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EX-32.1 - EXHIBIT 32.1 - Village Bank & Trust Financial Corp.v472088_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Village Bank & Trust Financial Corp.v472088_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Village Bank & Trust Financial Corp.v472088_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2017

 

¨ 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 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
Emerging growth company ¨  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

 

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.

 

1,432,285 shares of common stock, $4.00 par value, outstanding as of July 31, 2017

 

 

 

 

 

 

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, 2017 (unaudited) and December 31, 2016 3
     
  Consolidated Statements of Operations For the Three and Six Months Ended June 30, 2017 and 2016 (unaudited) 4
     
  Consolidated Statements of Comprehensive Income For the Three and Six Months Ended June 30, 2017 and 2016 (unaudited) 5
     
  Consolidated Statements of Shareholders’ Equity For the Six Months Ended June 30, 2017 and 2016 (unaudited) 6
     
  Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2017 and 2016 (unaudited) 7
     
  Notes to Consolidated Financial Statements (unaudited) 8
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 45
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 71
       
  Item 4. Controls and Procedures 71
       
Part II – Other Information  
       
  Item 1. Legal Proceedings 72
       
  Item 1A. Risk Factors 72
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 72
       
  Item 3. Defaults Upon Senior Securities 72
       
  Item 4. Mine Safety Disclosures 72
       
  Item 5. Other Information 72
       
  Item 6. Exhibits 73
       
Signatures 74

 

 2

 

 

Part I – Financial Information

 

ITEM 1 – FINANCIAL STATEMENTS

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Balance Sheets
June 30, 2017 (Unaudited) and December 31, 2016
(in thousands, except share data)

 

   June 30,   December 31, 
   2017   2016 
Assets          
Cash and due from banks  $15,623   $10,848 
Federal funds sold   16,670    948 
Total cash and cash equivalents   32,293    11,796 
Investment securities available for sale   43,052    43,894 
Loans held for sale   11,028    14,784 
Loans          
Outstandings   339,741    337,100 
Allowance for loan losses   (3,267)   (3,373)
Deferred fees and costs, net   655    660 
Total loans, net   337,129    334,387 
Other real estate owned, net of valuation allowance   1,788    2,926 
Assets held for sale   841    841 
Premises and equipment, net   12,802    12,758 
Bank owned life insurance   7,176    7,093 
Accrued interest receivable   2,162    2,274 
Other assets   13,984    14,049 
           
   $462,255   $444,802 
           
Liabilities and Shareholders' Equity          
Liabilities          
Deposits          
Noninterest bearing demand  $100,488   $92,574 
Interest bearing   304,903    290,703 
Total deposits   405,391    383,277 
Federal Home Loan Bank advances   1,600    2,400 
Long-term debt - trust preferred securities   8,764    8,764 
Other borrowings   -    81 
Accrued interest payable   64    70 
Other liabilities   2,968    6,596 
Total liabilities   418,787    401,188 
           
Shareholders' equity          
Preferred stock, $4 par value, $1,000 liquidation preference, 1,000,000 shares authorized; 5,027 shares issued and outstanding at June 30, 2017 and 5,715 shares issued and outstanding at December 31, 2016   20    23 
Common stock, $4 par value - 10,000,000 shares authorized;  1,429,346 shares issued and outstanding at June 30, 2017 and 1,428,261 shares issued and outstanding at December 31, 2016   5,643    5,629 
Additional paid-in capital   58,064    58,643 
Accumulated deficit   (20,791)   (21,172)
Common stock warrant   732    732 
Stock in directors rabbi trust   (1,010)   (1,034)
Directors deferred fees obligation   1,010    1,034 
Accumulated other comprehensive loss   (200)   (241)
Total shareholders' equity   43,468    43,614 
           
   $462,255   $444,802 

 

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, 2017 and 2016
(Unaudited)
(in thousands, except per share data)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2017   2016   2017   2016 
Interest income                    
Loans  $3,993   $3,804   $7,951   $7,569 
Investment securities   165    69    328    189 
Federal funds sold   34    14    45    28 
Total interest income   4,192    3,887    8,324    7,786 
                     
Interest expense                    
Deposits   589    595    1,155    1,194 
Borrowed funds   81    63    154    104 
Total interest expense   670    658    1,309    1,298 
                     
Net interest income   3,522    3,229    7,015    6,488 
Provision for loan losses   -    -    -    - 
Net interest income after provision for loan losses   3,522    3,229    7,015    6,488 
                     
Noninterest income                    
Service charges and fees   635    649    1,194    1,185 
Gain on sale of loans   1,424    1,441    2,800    2,587 
Gain on sale of asset held for sale   -    504    -    504 
Gain (loss) on sale of investment securities   -    38    (9)   147 
Rental income   -    262    -    582 
Other   88    92    178    177 
Total noninterest income   2,147    2,986    4,163    5,182 
                     
Noninterest expense                    
Salaries and benefits   3,048    2,759    6,058    5,418 
Commissions   382    381    748    630 
Occupancy   284    415    551    864 
Equipment   177    193    360    376 
Write down of assets held for sale   -    220    -    220 
Cease use lease obligation   -    -    (125)   - 
Supplies   62    72    117    151 
Professional and outside services   727    758    1,512    1,476 
Advertising and marketing   51    78    140    163 
Foreclosed assets, net   30    70    (162)   171 
FDIC insurance premium   69    135    138    197 
Other operating expense   508    475    961    943 
Total noninterest expense   5,338    5,556    10,298    10,609 
              -      
Income before income tax expense   331    659    880    1,061 
Income tax expense   94    -    227    - 
                     
Net income   237    659    653    1,061 
                     
Preferred stock dividends and amortization of discount   (114)   (183)   (272)   (361)
Net income available to common shareholders  $123   $476   $381   $700 
                     
Earnings per share, basic  $0.09   $0.34   $0.27   $0.50 
Earnings per share, diluted  $0.09   $0.34   $0.27   $0.50 

 

See accompanying notes to consolidated financial statements.

