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EX-32.1 - EXHIBIT 32.1 - Village Bank & Trust Financial Corp.tv478303_ex32-1.htm
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EX-31.1 - EXHIBIT 31.1 - Village Bank & Trust Financial Corp.tv478303_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 September 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.

 

1,430,854 shares of common stock, $4.00 par value, outstanding as of October 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 September 30, 2017 (unaudited) and December 31, 2016 3
     
  Consolidated Statements of Operations For the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited) 4
     
  Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited) 5
     
  Consolidated Statements of Shareholders’ Equity For the Nine Months Ended September 30, 2017 and 2016 (unaudited) 6
     
  Consolidated Statements of Cash Flows For the Nine Months Ended September 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 47
     
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 74
     
  Item 4. Controls and Procedures 74
     
Part II – Other Information  
     
  Item 1. Legal Proceedings 75
     
  Item 1A. Risk Factors 75
     
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 75
     
  Item 3. Defaults Upon Senior Securities 75
     
  Item 4. Mine Safety Disclosures 75
     
  Item 5. Other Information 75
     
  Item 6. Exhibits 76
     
Signatures 77

 

 2 

 

 

Part I – Financial Information

 

ITEM 1 – FINANCIAL STATEMENTS

 

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

 

   September 30,   December 31, 
   2017   2016 
Assets          
Cash and due from banks  $15,684   $10,848 
Federal funds sold   15,026    948 
Total cash and cash equivalents   30,710    11,796 
Investment securities available for sale   44,834    43,894 
Loans held for sale   5,641    14,784 
Loans          
Outstandings   347,002    337,100 
Allowance for loan losses   (3,243)   (3,373)
Deferred fees and costs, net   676    660 
Total loans, net   344,435    334,387 
Other real estate owned, net of valuation allowance   1,788    2,926 
Assets held for sale   841    841 
Premises and equipment, net   13,077    12,758 
Bank owned life insurance   7,222    7,093 
Accrued interest receivable   2,516    2,274 
Other assets   13,642    14,049 
           
   $464,706   $444,802 
           
Liabilities and Shareholders' Equity          
Liabilities          
Deposits          
Noninterest bearing demand  $103,396   $92,574 
Interest bearing   304,008    290,703 
Total deposits   407,404    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   142    70 
Other liabilities   3,162    6,596 
Total liabilities   421,072    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 September 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; 1,430,854 shares issued and outstanding at September 30, 2017 and 1,428,261 shares issued and outstanding at December 31, 2016   5,661    5,629 
Additional paid-in capital   58,028    58,643 
Accumulated deficit   (20,631)   (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   (176)   (241)
Total shareholders' equity   43,634    43,614 
           
   $464,706   $444,802 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Operations
Three and Nine Months Ended September 30, 2017 and 2016
(Unaudited)
(in thousands, except per share data)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2017   2016   2017   2016 
Interest income                    
Loans  $4,135   $4,013   $12,086   $11,583 
Investment securities   178    72    506    261 
Federal funds sold   67    19    111    46 
Total interest income   4,380    4,104    12,703    11,890 
                     
Interest expense                    
Deposits   615    590    1,770    1,784 
Borrowed funds   73    70    227    174 
Total interest expense   688    660    1,997    1,958 
                     
Net interest income   3,692    3,444    10,706    9,932 
Provision for loan losses   -    -    -    - 
Net interest income after provision for loan losses   3,692    3,444    10,706    9,932 
                     
Noninterest income                    
Service charges and fees   591    673    1,785    1,858 
Gain on sale of loans   1,395    2,043    4,195    4,630 
Gain on sale of asset held for sale   -    -    -    504 
Gain (loss) on sale of investment securities   -    15    (9)   162 
Rental income   -    -    -    582 
Other   92    114    270    292 
Total noninterest income   2,078    2,845    6,241    8,028 
                     
Noninterest expense                    
Salaries and benefits   2,985    3,045    9,042    8,463 
Commissions   431    533    1,180    1,163 
Occupancy   269    324    821    1,188 
Equipment   193    197    553    573 
Write down of assets held for sale   -    -    -    220 
Cease use lease obligation   -    -    (125)   - 
Supplies   55    81    173    232 
Professional and outside services   742    743    2,254    2,220 
Advertising and marketing   134    76    274    239 
Foreclosed assets, net   11    79    (151)   250 
FDIC insurance premium   69    90    207    287 
Other operating expense   502    541    1,460    1,484 
Total noninterest expense   5,391    5,709    15,688    16,319 
              -      
Income before income tax expense   379    580    1,259    1,641 
Income tax expense (benefit)   106    (11,352)   333    (11,352)
                     
