans  $8,410   $1,654   $8,590   $18,654   $288,117   $306,771   $8,590 

 

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

 

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

 

 14 

 

 

   June 30, 2016 
       Unpaid     
   Recorded   Principal   Related 
   Investment   Balance   Allowance 
With no related allowance recorded               
Construction and land development               
Commercial  $126   $193   $- 
Commercial real estate               
Owner occupied   1,422    1,431      
Non-owner occupied   2,596    2,596    - 
    4,018    4,027    - 
Consumer real estate               
Home equity lines   1,178    1,202    - 
Secured by 1-4 family residential               
First deed of trust   4,403    4,434    - 
Second deed of trust   633    903    - 
    6,214    6,539    - 
Commercial and industrial loans (except those secured by real estate)   365    595    - 
    10,723    11,354    - 
                
With an allowance recorded               
Construction and land development               
Commercial   1,746    1,746    25 
Commercial real estate               
Owner occupied   4,447    4,462    142 
Non-Owner occupied   91    91    1 
    4,538    4,553    143 
Consumer real estate               
Secured by 1-4 family residential               
First deed of trust   1,697    1,697    190 
Second deed of trust   245    245    95 
    1,942    1,942    285 
Commercial and industrial loans (except those secured by real estate)   143    245    12 
    8,369    8,486    465 
                
Total               
Construction and land development               
Commercial   1,872    1,939    25 
    1,872    1,939    25 
Commercial real estate               
Owner occupied   5,869    5,893    142 
Non-owner occupied   2,687    2,687    1 
    8,556    8,580    143 
Consumer real estate               
Home equity lines   1,178    1,202    - 
Secured by 1-4 family residential,               
First deed of trust   6,100    6,131    190 
Second deed of trust   878    1,148    95 
    8,156    8,481    285 
Commercial and industrial loans (except those secured by real estate)   508    840    12 
   $19,092   $19,840   $465 

 

 15 

 

 

   December 31, 2015 
       Unpaid     
   Recorded   Principal   Related 
   Investment   Balance   Allowance 
With no related allowance recorded               
Construction and land development               
Commercial  $123   $190   $- 
Commercial real estate               
Owner occupied   1,066    1,066      
Non-owner occupied   2,418    2,418    - 
    3,484    3,484    - 
Consumer real estate               
Home equity lines   1,238    1,247    - 
Secured by 1-4 family residential               
First deed of trust   3,984    3,988    - 
Second deed of trust   962    1,232    - 
    6,184    6,467    - 
Commercial and industrial loans (except those secured by real estate)   690    920    - 
    10,481    11,061    - 
                
With an allowance recorded               
Construction and land development               
Commercial   1,699    1,699    2 
Commercial real estate               
Owner occupied   5,719    5,734    383 
Non-Owner occupied   449    449    26 
    6,168    6,183    409 
Consumer real estate               
Secured by 1-4 family residential               
First deed of trust   1,775    1,775    324 
Second deed of trust   250    250    98 
    2,025    2,025    422 
Commercial and industrial loans (except those secured by real estate)   136    238    18 
    10,028    10,145    851 
                
Total               
Construction and land development               
Commercial   1,822    1,889    2 
    1,822    1,889    2 
Commercial real estate               
Owner occupied   6,785    6,800    383 
Non-owner occupied   2,867    2,867    26 
    9,652    9,667    409 
Consumer real estate               
Home equity lines   1,238    1,247    - 
Secured by 1-4 family residential,               
First deed of trust   5,759    5,763    324 
Second deed of trust   1,212    1,482    98 
    8,209    8,492    422 
Commercial and industrial loans  (except those secured by real estate)   826    1,158    18 
   $20,509   $21,206   $851 

 

 16 

 

 

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

 

   For the Three Months   For the Six Months 
   Ended June 30, 2016   Ended June 30, 2016 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                    
Construction and land development                    
Residential  $-   $-   $-   $- 
Commercial   443    29    271    40 
    443    29    271    40 
Commercial real estate                    
Owner occupied   1,049    15    932    29 
Non-owner occupied   2,434    30    2,533    64 
Multifamily   -    -    -    - 
Farmland   -    -    -    - 
    3,483    45    3,465    93 
Consumer real estate                    
Home equity lines   1,287    1    1,287    1 
Secured by 1-4 family residential                    
First deed of trust   4,339    45    4,215    92 
Second deed of trust   954    11    1,005    23 
    6,580    57    6,508    116 
Commercial and industrial loans (except those secured by real estate)   453    7    625    14 
Consumer and other        -    7    - 
    10,959    138    10,876    263 
                     