 

 4

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Comprehensive Income
Three and Six Months Ended June 30, 2017 and 2016
(Unaudited)
(in thousands)

 

   Three Months Ended   Six Months Ended 
   June 30,   June 30, 
   2017   2016   2017   2016 
                 
Net income  $237   $659   $653   $1,061 
Other comprehensive income                    
Unrealized holding gains arising during the period   100    86    47    880 
Tax effect   34    29    16    299 
Net change in unrealized holding gains on securities available for sale, net of tax   66    57    31    581 
                     
Reclassification adjustment                    
Reclassification adjustment for (gains) losses realized in income   -    (38)   9    (147)
Tax effect   -    (13)   3    (50)
Reclassification for (gains) losses included in net income, net of tax   -    (25)   6    (97)
                     
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   68    34    41    488 
                     
Total comprehensive income  $305   $693   $694   $1,549 

 

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, 2017 and 2016
(Unaudited)
(in thousands)

 

                           Directors   Accumulated     
           Additional   Retained       Stock in   Deferred   Other     
   Preferred   Common   Paid-in   Earnings       Directors   Fees   Comprehensive     
   Stock   Stock   Capital   (Deficit)   Warrant   Rabbi Trust   Obligation   Income (Loss)   Total 
                                     
Balance, December 31, 2016  $23   $5,629   $58,643   $(21,172)  $732   $(1,034)  $1,034   $(241)  $43,614 
Preferred stock redemption   (3)   -    (685)   -    -    -    -    -    (688)
Preferred stock dividend   -    -    -    (272)   -    -    -    -    (272)
Restricted stock redemption   -    -    -    -    -    24    (24)   -    - 
Issuance of common stock   -    14    (14)   -    -    -    -    -    - 
Stock based compensation   -    -    120    -    -    -    -    -    120 
Minimum pension adjustment (net of income taxes of $1)   -    -    -    -    -    -    -    4    4 
Net income   -    -    -    653    -    -    -    -    653 
Change in unrealized gain (loss) on investment securities  available-for-sale, net of reclassification and tax effect   -    -    -    -    -    -    -    37    37 
                                              
Balance, June 30, 2017  $20   $5,643   $58,064   $(20,791)  $732   $(1,010)  $1,010   $(200)  $43,468 
                                              
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 $1)   -    -    -    -    -    -    -    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 

 

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, 2017 and 2016
(Unaudited)
(in thousands)

 

   2017   2016 
         
Cash Flows from Operating Activities          
Net income  $653   $1,061 
Adjustments to reconcile net income to net  cash provided by (used in) operating activities:          
Depreciation and amortization   368    412 
Deferred income taxes   226    340 
Valuation allowance (recovery) on net deferred tax asset   -    (340)
Write-down of other real estate owned   351    383 
Valuation allowance other real estate owned   (331)   (294)
Write-down of assets held for sale   -    220 
(Gain) loss on securities sold   9    (147)
Gain on loans sold   (2,800)   (2,587)
Gain on sale of assets held for sale   -    (504)
Loss on sale and disposal of premises and equipment   -    2 
Gain on sale of other real estate owned   (218)   (55)
Stock compensation expense   120    167 
Proceeds from sale of mortgage loans   88,924    87,942 
Origination of mortgage loans for sale   (82,368)   (87,146)
Amortization of premiums and accretion of discounts on securities, net   43    88 
Decrease in interest receivable   112    98 
Increase in bank owned life insurance   (83)   (93)
Iincrease in other assets   (177)   (997)
Decrease in interest payable   (6)   (1,266)
Decrease in other liabilities   (984)   (634)
Net cash provided by (used in) operating activities   3,839    (3,350)
           
Cash Flows from Investing Activities          
Purchases of available for sale securities   (2,055)   - 
Proceeds from the sale or calls of available for sale securities   2,902    17,551 
Proceeds from the sale of assets held for sale   -    7,338 
Net increase in loans   (3,027)   (12,052)
Proceeds from sale of other real estate owned   1,621    2,819 
Purchases of premises and equipment   (412)   (391)
Net cash provided by (used in) investing activities   (971)   15,265 
           
Cash Flows from Financing Activities          
Redeemption of preferred stock   (688)   - 
Payment of preferred dividends   (2,916)   - 
Net increase in deposits   22,114    2,776 
Net decrease in Federal Home Loan Bank advances   (800)   (2,800)
Net decrease in other borrowings   (81)   (192)
Net cash provided by (used in) financing activities   17,629    (216)
           
Net increase in cash and cash equivalents   20,497    11,699 
Cash and cash equivalents, beginning of period   11,796    17,262 
           
Cash and cash equivalents, end of period  $32,293   $28,961 
           
Supplemental Disclosure of Cash Flow Information          
Cash payments for interest  $1,315   $2,552 
Supplemental Schedule of Non Cash Activities          
Real estate owned assets acquired in settlement of loans  $285   $268 
Bank financed sale of asset held for sale  $-   $4,912 
Dividends on preferred stock accrued  $272   $361 

 

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, 2017 and 2016

(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.