Net income   273    11,932    926    12,993 
                     
Preferred stock dividends and amortization of discount   (113)   (186)   (385)   (547)
Net income available to common shareholders  $160   $11,746   $541   $12,446 
                     
Earnings per share, basic  $0.11   $8.21   $0.38   $8.74 
Earnings per share, diluted  $0.11   $8.21   $0.38   $8.74 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

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

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2017   2016   2017   2016 
                 
Net income  $273   $11,932   $926   $12,993 
Other comprehensive income                    
Unrealized holding gains arising during the period   33    22    80    902 
Tax effect   11    8    27    307 
Net change in unrealized holding gains on securities available for sale, net of tax   22    14    53    595 
                     
Reclassification adjustment                    
Reclassification adjustment for (gains) losses realized in income   -    (15)   9    (162)
Tax effect   -    (5)   3    (55)
Reclassification for (gains) losses included in net income, net of tax   -    (10)   6    (107)
                     
Minimum pension adjustment   3    3    9    9 
Tax effect   1    1    3    3 
Minimum pension adjustment, net of tax   2    2    6    6 
                     
Total other comprehensive income   24    6    65    494 
                     
Total comprehensive income  $297   $11,938   $991   $13,487 

 

See accompanying notes to consolidated financial statements.

 

 5 

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Shareholders' Equity
Nine Months Ended September 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   -    -    -    (385)   -    -    -    -    (385)
Restricted stock redemption                            24    (24)        - 
Issuance of common stock   -    32    (32)   -    -    -    -    -    - 
Stock based compensation   -    -    102    -    -    -    -    -    102 
Minimum pension adjustment (net of income taxes of $3)   -    -    -    -    -    -    -    6    6 
Net income   -    -    -    926    -    -    -    -    926 
Change in unrealized gain on investment securities  available-for-sale, net of reclassification and tax effect   -    -    -    -    -    -    -    59    59 
                                              
Balance, September 30, 2017  $20   $5,661   $58,028   $(20,631)  $732   $(1,010)  $1,010   $(176)  $43,634 
                                              
Balance, December 31, 2015  $23   $5,562   $58,497   $(33,948)  $732   $(1,034)  $1,034   $(507)  $30,359 
Preferred stock dividend   -    -    -    (547)   -    -    -    -    (547)
Issuance of common stock   -    56    (56)   -    -    -    -    -    - 
Stock based compensation   -    -    156    -    -    -    -    -    156 
Minimum pension adjustment (net of income taxes of $3)   -    -    -    -    -    -    -    6    6 
Net income   -    -    -    12,993    -    -    -    -    12,993 
Change in unrealized gain on investment securities  available-for-sale, net of reclassification and tax effect   -    -    -    -    -    -    -    488    488 
                                              
Balance, September 30, 2016  $23   $5,618   $58,597   $(21,502)  $732   $(1,034)  $1,034   $(13)  $43,455 

 

See accompanying notes to consolidated financial statements.

 

 6 

 

 

Village Bank and Trust Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2017 and 2016
(Unaudited)  
(in thousands)

 

   2017   2016 
         
Cash Flows from Operating Activities          
Net income  $926   $12,993 
Adjustments to reconcile net income to net  cash provided by (used in) operating activities:          
Depreciation and amortization   552    606 
Deferred income taxes   332    645 
Valuation allowance (recovery) on net deferred tax asset   -    (11,997)
Write-down of other real estate owned   351    466 
Valuation allowance other real estate owned   (331)   (335)
Write-down of assets held for sale   -    220 
(Gain) loss on securities sold   9    (162)
Gain on loans sold   (4,195)   (4,630)
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)   (59)
Stock compensation expense   102    156 
Proceeds from sale of mortgage loans   132,070    157,290 
Origination of mortgage loans for sale   (118,732)   (154,380)
Amortization of premiums and accretion of discounts on securities, net   66    116 
Increase in interest receivable   (242)   (294)
Increase in bank owned life insurance   (129)   (139)
Decrease in other assets   50    2,611 
Increase (decrease) in interest payable   72    (1,282)
Decrease in other liabilities   (903)   (2,290)
Net cash provided by (used in) operating activities   9,780    (967)
           