With an allowance recorded                    
Construction and land development                    
Commercial   1,428    6    1,586    12 
Commercial real estate                    
Owner occupied   5,308    53    5,454    110 
Non-Owner occupied   272    4    183    9 
    5,580    57    5,637    119 
Consumer real estate                    
Home equity line   -    -    -    - 
Secured by 1-4 family residential                    
First deed of trust   1,681    3    1,861    9 
Second deed of trust   235    2    192    4 
    1,916    5    2,053    13 
Commercial and industrial loans (except those secured by real estate)   130    -    134    - 
    9,054    68    9,410    144 
                     
Total                    
Construction and land development                    
Residential   -    -    -    - 
Commercial   1,871    35    1,856    52 
    1,871    35    1,856    52 
Commercial real estate                    
Owner occupied   6,357    68    6,386    139 
Non-owner occupied   2,706    34    2,716    73 
Multifamily   -    -    -    - 
Farmland   -    -    -    - 
    9,063    102    9,102    212 
Consumer real estate                    
Home equity lines   1,287    1    1,287    1 
Secured by 1-4 family residential,                    
First deed of trust   6,020    48    6,077    101 
Second deed of trust   1,189    13    1,197    27 
    8,496    62    8,561    129 
Commercial and industrial loans (except those secured by real estate)   583    7    759    14 
Consumer and other   -    -    7    - 
   $20,013   $206   $20,285   $407 

 

 17 

 

 

Included in impaired loans are loans classified as troubled debt restructurings (“TDRs”). A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. For loans classified as impaired TDRs, the Company further evaluates the loans as performing or nonaccrual. To restore a nonaccrual loan that has been formally restructured in a TDR to accrual status, we perform a current, well documented credit analysis supporting a return to accrual status based on the borrower’s financial condition and prospects for repayment under the revised terms. Otherwise, the TDR must remain in nonaccrual status. The analysis considers the borrower’s sustained historical repayment performance for a reasonable period to the return-to-accrual date, but may take into account payments made for a reasonable period prior to the restructuring if the payments are consistent with the modified terms. A sustained period of repayment performance generally would be a minimum of six months and would involve payments in the form of cash or cash equivalents.

 

The following is a summary of performing and nonaccrual TDRs and the related specific valuation allowance by portfolio segment for the periods indicated (dollars in thousands).

 

               Specific 
               Valuation 
   Total   Performing   Nonaccrual   Allowance 
June 30, 2016                    
Construction and land development                    
Commercial  $1,677   $1,677   $-   $15 
    1,677    1,677    -    15 
Commercial real estate                    
Owner occupied   5,644    5,394    250    142 
Non-owner occupied   2,687    2,687    -    1 
    8,331    8,081    250    143 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   4,290    3,346    944    159 
Second deeds of trust   680    680    -    - 
    4,970    4,026    944    159 
Commercial and industrial loans (except those secured by real estate)   118    -    118    6 
   $15,096   $13,784   $1,312   $323 

 

 18 

 

 

 

               Specific 
               Valuation 
   Total   Performing   Nonaccrual   Allowance 
December 31, 2015                    
Construction and land development                    
Commercial  $1,699   $1,699   $-   $2 
    1,699    1,699    -    2 
Commercial real estate                    
Owner occupied   5,730    5,458    272    184 
Non-owner occupied   2,866    2,866    -    26 
    8,596    8,324    272    210 
Consumer real estate                    
Home equity lines   87    -    87    - 
Secured by 1-4 family residential                    
First deeds of trust   4,283    3,544    739    236 
Second deeds of trust   693    693    -    1 
    5,063    4,237    825    237 
Commercial and industrial loans (except those secured by real estate)   127    -    127    18 
   $15,485   $14,260   $1,225   $467 

 

There were no TDRs identified during the six months ended June 30, 2016 and June 30, 2015.