 

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, 2017 is not necessarily indicative of the results to be expected for the full year ending December 31, 2017. 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, 2016 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, 2017 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 per common share computation (in thousands, except per share data):

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
Numerator                    
Net income - basic and diluted  $237   $659   $653   $1,061 
Preferred stock dividend   (114)   (183)   (272)   (361)
Net income available to common  shareholders  $123   $476   $381   $700 
                     
Denominator                    
Weighted average shares outstanding - basic   1,430    1,422    1,429    1,420 
Dilutive effect of common stock options and  restricted stock awards   -    -    -    - 
                     
Weighted average shares outstanding - diluted   1,430    1,422    1,429    1,420 
                     
Earnings per share - basic  $0.09   $0.34   $0.27   $0.50 
Earnings per share - diluted  $0.09   $0.34   $0.27   $0.50 

 

Outstanding options and warrants to purchase common stock were considered in the computation of diluted earnings per share for the periods presented. Stock options for 2,337 shares were not included in computing diluted earnings per share for the three and six months ended June 30, 2017, and stock options for 2,616 were not included in computed diluted earnings per share for the three and six months ended June 30, 2016, because their effects were anti-dilutive.

 

Note 4 – Investment securities available for sale

 

At June 30, 2017 and December 31, 2016, 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):

 

 9

 

 

           Gross   Gross   Estimated     
   Par   Amortized   Unrealized   Unrealized   Fair   Average 
   Value   Cost   Gains   Losses   Value   Yield 
June 30, 2017                              
US Government Agencies                              
One to five years  $27,400   $27,574   $-   $(153)  $27,421    1.29%
Five to ten years   2,000    2,051    -    (10)   2,041    2.00%
More than ten years   2,695    2,700    -    (12)   2,688    1.53%
    32,095    32,325    -    (175)   32,150    1.35%
Mortgage-backed securities                              
One to five years   3,795    3,880    -    (19)   3,861    1.44%
More than ten years   7,173    7,065    1    (25)   7,041    2.38%
    10,968    10,945    1    (44)   10,902    2.06%
                               
Total investment securities  $43,063   $43,270   $1   $(219)  $43,052    1.53%
                               
December 31, 2016                              
US Government Agencies                              
One to five years  $29,400   $29,607   $-   $(213)  $29,394    1.25%
More than ten years   2,862    2,868    -    (16)   2,852    1.08%
    32,262    32,475    -    (229)   32,246    1.24%
Mortgage-backed securities                              
One to five years   3,457    3,524    -    (33)   3,491    1.78%
More than ten years   8,253    8,170    1    (14)   8,157    2.16%
    11,710    11,694    1    (47)   11,648    2.05%
                               
Total investment securities  $43,972   $44,169   $1   $(276)  $43,894    1.45%

 

There were no investment securities pledged to secure deposit repurchase agreements at June 30, 2017 and approximately $1,050,000 at December 31, 2016.

 

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, 
   2017   2016   2017   2016 
                 
Gross realized gains  $-   $38   $-   $147 
Gross realized losses   -    -    (9)   - 
                     
   $-   $38   $(9)  $147 

 

The Company sold approximately $2 million of investment securities available for sale at a loss of $9,000 for the six months ended June 30, 2017. The Company sold approximately $6 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 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.

 

Investment securities available for sale that have an unrealized loss position at June 30, 2017 and December 31, 2016 are detailed below (dollars in thousands):

 

 10

 

 

   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, 2017                              
US Government Agencies  $29,462   $(163)  $2,688   $(12)  $32,150   $(175)
Mortgage-backed securities   10,833    (44)   -    -    10,833    (44)
                               
   $40,295   $(207)  $2,688   $(12)  $42,983   $(219)
                               
December 31, 2016                              
US Government Agencies  $27,291   $(213)  $2,852   $(16)  $33,143   $(229)
Mortgage-backed securities   9,450    (47)   -    -    9,450    (47)
                               
   $36,741   $(260)  $2,852   $(16)  $42,593   $(276)

 

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, 2017.

 

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):

 

 11

 

 

   June 30, 2017   December 31, 2016 
   Amount   %   Amount   % 
Construction and land development                    
Residential  $6,242    1.84%  $6,770    2.01%
Commercial   28,708    8.45%   27,092    8.04%
    34,950    10.29%   33,862    10.05%
Commercial real estate                    
Owner occupied   72,430    21.32%   66,021    19.59%
Non-owner occupied   59,387    17.48%   57,944    17.19%
Multifamily   6,277    1.85%   8,824    2.62%
Farmland   299    0.09%   310    0.09%
    138,393    40.74%   133,099    39.49%
Consumer real estate                    
Home equity lines   20,512    6.04%   20,691    6.14%
Secured by 1-4 family residential,                    
First deed of trust   51,353    15.12%   54,791    16.25%
Second deed of trust   5,635    1.65%   5,768    1.71%
    77,500    22.81%   81,250    24.10%
Commercial and industrial loans (except those secured by real estate)   43,491    12.80%   39,390    11.68%
Guaranteed student loans   43,422    12.78%   47,398    14.06%
Consumer and other   1,985    0.58%   2,101    0.62%
                     
Total loans   339,741    100.0%   337,100    100.0%
Deferred loan cost, net   655         660      
Less: allowance for loan losses   (3,267)        (3,373)     
                     
   $337,129        $334,387      

 