Cash Flows from Investing Activities          
Purchases of available for sale securities   (4,379)   (10,000)
Proceeds from the sale or calls of available for sale securities   3,454    21,933 
Proceeds from the sale of assets held for sale   -    7,338 
Net increase in loans   (10,333)   (22,488)
Proceeds from sale of other real estate owned   1,621    3,101 
Purchases of premises and equipment   (871)   (700)
Net cash used in investing activities   (10,508)   (816)
           
Cash Flows from Financing Activities          
Redeemption of preferred stock   (688)   - 
Payment of preferred dividends   (2,916)   - 
Net increase in deposits   24,127    14,372 
Net increase (decrease) in Federal Home Loan Bank advances   (800)   2,200 
Net decrease in other borrowings   (81)   (293)
Net cash provided by financing activities   19,642    16,279 
           
Net increase in cash and cash equivalents   18,914    14,496 
Cash and cash equivalents, beginning of period   11,796    17,262 
           
Cash and cash equivalents, end of period  $30,710   $31,758 
           
Supplemental Disclosure of Cash Flow Information          
Cash payments for interest  $1,925   $3,239 
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  $385   $547 

 

See accompanying notes to consolidated financial statements.

 

 7 

 

 

Village Bank and Trust Financial Corp. and Subsidiary

Notes to Consolidated Financial Statements

Three and Nine Months Ended September 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 nine month period ended September 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 September 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   Nine Months Ended 
   September 30,   September 30, 
   2017   2016   2017   2016 
Numerator                    
Net income - basic and diluted  $273   $11,932   $926   $12,993 
Preferred stock dividend   (113)   (186)   (385)   (547)
Net income available to common  shareholders  $160   $11,746   $541   $12,446 
                     
Denominator                    
Weighted average shares outstanding - basic   1,431    1,430    1,430    1,423 
Dilutive effect of common stock options and  restricted stock awards   -    -    -    - 
                     
Weighted average shares outstanding - diluted   1,431    1,430    1,430    1,423 
                     
Earnings per share - basic  $0.11   $8.21   $0.38   $8.74 
Earnings per share - diluted  $0.11   $8.21   $0.38   $8.74 

 

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 nine months ended September 30, 2017, and stock options for 2,587 and 1,742 were not included in computed diluted earnings per share for the three and nine months ended September 30, 2016, because their effects were anti-dilutive.

 

 9 

 

 

Note 4 – Investment securities available for sale

 

At September 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):

 

           Gross   Gross   Estimated     
   Par   Amortized   Unrealized   Unrealized   Fair   Average 
   Value   Cost   Gains   Losses   Value   Yield 
September 30, 2017                              
US Government Agencies                              
One to five years  $27,400   $27,558   $-   $(150)  $27,408    1.29%
Five to ten years   2,000    2,049    -    (4)   2,045    2.00%
More than ten years   2,548    2,553    -    (15)   2,538    1.78%
    31,948    32,160    -    (169)   31,991    1.37%
Mortgage-backed securities                              
One to five years   3,595    3,673    -    (12)   3,661    1.44%
More than ten years   6,967    6,864    1    (8)   6,857    2.41%
    10,562    10,537    1    (20)   10,518    2.08%
                               
Corporate debt                              
Five to ten years   2,300    2,323    2    -    2,325    5.42%
                               
Total investment securities  $44,810   $45,020   $3   $(189)  $44,834    1.75%
                               
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 September 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   Nine Months 
   Ended September 30,   Ended September 30, 
   2017   2016   2017   2016 
                 
Gross realized gains  $-   $15   $-   $162 
Gross realized losses   -    -    (9)   - 
                     
   $-   $15   $(9)  $162 

 

The Company sold approximately $2 million of investment securities available for sale at a loss of $9,000 for the nine months ended September 30, 2017. The Company sold approximately $4 million and $22 million of investment securities for the three and nine months ended September 30, 2016 resulting in a net gain of $15,000 and $162,000, 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.