 

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

 

   June 30, 2016   June 30, 2015 
   Number of   Recorded   Number of   Recorded 
   Loans   Balance   Loans   Balance 
                 
Construction and land development                    
Commercial   -   $-    3   $91 
    -    -    3    91 
Commercial real estate                    
Owner occupied   1    250    1    158 
Non-owner occupied   1    560    -    - 
    2    810    1    158 
Consumer real estate                    
Secured by 1-4 family residential                    
First deed of trust   3    500    12    835 
Second deed of trust   2    88    2    98 
    5    588    14    933 
                     
Commercial and industrial (except those secured by real estate)   1    118    1    133 
    8   $1,516    19   $1,315 

 

 19 

 

 

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

 

   Beginning   Provision for           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Three Months Ended June 30, 2016                         
Construction and land development                         
Residential  $44   $(13)  $-   $-   $31 
Commercial   353    (94)   -    -    259 
    397    (107)   -    -    290 
Commercial real estate                         
Owner occupied   985    (265)   (9)   -    711 
Non-owner occupied   402    34    -    1    437 
Multifamily   51    3    -    -    54 
Farmland   4    (2)   -    -    2 
    1,442    (230)   (9)   1    1,204 
Consumer real estate                         
Home equity lines   392    (81)   (53)   1    259 
Secured by 1-4 family residential                         
First deed of trust   546    (63)   -    7    490 
Second deed of trust   97    53    (25)   8    133 
    1,035    (91)   (78)   16    882 
Commercial and industrial loans (except those secured by real estate)   95    110    -    21    226 
Guaranteed student loans   206    25    (40)   -    191 
Consumer and other   -    7    -    1    8 
Unallocated   436    286    -    -    722 
                          
   $3,611   $-   $(127)  $39   $3,523 

 

 20 

 

 

   Beginning   Provision for           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Three Months Ended June 30, 2015                         
Construction and land development                         
Residential  $35    57   $-   $-   $92 
Commercial   88    331    (71)   21    369 
    123    388    (71)   21    461 
Commercial real estate                         
Owner occupied   1,836    (23)   (127)   -    1,686 
Non-owner occupied   607    30    -    2    639 
Multifamily   78    32    -    -    110 
Farmland   130    (3)   -    -    127 
    2,651    36    (127)   2    2,562 
Consumer real estate                         
Home equity lines   469    11    (40)   1    441 
Secured by 1-4 family residential                         
First deed of trust   1,703    (456)   (66)   11    1,192 
Second deed of trust   284    17    (55)   4    250 
    2,456    (428)   (161)   16    1,883 
Commercial and industrial loans (except those secured by real estate)   356    (20)   -    46    382 
Guaranteed student loans   217    37    (1)   -    253 
Consumer and other   41    (13)   (3)   1    26 
                          
   $5,844   $-   $(363)  $86   $5,567 

 

   Beginning   Provision for           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Six Months Ended June 30, 2016                         
Construction and land development                         
Residential  $30   $-   $-   $1   $31 
Commercial   291    (32)   -    -    259 
    321    (32)   -    1    290 
Commercial real estate                         
Owner occupied   1,167    (447)   (9)   -    711 
Non-owner occupied   460    (25)   -    2    437 
Multifamily   51    3    -    -    54 
Farmland   17    (140)   -    125    2 
    1,695    (609)   (9)   127    1,204 
Consumer real estate                         
Home equity lines   448    (138)   (53)   2    259 
Secured by 1-4 family residential                         
First deed of trust   602    (99)   (27)   14    490 
Second deed of trust   111    34    (25)   13    133 
    1,161    (203)   (105)   29    882 
Commercial and industrial loans (except those secured by real estate)   94    88    -    44    226 
Guaranteed student loans   230    88    (127)   -    191 
Consumer and other   2    5    (1)   2    8 
Unallocated   59    663    -    -    722 
                          
   $3,562   $-   $(242)  $203   $3,523 

 

 21 

 

 