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 $30,668,000 and $27,073,000 at June 30, 2017 and December 31, 2016, 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, 2017                         
Construction and land development                         
Residential  $6,242   $-   $-   $-   $6,242 
Commercial   27,460    1,148    100    -    28,708 
    33,702    1,148    100    -    34,950 
Commercial real estate                         
Owner occupied   64,887    3,960    3,583    -    72,430 
Non-owner occupied   58,738    649    -    -    59,387 
Multifamily   6,094    183    -    -    6,277 
Farmland   299    -    -    -    299 
    130,018    4,792    3,583    -    138,393 
Consumer real estate                         
Home equity lines   19,263    208    1,041    -    20,512 
Secured by 1-4 family residential                         
First deed of trust   47,079    2,384    1,890    -    51,353 
Second deed of trust   5,282    208    145    -    5,635 
    71,624    2,800    3,076    -    77,500 
Commercial and industrial loans (except those secured by real estate)   42,794    10    687    -    43,491 
Guaranteed student loans   43,422              -    43,422 
Consumer and other   1,933    42    10    -    1,985 
                          
Total loans  $323,493   $8,792   $7,456   $-   $339,741 
                          
December 31, 2016                         
Construction and land development                         
Residential  $6,770   $-   $-   $-   $6,770 
Commercial   25,342    1,648    102    -    27,092 
    32,112    1,648    102    -    33,862 
Commercial real estate                         
Owner occupied   58,788    3,565    3,668    -    66,021 
Non-owner occupied   57,944    -    -    -    57,944 
Multifamily   8,634    190    -    -    8,824 
Farmland   310    -    -    -    310 
    125,676    3,755    3,668    -    133,099 
Consumer real estate                         
Home equity lines   19,501    487    703    -    20,691 
Secured by 1-4 family residential                         
First deed of trust   49,648    2,847    2,296    -    54,791 
Second deed of trust   5,399    125    244    -    5,768 
    74,548    3,459    3,243    -    81,250 
Commercial and industrial loans (except those secured by real estate)   39,390    -    -    -    39,390 
Guaranteed student loans   46,009    739    650    -    47,398 
Consumer and other   2,043    52    6    -    2,101 
Guaranteed Student loans                         
Total loans  $319,778   $9,653   $7,669   $-   $337,100 

 

 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, 2017                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $6,242   $6,242   $- 
Commercial   -    -    -    -    28,708    28,708    - 
    -    -    -    -    34,950    34,950    - 
Commercial real estate                                   
Owner occupied   -    -    -    -    72,430    72,430    - 
Non-owner occupied   -    -    -    -    59,387    59,387    - 
Multifamily   183    -    -    183    6,094    6,277    - 
Farmland   -    -    -    -    299    299    - 
    183    -    -    183    138,210    138,393    - 
Consumer real estate                                   
Home equity lines   56    -    -    56    20,456    20,512    - 
Secured by 1-4 family residential                                   
First deed of trust   442    -    -    442    50,911    51,353    - 
Second deed of trust   89    -    -    89    5,546    5,635    - 
    587    -    -    587    76,913    77,500    - 
Commercial and industrial loans (except those secured by real estate)   18    12    -    30    43,461    43,491    - 
Guaranteed student loans   1,562    1,575    8,058    11,195    32,227    43,422    8,058 
Consumer and other   2    -    -    2    1,983    1,985    - 
                                    
Total loans  $2,352   $1,587   $8,058   $11,997   $327,744   $339,741   $8,058 

 

                           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, 2016                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $6,770   $6,770   $- 
Commercial   -    -    -    -    27,092    27,092    - 
    -    -    -    -    33,862    33,862    - 
Commercial real estate                                   
Owner occupied   -    -    -    -    66,021    66,021    - 
Non-owner occupied   -    -    -    -    57,944    57,944    - 
Multifamily   190    -    -    190    8,634    8,824    - 
Farmland   -    -    -    -    310    310    - 
    190    -    -    190    132,909    133,099    - 
Consumer real estate                                   
Home equity lines   -    -    -    -    20,691    20,691    - 
Secured by 1-4 family residential                                   
First deed of trust   414    63    -    477    54,314    54,791    - 
Second deed of trust   128    -    -    128    5,640    5,768    - 
    542    63    -    605    80,645    81,250    - 
Commercial and industrial loans (except those secured by real estate)   15    62    -    77    39,313    39,390    - 
Guaranteed student loans   2,743    1,923    8,174    12,840    34,558    47,398    8,174 
Consumer and other   11    -    -    11    2,090    2,101    - 
                                    
Total loans  $3,501   $2,048   $8,174   $13,723   $323,377   $337,100   $8,174 

 

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.

 

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

 

 14

 

 

   June 30, 2017 
       Unpaid     
   Recorded   Principal   Related 
   Investment   Balance   Allowance 
With no related allowance recorded               
Construction and land development               
Commercial  $100   $167   $- 
Commercial real estate               
Owner occupied   3,550    3,550      
Non-owner occupied   2,197    2,197    - 
    5,747    5,747    - 
Consumer real estate               
Home equity lines   901    901    - 
Secured by 1-4 family residential               
First deed of trust   3,506    3,506    - 
Second deed of trust   516    723    - 
    4,923    5,130    - 
Commercial and industrial loans (except those secured by real estate)   477    707    - 
Consumer and other   4    4      
    11,251    11,755    - 
                
With an allowance recorded               
Construction and land development               
Commercial   469    469    4 
Commercial real estate               
Owner occupied   1,936    1,951    24 
    1,936    1,951    24 
Consumer real estate               
Home equity lines   140    140    7 
Secured by 1-4 family residential               
First deed of trust   864    864    77 
Second deed of trust   172    172    91 
    1,176    1,176    175 
Commercial and industrial loans (except those secured by real estate)   102    218    61 
    3,683    3,814    264 
                
Total               
Construction and land development               
Commercial   569    636    4 
    569    636    4 
Commercial real estate               
Owner occupied   5,486    5,501    24 
Non-owner occupied   2,197    2,197    - 
    7,683    7,698    24 
Consumer real estate               
Home equity lines   1,041    1,041    7 
Secured by 1-4 family residential,               
First deed of trust   4,370    4,370    77 
Second deed of trust   688    895    91 
    6,099    6,306    175 
Commercial and industrial loans (except those secured by real estate)   579    925    61 
Consumer and other   4    4    - 
   $14,934   $15,569   $264 