 

 10 

 

 

Investment securities available for sale that have an unrealized loss position at September 30, 2017 and December 31, 2016 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 
September 30, 2017                              
US Government Agencies  $19,511   $(95)  $12,480   $(74)  $31,991   $(169)
Mortgage-backed securities   7,800    (15)   587    (5)   8,387    (20)
                               
   $27,311   $(110)  $13,067   $(79)  $40,378   $(189)
                               
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 September 30, 2017.

 

 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):

 

   September 30, 2017   December 31, 2016 
   Amount   %   Amount   % 
Construction and land development                    
Residential  $6,327    1.82%  $6,770    2.01%
Commercial   28,721    8.28%   27,092    8.04%
    35,048    10.10%   33,862    10.05%
Commercial real estate                    
Owner occupied   71,834    20.70%   66,021    19.59%
Non-owner occupied   61,831    17.82%   57,944    17.19%
Multifamily   6,114    1.76%   8,824    2.62%
Farmland   278    0.08%   310    0.09%
    140,057    40.36%   133,099    39.49%
Consumer real estate                    
Home equity lines   20,595    5.94%   20,691    6.14%
Secured by 1-4 family residential,                    
First deed of trust   54,820    15.80%   54,791    16.25%
Second deed of trust   6,293    1.81%   5,768    1.71%
    81,708    23.55%   81,250    24.10%
Commercial and industrial loans (except those secured by real estate)   40,647    11.71%   39,390    11.68%
Guaranteed student loans   47,643    13.73%   47,398    14.06%
Consumer and other   1,899    0.55%   2,101    0.62%
                     
Total loans   347,002    100.0%   337,100    100.0%
Deferred loan cost, net   676         660      
Less: allowance for loan losses   (3,243)        (3,373)     
                     
   $344,435        $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 $25,111,000 and $27,073,000 at September 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 
September 30, 2017                         
Construction and land development                         
Residential  $6,327   $-   $-   $-   $6,327 
Commercial   27,495    1,129    97    -    28,721 
    33,822    1,129    97    -    35,048 
Commercial real estate                         
Owner occupied   70,657    798    379    -    71,834 
Non-owner occupied   57,095    1,568    3,168    -    61,831 
Multifamily   6,114    -    -    -    6,114 
Farmland   278    -    -    -    278 
    134,144    2,366    3,547    -    140,057 
Consumer real estate                         
Home equity lines   19,495    378    722    -    20,595 
Secured by 1-4 family residential                         
First deed of trust   50,626    2,016    2,178    -    54,820 
Second deed of trust   5,944    206    143    -    6,293 
    76,065    2,600    3,043    -    81,708 
Commercial and industrial loans (except those secured by real estate)   35,440    3,916    1,291    -    40,647 
Guaranteed student loans   47,643    -    -    -    47,643 
Consumer and other   1,659    222    18    -    1,899 
                          
Total loans  $328,773   $10,233   $7,996   $-   $347,002 
                          
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 
                          
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):

 

                           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 
September 30, 2017                                   
Construction and land development                                   
Residential  $-   $-   $-   $-   $6,327   $6,327   $- 
Commercial   26    -    -    26    28,695    28,721    - 
    26    -    -    26    35,022    35,048    - 
Commercial real estate                                   
Owner occupied   -    -    -    -    71,834    71,834    - 
Non-owner occupied   -    -    -    -    61,831    61,831    - 
Multifamily   -    -    -    -    6,114    6,114    - 
Farmland   -    -    -    -    278    278    - 
    -    -    -    -    140,057    140,057    - 
Consumer real estate                                   
Home equity lines   -    -    -    -    20,595    20,595    - 
Secured by 1-4 family residential                                   
First deed of trust   271    150    -    421    54,399    54,820    - 
Second deed of trust   95    -    -    95    6,198    6,293    - 
    366    150    -    516    81,192    81,708    - 
Commercial and industrial loans (except those secured by real estate)   -    536    -    536    40,111    40,647    - 
Guaranteed student loans   2,077    1,597    8,113    11,787    35,856    47,643    8,113 
Consumer and other   -    4    -    4    1,895    1,899    - 
                                    
Total loans  $2,469   $2,287   $8,113   $12,869   $334,133   $347,002   $8,113 

 

                           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 

 

 14 

 

 

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):

 

 15 

 

 