   Beginning   Provision for           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Six Months Ended June 30, 2015                         
Construction and land development                         
Residential  $34   $57   $-   $1   $92 
Commercial   202    330    (185)   22    369 
    236    387    (185)   23    461 
Commercial real estate                         
Owner occupied   1,837    (23)   (127)   -    1,686 
Non-owner occupied   607    30    -    2    639 
Multifamily   77    32    -    -    110 
Farmland   130    (3)   -    -    127 
    2,651    36    (127)   2    2,562 
Consumer real estate                         
Home equity lines   469    11    (40)   1    441 
Secured by 1-4 family residential                         
First deed of trust   1,345    (456)   (66)   369    1,192 
Second deed of trust   275    17    (55)   13    250 
    2,089    (428)   (161)   383    1,883 
Commercial and industrial loans  (except those secured by real estate)   506    (20)   (162)   58    382 
Guaranteed student loans   217    37    (1)   -    253 
Consumer and other   30    (12)   (6)   14    26 
                          
   $5,729   $-   $(642)  $480   $5,567 

 

   Beginning   Provision for           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Year Ended December 31, 2015                         
Construction and land development                         
Residential  $34   $(6)  $-   $2   $30 
Commercial   202    292    (252)   49    291 
    236    286    (252)   51    321 
Commercial real estate                         
Owner occupied   1,837    (576)   (127)   33    1,167 
Non-owner occupied   607    (151)   -    4    460 
Multifamily   77    (26)   -    -    51 
Farmland   130    (113)   -    -    17 
    2,651    (866)   (127)   37    1,695 
Consumer real estate                         
Home equity lines   469    36    (62)   5    448 
Secured by 1-4 family residential                         
First deed of trust   1,345    (1,020)   (103)   380    602 
Second deed of trust   275    (159)   (55)   50    111 
    2,089    (1,143)   (220)   435    1,161 
Commercial and industrial loans (except those secured by real estate)   506    (350)   (162)   100    94 
Guaranteed student loans   217    13    -    -    230 
Consumer and other   30    1    (55)   26    2 
Unallocated   -    59    -    -    59 
                          
   $5,729   $(2,000)  $(816)  $649   $3,562 

 

 22 

 

 

The allowance for loan losses at each of the periods presented includes an amount that could not be identified to individual types of loans referred to as the unallocated portion of the allowance. We recognize the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. We concluded that the unallocated portion of the allowance was within a reasonable range around the estimate of losses.

 

Discussion of the provision for (recovery of) loan losses related to specific loan types are provided following:

 

·The recovery of loan losses totaling $609,000 for the commercial real estate portfolio for the first six months of 2016 was attributable to changes in our assessment of the general component of the allowance for loan losses as it related to this portfolio. The general component allocated to this portfolio declined primarily as a result of declines in the historical loss experience from 0.70% in the first six months of 2015 to 0.15% in the first six months of 2016. In addition, the portfolio was in a net-recovery position of $118,000 as of June 30, 2016.

 

·The recovery of loan losses totaling $203,000 for the consumer real estate portfolio for the six months ended 2016 was also attributable to changes in our assessment of the general component of the allowance for loan losses as it related to this portfolio. The general component allocated to this portfolio declined primarily as a result of declines in the historical loss experience from 0.24% in 2015 to a net recovery of 0.05% in the second quarter of 2016.

 

·The provision for loan losses totaling $387,000 for the construction and land development portfolio in 2015 was also attributable to changes in our assessment of the general component of the allowance for loan losses as it related to this portfolio. The general component allocated to this portfolio increased primarily as a result of an increase in the historical loss experience from a net recovery of 0.27% in 2014 to a net charge-off of 0.34% in 2015. In addition, the portfolio was in a net charge-off position of $162,000 as of June 30, 2015.

 

·The recovery of loan losses totaling $428,000 for the consumer real estate portfolio in the first quarter of 2015 was also attributable to changes in our assessment of the general component of the allowance for loan losses as it related to this portfolio. The general component allocated to this portfolio declined primarily as a result of declines in the historical loss experience from 1.36% in 2014 to 0.68% in the second quarter of 2015. In addition, the portfolio was in a net recovery position of $222,000 as of June 30, 2015.