 

 15

 

 

   December 31, 2016 
       Unpaid     
   Recorded   Principal   Related 
   Investment   Balance   Allowance 
With no related allowance recorded               
Construction and land development               
Commercial  $102   $169   $- 
Commercial real estate               
Owner occupied   1,487    1,487    - 
Non-owner occupied   2,236    2,236    - 
    3,723    3,723    - 
Consumer real estate               
Home equity lines   703    703    - 
Secured by 1-4 family residential               
First deed of trust   3,514    3,518    - 
Second deed of trust   619    865    - 
    4,836    5,086    - 
Commercial and industrial loans (except those secured by real estate)   538    768    - 
    9,199    9,746    - 
                
With an allowance recorded               
Construction and land development               
Commercial   479    479    9 
Commercial real estate               
Owner occupied   4,117    4,132    86 
Non-Owner occupied   -    -    - 
    4,117    4,132    86 
Consumer real estate               
Secured by 1-4 family residential               
First deed of trust   1,550    1,550    144 
Second deed of trust   90    90    90 
    1,640    1,640    234 
Commercial and industrial loans (except those secured by real estate)   6    122    6 
    6,242    6,373    335 
                
Total               
Construction and land development               
Commercial   581    648    9 
    581    648    9 
Commercial real estate               
Owner occupied   5,604    5,619    86 
Non-owner occupied   2,236    2,236    - 
    7,840    7,855    86 
Consumer real estate               
Home equity lines   703    703    - 
Secured by 1-4 family residential,               
First deed of trust   5,064    5,068    144 
Second deed of trust   709    955    90 
    6,476    6,726    234 
Commercial and industrial loans (except those secured by real estate)   544    890    6 
   $15,441   $16,119   $335 

 

 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, 2017   Ended June 30, 2017 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                    
Construction and land development                    
Commercial  $101   $1   $92   $2 
    101    1    92    2 
Commercial real estate                    
Owner occupied   2,578    8    1,824    58 
Non-owner occupied   2,207    29    2,300    59 
    4,785    37    4,124    117 
Consumer real estate                    
Home equity lines   872    -    863    1 
Secured by 1-4 family residential                    
First deed of trust   3,489    22    3,646    62 
Second deed of trust   521    7    579    18 
    4,882    29    5,088    81 
Commercial and industrial loans (except those secured by real estate)   485    6    488    14 
Consumer and other   2    -    1    - 
    10,255    73    9,793    214 
                     
With an allowance recorded                    
Construction and land development                    
Commercial   472    12    477    12 
Commercial real estate                    
Owner occupied   2,937    41    3,593    41 
    2,937    41    3,593    41 
Consumer real estate                    
Home equity line   70    6    35    6 
Secured by 1-4 family residential                    
First deed of trust   1,084    -    1,299    18 
Second deed of trust   174    2    132    2 
    1,328    8    1,466    26 
Commercial and industrial loans (except those secured by real estate)   95    4    50    4 
Consumer and other   3    -    1    - 
    4,835    65    5,587    83 
                     
Total                    
Construction and land development                    
Commercial   573    13    569    14 
    573    13    569    14 
Commercial real estate                    
Owner occupied   5,515    49    5,417    99 
Non-owner occupied   2,207    29    2,300    59 
    7,722    78    7,717    158 
Consumer real estate                    
Home equity lines   942    6    898    7 
Secured by 1-4 family residential,                    
First deed of trust   4,573    22    4,945    80 
Second deed of trust   695    9    711    20 
    6,210    37    6,554    107 
Commercial and industrial loans (except those secured by real estate)   580    10    538    18 
Consumer and other   5    -    2    - 
   $15,090   $138   $15,380   $297 

 

 17

 

 

   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 

 

 18

 

 

Included in impaired loans are loans classified as troubled debt restructurings (“TDRs”). A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. For loans classified as impaired TDRs, the Company further evaluates the loans as performing or 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.

 

An accruing loan that is modified in a TDR can remain in accrual status if, based on a current well-documented credit analysis, collection of principal and interest in accordance with the modified terms is reasonably assured, and the borrower has demonstrated sustained historical repayment performance for a reasonable period before modification. 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, 2017                    
Construction and land development                    
Commercial  $469   $469   $-   $4 
    469    469    -    4 
Commercial real estate                    
Owner occupied   4,264    4,060    204    24 
Non-owner occupied   2,197    2,197    -      
    6,461    6,257    204    24 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   3,460    2,757    703    74 
Second deeds of trust   602    534    68    4 
    4,062    3,291    771    78 
Commercial and industrial loans (except those secured by real estate)   368    239    129    - 
   $11,360   $10,256   $1,104   $108 

 

 19

 

 

               Specific 
               Valuation 
   Total   Performing   Nonaccrual   Allowance 
December 31, 2016                    
Construction and land development                    
Commercial  $479   $479   $-   $9 
    479    479    -    9 
Commercial real estate                    
Owner occupied   4,342    4,117    225    86 
Non-owner occupied   2,236    2,236    -    - 
    6,578    6,353    225    86 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   3,853    3,012    841    139 
Second deeds of trust   547    547    -    - 
    4,400    3,559    841    139 
Commercial and industrial loans (except those secured by real estate)   397    -    397    - 
   $11,854   $10,391   $1,463   $234 

 

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

 