   September 30, 2017 
       Unpaid     
   Recorded   Principal   Related 
   Investment   Balance   Allowance 
With no related allowance recorded               
Construction and land development               
Commercial  $97   $164   $- 
Commercial real estate               
Owner occupied   3,512    3,512      
Non-owner occupied   2,176    2,176    - 
    5,688    5,688    - 
Consumer real estate               
Home equity lines   601    601    - 
Secured by 1-4 family residential               
First deed of trust   3,968    3,968    - 
Second deed of trust   594    802    - 
    5,163    5,371    - 
Commercial and industrial loans (except those secured by real estate)   463    693    - 
Consumer and other   3    3      
    11,414    11,919    - 
                
With an allowance recorded               
Construction and land development               
Commercial   464    464    2 
Commercial real estate               
Owner occupied   1,922    1,937    21 
    1,922    1,937    21 
Consumer real estate               
Home equity lines   138    138    4 
Secured by 1-4 family residential               
First deed of trust   765    765    62 
Second deed of trust   86    86    5 
    989    989    71 
Commercial and industrial loans (except those secured by real estate)   785    901    233 
    4,160    4,291    327 
                
Total               
Construction and land development               
Commercial   561    628    2 
    561    628    2 
Commercial real estate               
Owner occupied   5,434    5,449    21 
Non-owner occupied   2,176    2,176    - 
    7,610    7,625    21 
Consumer real estate               
Home equity lines   739    739    4 
Secured by 1-4 family residential,               
First deed of trust   4,733    4,733    62 
Second deed of trust   680    888    5 
    6,152    6,360    71 
Commercial and industrial loans (except those secured by real estate)   1,248    1,594    233 
Consumer and other   3    3    - 
   $15,574   $16,210   $327 

 

 16 

 

 

   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 

 

 17 

 

 

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 Nine Months 
   Ended September 30, 2017   Ended September 30, 2017 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                    
Construction and land development                    
Commercial  $99   $1   $100   $3 
    99    1    100    3 
Commercial real estate                    
Owner occupied   3,531    32    2,539    90 
Non-owner occupied   2,187    23    2,206    82 
    5,718    55    4,745    172 
Consumer real estate                    
Home equity lines   751    16    761    17 
Secured by 1-4 family residential                    
First deed of trust   3,737    24    3,615    86 
Second deed of trust   555    9    563    27 
    5,043    49    4,939    130 
Commercial and industrial loans (except those secured by real estate)   470    35    493    49 
Consumer and other   4    -    2    - 
    11,334    140    10,279    354 
                     
With an allowance recorded                    
Construction and land development                    
Commercial   467    5    472    17 
Commercial real estate                    
Owner occupied   1,929    17    2,978    58 
    1,929    17    2,978    58 
Consumer real estate                    
Home equity line   139    -    69    6 
Secured by 1-4 family residential                    
First deed of trust   815    8    1,120    26 
Second deed of trust   129    1    131    3 
    1,083    9    1,320    35 
Commercial and industrial loans (except those secured by real estate)   444    -    245    4 
Consumer and other   -    -    1    - 
    3,923    31    5,016    114 
                     
Total                    
Construction and land development                    
Commercial   566    6    572    20 
    566    6    572    20 
Commercial real estate                    
Owner occupied   5,460    49    5,517    148 
Non-owner occupied   2,187    23    2,206    82 
    7,647    72    7,723    230 
Consumer real estate                    
Home equity lines   890    16    830    23 
Secured by 1-4 family residential,                    
First deed of trust   4,552    32    4,735    112 
Second deed of trust   684    10    694    30 
    6,126    58    6,259    165 
Commercial and industrial loans (except those secured by real estate)   915    35    738    53 
Consumer and other   4    -    3    - 
   $15,257   $171   $15,295   $468 

 

 18 

 

 

   For the Three Months   For the Nine Months 
   Ended September 30, 2016   Ended September 30, 2016 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
   Investment   Recognized   Investment   Recognized 
With no related allowance recorded                    
Construction and land development                    
Commercial  $92   $-   $211   $40 
    92    -    211    40 
Commercial real estate                    
Owner occupied   935    -    933    29 
Non-owner occupied   2,546    28    2,537    92 
    3,481    28    3,470    121 
Consumer real estate                    
Home equity lines   1,164    -    1,246    1 
Secured by 1-4 family residential                    
First deed of trust   4,137    42    4,188    134 
Second deed of trust   839    9    950    32 
    6,140    51    6,384    167 
Commercial and industrial loans (except those secured by real estate)   455    -    568    14 
Consumer and other   -    -    5    - 
    10,168    79    10,638    342 
                     