 

 23 

 

 

Loans were evaluated for impairment as follows for the periods indicated (dollars in thousands):

 

   Recorded Investment in Loans 
   Allowance   Loans 
   Ending           Ending         
   Balance   Individually   Collectively   Balance   Individually   Collectively 
                         
Period Ended June 30, 2016                              
Construction and land development                              
Residential  $31   $-   $31   $5,109   $-   $5,109 
Commercial   259    25    234    24,873    1,872    23,001 
    290    25    265    29,982    1,872    28,110 
Commercial real estate                              
Owner occupied   711    142    569    78,753    5,869    72,884 
Non-owner occupied   437    1    436    46,013    2,687    43,326 
Multifamily   54    -    54    8,993    -    8,993 
Farmland   2    -    2    250    -    250 
    1,204    143    1,061    134,009    8,556    125,453 
Consumer real estate                              
Home equity lines   259    -    259    20,694    1,178    19,516 
Secured by 1-4 family residential                              
First deed of trust   490    190    300    55,289    6,100    49,189 
Second deed of trust   133    95    38    5,914    878    5,036 
    882    285    597    81,897    8,156    73,741 
Commercial and industrial loans (except those secured by real estate)   226    12    214    28,859    508    28,351 
Student loans   191    -    191    46,781    -    46,781 
Consumer and other   730    -    730    1,691    -    1,691 
                               
   $3,523   $465   $3,058   $323,219   $19,092   $304,127 
                               
Year Ended December 31, 2015                              
Construction and land development                              
Residential  $30   $-   $30   $5,202   $-   $5,202 
Commercial   291    2    289    25,948    1,822    24,126 
    321    2    319    31,150    1,822    29,328 
Commercial real estate                              
Owner occupied   1,167    383    784    69,256    6,785    62,471 
Non-owner occupied   460    26    434    38,037    2,867    35,170 
Multifamily   51    -    51    8,537    -    8,537 
Farmland   17    -    17    388    -    388 
    1,695    409    1,286    116,218    9,652    106,566 
Consumer real estate                              
Home equity lines   448    -    448    20,333    1,238    19,095 
Secured by 1-4 family residential                              
First deed of trust   602    324    278    56,776    5,759    51,017 
Second deed of trust   111    98    13    6,485    1,212    5,273 
    1,161    422    739    83,594    8,209    75,385 
Commercial and industrial loans (except those secured by real estate)   94    18    76    20,086    826    19,260 
Student loans   230    -    230    53,989    -    53,989 
Consumer and other   61    -    61    1,734    -    1,734 
                               
   $3,562   $851   $2,711   $306,771   $20,509   $286,262 

 

 24 

 

 

Note 6 – Deposits

 

Deposits as of June 30, 2016 and December 31, 2015 were as follows (dollars in thousands):

 

   June 30, 2016   December 31, 2015 
   Amount   %   Amount   % 
                 
Demand accounts  $78,122    21.2%  $78,282    21.4%
Interest checking accounts   42,361    11.5%   44,256    12.1%
Money market accounts   67,831    18.5%   64,841    17.8%
Savings accounts   19,820    5.4%   19,403    5.3%
Time deposits of $250,000 and over   15,077    4.1%   9,717    2.7%
Other time deposits   144,413    39.3%   148,349    40.7%
                     
Total  $367,624    100.0%  $364,848    100.0%

 

Note 7 – Trust preferred securities

 

During the first quarter of 2005, Southern Community Financial Capital Trust I, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On February 24, 2005, $5.2 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 2.15%) which adjusts, and is payable, quarterly. The interest rate at June 30, 2016 was 2.80%. The securities were redeemable at par beginning on March 15, 2010 and each quarter after such date until the securities mature on March 15, 2035. No amounts have been redeemed at June 30, 2016 and there are no plans to do so. The principal asset of the Trust is $5.2 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

 

During the third quarter of 2007, Village Financial Statutory Trust II, a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable securities. On September 20, 2007, $3.6 million of Trust Preferred Capital Notes were issued through a pooled underwriting. The securities have LIBOR-indexed floating rate of interest (three-month LIBOR plus 1.4%) which adjusts, and is also payable, quarterly. The interest rate at June 30, 2016 was 2.05%. The securities may be redeemed at par at any time commencing in December 2012 until the securities mature in 2037. No amounts have been redeemed at June 30, 2016 and there are no plans to do so. The principal asset of the Trust is $3.6 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the Trust Preferred Capital Notes.

 

The Trust Preferred Capital Notes may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capita