   Six Months Ended 
   June 30, 2017 
       Pre-   Post- 
       Modification   Modification 
   Number of   Recorded   Recorded 
   Loans   Balance   Balance 
             
Secured by 1-4 family residential               
First deed of trust   1   $190   $190 
Second deed of trust   1    68    68 
    2    258    258 
                
    2   $258   $258 

 

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

 

 20

 

 

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

 

   Six Months Ended   Six Months Ended 
   June 30, 2017   June 30, 2016 
   Number of   Recorded   Number of   Recorded 
   Loans   Balance   Loans   Balance 
                 
Commercial real estate                    
Owner occupied   1   $353    1   $250 
Non-owner occupied   1    593    1    560 
    2    946    2    810 
Consumer real estate                    
Secured by 1-4 family residential                    
First deed of trust   14    731    3    500 
Second deed of trust   -    -    2    88 
    14    731    5    588 
                     
Commercial and industrial (except those secured by real estate)   1    45    1    118 
    17   $1,722    8   $1,516 

 

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

 

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Three Months Ended June 30, 2017                         
Construction and land development                         
Residential  $41   $(4)  $-   $1   $38 
Commercial   249    (36)   -    -    213 
    290    (40)   -    1    251 
Commercial real estate                         
Owner occupied   619    (104)   -    -    515 
Non-owner occupied   404    12    -    -    416 
Multifamily   44    (4)   -    -    40 
Farmland   3    -    -    -    3 
    1,070    (96)   -    -    974 
Consumer real estate                         
Home equity lines   256    (6)   -    -    250 
Secured by 1-4 family residential                         
First deed of trust   532    33    (107)   4    462 
Second deed of trust   139    (29)   -    17    127 
    927    (2)   (107)   21    839 
Commercial and industrial loans  (except those secured by real estate)   292    3    -    7    302 
Student loans   105    22    (28)   -    99 
Consumer and other   14    (6)   -    1    9 
Unallocated   674    119    -    -    793 
                          
   $3,372   $-   $(135)  $30   $3,267 

 

 21

 

 

       Provision for             
   Beginning   (Recovery of)           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 

 

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Six Months Ended June 30, 2017                         
Construction and land development                         
Residential  $41   $(4)  $-   $1   $38 
Commercial   300    (87)   -    -    213 
    341    (91)   -    1    251 
Commercial real estate                         
Owner occupied   611    (109)   -    13    515 
Non-owner occupied   406    10    -    -    416 
Multifamily   56    (16)   -    -    40 
Farmland   3    -    -    -    3 
    1,076    (115)   -    13    974 
Consumer real estate                         
Home equity lines   271    (22)   -    1    250 
Secured by 1-4 family residential                         
First deed of trust   447    100    (107)   22    462 
Second deed of trust   136    (32)   -    23    127 
    854    46    (107)   46    839 
Commercial and industrial loans  (except those secured by real estate)   223    69    -    10    302 
Student loans   158    11    (70)   -    99 
Consumer and other   8    -    (2)   3    9 
Unallocated   713    80    -    -    793 
                          
   $3,373   $-   $(179)  $73   $3,267 

 

 22

 

 

       Provision for             
   Beginning   (Recovery of)           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 

 

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Year Ended December 31, 2016                         
Construction and land development                         
Residential  $30   $10   $-   $1   $41 
Commercial   291    9    (10)   10    300 
    321    19    (10)   11    341 
Commercial real estate                         
Owner occupied   1,167    (490)   (66)   -    611 
Non-owner occupied   460    (106)   (1)   53    406 
Multifamily   51    5    -    -    56 
Farmland   17    (139)   -    125    3 
    1,695    (730)   (67)   178    1,076 
Consumer real estate                         
Home equity lines   448    (127)   (53)   3    271 
Secured by 1-4 family residential                         
First deed of trust   602    (40)   (140)   25    447 
Second deed of trust   111    21    (25)   29    136 
    1,161    (146)   (218)   57    854 
Commercial and industrial loans  (except those secured by real estate)   94    44    (15)   100    223 
Student loans   230    149    (221)   -    158 
Consumer and other   2    10    (13)   9    8 
Unallocated   59    654    -    -    713 
                          
   $3,562   $-   $(544)  $355   $3,373 

 

 23

 

 

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 acceptable given the continued higher level of classified assets and was within a reasonable range around the estimate of losses. The allowance for loan losses included an unallocated portion of approximately $793,000, $713,000, and $722,000 at June 30, 2017, December 31, 2016, and June 30, 2016, respectively.

 

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

 

·The recovery of loan losses totaling $91,000 for the construction and land development portfolio at June 30, 2017 was attributed to a decline in the general component of the allowance for loan losses as a result of a decrease in the historical loss experience from 0.38% as of December 31, 2016 to 0.10% as of June 30, 2017.

 

·The recovery of loan losses totaling $115,000, $730,000 and $609,000 for the commercial real estate portfolio for the six months ended June 30, 2017, year ended December 31, 2016, and six months ended June 30, 2016, respectively, 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 0.15% in the first six months of 2016 to a net recovery of 0.05% in the first six months of 2017. In addition, the portfolio was in a net-recovery position of $13,000 and $111,000 for the six months ended June 30, 2017 and year ended December 31, 2016, respectively.

 

·The provision for loan losses totaling $46,000 for the consumer real estate portfolio for the six months ended June 30, 2017 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 increased primarily as a result of increases in the historical loss experience from 0.0022% as of the year end December 31, 2016 to 0.16% in the first six months of 2017. In addition, the portfolio was in a net charge-off position of $61,000 for the six months ended June 30, 2017.