With an allowance recorded                    
Construction and land development                    
Commercial   1,423    7    1,531    19 
Commercial real estate                    
Owner occupied   4,911    47    5,272    157 
Non-Owner occupied   158    -    174    9 
    5,069    47    5,446    166 
Consumer real estate                    
Secured by 1-4 family residential                    
First deed of trust   1,680    -    1,800    9 
Second deed of trust   171    -    185    4 
    1,851    -    1,985    13 
Commercial and industrial loans (except those secured by real estate)   99    -    122    - 
    8,442    54    9,084    198 
                     
Total                    
Construction and land development                    
Commercial   1,515    7    1,742    59 
    1,515    7    1,742    59 
Commercial real estate                    
Owner occupied   5,846    47    6,205    186 
Non-owner occupied   2,704    28    2,711    101 
    8,550    75    8,916    287 
Consumer real estate                    
Home equity lines   1,164    -    1,246    1 
Secured by 1-4 family residential,                    
First deed of trust   5,817    42    5,987    143 
Second deed of trust   1,010    9    1,135    36 
    7,991    51    8,368    180 
Commercial and industrial loans (except those secured by real estate)   554    -    690    14 
Consumer and other   -    -    5    - 
   $18,610   $133   $19,722   $540 

 

 19 

 

  

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 
September 30, 2017                    
Construction and land development Commercial  $464   $464   $-   $2 
    464    464    -    2 
Commercial real estate                    
Owner occupied   4,232    4,037    195    21 
Non-owner occupied   2,176    2,176    -    - 
    6,408    6,213    195    21 
Consumer real estate                    
Secured by 1-4 family residential                    
First deeds of trust   3,432    2,733    699    60 
Second deeds of trust   597    530    67    5 
    4,029    3,263    766    65 
Commercial and industrial loans (except those secured by real estate)   351    230    121    - 
   $11,252   $10,170   $1,082   $88 

 

 20 

 

  

               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):

 

   Nine Months Ended 
   September 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 nine months ended September 30, 2016.

  

 21 

 

  

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

 

   Nine Months Ended   Nine Months Ended 
   September 30, 2017   September 30, 2016 
   Number of   Recorded   Number of   Recorded 
   Loans   Balance   Loans   Balance 
                 
Commercial real estate                    
Owner occupied   3   $2,309    2   $390 
Non-owner occupied   -    -    -    - 
    3    2,309    2    390 
Consumer real estate                     
Secured by 1-4 family residential                    
First deed of trust   10    1,049    7    692 
Second deed of trust   2    75    2    86 
    12    1,124    9    778 
                     
Commercial and industrial (except those secured by real estate)   2    44    1    103 
    17   $3,477    12   $1,271 

 

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 September 30, 2017                         
Construction and land development                         
Residential  $38   $-   $-   $-   $38 
Commercial   213    (40)   -    2    175 
    251    (40)   -    2    213 
Commercial real estate                         
Owner occupied   515    9    -    -    524 
Non-owner occupied   416    18    -    -    434 
Multifamily   40    (1)   -    -    39 
Farmland   3    -    -    -    3 
    974    26    -    -    1,000 
Consumer real estate                         
Home equity lines   250    (3)   -    -    247 
Secured by 1-4 family residential                         
First deed of trust   462    (10)   -    7    459 
Second deed of trust   127    (89)   -    7    45 
    839    (102)   -    14    751 
Commercial and industrial loans  (except those secured by real estate)   302    140    -    3    445 
Student loans   99    45    (45)   -    99 
Consumer and other   9    (4)   -    2    7 
Unallocated   793    (65)   -    -    728 
                          
   $3,267   $-   $(45)  $21   $3,243 

 

 22 

 

  