 

·The recovery of loan losses totaling $146,000 and $203,000 for the consumer real estate portfolio for the year ended December 31, 2016 and six months ended June 30, 2016, respectively, 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 a net recovery of 0.05% in the first six months of 2016 to a net charge-off of 0.0022% for the year ended December 31, 2016.

 

 24

 

 

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 
                         
As of June 30, 2017                              
Construction and land development                              
Residential  $38   $-   $38   $6,242   $-   $6,242 
Commercial   213    4    209    28,708    569    28,139 
    251    4    247    34,950    569    34,381 
Commercial real estate                              
Owner occupied   515    24    491    72,430    5,486    66,944 
Non-owner occupied   416    -    416    59,387    2,197    57,190 
Multifamily   40    -    40    6,277    -    6,277 
Farmland   3    -    3    299    -    299 
    974    24    950    138,393    7,683    130,710 
Consumer real estate                              
Home equity lines   250    7    243    20,512    1,041    19,471 
Secured by 1-4 family residential                              
First deed of trust   462    77    385    51,353    4,370    46,983 
Second deed of trust   127    91    36    5,635    688    4,947 
    839    175    664    77,500    6,099    71,401 
Commercial and industrial loans                              
(except those secured by real estate)   302    61    241    43,491    579    42,912 
Student loans   99    -    99    43,422    -    43,422 
Consumer and other   802    -    802    1,985    4    1,981 
                               
   $3,267   $264   $3,003   $339,741   $14,934   $324,807 
                               
As of December 31, 2016                              
Construction and land development                              
Residential  $41   $-   $41   $6,770   $-   $6,770 
Commercial   300    9    291    27,092    581    26,511 
    341    9    332    33,862    581    33,281 
Commercial real estate                              
Owner occupied   611    86    525    66,021    5,604    60,417 
Non-owner occupied   406    -    406    57,944    2,236    55,708 
Multifamily   56    -    56    8,824    -    8,824 
Farmland   3    -    3    310    -    310 
    1,076    86    990    133,099    7,840    125,259 
Consumer real estate                              
Home equity lines   271    -    271    20,691    703    19,988 
Secured by 1-4 family residential                              
First deed of trust   447    144    303    54,791    5,064    49,727 
Second deed of trust   136    90    46    5,768    709    5,059 
    854    234    620    81,250    6,476    74,774 
Commercial and industrial loans  (except those secured by real estate)   223    6    217    39,390    544    38,846 
Student loans   158    -    158    47,398    -    47,398 
Consumer and other   721    -    721    2,101    -    2,101 
                               
   $3,373   $335   $3,038   $337,100   $15,441   $321,659 

 

 25

 

 

Note 6 – Deposits

 

Deposits as of June 30, 2017 and December 31, 2016 were as follows (dollars in thousands):

 

   June 30,   December 31, 
   2017   2016 
         
Demand accounts  $100,488   $92,574 
Interest checking accounts   48,916    44,390 
Money market accounts   81,673    71,290 
Savings accounts   27,653    26,598 
Time deposits of $250,000 and over   14,290    13,372 
Other time deposits   132,371    135,053 
           
   $405,391   $383,277 

 

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, 2017 was 3.40%. 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, 2017 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, 2017 was 2.65%. 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, 2017 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 capital after its inclusion. The portion of the Trust Preferred Capital Notes not considered as Tier 1 capital may be included in Tier 2 capital.

 

The obligations of the Company with respect to the issuance of the Trust Preferred Capital Notes constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the Trust Preferred Capital Notes. Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related Trust Preferred Capital Notes and require a deferral of common dividends. The Company is current on these interest payments.

 

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Note 8 – Stock incentive plan

 

The Village Bank and Trust Financial Corp. Incentive Plan, which was adopted on February 28, 2006, authorized the issuance of up to 48,750 shares of common stock (after the reverse stock split) (the “2006 Plan”). On May 26, 2015, the Company’s shareholders approved the adoption of the Village Bank and Trust Financial Corp. 2015 Stock Incentive Plan (the “2015 Plan”) authorizing the issuance of up to 60,000 shares of common stock. The 2015 Plan was adopted to replace the 2006 Plan and any new awards will be made pursuant to the 2015 Plan. The prior awards made under the 2006 Plan were unchanged by the adoption of the 2015 Plan and continue to be governed by the terms of the 2006 Plan.

 

The following table summarizes stock options outstanding under the stock incentive plan at the indicated dates:

 

   Six Months Ended June 30, 
   2017   2016 
       Weighted               Weighted         
       Average               Average         
       Exercise   Fair Value   Intrinsic       Exercise   Fair Value   Intrinsic 
   Options   Price   Per Share   Value   Options   Price   Per Share   Value 
                                 
Options outstanding, beginning of period   2,337   $24.21   $12.76         2,929   $24.47   $12.71      
Granted   -    -    -         -    -    -      
Forfeited   -    -    -         -    -    -      
Exercised   -    -    -         -    -    -      
Options outstanding, end of period   2,337   $24.21   $12.76   $-    2,929   $24.47   $12.71   $- 
Options exercisable, end of period   2,337                   1,730                

 

During the second quarter of 2017, we granted certain officers 600 restricted shares of common stock with a weighted average fair market value of $28.83 at the date of grant. The restricted stock awards vest over two years. During the second quarter of 2016, we granted certain officers 4,000 restricted shares of common stock with a weighted average fair market value of $20.00 at the date of grant. These restricted stock awards vest over two years. Prior to vesting, these shares are subject to forfeiture to us without consideration upon termination of employment under certain circumstances. The total number of shares underlying non-vested restricted stock was 30,098 and 50,253 at June 30, 2017 and 2016, respectively.

 

The fair value of the stock is based on the grant date of the award and the expense is recognized over the vesting period. Unamortized stock-based compensation related to nonvested share based compensation arrangements granted under the stock incentive plan as of June 30, 2017 and 2016, was $413,281 and $856,794, respectively. The time based unamortized compensation of $237,080 is expected to be recognized over a weighted average period of 1.70 years.

 

Stock-based compensation expense was approximately $120,000 and $167,000 for the six months ended June 30, 2017 and 2016, respectively.

 

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Note 9 — Fair value

 

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are independent, knowledgeable, able to transact and willing to transact.

 

Financial Accounting Standards Board (“FASB”) Codification Topic 820: Fair Value Measurements and Disclosures establishes a hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair values hierarchy is as follows:

 

Level 1 Inputs — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2 Inputs — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 Inputs — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Company used the following methods to determine the fair value of each type of financial instrument:

 

Securities: Fair values for securities available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Levels 1 and 2).

 

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Impaired loans: The fair values of impaired loans are measured for impairment using the fair value of the collateral for collateral-dependent loans on a nonrecurring basis. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than two years old, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal if deemed significant using observable market data. Likewise, values for inventory and account receivables collateral are based on financial statement balances or aging reports (Level 3). Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Operations.

 

Real Estate Owned: Real estate owned assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, real estate owned assets are carried at net realizable value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

 

Assets held for sale: Assets held for sale were transferred from premises and equipment at cost less accumulated depreciation at the date of transfer. The Company periodically evaluates the value of assets held for sale and records an impairment charge for any subsequent declines in fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the assets held for sale as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the asset held for sale as nonrecurring Level 3.

 

Assets and liabilities measured at fair value under Topic 820 on a recurring and non-recurring basis are summarized below for the indicated dates (dollars in thousands):

 

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   Fair Value Measurement 
   at June 30, 2017 Using 
       Quoted Prices         
       in Active   Other   Significant 
       Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets - Recurring                    
US Government Agencies  $32,150   $-   $32,150   $- 
Mortgage-backed securities   10,902    -    10,902    - 
                     
Financial Assets - Non-Recurring                    
Impaired loans   14,934    -    14,002    932 
Assets held for sale   841    -    -    841 
Real estate owned   1,788    -    1,788    - 

 

   Fair Value Measurement 
   at December 31, 2016 Using 
       Quoted Prices         
       in Active   Other   Significant 
       Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets - Recurring                    
US Government Agencies  $32,246   $2,103   $30,143   $- 
Mortgage-backed securities   11,648    9,450    2,198    - 
                     
Financial Assets - Non-Recurring                    
Impaired loans   15,441    -    14,467    974 
Assets held for sale   841    -    -    841 
Real estate owned   2,926    -    2,926    - 

 

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The following tables present qualitative information about Level 3 fair value measurements for financial instruments measured at fair value at June 30, 2017 and December 31, 2016 (dollars in thousands):

 

   June 30, 2017 
             Range 
   Fair Value   Valuation  Unobservable  (Weighted 
   Estimate   Techniques  Input  Average) 
   (In thousands) 
               
Impaired loans - real estate secured  $290   Appraisal (1) or Internal Valuation (2)  Selling costs   6%-10% (7%) 
Discount for lack of
marketability and age
of appraisal
 
 
6%-30% (10%)
 
 
 
Impaired loans - non-real estate secured  $642   Appraisal (1) or Discounted Cash Flow  Selling costs  10%
Discount for lack of
marketability or practical life
0%-50% (20%)  
Assets held for sale  $841   Appraisal (1) or Internal Valuation (2)  Selling costs   6%-10% (7%) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discount for lack of
marketability and age
of appraisal
 
 
 
 
 
 
 
 
6%-30% (15%)
 
 
 

 

(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally included various level 3 inputs which are not identifiable

(2) Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances

 

   December 31, 2016 
             Range 
   Fair Value   Valuation  Unobservable  (Weighted 
   Estimate   Techniques  Input  Average) 
   (In thousands) 
               
Impaired loans - real estate secured  $517   Appraisal (1) or Internal Valuation (2)  Selling costs   6%-10% (7%) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discount for lack of
marketability and age
of appraisal
 
 
 
 
 
 
 
 
6%-30% (10%)
 
 
 
Impaired loans - non-real estate secured  $457   Appraisal (1) or Discounted Cash Flow  Selling costs   10%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discount for lack of
marketability or practical life
 
 
 
 
 
0%-50% (20%)
 
 
Assets held for sale  $841   Appraisal (1) or Internal Valuation (2)  Selling costs   6%-10% (7%) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Discount for lack of
marketability and age
of appraisal
 
 
 
 
 
 
 
 
6%-30% (15%)
 
 
 

 

(1) Fair Value is generally determined through independent appraisals of the underlying collateral, which generally included various level 3 inputs which are not identifiable

(2) Internal valuations may be conducted to determine Fair Value for assets with nominal carrying balances

 

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In general, fair value of securities is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon market prices determined by an outside, independent entity that primarily uses as inputs, observable market-based parameters. Fair value of loans held for sale is based upon internally developed models that primarily use as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally coincides with the Company’s monthly and/or quarterly valuation process.

 

Cash and cash equivalents – The carrying amount of cash and cash equivalents approximates fair value.

 

Investment securities – The fair value of investment securities available-for-sale is estimated based on bid quotations received from independent pricing services for similar assets. The carrying amount of other investments approximates fair value.

 

Loans – For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. For all other loans, fair values are calculated by discounting the contractual cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loans, or by using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

 

Assets held for sale – The carrying value of assets held for sale is based on fair value less selling costs.  Fair values for assets held for sale are estimated based on ap