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Three Months Ended September 30, 2016                         
Construction and land development                         
Residential  $31   $12   $-   $-   $43 
Commercial   259    22    (10)   5    276 
    290    34    (10)   5    319 
Commercial real estate                         
Owner occupied   711    (17)   (57)        637 
Non-owner occupied   437    53    (1)   51    540 
Multifamily   54    2    -    -    56 
Farmland   2    1    -    -    3 
    1,204    39    (58)   51    1,236 
Consumer real estate                         
Home equity lines   259    4    -    1    264 
Secured by 1-4 family residential                         
First deed of trust   490    79    (113)   6    462 
Second deed of trust   133    (11)        6    128 
    882    72    (113)   13    854 
Commercial and industrial loans  (except those secured by real estate)   226    (46)   (15)   46    211 
Guaranteed student loans   191    13    (16)        188 
Consumer and other   8    7    (12)   5    8 
Unallocated   722    (119)   -    -    603 
                          
   $3,523   $-   $(224)  $120   $3,419 

 

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Nine Months Ended September 30, 2017                         
Construction and land development                         
Residential  $41   $(4)  $-   $1   $38 
Commercial   300    (127)   -    2    175 
    341    (131)   -    3    213 
Commercial real estate                         
Owner occupied   611    (100)   -    13    524 
Non-owner occupied   406    28    -    -    434 
Multifamily   56    (17)   -    -    39 
Farmland   3    -    -    -    3 
    1,076    (89)   -    13    1,000 
Consumer real estate                         
Home equity lines   271    (25)   -    1    247 
Secured by 1-4 family residential                         
First deed of trust   447    90    (107)   29    459 
Second deed of trust   136    (120)   -    29    45 
    854    (55)   (107)   59    751 
Commercial and industrial loans  (except those secured by real estate)   223    209    -    13    445 
Student loans   158    56    (115)   -    99 
Consumer and other   8    (5)   (2)   6    7 
Unallocated   713    15    -    -    728 
                          
   $3,373   $-   $(224)  $94   $3,243 

 

 23 

 

  

       Provision for             
   Beginning   (Recovery of)           Ending 
   Balance   Loan Losses   Charge-offs   Recoveries   Balance 
                     
Nine Months Ended September 30, 2016                         
Construction and land development                         
Residential  $30   $12   $-   $1   $43 
Commercial   291    (10)   (10)   5    276 
    321    2    (10)   6    319 
Commercial real estate                         
Owner occupied   1,167    (464)   (66)   -    637 
Non-owner occupied   460    27    -    53    540 
Multifamily   51    5    -    -    56 
Farmland   17    (139)   -    125    3 
    1,695    (571)   (66)   178    1,236 
Consumer real estate                         
Home equity lines   448    (134)   (53)   3    264 
Secured by 1-4 family residential                         
First deed of trust   602    (20)   (140)   20    462 
Second deed of trust   111    23    (25)   19    128 
    1,161    (131)   (218)   42    854 
Commercial and industrial loans  (except those secured by real estate)   94    42    (15)   90    211 
Guaranteed student loans   230    101    (143)   -    188 
Consumer and other   2    13    (14)   7    8 
Unallocated   59    544    -    -    603 
                          
   $3,562   $-   $(466)  $323   $3,419 

 

       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 

 

 24 

 

  

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 $728,000, $713,000, and $603,000 at September 30, 2017, December 31, 2016, and September 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 $102,000 for the consumer real estate portfolio for the three months ended September 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 0.16% as of June 30, 2017 to 0.13% as of September 30, 2017.

 

·The provision for loan losses totaling $140,000 for the commercial and industrial loans (except those secured by real estate) for the three months ended September 30, 2017 was attributed to an increase of $172,000 in the specific reserve associated with loans evaluated individually for impairment.

 

·The recovery of loan losses totaling $131,000 for the construction and land development portfolio for the nine months ended September 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 0.01% as of September 30, 2017.

 

·The recovery of loan losses totaling $89,000, $730,000 and $571,000 for the commercial real estate portfolio for the nine months ended September 30, 2017, year ended December 31, 2016, and nine months ended September 30, 2016, respectively, was attributable to a decline in the general component of the allowance for loan losses as a result of decreases in the historical loss experience from 0.20% as of September 30, 2016 to a net recovery of 0.04% as of September 30, 2017. In addition, the portfolio was in a net-recovery position of $13,000 and $111,000 for the nine months ended September 30, 2017 and year ended December 31, 2016, respectively.

 

·The recovery of loan losses totaling $55,000 for the consumer real estate portfolio for the nine months ended September 30, 2017 was attributed to a decrease of $104,000 in the specific reserve associated with loans evaluated individually for impairment. This decrease was offset by an increase in the general component allocated to this portfolio as a result of increases in the historical loss experience from 0.0022% as of year end December 31, 2016 to 0.13% for the nine months ended September 30, 2017. In addition, the portfolio was in a net charge-off position of $48,000 for the nine months ended September 30, 2017.

 

 25 

 

  

·The recovery of loan losses totaling $146,000 and $131,000 for the consumer real estate portfolio for the year ended December 31, 2016 and nine months ended September 30, 2016, respectively, was attributable to a decline in the general component of the allowance for loan losses as a result of decreases in the historical loss experience from 0.07% as of September 30, 2016 to 0.0022% as of December 31, 2016. In addition, the portfolio was in a net-charge off position of $161,000 and $176,000 for the year ended December 31, 2016 and the nine months ended September 30, 2016.

 

·The provision for loan losses totaling $209,000 for the commercial and industrial loans (except those secured by real estate) for the nine months ended September 30, 2017 was attributed to an increase of $227,000 in the specific reserve associated with loans evaluated individually for impairment.

 

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

 

 26 

 

  

   Recorded Investment in Loans 
   Allowance   Loans 
                         
   Ending           Ending         
   Balance   Individually   Collectively   Balance   Individually   Collectively 
                         
As of September 30, 2017                              
Construction and land development                              
Residential  $38   $-   $38   $6,327   $-   $6,327 
Commercial   175    2    173    28,721    561    28,160 
    213    2    211    35,048    561    34,487 
Commercial real estate                              
Owner occupied   524    21    503    71,834    5,434    66,400 
Non-owner occupied   434    -    434    61,831    2,176    59,655 
Multifamily   39    -    39    6,114    -    6,114 
Farmland   3    -    3    278    -    278 
    1,000    21    979    140,057    7,610    132,447 
Consumer real estate                              
Home equity lines   247    4    243    20,595    739    19,856 
Secured by 1-4 family residential                              
First deed of trust   459    62    397    54,820    4,733    50,087 
Second deed of trust   45    5    40    6,293    680    5,613 
    751    71    680    81,708    6,152    75,556 
Commercial and industrial loans (except those secured by real estate)   445    233    212    40,647    1,248    39,399 
Student loans   99    -    99    47,643    -    47,643 
Consumer and other   735    -    735    1,899    3    1,896 
                               
   $3,243   $327   $2,916   $347,002   $15,574   $331,428 
                               
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 

 

 27 

 

 

Note 6 – Deposits

 

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

 

   September 30,   December 31, 
   2017   2016 
         
Demand accounts  $103,396   $92,574 
Interest checking accounts   48,673    44,390 
Money market accounts   81,423    71,290 
Savings accounts   27,601    26,598 
Time deposits of $250,000 and over   15,348    13,372 
Other time deposits   130,963    135,053 
           
   $407,404   $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 September 30, 2017 was 3.47%. 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 September 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 September 30, 2017 was 2.72%. 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 September 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 plans at the indicated dates:

 

   Nine Months Ended September 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   $12.74      
Granted   -    -    -         -    -    -      
Forfeited   -    -    -         -    -    -      
Exercised   -    -    -         -    -    -      
                                         
Options outstanding, end of period   2,337   $24.21   $12.76   $-    2,929   $24.47   $12.74   $- 
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 third quarter of 2017, we granted certain officers 5,450 restricted shares of common stock with a weighted average fair market value of $31.00 at the date of grant. These restricted stock awards vest over three 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 28,437 and 51,665 at September 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 September 30, 2017 and 2016, was $487,374 and $775,575, respectively. The time based unamortized compensation of $301,676 is expected to be recognized over a weighted average period of 1.99 years.

 

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Stock-based compensation expense was approximately $102,000 and $156,000 for the nine months ended September 30, 2017 and 2016, respectively.

 

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 September 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  $31,991   $-   $31,991   $- 
Mortgage-backed securities   10,518    -    10,518    - 
Other investments   2,325    1,000    1,325    - 
                     
Financial Assets - Non-Recurring                    
Impaired loans   15,574    -    14,039    1,535 
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 September 30, 2017 and December 31, 2016 (dollars in thousands):

 

   September 30, 2017
             Range
   Fair Value   Valuation  Unobservable  (Weighted
   Estimate   Techniques  Input  Average)
              
Impaired loans - real estate secured  $287</